SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-3/A
Amendment
No. 2
REGISTRATION
STATEMENT
Under
THE
SECURITIES ACT OF 1933
NUTRITION
21, INC.
(Exact
name of registrant as specified in its charter)
|
New
York
|
11-2653613
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.
R. S. Employer Identification No.)
|
4
Manhattanville Road
Purchase,
New York 10577
(914)
701-4500
(Address,
including zip code, and telephone
number
including area code of registrant's principal executive offices)
Benjamin
T. Sporn
Vice
President, General Counsel and Secretary
4
Manhattanville Road
Purchase,
New York 10577
(914)
701-4500
(Name,
address, including zip code and telephone number,
including
area code, of agent for service)
Copies
of
all communications to:
Oscar
D.
Folger, Esq.
521
Fifth
Avenue
New
York,
New York 10175
Phone
(212) 697-6464
Approximate
date of commencement of proposed sale to the public: from time to time after
the
effective date of this Registration Statement.
If
the
only securities being registered on this form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box. o
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list
the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
EXPLANATORY
NOTE: This amendment is being filed to correct Footnote No. 6 to the
SELLING
SECURITY HOLDERS table and to update the Consent
of J. H. Cohn LLP in Exhibit 23.2.
CALCULATION
OF REGISTRATION FEE
|
Title
of Each Class of
Securities
Being Registered(2)
|
|
Amount
Being
Registered
|
|
Proposed
Maximum
Offering
Price
per
Share(1)
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|
Proposed
Maximum
Aggregate
Offering
Price
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|
Amount
of
Registration
Fee
|
|
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Common
Stock par value $0.005(3)
|
|
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35,463,730
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|
$
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0.96
|
|
$
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34,045,180
|
|
$
|
1,045.19
|
|
(1)
Estimated for purposes of computing the registration fee pursuant to Rule 457(c)
at $0.96 per share based upon the average of the high and low prices of $1.00
and $0.92 on September 28, 2007.
(2)
Pursuant to Rule 416, there are also being registered such additional number
of
shares of common stock as may be issuable to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
(3)
Represents (a) up to 14,599,441 shares of Registrant's Common Stock (the "Common
Stock"), issuable upon conversion of 17,750 shares of Series J 8% Convertible
Preferred Stock (the "Series J Preferred Stock") having a stated value of $1,000
per share, at a per share conversion price of $1.2158, (b) up to 6,715,218
shares of common stock issuable on exercise of Warrants at $1.2158 per share,
(c) up to 5,965,133 shares of Common Stock issuable in respect of dividends
accruing on the Series J Preferred Stock through the fourth anniversary of
issuance based on 90% of the twenty consecutive trading day volume weighted
average price of $0.9522 prior to October 1, 2007 and (d) 8,183,938 additional
shares of Common Stock, equal to 30% of the amounts in clauses (a) through
(c),
representing our current good faith estimate of additional shares that we might
be required to issue on conversion of the Series J Preferred Stock, exercise
of
the Warrants or as dividends on the Series J Preferred Stock as a result of
adjustments resulting from any variation in the market price of our securities
and anti-dilution provisions for events other than those described in Note
2.
The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING
SECURITY HOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES, AND THE SELLING SECURITY HOLDERS
ARE
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR
SALE IS NOT PERMITTED.
PRELIMINARY
PROSPECTUS, DATED NOVEMBER 5, 2007
NUTRITION
21, INC.
Up
to
35,463,730 Shares
Common
Stock
This
prospectus relates to the offering and sale of:
*
14,599,441 shares of our common stock issuable upon conversion of our Series
J
8% Convertible Preferred Stock (the " Series J Preferred Stock"),
*
6,715,218 shares of our common stock issuable upon the exercise of warrants
with
an exercise price $1.2158 per share,
*
5,965,133 shares of our common stock which we estimate we may issue for payment
of dividends on the Series J referred Stock, and
*
8,183,938 additional shares of our common stock that we estimate we might be
required to issue on conversion of the Series J Preferred Stock, exercise of
the
Warrants or as dividends on the Series J Preferred Stock as a result of
adjustments resulting from any variation in the market price of our securities
and anti-dilution provisions, in addition to shares that we might be required
to
issue to prevent dilution from stock splits, stock dividends or similar
transactions.
All
of
the shares are being offered by the selling security holders listed in the
section of this prospectus entitled "Selling Security Holders."
Nutrition
21's common stock is traded on the Nasdaq Capital Market under the symbol NXXI.
As reported by Nasdaq for September 28, 2007, the last sale price for Nutrition
21's common stock was $0.95.
INVESTING
IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE THE SECTION ENTITLED
“RISK FACTORS” BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date
of this preliminary prospectus is November 5, 2007.
TABLE
OF
CONTENTS
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Page
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ABOUT
NUTRITION 21
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4 |
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RISK
FACTORS
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5 |
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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13 |
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USE
OF PROCEEDS
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14 |
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ADDITIONAL
DISCLOSURES
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19 |
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PLAN
OF DISTRIBUTION
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25 |
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LEGAL
MATTERS
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26 |
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EXPERTS
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27 |
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WHERE
YOU CAN FIND MORE INFORMATION
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27 |
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INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
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27 |
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We
develop, market and distribute proprietary, clinically substantiated nutritional
supplements targeting significant age- and weight-related health needs,
including diabetes, cardiovascular health, obesity, mental health, cognitive
function and joint health. Our core business strategy is to develop branded
nutritional supplement products that we support with extensive marketing
initiatives and distribute through our established network of retailers or
sell
directly to consumers.
Historically,
our primary focus had been dedicated to the research, development and
commercialization of innovative chromium-based ingredients for use by our
customers in multi-component products targeting the prevention and treatment
of
metabolic diseases stemming from insulin resistance. In fiscal 2006, we began
a
transition from serving primarily as a provider of chromium ingredients to
a
supplier of branded finished products. We currently market and sell Chromax®
chromium picolinate, a patented formulation of chromium that has been
demonstrated in multiple clinical and preclinical studies to have greater
bioavailability in comparison to other chromium-based formulations. We also
market and sell a proprietary, non-prescription, insulin sensitizer for people
with type 2 diabetes under the Diachrome® brand. We currently hold 32 U.S.
patents and more than 65 foreign patents for our nutrition
products.
We
significantly advanced our transition to a branded nutritional supplements
company with our August 25, 2006 purchase of Iceland Health, Inc. As a result
of
the transaction, we acquired and integrated this company’s established line of
Omega-3 products that promote cardiovascular and joint health. These products
include Maximum Strength Omega-3™, which contains 1,000mg of Omega-3, and Joint
Relief Advanced Formula™, which contains 1,000mg of Omega-3 plus Iceland
Collagen GHA™, a blend of collagen, chondroitin sulfate, hyaluronic acid and
glucosamine sulfate. The acquisition also provided us with the exclusive U.S.
rights to market and sell Omega-3 fatty acids produced by an Icelandic company
that utilizes a proprietary distillation process to manufacture the highest
concentration of naturally occurring Omega-3 fatty acids.
We
currently sell our Chromax® branded chromium picolinate through most of the
major U.S. food, drug and mass merchandise retailers, including Wal-Mart, CVS,
Walgreen’s and Albertsons. In addition, our acquisition of Iceland Health, Inc.
provided us with substantial direct-to-consumer marketing expertise and
capabilities, including television infomercials, print, radio, direct mail
and
Internet e-commerce. We plan to increase the sales of our existing products
by
expanding their distribution into new channels. For example, our Iceland Health®
line of products was recently introduced into the food, drug and mass retail
channel and our Chromax® line of products will soon be available directly to
consumers via infomercials and other direct marketing initiatives.
We
are in
the process of researching and developing several brand extensions. One such
new
product, Advanced Memory Formula™, is currently in the process of being launched
in major retail chains, including Walgreens, Rite Aid and CVS. Advanced Memory
Formula™ has a patent-pending formulation that supports cognitive function,
improves memory and recall, and increases alertness and concentration. In
addition to chromium picolinate, Advanced Memory Formula™ includes
phosphatidylserine, a natural substance found in the brain that helps metabolize
glucose, and Omega-3 fatty acids.
We
are a
New York corporation that was incorporated on June 29, 1983. Our executive
offices are located at 4 Manhattanville Road, Purchase, New York 10577 and
our
telephone number at that address is (914)-701-4500. Our website address is
www.nutrition21.com. The information on our website is not, and should not
be,
considered part of this prospectus and is not incorporated by reference into
this document.
Investment
in our common stock involves a high degree of risk. Before purchasing any of
our
common stock, you should consider carefully the factors discussed below. Each
of
these factors could adversely affect our business, operating results, financial
condition, and the value of an investment in our common stock.
An
investment in the Company involves the following risks, among
others:
Financial
Performance Risks
We
have not been profitable for the last six fiscal years. We
had
net losses of $19.148 million, $10.317 million, $7.044 million, $5.901 million,
$10.506 million and $6.011 million for the fiscal years ended on June 30, 2007,
2006, 2005, 2004, 2003 and 2002, respectively. As of June 30, 2007, our
accumulated losses aggregated approximately $91.433 million. As a result we
have
been required periodically to rely on offerings of securities to fund cash
shortfalls in our business. We will likely continue to be unprofitable in the
future should we fail to increase our revenues significantly.
In
the
fiscal years ending June 30, 2008 and 2009, respectively, we expect to incur
approximately $0.5 million and $0.3 million of expenses for accretion of debt
discount and amortization of debt issuance costs on Series I preferred stock
that was issued in fiscal year 2005. The issuance of Series J preferred stock
in
September, 2007 may increase these expenses. Also, the issuance of additional
securities other than common stock may increase these expenses.
We
may use significant cash in our operations and may need to raise additional
funds.
During
the fiscal year ended June 30, 2007 cash used in operations was $10.3
million. To
fund
any negative cash flow and to support the marketing and other expenses we
envision, we may need to raise funds. There is no assurance that additional
funds will be available on terms favorable to the Company and its shareholders,
or at all. The Series J preferred stock limits our ability to incur indebtedness
and to issue additional preferred stock.
Failure
to remediate the material weaknesses in our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
could
have a material adverse effect on our business and stock price.
During
the audit of our financial statements for the year ended June 30, 2007, we
identified a material weakness in our internal control over financial reporting
that is set out in Item 9A of this Report. As defined by the Public Company
Accounting Oversight Board Auditing Standard No. 5, a material weakness is
a
deficiency or a combination of deficiencies over financial reporting such that
there is a reasonable possibility that a material misstatement of the annual
or
the interim financial statements will not be prevented or detected.
