-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HGMsjJ8PsjZpWl3t52XoDt8jQ4FnsCR2NpfHGux6pO51blnJ7xLjlKhmKQPfrNyV EAssinUvsflZPXQsx1wAHg== 0000950117-96-001115.txt : 19960918 0000950117-96-001115.hdr.sgml : 19960918 ACCESSION NUMBER: 0000950117-96-001115 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19960917 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALGOS PHARMACEUTICAL CORP CENTRAL INDEX KEY: 0000924862 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 223142274 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-04313 FILM NUMBER: 96631301 BUSINESS ADDRESS: STREET 1: 4900 ROUTE 33 CITY: NEPTUNE STATE: NJ ZIP: 07753 BUSINESS PHONE: 9089385959 S-1/A 1 ALGOS PHARMACEUTICAL CORPORATION S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1996 REGISTRATION NO. 333-04313 ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ALGOS PHARMACEUTICAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 2834 22-3142274 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------ COLLINGWOOD PLAZA 4900 ROUTE 33 NEPTUNE, NEW JERSEY 07753-6804 (908) 938-5959 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ JOHN W. LYLE ALGOS PHARMACEUTICAL CORPORATION COLLINGWOOD PLAZA 4900 ROUTE 33 NEPTUNE, NEW JERSEY 07753-6804 (908) 938-5959 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: RAYMOND Y. LIN THOMAS E. CONSTANCE LATHAM & WATKINS MARK B. SEGALL 885 THIRD AVENUE, SUITE 1000 KRAMER, LEVIN, NAFTALIS & FRANKEL NEW YORK, NEW YORK 10022 919 THIRD AVENUE (212) 906-1200 NEW YORK, NEW YORK 10022 (212) 715-9100
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable on or after the effective date of this Registration Statement. 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, check the following box. [ ] ------------------------ 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. ________________________________________________________________________________ CROSS-REFERENCE SHEET (PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE RESPONSES TO THE ITEMS OF PART I OF FORM S-1).
ITEM NUMBER AND CAPTION LOCATION AND CAPTION IN PROSPECTUS --------------------------------------------------------------------- ------------------------------------ 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus...................................................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.............. Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............................................................ Prospectus Summary; Risk Factors 4. Use of Proceeds...................................................... Use of Proceeds 5. Determination of Offering Price...................................... Underwriting 6. Dilution............................................................. Dilution 7. Selling Security Holders............................................. Not Applicable 8. Plan of Distribution................................................. Underwriting 9. Description of Securities to be Registered........................... Description of Capital Stock 10. Interests of Named Experts and Counsel............................... Legal Matters; Experts 11. Information with Respect to the Registrant........................... Outside Front Cover Pages; Prospectus Summary; Risk Factors; Capitalization; Dividend Policy; Dilution; Selected Financial Information; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management and Key Scientific Advisors; Principal Stockholders; Certain Relationships and Related Transactions; Description of Capital Stock; Shares Eligible For Future Sale; Underwriting; Additional Information; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................................................... Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATES. Subject to Completion, dated August 30, 1996 PROSPECTUS 3,500,000 SHARES ALGOS PHARMACEUTICAL CORPORATION COMMON STOCK --------------------------- [LOGO] All of the shares of Common Stock (the 'Common Stock') of Algos Pharmaceutical Corporation ('Algos'or the 'Company') offered hereby (the 'Offering') are being sold by the Company. At the request of the Company, the Underwriters have reserved 300,000 shares of Common Stock for sale at the initial public offering price to certain of the Company's employees and certain other persons. If such shares are not purchased by such employees or other persons they will be offered by the Underwriters to the public upon the terms and conditions set forth in this Prospectus. See 'Underwriting.' Johnson & Johnson Development Corporation, an affiliate of Johnson & Johnson, has expressed an interest in purchasing 10% of the Offering, up to $6.5 million worth of the shares of Common Stock offered hereby, at the public offering price. Prior to the Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $14.00 and $16.00 per share. See 'Underwriting' for information relating to the factors to be considered in determining the initial public offering price. Subject to notice of issuance, the Common Stock has been approved for quotation on the Nasdaq National Market under the symbol 'ALGO.' --------------------------- THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE 'RISK FACTORS' BEGINNING ON PAGE 6. --------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Price to Discounts and Proceeds to Public Commissions (1) Company (2) Per Share.................................... $ $ $ Total(3)..................................... $ $ $
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See 'Underwriting.' (2) Before deducting expenses payable by the Company estimated at $800,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 525,000 additional shares on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See 'Underwriting.' --------------------------- The shares of Common Stock offered by this Prospectus are offered by the Underwriters, subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery and to acceptance by the Underwriters Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such states and to certain further conditions. It is expected that delivery of certificates representing the shares of Common Stock will be made at the offices of Lehman Brothers Inc., New York, New York, on or about , 1996. --------------------------- LEHMAN BROTHERS COWEN & COMPANY , 1996 The following table lists the Company's ten products in development that have reached Phase II clinical trials or are scheduled for Phase II or Phase III clinical trials in 1996, their respective intended therapeutic indications and current stage of development. There can be no assurance that any of these products will be developed successfully or approved by the FDA. ALGOS PRODUCTS IN DEVELOPMENT PRODUCT INDICATION STAGE OF DEVELOPMENT - ------------------------------------ ------------------------------------ ------------------------------------ NARCOTIC ANALGESICS MorphiDex'tm' Moderate to severe Pivotal Phase II clinical trial pain (primarily cancer pain) completed. Additional Phase II and III clinical trials in progress or scheduled in 1996. Two Phase I/II clinical trials completed. HydrocoDex SR'tm' and HydrocoDex Moderate to moderately severe pain Phase II clinical trial scheduled in Plus'tm' (primarily post-operative, 1996. musculoskeletal and trauma-related pain) OxycoDex'tm' Moderate to moderately severe pain Phase II clinical trial in progress. (primarily post-operative pain) Additional Phase II clinical trial scheduled in 1996. NON-NARCOTIC ANALGESICS Ibuprofen/NMDA Antagonist Over-the-counter ('OTC') analgesic Phase II clinical trial completed. Combination Additional Phase II clinical trial scheduled in 1996. Acetaminophen/NMDA Antagonist OTC analgesic Phase II clinical trial in progress. Combination ANESTHETICS Lidocaine/NMDA Antagonist Extended duration anesthetic Phase I/II clinical trial scheduled Combination in 1996. OTHERS Urge Urinary Incontinence Treatment Urge urinary incontinence Phase II clinical trial in progress. Opiate Addiction Treatment Opiate addiction Phase II clinical trial scheduled in 1996. Cocaine Addiction Treatment Cocaine addiction Phase II clinical trial scheduled in 1996.
The following are trademarks of the Company: MorphiDex'tm', HydrocoDex SR'tm', HydrocoDex Plus'tm' and OxycoDex'tm'. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in the Prospectus (i) gives effect to a 8.30-for-1 stock split in the form of a stock dividend declared in May 1996, and (ii) assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Algos Pharmaceutical Corporation ('Algos' or the 'Company') is a leader in developing a new generation of proprietary pain management products. The Company develops its proprietary pain management products by combining existing analgesic or anesthetic drugs with N-methyl-D-aspartate ('NMDA') antagonist drugs that have been approved for human use in other applications. Independent research and the Company's pre-clinical studies and clinical trials conducted to date have shown that the Company's products may significantly improve pain relief over currently available analgesics, including narcotic drugs such as morphine, hydrocodone and oxycodone and non-narcotic analgesics such as acetaminophen (e.g. Tylenol'r'), ibuprofen (e.g. Advil'r') and naproxen (e.g. Aleve'r'). The Company is also developing a local anesthetic product that has the potential to provide greater anesthetic effect with longer and more controlled duration than existing products. The Company's analgesic and anesthetic products will target markets with combined 1995 U.S. sales estimated at $6.4 billion. In addition, the Company is using its NMDA antagonist technology to develop products to treat urge urinary incontinence and opiate and cocaine addiction. The Company believes that its analgesic and anesthetic products have the potential for more rapid market introduction than many other new drugs because (i) the Company's products combine existing drugs whose separate safety profiles are known and established and (ii) clinical trials for new analgesics and anesthetics historically have achieved statistically significant results with fewer patients than may be required for many other drugs. As a result, the Company currently anticipates that it will file its first New Drug Application ('NDA') with the Food and Drug Administration ('FDA') in 1997. The Company has ten products that have reached Phase II clinical trials or are scheduled for Phase II or Phase III clinical trials in 1996. The Company has completed or is currently conducting eleven clinical trials and has scheduled additional clinical trials to commence in 1996. A pivotal Phase II clinical efficacy trial has been completed with MorphiDex'tm' demonstrating statistically significant superior pain relief over morphine. The Company's products that have reached Phase II clinical trials or are scheduled for Phase II or Phase III clinical trials consist of: (i) four narcotic analgesic/NMDA antagonist combination products: MorphiDex'tm', expected to be used primarily to treat cancer pain, HydrocoDex SR'tm' and HydrocoDex Plus'tm', expected to be used primarily to treat moderate to moderately severe post-operative, musculoskeletal and trauma-related pain, and OxycoDex'tm', expected to be used primarily to treat moderate to moderately severe post-operative pain; (ii) two over-the-counter ('OTC') analgesic/NMDA antagonist combination products: a combination product of an NMDA antagonist with acetaminophen, the largest selling OTC analgesic, and a combination product of an NMDA antagonist with ibuprofen, the largest selling OTC non-steroidal anti-inflammatory drug ('NSAID'); (iii) one injectable local anesthetic/NMDA combination product intended to provide greater anesthetic effect with longer and more controlled duration for use in dental procedures and in-patient and out-patient surgeries; (iv) one product that uses an NMDA antagonist intended as a treatment for urge urinary incontinence, a condition which afflicts an estimated five million people in the U.S.; and (v) two products intended as treatments for opiate and cocaine addiction, which the Company expects to develop in collaboration with the National Institute on Drug Abuse ('NIDA'), National Institutes of Health ('NIH'). In June 1996, the Company entered into a license agreement with McNeil Consumer Products Company ('McNeil'), an affiliate of Johnson & Johnson, pursuant to which the Company granted McNeil the exclusive right to develop acetaminophen/NMDA antagonist combination products and certain NSAID/NMDA antagonist combination products for the treatment of pain (the 'McNeil License Agreement'). The McNeil License Agreement: (i) grants McNeil an exclusive worldwide license to manufacture and market such products; (ii) provides for an initial payment of $2.0 million to 3 the Company and subsequent payments of up to an additional $8.0 million upon the achievement of certain milestones generally relating to product development and patent issuances; and (iii) provides for the payment of royalties to the Company on net sales of the licensed products. McNeil will bear all of the costs of developing products it selects, except for approximately $500,000 to be borne by the Company. McNeil will be required to pay minimum royalties, provided that certain conditions have been met, even if McNeil has not commenced marketing of an acetaminophen product or an NSAID product. In June 1996, the Company entered into a letter of intent with NIDA, NIH, pending formal approval of a cooperative research and development agreement (a 'CRADA'), to conduct joint research on a methadone/NMDA antagonist combination drug as a potential treatment for opiate addiction. The Company believes that the markets in which it intends to compete offer attractive opportunities. Favorable factors in the target analgesic markets include: high growth rates partially attributable to the rapidly growing population segment aged 65 and older; increasing recognition of the therapeutic benefits of effective pain treatment including reductions in healing and recovery time; generally concentrated distribution channels that permit more cost-effective selling and marketing; lack of recent product innovation which has resulted in market segments comprised largely of older off-patent drugs; higher profit margins from branded proprietary products; and the potential for rapid acceptance of new pain management pharmaceuticals by members of the medical profession. The market for local anesthetics also presents attractive opportunities for the Company's controlled duration product because existing local anesthetics have limited and less controllable duration which restricts their use in surgery. The Company believes the markets for its products to treat urge urinary incontinence and drug addiction present significant opportunities because of the lack of satisfactory pharmaceutical treatments and the large potential market sizes. The Company's strategic goal is to establish a leading position in the pain management pharmaceutical market. The Company intends to achieve this goal by: (i) introducing superior proprietary products; (ii) minimizing development time, cost and risk; (iii) leveraging its proprietary technology across multiple product opportunities; (iv) outsourcing to efficiently deploy resources; and (v) maximizing market penetration and margin potential through a combination of Company direct sales and strategic alliances. The Company seeks to protect its proprietary position by, among other methods, filing United States and foreign patent applications with respect to the development of its products. The Company has exclusive licenses for three issued U.S. patents and six U.S. patent applications pending and holds one additional U.S. patent application pending. To date, the Company has generated no product revenues and has experienced net losses in each year since its inception. At June 30, 1996, the Company had an accumulated deficit of approximately $4.9 million. The Company was incorporated in Delaware in 1992. Its executive offices are located at Collingwood Plaza, 4900 Route 33, Neptune, New Jersey 07753, and its telephone number is (908) 938-5959. THE OFFERING Common Stock offered by the Company................................... 