Business
Strategy and Operational Risks
As
a
part of our business strategy, we have made and may continue to make
acquisitions. These acquisitions could disrupt our operations and harm our
operating results. An
element of our strategy includes expanding our product offerings, gaining
shelf-space and gaining access to new skills and other resources through
strategic acquisitions when attractive opportunities arise. Acquiring additional
businesses and the implementation of other elements of our business strategy
are
subject to various risks and uncertainties. Some of these factors are within
our
control and some are outside our control. These risks and uncertainties include,
but are not limited to, the following:
| · |
Any
acquisition may result in significant expenditures of cash, stock
and/or
management resources,
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·
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Acquired
businesses may not perform in accordance with
expectations,
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·
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We
may encounter difficulties and costs with the integration of the
acquired
businesses,
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·
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Management’s
attention may be diverted from other aspects of our
business,
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·
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We
may face unexpected problems entering geographic and product markets
in
which we have limited
or no direct prior experience,
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·
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We
may lose key employees of acquired or existing
businesses,
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·
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We
may incur liabilities and claims arising out of acquired businesses,
and
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·
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We
may incur indebtedness or issue additional capital stock which could
be
dilutive to holders of our
common stock.
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By
way of
example, our acquisition of Iceland Health, Inc. has materially increased the
size of our business and has raised challenges that could adversely affect
our
goal to achieve profitable operations.
We
acquired Iceland Health, Inc. on August 25, 2006. This acquisition permitted
us
to enter the business of offering omega-3 products into the consumer market.
The
addition of the Iceland Health products substantially increased our size, by
contributing approximately 52% of our revenues in the two quarters following
the
acquisition. Iceland Health uses distribution channels (principally direct
response rather than through mass retailers) which differ from those of our
traditional product lines and with which our management had little experience.
We have also needed to bolster the management resources of Iceland Health.
As a
result, this acquisition has contributed to our losses. We cannot assure you
that we will be able to capitalize on Iceland Health’s products lines and
achieve profitability in this business or in our company as a whole.
Because
a significant portion our sales is to a small number of retail customers, we
are
dependent to a large degree upon these customers and their ability to
successfully sell our products. In
fiscal
2007, two of our mass merchandise retail customers together accounted for
approximately 14% of our total revenues, and ten of our mass merchandise retail
customers represented approximately 18% of our total revenues. Consistent with
industry practice, we do not operate under a long-term written supply contract
with our mass merchandise retail customers. Our business would materially suffer
if we lost any major mass merchandise retail customer or if our business with
a
major mass merchandise retail customer were to decrease significantly.
The
success of our retail distribution business is dependent, to a large degree,
on
the positioning of our products by our mass merchandise retail customers and
on
the support they provide for our products, which are outside our control and
in
turn depend in large part on the level of sales of our products.
A
significant amount of marketing expenditures is required in order to generate
sales of our products, and we cannot be certain if our marketing initiatives
will be successful or if we will be able to raise these funds.
Both our
mass merchandise retail distribution business and our Iceland Health direct
response marketing business require substantial expenditures to generate sales.
To
succeed in our arrangements
with mass merchandise retailers we need to launch and maintain successful
marketing campaigns to encourage consumers to purchase branded products stocked
by these retailers. Our failure to generate such demand could cause retailers
to
terminate their relationship with us. Our arrangements with mass retailers
are
terminable by them on notice.
Our
direct response marketing business requires significant expenditure for the
purchase of media advertising and related matters in advance of sales. Growth
in
our sales of Iceland Health omega-3 products will be impaired if we do not
successfully introduce these products into our mass distribution channels with
the support of significant marketing expenditures.
Our
marketing and related expenses aggregated approximately 80% of total revenues
in
the fiscal year ended June 30, 2007.
We
rely on a limited number of products for the majority of our sales and any
reduction in the demand for or availability of these products would have an
adverse effect on our sales. Our
significant products are limited to Chromax, Diachrome, Iceland Health Omega-3
and Iceland Health Joint Relief, and we are in the process of launching Advanced
Memory Formula, a product for the support of cognitive function. This narrow
line of products puts us at risk of being affected adversely should sales of
even a small number of products fail to grow as expected or decline, or should
new products not be accepted in the marketplace either initially or not at
all.
Successful growth of our business depends on our ability to develop and market
new products on a continuous basis.
We
rely on outside suppliers to formulate, manufacture and package our products.
Because we do not have long-term agreements with any of our suppliers other
than
our manufacturer in Iceland, our business could be disrupted if our relationship
with a supplier is terminated or curtailed, or if a supplier suffers financial
difficulties or otherwise fails to supply us on a timely basis and at favorable
prices.
We
acquire omega-3 fatty acids that are sold as Iceland Health Omega 3 from a
manufacturer in Iceland under an agreement that gives us the exclusive right
until 2015 to import omega -3 fatty acids from this manufacturer and to
distribute this product in the United States. These products are identified
on
packaging as “coming from Iceland.” We purchase omega-3 fatty acids for our
Iceland Health Joint Relief product from various suppliers in the United States,
on a purchase order basis, for sale in packaging that does not identify the
product as “coming from Iceland.” Should our manufacturer in Iceland fail to
adequately supply us at any time, we believe that we can with some disruption
purchase additional omega-3 fatty acids from our current or other suppliers
in
the US, but we may be adversely affected by our inability to identify these
products as “coming from Iceland.” We purchase our chromium and related
compounds on a purchase order basis from several suppliers, but our business
may
nevertheless be disrupted if we are required to change a significant supplier.
The
failure of third party call center operators to effectively handle customer
calls could adversely affect our business. We
rely
on outside contractors for the call center requirements of our direct response
marketing business, and we are dependent on the uninterrupted and efficient
operation of these facilities. Should we experience unacceptable numbers of
uncompleted calls we will need to slow our marketing of Iceland Health products
and to commit additional resources to better train our call center suppliers.
Several
researchers have questioned the safety of chromium picolinate, and we may be
liable for damages if our products are proven to have harmful side
effects.
In
1995
and 2002, a research group headed by Dianne Stearns, Ph.D. (University of
Dartmouth College and Northern Arizona University) administered chromium
picolinate in a laboratory to Chinese hamster ovary cell lines and reported
safety concerns. Also, in 2003, a research group headed by John Vincent, Ph.D.
(University of Alabama) administered chromium picolinate to fruit flies and
reported safety concerns.
The
Company engaged an independent contract research organization and replicated
the
studies conducted by Stearns using Chromax chromium picolinate following
internationally accepted procedures. This study found Chromax chromium
picolinate to be safe and was published in Mutation
Research, 2005.
Experts
have advised that fruit fly studies do not predict results in
humans. However,
the Stearns and Vincent studies can nevertheless reduce the marketability of
our
products. In addition, if in fact safety concerns are well founded for humans,
our viability will be affected since a large portion of our revenues is derived
from the sale of chromium picolinate for inclusion in nutritional supplement
products.
Harmful
effects could also result in legal action against us. We have $5.0 million
of
product liability insurance for the products we currently market and intend
to
obtain product liability insurance for products we will market in the future.
We
may not succeed in obtaining additional insurance or obtaining insurance
sufficient to cover all possible liabilities.
If
we
are unable to retain key personnel, our ability to manage our business
effectively and continue our growth could be negatively
impacted.
Paul
Intlekofer, our Chief Executive Officer, and other key management employees
are
primarily responsible for our day-to-day operations, and we believe our success
depends in part on our ability to retain them and to continue to attract
additional qualified individuals to our management team. We do not have an
employment agreement with any of our key management employees. The loss or
limitation of the services of any of our key management employees or the
inability to attract additional qualified management personnel could have a
material adverse effect on our business, financial condition, and results of
operations.
We
have no proprietary rights in products that we import from
Iceland.
The
Iceland manufacturer of the omega-3 fatty acids that we sell as “coming from
Iceland” uses a patented distillation process to remove toxins and dioxins from
the fish oils from which the product is derived. However, the product itself
is
not patented, nor do we have the right to sue persons who infringe on the
manufacturer’s distillation process. Further, the product competes with omega-3
fatty acids that are produced with competitive distillation processes or that
are derived directly from algae in a process that does not need to remove toxins
and dioxin.
If
we
do not timely take action to overcome the effect of the expiration of our patent
rights, or if we do not enforce our patent rights, or are unsuccessful enforcing
our patent rights, we will face increased competition.
Our
significant patents consist of:
· three
method of use patents that expire in 2009 that cover the use in low doses of
chromium picolinate for improving body composition, glucose stabilization and
cholesterol maintenance,
·
another
method of use patent that expires in 2015 and covers the use of high doses
of
chromium picolinate for glucose stabilization,
·
four
patents that expire in 2017 and cover the use of chromium for relieving the
symptoms of depression and pre-menstrual syndrome,
·
two
composition of matter patents that expire in 2017 and cover chromium picolinate
and biotin compositions and their use for stabilizing serum
glucose,
·
one
composition of matter patent that expires in 2017 and covers a composition
of
chromium picolinate and other ingredients and its use for improving body
composition, and
·
12
other
chromium-based patents that expire in 2017, 2018 and 2021 that cover a range
of
compositions and uses for which we do not offer products.
Our
ingredients business accounted for approximately 18% of our revenues in the
fiscal year 2007 and, since our ingredients are not branded, this business
depends almost entirely on the strength of our patents. Our branded products
that are based on chromium picolinate or other patented compounds also benefit
from patent protection. We will be materially and adversely affected if, by
the
expiration date of significant patents, which is 2009 for our patents for low
dose uses of chromium picolinate, we cannot maintain prior revenue levels by
reducing prices and increasing unit sales or by developing other formulations
of
chromium picolinate products to replace any reduction in sales.
We
have
also applied for 11 other United States patents relating to improving insulin
sensitivity, improving cognitive function, improving immune function, reducing
hyperglycemia, and treatment of diabetes, dyslipidemia, hypercholesterolemia
and
other diseases. If we do not obtain patent protection, our ability to develop
and market products for these disease states will be adversely affected, since
we will be subject to competition on the products we develop. In addition,
we
expect to incur significant expense for the development and marketing of our
cognitive product and we may be adversely affected should our application for
a
patent for our new cognitive product not be approved. Despite past successes
in
obtaining patent protection, there is no guarantee a patent will be granted
in
each instance.
Composition
of matter patents protect the manufacture, sale or use of a product. Method
of
use patents cover the use of a product. Method of use patents are more difficult
to enforce since the actual infringer is the person that takes the chromium
picolinate for the patented use. In order to enforce a method of use patent
against manufacturers or sellers, the patent owner must prove contributory
or
induced infringement, which is more difficult than enforcing a composition
of
matter patent.
We
are
from time to time faced with competition from companies, including importers,
that disregard our patent rights. Companies frequently take calculated risks
that we will not sue to enforce our patent rights against them and that we
will
not prevail in any suits that we do bring. In considering whether to bring
a
suit, we take into account the legal costs of enforcing the patent.
Competitors
who disregard our patent rights can undercut our prices because they avoid
paying for the technology in their products.
If
we
fail to protect our trademarks, then our ability to compete could be negatively
affected, which would harm our financial condition and operating
results. The
market for our products depends to a significant extent upon the goodwill
associated with our Chromax, Diachrome and Iceland Health trademarks. We own
the
material trademark rights used in connection with the packaging, marketing
and
distribution of our products in the markets where those products are sold.
Therefore, trademark protection is important to our business. Although most
of
our trademarks are registered in the United States and in certain foreign
countries in which we operate, we may not be successful in asserting trademark
protection. In addition, the laws of certain foreign countries may not protect
our intellectual property rights to the same extent as the laws of the United
States. The loss or infringement of our trademarks could impair the goodwill
associated with our brands and harm our reputation, which would harm our
financial condition and operating results.