3,500,000 shares Common Stock to be outstanding after the Offering...................................... 15,544,123 shares(1) Use of Proceeds................................. To fund research and product development, the establishment of a direct sales force, working capital and for other general corporate purposes. See 'Use of Proceeds.' Proposed Nasdaq National Market symbol.......... ALGO
- ------------ (1) Excludes an aggregate of 1,085,665 shares of Common Stock reserved for issuance upon the exercise of outstanding options and warrants, including the conversion of the Company's Series B Convertible Preferred Stock, $.01 par value per share (the 'Series B Preferred Stock'). See 'Management and Key Scientific Advisors -- Stock Option Plans' and 'Description of Capital Stock.' 4 SUMMARY FINANCIAL INFORMATION
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------- ---------------------- 1992 1993 1994 1995 1995 1996 ----- ----- ------- ------- ------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues.................................... $ 96(1) $ 215(1) $ -- $ -- $ -- $ 1,500 Operating expenses: Research and development............... 125 40 654 1,615 801 1,004 General and administrative............. 369 436 623 760 396 1,628 ----- ----- ------- ------- ------- ----------- Total operating expenses.......... 494 476 1,277 2,375 1,197 2,632 ----- ----- ------- ------- ------- ----------- Interest income............................. 13 4 153 253 138 77 ----- ----- ------- ------- ------- ----------- Net loss.................................... $(385) $(257) $(1,124) $(2,122) $(1,059) $(1,055) ----- ----- ------- ------- ------- ----------- ----- ----- ------- ------- ------- ----------- Pro forma net loss per common share(2)...... $ (0.17) $ (0.09) ------- ----------- ------- ----------- Pro forma weighted average common shares outstanding(2)............................ 12,199 12,329 ------- ----------- ------- -----------
JUNE 30, 1996 --------------------- AS ACTUAL ADJUSTED(3) ------ ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents(4)............................................................... $2,505 $50,584 Working capital............................................................................ 3,268 51,590 Total assets............................................................................... 4,903 52,685 Deficit accumulated during the development stage........................................... (4,943) (4,943) Total stockholders' equity................................................................. 3,649 51,674
- ------------ (1) Represents revenues from consulting activities in which the Company has ceased to engage. (2) Adjusted to give effect to the automatic conversion of all outstanding shares of Series A Preferred Stock (the 'Series A Preferred Stock') into Common Stock upon consummation of the Offering. See Note 2 to the Financial Statements. (3) As adjusted to give effect to the Offering at an assumed initial public offering price of $15.00 per share (after deducting the underwriting discounts and commissions and estimated offering expenses) and the receipt of the net proceeds therefrom. See 'Use of Proceeds' and 'Capitalization.' (4) Does not include $2.0 million received from McNeil on July 5, 1996 pursuant to the McNeil License Agreement of which $500,000 is committed to fund the Company's portion of development costs under the McNeil License Agreement. 5 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. The following factors, in addition to the other information in this Prospectus, should be carefully considered in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby. Early Stage of the Company; Continuing Losses; Uncertainty of Future Profitability Since its formation in January 1992, the Company has been engaged primarily in organizational and start-up activities, conducting research and development programs, recruiting officers and key scientists, and negotiating and consummating technology licensing and research agreements. The Company has no revenues from product sales and no history of manufacturing or marketing. To date, substantially all of its funding has been provided by contributions of capital made by its founders, through a private placement of 700,000 shares of its Series A Preferred Stock and an initial payment from McNeil pursuant to the McNeil License Agreement. There can be no assurance that the Company will have any source of product revenue or that its operations will eventually generate sufficient revenues to achieve profitability. The Company has experienced losses since its inception. The Company had accumulated losses of approximately $4.9 million through June 30, 1996, and losses are continuing and are expected to continue for the foreseeable future. Therefore, the Company has a limited history upon which investors may base an evaluation of its likely performance. The Company's prospects must be considered in light of the problems, expenses, complications and delays frequently encountered in connection with the formation of a new business, the development of new pharmaceutical products, including obtaining the necessary regulatory approvals, the utilization of unproven technology and the competitive environment in which the Company plans to operate. Uncertainty Associated with Pre-Clinical Studies and Clinical Trials In order to receive regulatory approval to sell its products commercially, the Company must demonstrate in pre-clinical studies and clinical trials that its potential products are safe and effective in humans. To date, four clinical trials have been completed on two of the Company's products. Although the results of the Company's initial pre-clinical studies and clinical trials to date have been encouraging, the results of initial pre-clinical studies and clinical trials are not by themselves predictive of results that will be obtained from subsequent or more extensive trials. Furthermore, there can be no assurance that clinical trials of products under development will demonstrate the safety and efficacy of such products to the extent necessary to obtain regulatory approvals. Many pharmaceutical companies have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and efficacy of a product could delay or prevent regulatory approval of such product and could have a material adverse effect on the Company. The rate of completion of clinical trials is dependent upon, among other factors, the enrollment of patients. Patient accrual is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the existence of competitive clinical trials. Delays in planned patient enrollment in the Company's current trials or future clinical trials may result in increased costs, program delays or both, which could have a material adverse effect on the Company. There can be no assurance that if clinical trials are completed the Company will be able to submit an NDA as scheduled or that any such application will be reviewed and approved by the FDA in a timely manner, or at all. See 'Business -- Government Regulation.' Uncertainty of Market Acceptance Even if regulatory approvals are obtained, uncertainty exists as to whether the Company's products will be accepted by the market. A number of factors may limit the market acceptance of the Company's products, including the timing of regulatory approvals and market entry relative to competitive products, the availability of alternative products, the price of the Company's products relative to alternative products, the availability of third-party reimbursement and the extent of marketing efforts by third-party distributors or agents retained by the Company. There can be no assurance of the Company's ability, or the length of time required, to achieve market acceptance of the Company's 6 products. In addition, certain of the Company's products contain narcotic ingredients that may require stringent record-keeping obligations, strict storage requirements and other limitations on such products' availability that may limit the commercial usage of such products. See 'Business -- Market Overview' and ' -- Products.' Certain Risks Associated With the McNeil License Agreement The McNeil License Agreement extends until the later of the expiration of the Company's patent rights or ten years from the date of execution, provided that the McNeil License Agreement is terminable: (i) by either party in the event of a breach by the other party upon 90 days notice or upon certain events of bankruptcy; (ii) by McNeil, at any time after one year from the effective date of the agreement; and (iii) by the Company upon certain other circumstances. Under certain circumstances, the McNeil License Agreement could terminate with respect to either acetaminophen or NSAID products without terminating with respect to the other category. In the event of a termination by McNeil, McNeil must pay all royalty payments and milestone payments due, if any, through the date of termination and the technology licensed by McNeil reverts to the Company. In such event, the Company retains the rights to the results of the two clinical studies funded by the Company, and McNeil retains the rights to the results of the clinical studies funded by McNeil during the term of the McNeil License Agreement. Competition and Technological Changes, Uncertainty and Obsolescence The Company's success will depend, in part, upon its ability to successfully achieve market share at the expense of existing and established products in the Company's target markets. The Company's products will be competing directly with the products of companies that are well-established and which may have a significantly higher degree of brand and name recognition and substantially more financial resources than those of the Company. The Company is also in competition with other pharmaceutical companies, hospitals, research organizations, individual scientists and non-profit organizations engaged in the development of new pain management pharmaceuticals. Many of these companies and entities have greater research and development capacities, experience, recognition and marketing, financial and managerial resources than the Company and represent significant competition for the Company. Also, the Company's competitors may succeed in developing competing technologies and obtaining FDA approval for products more rapidly than the Company. There can be no assurance that developments by others will not render the Company's products or technologies non-competitive or obsolete. Government Regulation; No Assurance of United States or Foreign Regulatory Approval The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical products through lengthy and detailed laboratory and clinical testing and other costly and time-consuming procedures. Satisfaction of these requirements typically takes a number of years, varies substantially based upon the type, complexity and novelty of the pharmaceutical products and is subject to uncertainty. Government regulation also affects the manufacture and marketing of pharmaceutical products. Regulatory approvals, if granted, may include significant limitations on the indicated uses for which a product may be marketed. The FDA actively enforces regulations prohibiting marketing of products for non-indicated use. Failure to comply with applicable regulatory requirements can result in, among other things, government imposed fines, suspensions of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. Furthermore, changes in existing regulations or adoption of new regulations could prevent the Company from obtaining, or affect the timing of, future regulatory approvals. The effect of government regulation may be to delay marketing of the Company's new products for a considerable period of time, to impose costly procedures upon the Company's activities and to furnish a competitive advantage to larger companies that compete with the Company. There can be no assurance that FDA or other regulatory approval for any products developed by the Company will be granted on a timely basis, if at all. Any such delay in obtaining, or failure to obtain, such approvals would adversely affect the marketing of the Company's products and the ability to generate product revenue. The Company is also subject to certain Drug Enforcement Agency ('DEA') regulations, including restrictions on storage, 7 transportation and administration, for its narcotic products. Government regulation may increase at any time, creating additional hurdles for the Company. The extent of potentially adverse government regulation which might arise from future legislation or administrative action cannot be predicted. See 'Business -- Government Regulation.' Need for Additional Funds The amount and timing of the Company's expenditures will depend on the progress of its research and development, the cost and timing of regulatory approvals, general market conditions, relationships with potential strategic partners, changes in the focus and direction of the Company's research and development programs, competitive and technological advances and other factors. The Company's cash requirements may vary materially from those now planned and no assurance can be given that development costs will not exceed the amounts budgeted for such purposes. The Company may require additional funding for its research and product development programs, operating expenses, regulatory clearances and sales and marketing expenses. Adequate funds for these purposes, whether obtained through financial markets or through collaborative or other arrangements with partners or from other sources, may not be available when needed or on terms acceptable to the Company. Insufficient funds may require the Company to delay, scale back or eliminate certain of its research and development programs or to make arrangements with third parties to commercialize products or technologies that the Company would otherwise seek to develop itself. As a result, the Company may not be able to independently develop any or all of the products