Industry
and Market Risks
We
are highly dependent upon consumers’ perception of the safety and quality of our
products as well as similar products distributed by other companies in our
industry, and adverse publicity and negative public perception regarding
particular ingredients or products or our industry in general could limit our
ability to increase revenue and grow our business. Decisions
about purchasing made by consumers of our products may be affected by adverse
publicity or negative public perception regarding particular ingredients or
products or our industry in general. This negative public perception may include
publicity regarding the legality or quality of particular ingredients or
products in general or of other companies or our products or ingredients
specifically. Negative public perception may also arise from regulatory
investigations, regardless of whether those investigations involve us. We are
highly dependent upon consumers’ perception of the safety and quality of our
products as well as similar products distributed by other companies. Thus,
the
mere publication of reports asserting that such products may be harmful could
have a material adverse effect on us, regardless of whether these reports are
scientifically supported. Publicity related to nutritional supplements may
also
result in increased regulatory scrutiny of our industry. Adverse publicity
may
have a material adverse effect on our business, financial condition and results
of operations. There can be no assurance of future favorable scientific results
and media attention or of the absence of unfavorable or inconsistent
findings.
Changes
in consumer preferences and discretionary spending could negatively impact
our
operating results. Our
business is subject to changing consumer trends and preferences. Our continued
success depends in part on our ability to anticipate and respond to these
changes, and we may not respond in a timely or commercially appropriate manner
to such changes. Furthermore, the nutritional supplement industry is
characterized by rapid and frequent changes in demand for products and new
product introductions and enhancements. Our failure to accurately predict these
trends could negatively impact consumer opinion of our products, which in turn
could harm our customer and distributor relationships and cause the loss of
sales.
We
face intense competition from competitors that are larger, more established
and
possess greater resources than we do, and if we are unable to compete
effectively, we may be unable to grow our market share in order to become
profitable.
Numerous
manufacturers and retailers compete actively for consumers. There can be no
assurance that we will be able to compete in this intensely competitive
environment. In addition, nutritional supplements can be purchased in a wide
variety of channels of distribution. These channels include mass market retail
stores and the Internet. Because these markets generally have low barriers
to
entry, additional competitors could enter the market at any time. Private label
products of our customers also provide competition to our products. Additional
national or international companies may seek in the future to enter or to
increase their presence in the health foods channel or the vitamin, mineral
supplement market. Increased competition in either or both could have a material
adverse effect on us.
In
our
ingredients business, we believe that we have a relatively strong position
for
existing stand-alone chromium sales, and we have a relatively small market
share
for sales of chromium into multi-ingredient products. Our major competitor
in
this business is InterHealth Nutraceuticals Inc. which is a privately held
company that markets chromium polynicotinate.
Our
therapeutic branded business confronts many large established companies in
a
huge industry that serves the diabetes therapeutic market. The market is served
by the major pharmaceutical companies that offer various medications to
diabetics. Our success in this arena will in large part depend on our obtaining
a scientific consensus that our supplement offers benefits that are competitive
with the numerous products offered by companies that participate in this
business.
Our
omega-3 business is highly competitive. As we enter retail distribution channels
with our omega-3 products, we will be entering an intensely competitive market
with large established companies and brands such as Nordic Naturals, which
offers omega-3 fatty acids that have potency and purity similar to our products,
as well as Bumble Bee Seafoods and Puritan's Pride.
Our
product sales may decline due to the introduction by others of products that
have competitive advantages. We
are
not aware of any studies that compare the relative advantages or disadvantages
of our products as against other competitive products. Research supporting
competitors' claims in the nutrition supplement market is not subject to
mandatory review by any government agency. Therefore, new products can appear
and be brought to market rapidly and with little advance notice. Competitive
products may appear or be supported by new research before we are able to
respond with new product development or countervailing research. If competing
products are developed that customers believe are superior to our products,
sales of our products could decline and our business would be
harmed.
Our
products are subject to government regulation, which could limit or prevent
the
sale of our products. The
manufacture, packaging, labeling, advertising, promotion, distribution and
sale
of our products are subject to regulation by numerous national and local
governmental agencies in the United States and other countries. The primary
regulatory bodies in the United States are the FDA and FTC. Failure to comply
with these regulatory requirements may result in various types of penalties
or
fines. These include injunctions, product withdrawals, recalls, product
seizures, fines and criminal prosecutions. Individual states also regulate
nutritional supplements. A state may interpret claims or products presumptively
valid under federal law as illegal under that state’s regulations. In markets
outside the United States, we are usually required to obtain approvals, licenses
or certifications from a country’s ministry of health or comparable agency, as
well as labeling and packaging regulations, all of which vary from country
to
country. Approvals or licensing may be conditioned on reformulation of products
or may be unavailable with respect to certain products or product ingredients.
Any of these government agencies, as well as legislative bodies, can change
existing regulations, or impose new ones, which could cause any of the
following:
|
|
·
|
requirements
for the reformulation of certain or all products to meet new
standards,
|
|
|
·
|
the
recall or discontinuance of certain or all
products,
|
|
|
·
|
additional
record keeping,
|
|
|
·
|
expanded
documentation of the properties of certain or all
products,
|
|
|
·
|
expanded
or different labeling,
|
|
|
·
|
adverse
event tracking and reporting, and
|
|
|
·
|
additional
scientific substantiation.
|
Any
or
all of these requirements could have a material adverse effect on us. There
can
be no assurance that the regulatory environment in which we operate will not
change or that such regulatory environment, or any specific action taken against
us, will not result in a material adverse effect on us.
U.S.
government regulation currently affects the sale of our
products.
The
U.S. Food and Drug Administration regulates the labeling and marketing of our
dietary supplements under the Dietary Supplement and Health Education Act,
also
known as DSHEA. Under DSHEA, we are required to submit for FDA approval claims
regarding the effect of our dietary supplements on the structure or function
of
the body. DSHEA also requires FDA approval for health claims that relate dietary
supplements to disease prevention.
Under
DSHEA, within 30 days after first marketing a product, a company must submit
to
the FDA for review each claim (other than a qualified health claim) by the
company that the product benefits bodily structure or function. If the FDA
believes that a claim suggests the product is intended to diagnose, treat,
cure
or prevent a disease, it will reject the claim, usually within three months,
in
which case the company may no longer make the claim. To date, the FDA has not
rejected any of our claims for benefit to bodily structure and function that
are
significant for the marketing of our products. Should the FDA in the future
reject significant claims, we may be unable to interest consumers in purchasing
our products.
The
FDA
review of health claims requires significant scientific agreement that the
totality of the data supports the claims that a product prevents disease. We
applied for a qualified health claim on December 19, 2003, related to the
prevention of diabetes. In August 2005, the FDA recognized chromium picolinate
as a safe nutritional supplement that may reduce risk of insulin resistance
and
possibly type 2 diabetes, and concluded that there is credible evidence to
support the following qualified health claim:
One
small
study suggests that chromium picolinate may reduce the risk of insulin
resistance, and therefore possibly may reduce the risk of type 2 diabetes.
FDA
concludes, however, that the existence of such a relationship between chromium
picolinate and either insulin resistance or type 2 diabetes is highly
uncertain.”
The
FDA
declined to permit other qualified health claims that were proposed by the
Company.
We
are subject to a Federal Trade Commission consent agreement that may adversely
affect our business. The
Federal Trade Commission ("FTC") regulates product-advertising claims, and
requires that claims be supported by competent and reliable scientific evidence.
Prior to our acquisition of a California limited partnership called Nutrition
21
("Nutrition 21 LP"), the FTC opened an inquiry into certain of the claims that
Nutrition 21 LP was making for chromium picolinate. The inquiry was terminated
by the FTC with Nutrition 21 LP entering into a consent agreement that requires
Nutrition 21 LP to support its claims by competent and reliable scientific
evidence. After we acquired Nutrition 21 LP in 1997, we undertook new clinical
studies to support the claims we intended to make for our products. The FTC
has
subsequently audited our chromium picolinate advertising and has not found
either a lack of competent and reliable scientific evidence or a failure to
comply with the consent agreement.
We
are
negotiating a settlement with QVC regarding liability for weight loss
advertising claims that were made on QVC, Inc. televised shopping programs
for
Lite Bites, a product that we have since discontinued. We anticipate that any
settlement would also resolve potential claims by the FTC against us for these
advertising claims. The cost of any settlement has not been reserved for in
our
financial statements and any material settlement could have a significant impact
on our operating results at the time the amount thereof becomes reasonably
ascertainable. The FTC continues to monitor our advertising and could limit
our
advertising in ways that could make marketing our products more difficult or
result in lost sales.
The
market price for our common stock may be particularly volatile, and our
stockholders may be unable to resell their shares at a profit.
The
trading price of our common stock has been subject to wide fluctuations and
may
continue to fluctuate in the future in response to a variety of factors,
including:
|
|
·
|
quarter-to-quarter
variations in operating results,
|
|
|
·
|
material
announcements by us or our
competitors,
|
|
|
·
|
governmental
regulatory action,
|
|
|
·
|
negative
or positive publicity involving us or the nutritional supplement
industry
generally,
|
|
|
·
|
general
economic downturns,
|
|
|
·
|
announcements
by official or unofficial health and medical
authorities,
|
|
|
·
|
consumer
preferences generally, or
|
|
|
·
|
other
events or factors, many of which are beyond our
control.
|
In
addition, the stock market has historically experienced significant price and
volume fluctuations, which have particularly affected the market prices of
many
nutritional supplement companies and which have, in certain cases, not had
a
strong correlation to the operating performance of these companies. General
economic conditions, such as recession or interest rate or currency rate
fluctuations in the United States or abroad, could negatively affect the
market price of our common stock. In addition, our operating results in future
quarters may be below the expectations of securities analysts and investors.
If
that were to occur, the price of our common stock would likely decline, perhaps
substantially.
The
limited liquidity for our common stock could affect an investor’s ability to
sell our shares at a satisfactory price.
Our
common stock is relatively illiquid. As of November 2, 2007, the Company had
approximately 62.5 million shares of common stock outstanding. The average
daily
trading volume in the common stock during the prior 60 trading days ending
on
that date was approximately 202,841 shares. A more active public market for
our
common stock, however, may not develop, which would continue to adversely affect
the trading price and liquidity of the common stock. Moreover, a thin trading
market for the common stock causes the market price for the common stock to
fluctuate significantly more than the stock market as a whole. Without a large
float, our common stock is less liquid than the stock of companies with broader
public ownership and, as a result, the trading prices of our common stock may
be
more volatile.