described in this Prospectus. To the extent the Company raises additional capital by issuing securities, further dilution to investors may result. Limited Sales and Marketing Experience The Company intends to market and sell certain of its products, if successfully developed and approved, through a direct sales force in the United States. The Company currently has no marketing and sales staff, and has yet to establish any product distribution channels. In order to market its products directly, the Company must develop a sales force with technical expertise. There can be no assurance that the Company will be able to successfully establish a direct sales organization or distribution channels. Failure to establish a sales force capability in the U.S. may have a material adverse effect on the Company. Dependence on Qualified Personnel Because of the specialized scientific nature of the Company's business, the Company is highly dependent upon its ability to attract and retain qualified scientific and technical personnel. The loss of significant scientific and technical personnel or the failure to recruit additional key scientific and technical personnel could have a material adverse effect on the Company. While the Company has consulting agreements with certain key individuals and institutions and has employment agreements with its key executives, there can be no assurance that the Company will be successful in retaining such personnel or their services under existing agreements. See 'Management and Key Scientific Advisors' and ' -- Executive Compensation and Employment Agreements.' The loss of John Lyle, the Company's Chief Executive Officer, could have a material adverse effect on the Company. The Company currently maintains a $6.0 million life insurance policy on Mr. Lyle. There is intense competition for qualified personnel in the areas of the Company's activities, and there can be no assurance that the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its business. Uncertain Ability to Protect Proprietary Technology The Company's success, competitive position and amount of potential future income will depend in part on its ability to obtain patent protection relating to the technologies, processes and products it is developing and may develop in the future. The Company's policy is to seek patent protection and enforce intellectual property rights. With respect to its products, the Company holds one U.S. patent application pending and has exclusive licenses for three issued U.S. patents and six U.S. patent 8 applications pending. No assurance can be given that any patent issued or licensed to the Company will provide protection against competitive products or otherwise be commercially viable. In this regard, the patent position of pharmaceutical compounds and compositions is particularly uncertain. Even issued patents may later be modified or revoked by the United States Patent and Trademark Office ('PTO') or in legal proceedings. Moreover, the Company believes that obtaining foreign patents may be more difficult than obtaining domestic patents because of differences in patent laws, and accordingly, its patent position may be stronger in the U.S. than abroad. In addition, foreign patents may be more difficult to protect and/or the remedies available may be less extensive than in the U.S. Patent applications in the U.S. are maintained in secrecy until patents issue and, since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries, the Company cannot be certain that it was the first creator of the inventions covered by pending patent applications or the first to file patent applications on such inventions. No assurance can be given that any of the Company's pending patent applications will be allowed, or if allowed, whether the scope of the claims allowed will be sufficient to protect the Company's products. The Company also expects to rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information or be issued patents that may prevent the sale of the Company's products or know-how or require licensing and the payment of significant fees or royalties by the Company in order to produce its products. Moreover, there can be no assurance that the Company's technology does not infringe upon any valid claims of patents owned by others. If the Company were found to be infringing on a patent held by another, the Company might have to seek a license to use the patented technology. There can be no assurance that, if required, the Company would be able to obtain such a license on terms acceptable to the Company, if at all. If a legal action were to be brought against the Company or its licensors, the Company could incur substantial costs in defending itself, and there can be no assurance that such an action would be resolved in the Company's favor. If such a dispute were to be resolved against the Company, the Company could be subject to significant damages and the testing, manufacture or sale of one or more of the Company's technologies or proposed products, if developed, could be enjoined. No assurance can be given as to the degree of protection any patents will afford, whether patents will be issued or whether the Company will be able to avoid violating or infringing upon patents issued to others. Despite the use of confidentiality agreements and non-compete agreements, which themselves may be of limited effectiveness, it may be difficult for the Company to protect its trade secrets. See 'Business -- Patents, Trade Secrets and Licenses' and 'Risk Factors -- Dependence on Qualified Personnel.' Uncertain Availability of Health Care Reimbursement The Company's ability to commercialize its pain management products may depend in part on the extent to which reimbursement for the costs of such products will be available from government health administration authorities, private health insurers and others. There can be no assurance that third-party insurance coverage will be adequate for the Company to establish and maintain price levels sufficient for realization of an appropriate return on its investment. Government, private insurers and other third-party payers are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new products approved for marketing by the FDA and by refusing, in some cases, to provide any coverage for uses of approved products for indications for which the FDA has not granted marketing approval. If adequate coverage and reimbursement levels are not provided by government and third-party payers for uses of the Company's products, the market acceptance of these products could be adversely affected. No Product Liability Insurance The Company will be exposed to potential product liability risks, which are inherent in the testing, manufacturing and marketing of human therapeutic products. The Company is contractually obligated under certain of its license agreements to indemnify the individuals and/or institutions from whom it has 9 licensed the technology against claims relating to the manufacture and sale of the products to be sold by the Company. McNeil, however, has agreed to indemnify the Company for third party claims or suits resulting from the manufacture, use or sale of the products pursuant to the McNeil License Agreement. The Company's indemnification liability, as well as direct liability to consumers for any defects in the products sold, could expose the Company to substantial risk and losses. Because the Company's products are still in their development stages, the Company has not purchased any product liability insurance. The Company plans to purchase such product liability insurance as it deems appropriate prior to marketing its products. McNeil is required by the McNeil License Agreement to maintain product liability insurance and may self-insure to cover its indemnification obligations to the Company. However, there can be no assurance that the Company will be able to obtain or maintain such insurance on acceptable terms or that any insurance obtained will provide adequate coverage against potential liabilities. Concentration of Ownership Upon completion of the Offering, the Company's directors and officers will beneficially own approximately 23.9% of the Common Stock. In addition, upon completion of the Offering, the Company's largest stockholder, Unifina AG, and related investors will control approximately 11.0% of the Common Stock. As a result, these stockholders, if they acted together, would have the ability to influence significantly the election of the Company's directors as well as the management and policies of the Company. This concentration of ownership may have the effect of delaying or preventing a change of control of the Company. See 'Principal Stockholders.' No Prior Trading Market; Possible Volatility of Stock Price Prior to the Offering, there has been no public market for shares of the Common Stock, and there can be no assurance that a regular trading market will develop after the Offering. The initial public offering price for the Common Stock will be determined by negotiations between the Company and the Underwriters. See 'Underwriting.' The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In addition, the market price of the Common Stock may prove to be highly volatile. Announcements of technological innovations, regulatory matters or new commercial products by the Company or its competitors, developments or disputes concerning patent or proprietary rights, publicity regarding actual or potential clinical results relating to products under development by the Company or its competitors, regulatory developments in both the U.S. and foreign countries, public concern as to the safety of pharmaceutical products, and economic and other external factors, as well as period-to-period fluctuations in financial results, may have a significant impact on the market price of the Common Stock. Forward Looking Statements This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the 'Exchange Act') concerning the Company's operations, economic performance and financial conditions, including, in particular, the likelihood of the Company's success in developing and bringing to market the products which it currently has under development. These statements are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond the control of the Company and reflect future business decisions which are subject to change. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect the Company's results. Consequently, actual results will vary from the statements contained herein and such variance may be, and is likely to be, material. Prospective investors should not place undue reliance on this information. 10 Shares Eligible for Future Sale Of the 15,544,123 shares of Common Stock to be outstanding after the Offering, no shares, other than the 3,500,000 shares of Common Stock sold in the Offering, will be immediately eligible for resale in the public market without restriction, after taking into consideration the effect of lock-up agreements entered into by all officers, directors and all other existing stockholders of the Company (the 'Lock-up Agreements'). Beginning 180 days after the date of this Prospectus, after taking into consideration the effect of the Lock-up Agreements, approximately 11,840,358 additional shares of Common Stock will become eligible for resale in the public market, subject as to certain of such shares to compliance with applicable provisions of Rules 144 and 701. See 'Shares Eligible for Future Sale.' Certain stockholders of the Company who own shares of the Company's capital stock prior to the Offering are entitled to certain registration rights with respect to their shares, including a demand registration right which is exercisable after 270 days from the date of this Prospectus and certain 'piggyback' registration rights which are exercisable in connection with registrations of shares initiated by the Company. Such rights are not applicable to the Offering. The Series B Preferred Stock is convertible into an aggregate of 100,000 shares of Common Stock, subject to customary anti-dilution adjustments, at any time after February 1, 1997. Holders of the Series B Preferred Stock have the right to require the Company to register the resale of the Common Stock that such holders receive upon conversion of the Series B Preferred Stock into Common Stock. See 'Description of Capital Stock -- Registration Rights.' If any such stockholders cause a large number of shares to be sold in the public market, such sales may have an adverse effect on the market price of the Common Stock and its ability to raise capital. Dilution; Absence of Dividends Purchasers of shares of Common Stock offered hereby will experience immediate and substantial dilution of $11.68 in net tangible book value per share, assuming an initial public offering price of $15.00 per share. See 'Dilution.' The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain earnings, if any, to support its growth strategy and does not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs and plans for expansion. See 'Dividend Policy.' Effect of Anti-Takeover Provisions The Company's Amended and Restated Certificate of Incorporation provides for a classified Board of Directors commencing with the 1996 annual meeting of stockholders and that members of the Board of Directors may be removed only for cause upon the affirmative vote of holders of at least a majority of the shares of capital stock of the Company entitled to vote. The Company's Amended and Restated Certificate of Incorporation requires that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing, and will require reasonable advance notice by a stockholder of a proposal or director nomination which such stockholder desires to present at any annual or special meeting of stockholders. Special meetings of stockholders may be called only by the Chief Executive Officer or, if none, the President of the Company or by the Board of Directors. In addition, the Board of Directors has the authority, without further action by the stockholders, to fix the rights and preferences of, and issue shares of, Preferred Stock. The Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits the Company from engaging in a 'business combination' with an 'interested stockholder' for a period of three years after the date of the transaction in which the person first becomes an 'interested stockholder,' unless the business combination is approved in a prescribed manner. The application of these provisions could have the effect of delaying or preventing a change of control of the Company. Certain other provisions of the Company's Amended and Restated Certificate of Incorporation could also have the effect of delaying or preventing changes of control or management of the Company, which could adversely affect the market price of the Common Stock. See 'Description of Capital Stock.' 