If
we
are unable to maintain a Nasdaq listing for our securities the liquidity of
our
stock will be reduced and investors may be unable to sell them, or may be able
to sell them only at reduced prices. We
are
currently in compliance with Nasdaq's minimum $1.00 bid price requirement for
continued listing on the Nasdaq Capital Market. If we fail to meet the $1.00
bid
price requirement for at least 30 consecutive business days, we will be provided
time to achieve compliance, generally up to one year provided we satisfy the
criteria for continued listing other than the minimum bid price. The period
during which our common stock will continue to be listed on the Nasdaq Capital
Market may be extended further subject to certain conditions. Throughout this
period we can regain compliance by maintaining a $1.00 per share bid price
for a
minimum of 10 consecutive business days. Should we not be in compliance at
the
end of this period, its common stock will be subject to delisting from the
Nasdaq Capital Market. Under certain circumstances, to ensure that we can
sustain long-term compliance, Nasdaq may require the closing bid price to equal
or to exceed the $1.00 minimum bid price requirement for more than 10
consecutive business days before determining that a company complies with
Nasdaq's minimum $1.00 bid price requirement.
The
liquidity of our common stock will be reduced if our securities fail to maintain
a Nasdaq listing. Purchasers of our common stock would likely find it more
difficult to sell our common stock, and the market value of our common stock
would likely decline.
In
addition, if we fail to maintain a Nasdaq listing for our securities, and no
other exclusion from the definition of a "penny stock" under the Exchange Act
is
available, then any broker engaging in a transaction in our securities would
be
required to provide any customer with a risk disclosure document, disclosure
of
market quotations, if any, disclosure of the compensation of the broker-dealer
and its salesperson in the transaction, and monthly account statements showing
the market values of our securities held in the customer's accounts. The bid
and
offer quotation and compensation information must be provided prior to effecting
the transaction and must be contained on the customer's confirmation. If brokers
become subject to the "penny stock" rules when engaging in transactions in
our
securities, they would become less willing to engage in these transactions,
which will make it more difficult for purchasers of our common stock to dispose
of their shares.
Should
we
fail to maintain our Nasdaq listing we may be required to redeem our Series
J 8%
convertible preferred stock, and should we then or thereafter not be listed
on
the Bulletin Board we may be required to redeem our Series I 6% Convertible
Preferred Stock before maturity at
the
original issue price.
Failure
to remediate the material weaknesses in our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
could
have a material adverse effect on our business and stock price.
During
the audit of our financial statements for the year ended June 30, 2007, our
independent registered public accounting firm identified a material weakness
regarding the company’s independent review and knowledge of complex accounting
areas (stock options; income taxes; projections for impairment analysis). As
defined by the Public Company Accounting Oversight Board Auditing Standard
No.5,
a material weakness is a deficiency or a combination of deficiencies over
financial reporting such that there is a reasonable possibility that a material
misstatement of the annual or the interim financial statements will not be
prevented or detected.
We
believe it is important to communicate our expectations to investors. However,
there may be events in the future that we are not able to predict accurately
or
that we do not fully control that could cause actual results to differ
materially from those expressed or implied. This prospectus and the documents
incorporated by reference in the accompanying prospectus may contain
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to
certain factors, risks and uncertainties that may cause actual results, events
and performances to differ materially from those referred to in such statements.
These forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties, including
without limitation, changes in external market factors, changes in the Company's
business or growth strategy or an inability to execute its strategy due to
changes in its industry or the economy generally, the emergence of new or
growing competitors, various other competitive factors and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission. Actual results could differ materially
from
the results referred to in the forward-looking statements. The forward-looking
statements are based on information available to us on the date hereof, and
we
assume no obligation to update any such forward-looking statements.
We
will
not receive any proceeds from the sale of the offered shares by the Selling
Security Holders. We have agreed to pay the expenses of registration of the
Common Stock, including legal and accounting fees. See "Plan of Distribution."
All of the shares of common stock are being sold by the Selling Security Holders
for their own accounts. Any proceeds that we receive from the exercise of
warrants will be used by us for general working capital.
We
are
authorized to issue 100,000,000 shares of Common Stock, $.005 par value, of
which 62,536,793 shares are issued and outstanding as of October 1, 2007. All
the outstanding shares of common stock are fully paid, validly issued and
nonassessable.
Holders
of shares of Common Stock are entitled to share equally on a per-share basis
in
such dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon liquidation, dissolution or winding up of the Company,
after payment of creditors and the holders of any senior securities, our assets
will be divided pro rata on a per-share basis among the holders of the shares
of
our Common Stock. There are no conversion or redemption privileges or any
sinking fund provisions with respect to the Common Stock.
Holders
of shares of Common Stock are entitled to cast one vote for each share held
at
all stockholders' meetings for all purposes, including election of directors.
The Common Stock does not have cumulative voting rights, which means that the
holders of more than 50% of the common stock can elect 100% of the directors
of
the Company if they choose to do so. The bylaws of the Company require that
only
a majority of the issued and outstanding shares of Common Stock need be
represented to constitute a quorum and transact business at a stockholders'
meeting.
We
adopted a Shareholder Rights Plan on September 12, 2002. Under this plan, we
distributed, as a dividend, one preferred share purchase right for each share
of
Common Stock held by stockholders of record as of the close of business on
September 25, 2002. The Rights Plan is designed to deter coercive takeover
tactics, including the accumulation of shares in the open market or through
private transactions, and to prevent an acquiror from gaining control of the
Company without offering a fair price to all of our stockholders. The Rights
will expire on September 11, 2012.
Each
Right entitles stockholders to buy one one-thousandth of a share of newly
created Series H Participating Preferred Stock of the Company for $3.00 per
share. Each one one-thousandth of a share of the Preferred Stock is designed
to
be the functional equivalent of one share of Common Stock. The Rights will
be
exercisable only if a person or group acquires beneficial ownership of 15%
or
more of the Company's Common Stock (30% in the case of a person or group that
is
currently a 15% holder) or commences a tender or exchange offer upon
consummation of which such person or group would beneficially own 15% or more
of
the Company's Common Stock.
If
any
person or group other than a person who is approved in advance by the board
(an
"Acquiring Person") becomes the beneficial owner of 15% or more of the Company's
Common Stock (30% in the case of a person that is currently a 15% holder),
then
(1) the Rights become exercisable for Common Stock instead of Preferred Stock,
(2) the Rights held by the Acquiring Person and certain affiliated parties
become void, and (3) the Rights held by others are converted into the right
to
acquire, at the purchase price specified in the Right, shares of Common Stock
of
the Company having a value equal to twice such purchase price. The Company
will
generally be entitled to redeem the Rights, at $.001 per Right, until 10 days
(subject to extension) following a public announcement that an Acquiring Person
has acquired a 15% position.
On
March
31, 2005 we issued 9,600 shares of Series I 6% Convertible Preferred Stock
("Series I Preferred Stock"). Each share of Series I Preferred Stock has a
stated value of $1,000 per share. The Series I Preferred Stock is convertible
into Common Stock at the option of the holders at $1.2535 per share, subject
to
anti-dilution provisions. Subject to certain conditions, we can force conversion
of the Series I Preferred Stock if the volume weighted average price of the
common stock is at least $3.76 for 20 consecutive trading days. The Series
I
Preferred Stock pays cumulative dividends at the annual rate of 6%. Dividends
are payable in cash, provided that if certain conditions are satisfied,
dividends may be paid in shares of Common Stock valued at 90% of the average
of
the 20 trading days volume weighted average prices immediately prior to the
dividend payment date. The stated value of the Series I Preferred Stock is
preferred in liquidation against the holders of Common Stock. The consent of
the
holders of the Series I Preferred Stock is required before we can issue senior
or pari passu stock. The Series I Preferred Stock generally has no voting
rights. We must redeem the Series I Preferred Stock at the original issue price
plus accrued dividends on March 31, 2009. We must also redeem the Series I
Preferred Stock on the occurrence of certain default events.
On
September 11, 2007 we sold 17,750 shares of Series J 8% Convertible Preferred
Stock ("Series J Preferred Stock"). Each share of Series J Preferred Stock
has a
stated value of $1,000 per share. The Series J Preferred Stock is convertible
into Common Stock at the option of the holders at $1.2158 per share, subject
to
anti-dilution provisions. Subject to certain conditions, we can force conversion
of the Series J Preferred Stock if the volume weighted average price of the
common stock is at least $3.6474 for 20 consecutive trading days. The Series
J
Preferred Stock pays cumulative dividends at the annual rate of 8%. Dividends
are payable in cash, provided that if certain conditions are satisfied,
dividends may be paid in shares of Common Stock valued at 90% of the average
of
the then 20 day consecutive trading day volume weighted average price. The
stated value of the Series J Preferred Stock is preferred in liquidation against
the holders of Common Stock. The consent of the holders of the Series J
Preferred Stock is required before we can issue senior or pari passu stock.
The
Series J Preferred Stock generally has no voting rights. We must redeem the
Series J Preferred Stock at the original issue price plus accrued dividends
on
September 11, 2011. We must also redeem the Series J Preferred Stock on the
occurrence of certain default events
The
following table sets forth the names of the Selling Security Holders, all of
the
securities of the Company beneficially owned by them, and the number of offered
shares which may be offered for sale pursuant to this prospectus by each of
the
Selling Security Holders.
All
information with respect to share ownership has been furnished by the Selling
Security Holders. The offered shares may be offered from time to time by the
Selling Security Holders named below. However, the Selling Security Holders
are
not obligated to sell any offered shares immediately under this prospectus.
The
table assumes that all of the offered shares held by the Selling Security
Holders are sold, and that the Selling Security Holders acquire no additional
shares of common stock before the completion of this offering.
Beneficial
ownership is determined in accordance with the rules of the SEC, and for
calculating the shares and percentage beneficially owned by each Selling
Security Holder includes any securities which the person has the right to
acquire within 60 days of the date of this prospectus through the conversion
or
exercise of any security or right. However, the terms of the Series J Preferred
Stock and Warrants reflected in the table and in the footnotes to the table
restrict each holder's right to convert the Series J Preferred Stock and to
exercise the Warrants to the extent that beneficial ownership of such holder
and
its affiliates would exceed 4.99% of the shares of Common Stock that would
be
outstanding after giving effect to such conversion or exercise, and the Warrants
are in any event not exercisable until March 11, 2008. For convenience the
table
and the footnotes are presented as if these restrictions did not
apply.
The
Series J Preferred Stock and the Warrants were issued in a private placement
entered into on September 11, 2007. We have agreed to register the shares
issuable on conversion of the Series J Preferred Stock and on exercise of the
Warrants. We are also registering 8,183,938 shares of Common Stock that may
be
issued as dividend payments to the Selling Security Holders.