11 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,500,000 shares of Common Stock offered hereby are estimated to be approximately $48.0 million ($55.3 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $15.00 per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. The Company intends to use approximately $32.0 million of the net proceeds of the Offering to fund anticipated research and product development activities and the planned establishment of the Company's direct sales force. The remaining $16.0 million will be used for working capital and for other general corporate purposes including the expansion of ongoing and scheduled preclinical studies and clinical trials or additional pre-clinical studies and clinical trials, if necessary, and the development of product line extensions and the initiation of development programs for the Company's next generation of pain management products for which the Company has not allocated any specific amounts. The Company believes it is prudent to raise the additional capital at this time since product development costs are inherently uncertain and actual development costs may exceed budgeted amounts. A portion of the net proceeds also may be used to acquire technology, licenses, or companies that complement the business of the Company, although currently there are no agreements or other arrangements regarding any such acquisitions by the Company. The amount and timing of such expenditures will depend on a number of factors, including progress of the Company's research and development programs, the number and breadth of these programs, the progress of the development and commercialization efforts of the Company, the ability of the Company to establish and maintain strategic alliances and licensing arrangements, competing technological and marketing developments, the costs involved in preparing, filing, prosecuting, maintaining, and enforcing patent claims and other proprietary rights, progress in the regulatory process, and other factors. The Company believes that the net proceeds from the Offering, together with interest thereon and the Company's existing capital resources will be sufficient to fund its operations for the research and development of the products currently in clinical trials and other working capital requirements for approximately three years. Pending such uses, the net proceeds will be invested in interest bearing or income producing accounts. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain earnings, if any, to support its growth strategy and does not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs and plans for expansion. 12 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1996, (i) on an actual basis and (ii) as adjusted to give effect to the Offering and the automatic conversion of all outstanding shares of Series A Preferred Stock of the Company into Common Stock upon the consummation of the Offering. See 'Use of Proceeds.' The information presented below should be read in conjunction with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the Company's historical financial statements and the notes thereto included elsewhere in this Prospectus.
JUNE 30, 1996 ACTUAL AS ADJUSTED(1) ------- -------------- (DOLLARS IN THOUSANDS) Stockholders' equity(2): Preferred Stock: 10,000,000 shares authorized; Convertible Series A Preferred Stock, 872,500 shares authorized (actual); 0 shares authorized (as adjusted); 707,500 shares issued and outstanding (actual); 0 shares issued and outstanding (as adjusted)...................................... $ 7 $ 0 Convertible Series B Preferred Stock, 100,000 shares authorized (actual and as adjusted); 100,000 shares issued and outstanding (actual and as adjusted)........ 1 1 Common Stock: 50,000,000 shares authorized; 6,171,876 issued and outstanding (actual); 15,544,123 issued and outstanding (as adjusted)......................... 62 155 Additional paid-in capital........................................................... 9,435 57,374 Unearned compensation expense........................................................ (913) (913) Deficit accumulated during the development stage..................................... (4,943) (4,943) ------- -------------- Total stockholders' equity................................................... 3,649 51,674 ------- -------------- Total capitalization......................................................... $ 3,649 $ 51,674 ------- -------------- ------- --------------
- ------------ (1) As adjusted to reflect the Offering at an assumed initial public offering price of $15.00 per share for the Common Stock, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company and to give effect to the automatic conversion of all outstanding shares of Series A Preferred Stock into Common Stock upon consummation of the Offering. (2) Gives effect to the Company's Amended and Restated Certificate of Incorporation that became effective after June 30, 1996. 13 DILUTION The net tangible book value per share of the Common Stock as of June 30, 1996 was $0.29 per share, after giving effect to the automatic conversion of all outstanding Series A Preferred Stock into an aggregate of 5,872,247 shares of Common Stock upon consummation of the Offering. 'Net tangible book value per share' represents the total tangible assets less total liabilities and the liquidation preference of the Series B Preferred Stock, divided by the number of shares of Common Stock outstanding after giving effect to the automatic conversion of Series A Preferred Stock into shares of Common Stock. Dilution per share represents the excess of the amount per share paid by purchasers of Common Stock in the Offering and the pro forma net tangible book value per share assuming completion of the Offering as of June 30, 1996, at an initial public offering price of $15.00 per share. After giving effect to the sale of 3,500,000 shares and the receipt of net proceeds of $48,025,000, the pro forma net tangible book value per share on June 30, 1996 would have been $3.32 per share, which represents an immediate increase in the net tangible book value of $3.03 to existing stockholders and an immediate dilution of $11.68 in net tangible book value per share to purchasers of shares of Common Stock offered hereby, as illustrated by the following table:
Assumed initial public offering price per share....................................... $15.00 Net tangible book value per share at June 30, 1996.................................... $0.29 Increase per share attributable to new investors...................................... 3.03 ----- Pro forma net tangible book value per share after the Offering........................ 3.32 ------ Dilution per share to new investors................................................... $11.68 ------ ------
The following table summarizes, on a pro forma basis as of June 30, 1996, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing holders of Common Stock and by new investors purchasing shares of Common Stock in the Offering at an assumed initial public offering price of $15.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders.................. 12,044,123 77.5% $ 7,869,600 13.0% $ 0.65 New investors.......................... 3,500,000 22.5 52,500,000 87.0 15.00 ---------- ------- ----------- ------- Total............................. 15,544,123 100.0% $60,369,600 100.0% ---------- ------- ----------- ------- ---------- ------- ----------- -------