Footnotes
to the table identify the Selling Security Holders who are broker-dealers or
affiliates of broker-dealers. The Selling Security Holders who are
broker-dealers or affiliates of broker-dealers have represented that they
purchased in the ordinary course of business the securities that are convertible
into or exercisable for the shares that they are offering for sale. These
Selling Security Holders have further represented that at the time of purchase
they had no agreements or understandings to distribute these
shares.
|
NAME
OF SELLING
SECURITY
HOLDER
|
|
PREFERRED
STOCK
OWNED
BEFORE
OFFERING
1
|
|
WARRANTS
OWNED
BEFORE
OFFERING
2
|
|
COMMON
STOCK
OWNED
BEFORE
OFFERING
3
|
|
AMOUNT
OF
COMMON
STOCK
UNDERLYING PREFERRED STOCK AND WARRANTS TO
BE
OFFERED
|
|
COMMON
STOCK
OWNED
AFTER
OFFERING
|
|
PERCENT
OF
CLASS OF PREFERRED STOCK OWNED AFTER THE OFFERING
|
|
|
Otago
Partners, LLC4
|
|
|
250
|
|
|
94,581
|
|
|
|
|
|
300,207
|
|
|
|
|
|
0
|
|
|
Shea
Ventures, LLC5
|
|
|
1,000
|
|
|
378,322
|
|
|
|
|
|
1,200,823
|
|
|
|
|
|
0
|
|
|
Diamond
Opportunity Fund, LLC6
|
|
|
500
|
|
|
189,161
|
|
|
111,111
|
|
|
600,413
|
|
|
111,111*
|
|
|
0
|
|
1
Consists
of Series J 8% Convertible Preferred Stock, with a stated value of $1,000
per
share and an initial conversion price into common stock of $1.2158 per
share of
common stock, subject to anti-dilution provisions. The Preferred Stock
accrues
dividends at 8% per annum. Subject to certain conditions, dividends may
be paid
at the option of the Company in shares of common stock valued at 90% of
the
volume weighted average price in a designated period prior to the dividend
payment date. This Prospectus also covers shares of common stock issuable
on
conversion of the Preferred Stock pursuant to anti-dilution provisions
and
shares of common stock issuable as dividends on the Preferred
Stock.
2
Consists
of Warrants to purchase shares of common stock at $1.2158 per share subject
to
anti-dilution provisions that are being registered hereunder. The Warrants
are
not exercisable until March 11, 2008. This Prospectus also covers shares
of
common stock issuable on exercise of the Warrants pursuant to anti-dilution
provisions.
3
Except
as otherwise noted, constitutes shares of common stock issuable on conversion
of
the Preferred Stock at $1.2158 per share and on exercise of Warrants at
$1.2158
per share.
4
Lindsay
A. Rosenwald, M.D. is the managing member of Otago Partners, LLC has sole
voting
and dispositive power over the securities held by this selling shareholder.
Mr.
Rosenwald disclaims beneficial ownership of these shares. Dr. Rosenwald
is the
sole shareholder and Chairman of Paramount BioCapital, Inc., an NASD member
broker-dealer, and Paramount BioCapital Asset Management , Inc., an investment
adviser registered with the SEC.
5
Edmund
H. Shea, Jr. has sole voting and dispositive power over the securities
held by
this selling shareholder. Mr. Shea disclaims beneficial ownership of these
shares.
6 The
shares listed herein are owned by Diamond Opportunity Fund, LLC. Diamond
Asset
Management serves as the manager of Diamond Opportunity Fund, LLC and,
in such
capacity, exercises sole power to vote and dispose of the shares. David
Hokin,
Rub Rubin and Richard Marks serve as the Managers and Managing Director,
respectively, of Diamond Asset Management, LLC and may be deemed to have
shared
power to vote and dispose of the shares. Diamond Asset Management, LLC
and each
of Messrs. Hokin, Rubin and Marks disclaim beneficial ownership of these
shares.
|
NAME
OF SELLING
SECURITY
HOLDER
|
|
PREFERRED
STOCK
OWNED
BEFORE
OFFERING
1
|
|
WARRANTS
OWNED
BEFORE
OFFERING
2
|
|
COMMON
STOCK
OWNED
BEFORE
OFFERING
3
|
|
AMOUNT
OF
COMMON
STOCK
UNDERLYING PREFERRED STOCK AND WARRANTS TO
BE
OFFERED
|
|
COMMON
STOCK
OWNED
AFTER
OFFERING
|
|
PERCENT
OF
CLASS OF PREFERRED STOCK OWNED AFTER THE OFFERING
|
|
|
Rockmore
Investment Master Fund Ltd7
|
|
|
1000
|
|
|
378,322
|
|
|
|
|
|
1,200,823
|
|
|
|
|
|
0
|
|
|
Islandia,
L.P8 .
|
|
|
2,500
|
|
|
945,805
|
|
|
|
|
|
3,002,064
|
|
|
|
|
|
0
|
|
|
UBS
O'Connor LLC F/B/O: O'Connor Global Convertible Arbitrage Master
Limited9
|
|
|
1,000
|
|
|
378,322
|
|
|
|
|
|
1,200,823
|
|
|
|
|
|
0
|
|
|
UBS
O'Connor LLC F/B/O: O'Connor Pipes Corporate Strategies Master
Limited10
|
|
|
1,000
|
|
|
378,322
|
|
|
|
|
|
1,200,823
|
|
|
|
|
|
0
|
|
7
Rockmore
Capital, LLC (“Rockmore Capital”) and Rockmore Partners, LLC (“Rockmore
Partners”), each a limited liability company formed under the laws of the State
of Delaware, serve as the investment manager and general partner, respectively,
to Rockmore Investments (US) LP, a Delaware limited partnership, which
invests
all of its assets through Rockmore Investment Master Fund Ltd., an exempted
company formed under the laws of Bermuda (“Rockmore Master Fund”). By reason of
such relationships, Rockmore Capital and Rockmore Partners may be deemed
to
share dispositive power over the shares of our common stock owned by Rockmore
Master Fund. Rockmore Capital and Rockmore Partners disclaim beneficial
ownership of such shares of our common stock. Rockmore Partners has delegated
authority to Rockmore Capital regarding the portfolio management decisions
with
respect to the shares of common stock owned by Rockmore Master Fund and,
as of
October 2, 2007, Mr. Bruce T. Bernstein and Mr. Brian Daly, as officers
of
Rockmore Capital, are responsible for the portfolio management decisions
of the
shares of common stock owned by Rockmore Master Fund. By reason of such
authority, Messrs. Bernstein and Daly may be deemed to share dispositive
power
over the shares of our common stock owned by Rockmore Master Fund. Messrs.
Bernstein and Daly disclaim beneficial ownership of such shares of our
common
stock and neither of such persons has any legal right to maintain such
authority. No other person has sole or shared voting or dispositive power
with
respect to the shares of our common stock as those terms are used for purposes
under Regulation 13D-G of the Securities Exchange Act of 1934, as amended.
No
person or “group” (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended, or the SEC’s Regulation 13D-G) controls
Rockmore Master Fund.
8
Richard
O. Berner, Edgar R. Berner, Thomas R. Berner, and Anthony R. Berner share
voting
and dispositive power over the securities held by this selling shareholder.
Richard O. Berner, Edgar R. Berner, Thomas R. Berner, and Anthony R. Berner
each
disclaims beneficial ownership of these shares.
9
Andrew
Martin has sole voting and dispositive power over the securities held by
this
selling shareholder. Mr. Martin is the Managing Director of the selling
security
holder. Mr. Martin disclaims beneficial ownership of these
shares.
10
Andrew
Martin has sole voting and dispositive power over the securities held by
this
selling shareholder. Mr. Martin is the Managing Director of the selling
security
holder. Mr. Martin disclaims beneficial ownership of these
shares.
|
NAME
OF SELLING
SECURITY
HOLDER
|
|
PREFERRED
STOCK
OWNED
BEFORE
OFFERING
1
|
|
WARRANTS
OWNED
BEFORE
OFFERING
2
|
|
COMMON
STOCK
OWNED
BEFORE
OFFERING
3
|
|
AMOUNT
OF
COMMON
STOCK
UNDERLYING PREFERRED STOCK AND WARRANTS TO
BE
OFFERED
|
|
COMMON
STOCK
OWNED
AFTER
OFFERING
|
|
PERCENT
OF
CLASS OF PREFERRED STOCK OWNED AFTER THE OFFERING
|
|
|
Midsummer
Investment, Ltd.11
|
|
|
5,000
|
|
|
1,891,611
|
|
|
30,839
|
|
|
6,004,130
|
|
|
30,839*
|
|
|
0
|
|
|
Fort
Mason Master, LP 12
|
|
|
2,817
|
|
|
1,065,847
|
|
|
62,857
|
|
|
3,382,840
|
|
|
969,271
(1.55%
of Common Stock)730,413
15
(1.17%
of Common Stock)
|
|
|
0
|
|
|
Fort
Mason Partners, LP 13
|
|
|
183
|
|
|
69,119
|
|
|
969,271
|
|
|
219,637
|
|
|
62,857*
47,366*
15
|
|
|
0
|
|
|
Pierce
Diversified Strategy Master Fund LLC, Ena 14
|
|
|
75
|
|
|
83,929
|
|
|
0
|
|
|
90,062
|
|
|
55,555*15
|
|
|
*
|
|
|
Enable
Opportunity Partners LP16
|
|
|
150
|
|
|
56,749
|
|
|
0
|
|
|
180,125
|
|
|
0
|
|
|
0
|
|
|
Enable
Growth Partners LP17
|
|
|
1,275
|
|
|
482,361
|
|
|
|
|
|
1,531,053
|
|
|
|
|
|
|
|
|
BridgePointe
Master Fund Ltd.18
|
|
|
1,000
|
|
|
378,322
|
|
|
|
|
|
1,200,823
|
|
|
|
|
|
|
|
11
Midsummer Capital, LLC is the investment advisor to Midsummer. By virtue
of such
relationship, Midsummer Capital, LLC may be deemed to have dispositive
power
over the shares owned by Midsummer. Midsummer Capital, LLC disclaims
beneficial
ownership of such shares. Mr. Michel Amsalem and Mr. Scott Kaufman have
delegated authority from the members of Midsummer Capital, LLC with respect
to
the shares of Common Stock owned by Midsummer. Messrs. Amsalem and Kaufman
may
be deemed to share dispositive power over the shares of common stock
held by
Midsummer. Messrs. Amsalem and Kaufman disclaim beneficial ownership
of such
shares of Common Stock, and neither person has any legal right to maintain
such
delegated authority.
12
The
shares listed herein are owned by Fort Mason Master, L.P. Fort Mason
Capital, LLC serves as the general partner of Fort Mason Master, L.P. and,
in such capacity, exercises sole voting and investment authority with
respect to
such shares. Mr. Daniel German serves as the sole managing member of Fort
Mason Capital, LLC. Fort Mason Capital, LLC and Mr. German each disclaim
beneficial ownership of such shares, except to the extent of its or his
pecuniary interest therein, if any.
13
The
shares listed herein are owned by Fort Mason Partners, LP. Fort Mason
Capital, LLC serves as the general partner of Fort Mason Partners, L.P.
and, in such capacity, exercises sole voting and investment authority
with
respect to such shares. Mr. Daniel German serves as the sole managing
member of Fort Mason Capital, LLC. Fort Mason Capital, LLC and Mr. German
each disclaim beneficial ownership of such shares, except to the extent
of its
or his pecuniary interest therein, if any.
14
Mitch
Levine has sole voting and dispositive power over the securities held
by this
selling shareholder. Mr. Levine is the Managing Partner of the selling
security
holder. Mr. Levine disclaims beneficial ownership of these
shares.
15
Shares
issuable upon exercise of previously acquired warrants.
16
Mitch
Levine has sole voting and dispositive power over the securities held
by this
selling shareholder. Mr. Levine is the Managing Partner of the selling
security
holder. Mr. Levine disclaims beneficial ownership of these
shares
17
Mitch
Levine has sole voting and dispositive power over the securities held
by this
selling shareholder. Mr. Levine is the Managing Partner of the selling
security
holder. Mr. Levine disclaims beneficial ownership of these
shares
18
Eric S.
Swartz has sole voting and dispositive power over the securities held
by this
selling shareholder and disclaims beneficial ownership of these
shares.
*
Less
than 1%
Total
Dollar Value of Common Stock Underlying the Preferred Stock and
Warrants
The
total
dollar value of the 21,314,659 shares of common stock that we have registered
for resale and that underlie the Preferred Stock and Warrants are, respectively,
$15,767,395 and $7,252,435. These amounts are based on the $1.08 closing price
per share on the Nasdaq Capital Market on September 10, 2007, which is the
day
immediately prior to the date of the sale of the Preferred Stock and Warrants.
Payments
Made and Potentially Required to be Made in Connection with the Preferred Stock
Offering
The
following table sets forth the dollar amount of each payment (including the
value of any payments to be made in common stock) that in connection with the
sale of the Preferred Stock and Warrants we are required to make to any selling
shareholder, any affiliate of a selling shareholder, or any person with whom
any
selling shareholder has a contractual relationship regarding the
transaction.
|
Name
of Selling Shareholder
|
|
Convertible
Preferred Stock (percentage of total offering)
|
|
Cash
Dividend Payments In First Year After Sale ($) (1)(2)
|
|
Cash
Dividend Payments Until Maturity ($) (1) (2)
|
|
Common
stock issuable as Dividends in first year after sale (1)
(3)
|
|
Common
stock issuable as Dividends until maturity (1) (3)
|
|
Potential
Liquidated Damages and Penalties ($) (4)
|
|
|
BridgePointe
Master Fund Ltd.
|
|
|
1,000
(5.6%)
|
|
|
80,000
|
|
|
320,000
|
|
|
94,317
|
|
|
377,270
|
|
|
320,083
|
|
|
Diamond
Opportunity Fund, LLC
|
|
|
500
(2.8%)
|
|
|
40,000
|
|
|
160,000
|
|
|
47,159
|
|
|
188,635
|
|
|
160,041
|
|
|
Enable
Growth Partners LP
|
|
|
1,275
(7.2%)
|
|
|
102,000
|
|
|
408,000
|
|
|
120,2554
|
|
|
481,019
|
|
|
408,105
|
|
|
Enable
Opportunity Partners LP
|
|
|
150
(0.8%)
|
|
|
12,000
|
|
|
48,000
|
|
|
14,418
|
|
|
56,950
|
|
|
48,012
|
|
|
Fort
Mason Master, LP
|
|
|
2,817(15.9%)
|
|
|
225,360
|
|
|
901,440
|
|
|
265,692
|
|
|
1,062,768
|
|
|
901,673
|
|
|
Fort
Mason Partners, LP
|
|
|
183(1.0%)
|
|
|
14,600
|
|
|
58,560
|
|
|
17,260
|
|
|
69,040
|
|
|
58,575
|
|
|
Islandia,
L.P.
|
|
|
2,500
(14.1%)
|
|
|
200,000
|
|
|
800,000
|
|
|
235,793
|
|
|
943,174
|
|
|
800,206
|
|
|
Midsummer
Investment, Ltd.
|
|
|
5,000
(28.2%)
|
|
|
400,000
|
|
|
1,600,000
|
|
|
471,587
|
|
|
1,866,348
|
|
|
1,600,413
|
|
|
Otago
Partners, LLC
|
|
|
250
(1.4%)
|
|
|
20,000
|
|
|
80,000
|
|
|
23,579
|
|
|
94,317
|
|
|
80,021
|
|
|
Pierce
Diversified Strategy Master Fund LLC, Ena
|
|
|
75
(0.4%)
|
|
|
6,000
|
|
|
24,000
|
|
|
7,074
|
|
|
28,295
|
|
|
24,006
|
|
|
Rockmore
Investment Master Fund Ltd
|
|
|
1,000
(5.6%)
|
|
|
80,000
|
|
|
320,000
|
|
|
94,317
|
|
|
377,270
|
|
|
320,083
|
|
|
Shea
Ventures, LLC
|
|
|
1,000
(5.6%)
|
|
|
80,000
|
|
|
320,000
|
|
|
94,317
|
|
|
377,270
|
|
|
320,083
|
|
|
UBS
O'Connor LLC F/B/O: O'Connor Global Convertible Arbitrage Master
Limited
|
|
|
1,000
(5.6%)
|
|
|
80,000
|
|
|
320,000
|
|
|
94,317
|
|
|
377,270
|
|
|
320,083
|
|
|
UBS
O'Connor LLC F/B/O: O'Connor Pipes Corporate Strategies Master
Limited
|
|
|
1,000
(5.6%)
|
|
|
80,000
|
|
|
320,000
|
|
|
94,317
|
|
|
377,270
|
|
|
320,083
|
|
|
Total
|
|
|
17,750
(100%)
|
|
|
1,420,000
|
|
|
5,680,000
|
|
|
1,674,133
|
|
|
6,696,534
|
|
|
5,681,466
|
|
(1)
The
Preferred Stock pays cumulative dividends at the annual rate of 8%. Dividends
are payable in cash, provided that in certain circumstances we may elect to
pay
dividends in shares of common stock valued at 90% of the then 20 consecutive
trading day volume weighted average price of our common stock.
(2)
Assumes that dividend payments will be made in cash and that there is no
conversion of Preferred Stock through maturity on September 11,
2011.
(3)
We
will
issue a total of 6,696,534 shares of common stock as dividends on the Preferred
Stock, assuming that no Preferred Stock is converted before maturity on
September 11, 2011, we elect and are permitted to pay all dividends on the
Preferred Stock in shares of common stock, and the 20 consecutive trading day
volume weighted average price of our common stock is $0.9424 (the 20 consecutive
trading day volume weighted average price of our common stock as of October
30,
2007) in all relevant calculation periods. As of October 30, 2007, the 90%
of
the 20 consecutive trading day volume weighted average per share price of our
common stock was $0.8424. The number of shares of common stock issuable as
dividends on the Preferred Stock will increase if the relevant volume weighted
average price of our common stock declines, and will decrease if the relevant
volume weighted average price of our common stock increases or if Preferred
Stock is converted prior to maturity.
(4)
Comprised of the total amount of liquidated damages and penalties potentially
payable to the selling shareholders as set forth below. In each case, we may
also be required to pay contractual damages in addition to liquidated damages
and penalties.
We
are
required to pay liquidated damages of up to $20 per trading day for each $1,000
of underlying common stock (based on the then volume weighted average price)
from which we do not timely remove restrictive legends on conversion of
Preferred Stock. This obligation will continue to accrue until the legends
are
removed. The table assumes that we will meet our contractual obligation, but
includes liquidated damages on the possibility that legends are removed five
trading days late.
Should
we
fail timely to deliver shares of common stock on conversion of the Preferred
Stock we will be required to pay to the converting shareholder liquidated
damages of up to $100 per trading day for each $5,000 of Stated Value of
Preferred Stock being converted. This obligation will continue to accrue until
such certificates are delivered. The table assumes that we will meet our
contractual obligation, but includes liquidated damages on the possibility
that
certificates are delivered five trading days late.
We
are
required to pay liquidated damages of up to $20 per trading day for each $1,000
of underlying common stock (based on the then volume weighted average price)
from which we do not timely remove restrictive legends on exercise of Warrants.
This obligation will continue to accrue until the legends are removed. The
table
assumes that we will meet our contractual obligation, but includes liquidated
damages on the possibility that legends are removed five trading days
late.
Should
we
default in the timely filing and effectiveness of this registration statement
or
should we fail to maintain the effectiveness of this registration statement,
we
will be required to pay to each holder of Preferred Stock partial liquidated
damages of up to 18% of the aggregate purchase price paid by such holder for
the
Preferred Stock. The table assumes that the maximum amount of liquidated damages
becomes payable.
The
table
does not take into account fees to Collins Stewart LLC and Life Science Group,
Inc. who acted as placements agents for the Preferred Stock and Warrants. These
fees consist of a combined total of $905,000 in cash and Warrants to purchase
79,996 shares of our common stock at an exercise price of $1.2158. The placement
agents have advised us that they are not affiliated with any of the selling
shareholders. The table also does not take into account $239,000 of legal and
other expenses that we paid to in connection with the transaction to persons
not
affiliated with the selling shareholders.
No
Conversion Discounts Relative to Market Price on Date of Sale from Preferred
Stock or the Warrants
There
are
no conversion discounts for the common stock underlying the Preferred Stock
or
the Warrants held by the selling shareholders or their affiliates. On September
10, 2007, the day immediately prior to the date of the sale of the Preferred
Stock and Warrants, the closing price of our Common Stock was $1.08. The
conversion price was fixed on the date of sale at $1.2158. The exercise price
of
the Warrants was fixed on the date of sale at $1.2158.
The
conversion and exercise prices remain fixed regardless of any decline in market
price for the underlying securities. However, the Preferred Stock contains
an
anti-dilution clause that provides that if we issue any shares of common stock
or common stock equivalents at less than $1.2158, subject to certain exceptions
the conversion price of the Preferred Stock will be reduced to the lower price
on a non-weighted basis. The Warrants contain an anti-dilution clause
that
provides that if we issue any shares of common stock or common stock equivalents
at less than $1.2158 per share, then, subject to certain exceptions, the
exercise price of the Warrants will be reduced to the lower price on a
non-weighted basis and the number of shares issuable on exercise of the Warrants
will be proportionately increased.
The
Warrants also incorporate Nasdaq rules that unless and until shareholders
approve the transaction, the exercise price of the Warrants will not be reduced
below $1.09 by this anti-dilution provision.
Comparison
of Company Proceeds to Potential Investor Profit
The
table
set forth below is subject to the same footnotes that apply to the prior
table.
|
1
|
|
2
|
|
3
|
|
4
|
|
5
|
|
6
|
|
7
|
|
|
Gross
Proceeds to Company from Preferred Stock Offering
|
|
Dividends
until maturity
|
|
Potential
liquidated damages and penalties
|
|
Total
of Prior two columns
|
|
Net
Proceeds to
the
Company before deducting fees and expenses to persons not affiliated
with
the selling shareholders
(Column
1 less Columns 2 and 3)
|
|
Percentage
that column 4 is of column 5
|
|
Percentage
that column 4 is of columns 5, averaged over the four-year term
of the
Preferred Stock
|
|
|
$17,750,000
|
|
$
|
5,680,000
|
|
$
|
5,681,466
|
|
$
|
11,361,466
|
|
$
|
6,388,534
|
|
|
178
|
%
|
|
44.5
|
%
|
Prior
Securities Transactions Between the Company and the Selling Stockholders or
Affiliates of the Selling Stockholders
The
following table sets forth information regarding three prior securities
transactions between us and certain of the selling stockholders, any affiliates
of such selling stockholders or any person with whom any selling stockholder
has
a contractual relationship regarding such securities transactions.
|
Date of
Transaction
|
|
Number of
Shares of
Common
Stock
Outstanding
prior to the
Transaction
(1)
|
|
Number of
Shares of
Common
Stock
Outstanding
prior
to the
Transaction
(excluding
Selling
Shareholders,
Affiliates and
Affiliates
of Selling
Shareholders)
(1)
|
|
Number of
Shares of
Common
Stock
Issued
or Issuable
Pursuant
to the
Transaction
(2)
|
|
Percentage
of
Total
Issued and
Outstanding
Securities
(excluding
Selling
Shareholders,
Affiliates
and
Affiliates
of
Selling
Shareholders)
Issued or
Issuable
in the
Transaction
|
|
Market
Price
Per Share
of
Common
Stock
Prior
to the
Transaction
|
|
Current
Market
Price (3)
|
|
|
11/09/03
|
|
|
37,986,988
|
|
|
26,444,740
|
|
|
4,062,500
|
|
|
15.36
|
|
$
|
1.05
|
|
$
|
1.04
|
|
|
03/31/05
|
|
|
38,055,830
|
|
|
34,195,707
|
|
|
10,628,662
|
|
|
31.08
|
|
$
|
1.22
|
|
$
|
1.04
|
|
|
05/19/06
|
|
|
42,492,316
|
|
|
36,257,492
|
|
|
7,777,777
|
|
|
21.45
|
|
$
|
2.05
|
|
$
|
1.04
|
|
(1)
For
purposes of this calculation, ownership of 5% or more was considered an
Affiliate of the Company.
(2)
For
purposes of this calculation, shares that we may be required to issue because
of
dilution which is speculative, and shares that we may choose to issue as
dividends are not included.
(3)
Closing price on November 2, 2007.
Comparison
of Registered Shares to Outstanding Shares
The
following table sets forth:
| |
·
|
the
number of shares of common stock outstanding immediately prior to
the
transaction in which we issued the Preferred Stock and Warrants that
are
held by persons other than the selling shareholders, affiliates of
the
company, and affiliates of the selling shareholders;
|
| |
·
|
the
number of shares registered for resale by the selling shareholders
or
affiliates of the selling shareholders in prior registration
statements;
|
| |
·
|
the
number of shares registered for resale by the selling shareholders
or
affiliates of the selling shareholders that continue to be held by
the
selling shareholders or affiliates of the selling
shareholders;
|
| |
·
|
the
number of shares that have been sold in registered resale transactions
by
the selling shareholders or affiliates of the selling shareholders;
and
|
| |
·
|
the
number of shares registered for resale on behalf of the selling
shareholders or affiliates of the selling shareholders in the current
transaction.
|
In
this
analysis, the calculation of the number of outstanding shares does not include
any securities underlying any outstanding convertible securities, options,
or
warrants.
|
Selling
Stockholder
|
|
Number of
Shares of
Common Stock
Outstanding
prior to the
Transaction
(excluding Selling
Shareholders,
Affiliates and
Affiliates of Selling
Shareholders)
(1)
|
|
Number of
Shares of
Common Stock
Registered
for Resale
by Selling
Stockholder
in Prior
Registration
Statements
|
|
Number of
Shares of
Common Stock
Registered
for Resale
by Selling
Stockholder
in Prior
Registration
Statements
Still held by
the Selling
Shareholder
(2)
|
|
Number of
Shares of
Common Stock
Sold in
Registered Resale
Transactions
by the Selling
Stockholder
|
|
Number of
Shares of
Common Stock
Registered
for Resale
by Selling
Stockholder
in Current
Transaction
(3)
|
|
|
Diamond
Opportunity Fund,
LLC
|
|
|
36,257,492
|
|
|
388,889
|
|
|
111,111
|
|
|
277,778
|
|
|
978,209
|
|
|
Enable
Growth Partners LP
|
|
|
26,444,740
|
|
|
125,000
|
|
|
0
|
|
|
125,000
|
|
|
2,494,433
|
(4)
|
|
Enable
Growth Partners LP
|
|
|
34,195,707
|
|
|
220,983
|
|
|
0
|
|
|
220,983
|
|
|
2,494,433
|
(4)
|
|
Fort
Mason Master, LP
|
|
|
36,257,492
|
|
|
2,556,441
|
|
|
1,699,684
|
|
|
856,757
|
|
|
5,511,455
|
|
|
Fort
Mason Partners, LP
|
|
|
36,257,492
|
|
|
165,782
|
|
|
110,223
|
|
|
55,559
|
|
|
357,796
|
|
|
Midsummer
Investment, Ltd.
|
|
|
34,195,707
|
|
|
5,303,609
|
|
|
1,939,154
|
|
|
3,364,455
|
|
|
9,762,089
|
|
|
Pierce
Diversified Strategy Master
Fund LLC, Ena
|
|
|
36,257,492
|
|
|
194,444
|
|
|
55,555
|
|
|
138,889
|
|
|
146,731
|
|
(1)
For
purposes of this calculation, ownership of 5% or more was considered an
Affiliate of the Company.
(2)
Does
not take into account any limitations on conversions or exercises that would
result in greater than 4.99% ownership.
(3)
Preferred Stock conversions, Warrant exercises and potential dividends based
on
the
20
consecutive trading day volume weighted average per share price of our common
stock as
of
October 30, 2007.
(4)
An
Affiliate is registering 296,133 shares in this transaction.
Company's
Financial Ability to Satisfy its Obligations to the Selling
Shareholders
We
have
the intention, and a reasonable basis to believe that we will have the financial
ability, to make required payments on the Preferred Stock and
Warrants.
Existing
Short Positions by Selling Shareholders
| |
·
|
Rockmore
Investment Master Fund Ltd. advised the Company that in the ordinary
course of its business in trading securities positions, Rockmore
Investment Master Fund Ltd. may enter into short sales. However, no
such short sales are entered into while in possession of any material,
nonpublic information. Rockmore Investment Master Fund Ltd. also
acknowledges the position of the Staff of the Commission set forth
in Item
A.65 of the SEC Telephone Interpretations
Manual.
|
| |
·
|
Otago
Partners, LLC (“Otago”) advised the Company that Otago may enter into
short sales in the ordinary course of its business of investing and
trading securities. Otago has advised the Company that no short
sales were entered into during the period beginning when such selling
stockholder obtained knowledge that the Company was contemplating
a
private placement and ending upon the public announcement of any
such
private placement. Further, the selling stockholder has acknowledged
to
the Company that it is aware of and adheres to the position of the
Staff set forth in Item
A.65 of the SEC Telephone Interpretations
Manual.
|
| |
·
|
Islandia,
L.P. advised the Company that it has entered into the following short
trades in the Company, on the following
dates:
|
|
Trade
Date
|
|
Quantity
|
|
|
Oct
23, 2007
|
|
|
13,000.00
|
|
|
Oct
24, 2007
|
|
|
5,000.00
|
|
|
Oct
25, 2007
|
|
|
16,000.00
|
|
|
Oct
30, 2007
|
|
|
4,900.00
|
|
|
Nov
1, 2007
|
|
|
2,600
|
|
|
Nov
2, 2007
|
|
|
2,000
|
|
The
dates
of these sales were made after the date of the announcement of the convertible
preferred stock transaction and after the filing of the registration
statement.
| |
·
|
In
the ordinary course of its business in trading securities positions,
Midsummer Investment, Ltd. (“Midsummer”) may enter into short sales.
However, no such short sales are entered into while in possession
of any
material, nonpublic information. Midsummer Investment, Ltd. also
acknowledges the position of the Staff of the Commission set forth
in Item
A.65 of the SEC Telephone Interpretations
Manual.
|
| |
·
|
Except
as indicated above, the shareholders not referred to above have advised
that they have no existing short position in the Company’s stock.
|
In
addition, in accordance with Section 4.15 of the Securities Purchase Agreement,
a copy of which is incorporated by reference into this registration statement,
each selling shareholder acknowledged and agreed to act in a manner that will
not violate the positions of the Commission as set forth in Item 65, Section
A,
of the Manual of Publicly Available Telephone Interpretations, dated July 1997,
compiled by the Office of Chief Counsel, Division of Corporation Finance.
Relationships
Between the Company and Selling Shareholders and
Affiliates
We
confirm that a description of any relationships and arrangements between us
and
these persons is set forth in this Registration Statement and in the
Registration Statement dated January 27, 2004 for the November 9, 2003
transaction, in the Registration Statement dated April 5, 2005 for the March
1,
2005 transaction, and in the Registration Statement dated June 15, 2006 for
the
May 19, 2006 transaction referred to earlier. All agreements between us and
and/or among those parties regarding the Preferred Stock and the Warrants are
included as exhibits to the registration statement by incorporation by
reference.
The
Method by which the Number of Registered Shares was
Determined
The
35,463,730 shares registered for the transaction consist of
14,599,440
shares issuable on conversion of $17,750,000 stated value of Preferred Stock
at
the fixed conversion price of $1.2158 per share
6,715,218
shares issuable on exercise of Warrants at $1.2158 per share,
5,965,133
shares of our common stock which we estimated we may issue for payment of
dividends on the Series J Preferred Stock and 8,183,938 shares (30% of the
27,279,792 sum of the foregoing), for potential common stock dividends issuable
on the Preferred Stock and for potential anti-dilution adjustments on the
Preferred Stock and the Warrants.
Each
Selling Stockholder (the “Selling
Stockholders”)
of the
common stock and any of their pledgees, assignees and successors-in-interest
may, from time to time, sell any or all of their shares of common stock on
the
Nasdaq Capital Market or any other stock exchange, market or trading facility
on
which the shares are traded or in private transactions. These sales may be
at
fixed or negotiated prices. A Selling Stockholder may use any one or more of
the
following methods when selling shares:
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
|
·
|
privately
negotiated transactions;
|
|
|
·
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a part;
|
|
|
·
|
broker-dealers
may agree with the Selling Stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
|
|
·
|
a
combination of any such methods of sale;
or
|
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended (the “Securities
Act”),
if
available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this Prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance
with
FINRA NASD Rule 2440; and in the case of a principal transaction a markup or
markdown in compliance with NASD IM-2440.
In
connection with the sale of the common stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock. In
no
event shall any broker-dealer receive fees, commissions and markups which,
in
the aggregate, would exceed eight percent (8%).
The
Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because
Selling Stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act including Rule 172 thereunder. In addition, any securities
covered by this prospectus which qualify for sale pursuant to Rule 144 under
the
Securities Act may be sold under Rule 144 rather than under this prospectus.
There is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the Selling Stockholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares may be resold by the Selling Stockholders without registration and
without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to this prospectus or Rule 144 under the Securities
Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not
be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged
in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases
and
sales of shares of the common stock by the Selling Stockholders or any other
person. We will make copies of this prospectus available to the Selling
Stockholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale (including
by
compliance with Rule 172 under the Securities Act).
Legal
matters relating to the validity of the securities offered hereunder are being
passed upon for Nutrition 21 by Oscar D. Folger, Esq., 521 Fifth Avenue, New
York, New York 10175. Mr. Folger's wife owns 29,775 shares of the common stock
of Nutrition 21.
The
consolidated financial statements and related financial statement schedule
of
Nutrition 21, Inc. as of June 30, 2007 and 2006 and for each of the years in
the
three-year period ended June 30, 2007, have been incorporated by reference
in
this prospectus in reliance upon the report, also incorporated by reference
herein, of J. H. Cohn LLP, independent registered public accounting firm, given
upon the authority of that firm as experts in accounting and auditing. Also,
the
financial statements of Iceland Health, Inc. as of December 31, 2005 and 2004,
and for each of the years in the three-year period ended December 31, 2005,
have
been incorporated by reference in this prospectus in reliance upon the report,
also incorporated by reference herein, of J. H. Cohn LLP, independent registered
public accounting firm, given upon the authority of that firm as experts in
accounting and auditing.
There
have been no material developments since the filing on October 24, 2007 of
Nutrition 21’s Annual Report on Form 10-K/A for the fiscal year ended June 30,
2007, which are not described in a subsequent report on Form 10-Q or Form
8-K.
We
file
annual, quarterly and special reports, proxy statements, and other information
with the SEC. You may read and copy any documents we file at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-00330 for further information on the Public Reference Room.
Our
SEC filings are also available to the public on our web site at www.nutrition21.com
and the
SEC’s web site at http://www.sec.gov. Information contained on our website is
not incorporated into this prospectus supplement or the accompanying prospectus,
and is not part of this prospectus supplement or the accompanying
prospectus.
The
SEC
allows us to “incorporate by reference” the information we file with it, which
means that we can disclose important information to you by referring you to
those documents. The information incorporated by reference is considered to
be
part of this prospectus, and later information that we file with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below, and any future filings made with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
as
amended (other than Current Reports on Form 8-K containing only Regulation
FD or
Regulation G disclosure furnished under Item 2.02 or 7.01 of Form 8-K,
unless otherwise indicated therein), until all the shares registered by this
prospectus are sold. The documents we incorporate by reference
are:
|
1.
|
Annual
Report on Form 10-K/A for the fiscal year ended June 30,
2007.
|
|
2.
|
The
Company's Proxy Statement dated October 24, 2007 for the Company's
Annual
Meeting on November 29, 2007.
|
|
|
Current
Reports on Form 8-K filed with the Securities and Exchange Commission
(“SEC”) on July 31, 2007, August
13, 2007 and September 12,
2007.
|
|
4.
|
All
other reports filed pursuant to Section 13(a) or 15(d) of the Exchange
Act
since the end of the fiscal year referred to in
(1) above
|
In
addition, any amendments to these document and all other reports, proxy
statements and other documents of Nutrition 21 hereafter filed with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of the offering of the securities covered by this prospectus, shall
be deemed to be incorporated in this prospectus and made a part of it by
reference from the date of filing of each of these documents. Statements in
this
prospectus modify and supersede statements contained in all earlier documents
incorporated by reference in this prospectus. Further, all future documents
incorporated by reference will modify and supersede this
prospectus.
Nutrition
21 undertakes to provide without charge to each person to whom this prospectus
is delivered, upon the written or oral request, a copy of any and all of the
information that has been incorporated by reference in the prospectus. Exhibits
to the information that is incorporated by reference will be included only
if
the exhibits are specifically incorporated by reference into the information
that the prospectus incorporates. Requests should be directed to the Secretary,
Nutrition 21 Inc., 4 Manhattanville Road, Purchase, New York 10577, telephone
number (914) 701-4503.
INDEMNIFICATION
Nutrition
21’s by-laws provide that Nutrition 21 may indemnify its directors and officers
to the fullest extent permitted by law. The New York Business Corporation Law
provides that a corporation may indemnify a director or officer made a party
to
a derivative action against reasonable expenses actually and necessarily
incurred by him in connection with the defense of such action, except in
relation to matters as to which the director or officer is adjudged to have
breached his duty to the corporation. In addition, the New York Business
Corporation Law provides that a corporation may indemnify a director or officer
made, or threatened to be made, a party to any action other than a derivative
action on behalf of the indemnifying corporation, whether civil or criminal,
against judgments, fines, amounts paid in settlement and reasonable expenses
actually and necessarily incurred as a result of such action, if the director
or
officer acted in good faith, for a purpose which he reasonably believed to
be in
the best interests of the corporation and, in criminal actions or proceedings,
had no reasonable cause to believe that his conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act might be
permitted to directors, officers or persons controlling our company under the
provisions described above, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable in the opinion
of the SEC that indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
expenses in connection with the issuance and distribution of the securities
being registered under this Registration Statement are estimated as
follows:
|
Securities
and Exchange Commission fee
|
|
$
|
1,046
|
|
|
Legal
Fees and expenses
|
|
$
|
5,000
|
|
|
Accountants'
fees and expenses
|
|
$
|
5,000
|
|
|
Miscellaneous
|
|
$
|
1,000
|
|
ITEM
15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section
5.3 of Nutrition 21's by-laws provides that Nutrition 21 may indemnify its
directors and officers to the fullest extent permitted by law.
Section
722 of the New York Business Corporation Law provides that a corporation may
indemnify a director or officer made a party to a derivative action, against
reasonable expenses actually and necessarily incurred by him in connection
with
the defense of such action, except in relation to matters as to which such
director or officer is adjudged to have breached his duty to the corporation.
Such indemnification does not include amounts paid in settling or otherwise
disposing of a threatened or pending action which is settled or otherwise
disposed of without court approval.
Section
722 of the Business Corporation Law further provides that a corporation may
indemnify a director or officer, made, or threatened to be made, a party to
any
action other than a derivative action on behalf of the indemnifying corporation,
whether civil or criminal, against judgments, fines, amounts paid in settlement
and reasonable expenses actually and necessarily incurred as a result of such
action, if such director or officer acted in good faith, for a purpose which
he
reasonably believed to be in the best interests of the corporation and, in
criminal actions or proceedings, had no reasonable cause to believe that his
conduct was unlawful.
Section
723 specifies the manner in which payment of such indemnification may be
authorized by the corporation. It provides that indemnification by a corporation
is mandatory in any case in which the director or officer has been completely
successful, whether on the merits or otherwise, in defending an action referred
to in Section 722. In the event that the director or officer has not been wholly
successful or the action is settled, indemnification must be authorized by
the
appropriate corporate action as set forth in Section 723. Section 724 provides
that upon application by a director or officer, indemnification may be awarded
by a court to the extent authorized under Sections 722 and 723. Section 725
provides that no indemnification agreement in any Certificate of Incorporation
or By-Laws is valid unless consistent with the statute. In addition, Section
725
contains certain other miscellaneous provisions affecting the indemnification
of
directors and officers.
Insofar
as indemnification by Nutrition 21 for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of Nutrition 21 under the foregoing provisions, or otherwise, Nutrition
21 has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities is asserted by such director, officer or controlling
person in connection with the securities being registered, Nutrition 21 will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and
will be governed by the final adjudication of such issue. Nutrition 21 may,
however, pay expenses incurred or paid by a director, officer or controlling
person of Nutrition 21 in the successful defense of any action, suit or
proceeding.
ITEM
16. EXHIBITS.
|
Exhibit
No.
|
|
Description
|
|
4.1
|
|
Form
of Securities Purchase Agreement dated as of September 10, 2007.
Incorporated by reference from Exhibit 4.1 to the Company’s Form 8-K filed
on September 12, 2007.
|
|
|
|
|
|
4.2
|
|
Form
of Certificate of Amendment of the Certificate of Incorporation of
Nutrition 21, Inc. creating Series J 8% Convertible Preferred Stock.
Incorporated by reference from Exhibit 4.2 to the Company’s Form 8-K filed
on September 12, 2007.
|
| |
|
|
|
4.3
|
|
Form
of Registration Rights Agreement. Incorporated by reference from
Exhibit
4.3 to the Company’s Form 8-K filed on September 12,
2007.
|
|
|
|
|
|
4.4
|
|
Form
of Common Stock Purchase Warrant. Incorporated by reference from
Exhibit
4.4 to the Company’s Form 8-K filed on September 12,
2007.
|
|
|
|
|
|
4.5
|
|
Letter
Agreement dated as of August 9, 2007 with CE Unterberg, Towbin, (now
called Collins Stewart LLC). Incorporated by reference from Exhibit
4.5 to
the Company’s Form 8-K filed on September 12, 2007.
|
|
|
|
|
|
4.6
|
|
Form
of Warrant issued to Collins Stewart LLC and Life Science Group,
Inc.
Incorporated by reference from Exhibit 4.6 to the Company’s Form 8-K filed
on September 12, 2007.
|
|
|
|
|
|
5
|
|
Opinion
of Oscar D. Folger (filed herewith)
|
|
|
|
|
|
23.1
|
|
Consent
of Oscar D. Folger (included in Exhibit 5)
|
|
|
|
|
|
23.2
|
|
Consent
of J. H. Cohn LLP (filed herewith)
|
The
undersigned Registrant hereby undertakes:
(1)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)
To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii)
To
reflect in the prospectus any fact or events arising after the effective date
of
the registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in
the
information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in the volume of securities offered (if
the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the high and low and of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the
effective registration statement.
(iii)
To include any material information with respect to the plan of distribution
not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
Provided,
however, that paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section
do not apply if the registration statement is on Form S-3 or Form F-3 and the
information required to be included in a post-effective amendment by those
paragraphs is contained in reports filed with or furnished to the Commission
by
the registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement, or is contained in a form of prospectus filed pursuant to Rule 424(b)
that is part of the registration statement.
(2)
That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
That
for purposes of determining any liability under the Securities Act of 1933,
each
filing of Registrant's annual report pursuant to Section 13(a) or 15(d) of
the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
If
the
registrant is subject to Rule 430C, each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed
in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify
any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
Insofar
as indemnification by Nutrition 21 for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of Nutrition 21 under the foregoing provisions, or otherwise, Nutrition
21 has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities is asserted by such director, officer or controlling
person in connection with the securities being registered, Nutrition 21 will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and
will be governed by the final adjudication of such issue.
Signatures
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Purchase, New York on the 13th
day of
November 2007.
| |
|
|
| |
Nutrition
21, Inc.
|
|
|
|
|
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By: |
/s/
Paul
Intlekofer |
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Paul
Intlekofer
Chief
Executive Officer
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POWER
OF
ATTORNEY
Each
person whose signature appears below hereby constitutes and appoints Paul
Intlekofer as his or her true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him or her and in his or her
name,
place and stead in any and all capacities to sign any and all amendments
(including post-effective amendments) to this Registration Statement on Form
S-3
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission under the
Securities Act of 1933.
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
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Signature
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Title
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Date
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/s/
John H. Gutfreund
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Chairman
of the Board
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November
13, 2007
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/s/
Paul Intlekofer
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Chief
Executive Officer and Director
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/s/
Alan Kirschbaum
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Chief
Financial Officer (Principal Financial Officer and Principal Accounting
Officer)
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/s/
P. George Benson
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Director
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/s/
John Cassis
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Director
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/s/
Warren D. Cooper
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Director
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/s/
Audrey T. Cross
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Director
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/s/
Peter C. Mann
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Director
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/s/
Marvin Moser
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Director
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