The above calculations exclude 678,940 shares of Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $0.13, 296,725 shares of Common Stock issuable upon the exercise of outstanding warrants at an exercise price of $1.20 and 100,000 shares of Common Stock issuable upon the conversion of the Series B Preferred Stock after February 1, 1997. The issuance of any such shares will result in further dilution to new investors. 14 SELECTED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The selected financial information set forth below with respect to the Company's statements of operations for each of the years ended December 31, 1993, 1994 and 1995 and the balance sheet data at each of December 31, 1994 and 1995 are derived from the financial statements of the Company audited by Coopers & Lybrand L.L.P., independent accountants. The statements of operations data for the year ended December 31, 1992 and the balance sheet data at each of December 31, 1992 and 1993 are derived from the Company's financial statements not included herein. The selected financial information for the six months ended June 30, 1995 and 1996 are derived from unaudited financial statements included herein. The unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996 or for any future period. This data should be read in conjunction with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and with the Company's financial statements and related notes contained elsewhere in this Prospectus.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------- ---------------------- 1992 1993 1994 1995 1995 1996 ----- ----- ------- ------- ------- ----------- STATEMENT OF OPERATIONS DATA: Revenues...................................... $ 96(1) $ 215(1) $ -- $ -- $ -- $ 1,500 Operating expenses: Research and development................. 125 40 654 1,615 801 1,004 General and administrative............... 369 436 623 760 396 1,628 ----- ----- ------- ------- ------- ----------- Total operating expenses............ 494 476 1,277 2,375 1,197 2,632 ----- ----- ------- ------- ------- ----------- Interest income............................... 13 4 153 253 138 77 ----- ----- ------- ------- ------- ----------- Net loss...................................... $(385) $(257) $(1,124) $(2,122) $(1,059) $(1,055) ----- ----- ------- ------- ------- ----------- ----- ----- ------- ------- ------- ----------- Pro forma net loss per common share(2)........ $ (0.17) $ (0.09) ------- ----------- ------- ----------- Pro forma weighted average common shares outstanding(2).............................. 12,199 12,329 ------- ----------- ------- -----------
JUNE 30, 1996 DECEMBER 31, ---------------------- ---------------------------------------- AS 1992 1993 1994 1995 ACTUAL ADJUSTED(3) ----- ----- ------- ------- ------- ----------- BALANCE SHEET DATA: Cash and cash equivalents(4).................. $ 288 $ 124 $ 5,634 $ 3,707 $ 2,505 $50,584 Working capital............................... 180 81 5,503 3,419 3,268 51,590 Total assets.................................. 330 153 5,765 3,820 4,903 52,685 Deficit accumulated during the development stage....................................... (385) (642) (1,766) (3,888) (4,943) (4,943) Total stockholders' equity.................... 214 108 5,618 3,521 3,649 51,674
- ------------ (1) Represents revenues from consulting activities in which the Company has ceased to engage. (2) Adjusted to give effect to the automatic conversion of all outstanding shares of Series A Preferred Stock upon consummation of the Offering. See Note 2 to the Financial Statements. (3) As adjusted to give effect to the Offering at an assumed initial public offering price of $15.00 per share (after deducting the underwriting discounts and commissions and estimated offering expenses) and the receipt of the net proceeds therefrom. See 'Use of Proceeds' and 'Capitalization.' (4) Does not include $2.0 million received from McNeil on July 5, 1996 pursuant to the McNeil License Agreement of which $500,000 is committed to fund the Company's portion of development costs under the McNeil License Agreement. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain information set forth herein contains forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Certain factors discussed herein could cause actual results to differ materially from those in the forward-looking statements. See 'Risk Factors -- Forward Looking Statements.' OVERVIEW Algos, a development stage company, is engaged primarily in the development and commercialization of proprietary pharmaceutical products. Since its formation in January 1992, the Company has devoted a substantial amount of its efforts to licensing technology, recruiting key management and staff, developing products, filing patents and other regulatory applications and raising capital. To date, the Company has earned no revenue from its planned principal line of business. The Company has incurred losses since its inception and expects to incur significant operating losses in the future. The Company expects that its product development expenses will increase significantly during 1996 and in future years as the drugs that the Company currently has under development move into advanced clinical trials and as additional drugs are considered for development. In addition, the Company expects that its personnel costs will increase significantly in the future, primarily as a result of the planned development of a direct sales force. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995 Revenue In the 1996 period, the Company recognized $1,500,000 of license revenue. This amount represents the initial payment of $2,000,000 due under the McNeil License Agreement and received in July 1996, less $500,000 which is currently restricted for the funding of future development costs. Research and Development In the 1996 period, research and development expenses increased $202,801, to $1,003,585 from $800,784 in 1995. The 1996 period included increased expenses related to the Company's clinical trials, including fees to clinical investigators which increased approximately $243,000. Increased compensation to employees and consultants was offset by reduced spending on pre-clinical studies. General and Administrative Expenses In the 1996 period, general and administrative expenses increased $1,231,726 to $1,628,184 from $396,458 in 1995. The increase was due primarily to a charge of $915,000 in the 1996 period relating to the issuance of Series B Preferred Stock in connection with an amendment to the license agreement with The Medical College of Virginia and amortization of unearned compensation expense of approximately $189,000 in connection with the grant of stock options. Higher professional fees and compensation expenses also contributed to the increase. YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 Research and Development In 1995, research and development expenses increased $961,229, to $1,614,943 from $653,714 in 1994. This increase was primarily attributable to the Company's pre-clinical studies in the field of NMDA antagonists. In 1995, direct costs associated with pre-clinical studies and clinical trials were approximately $542,000 and formulation development, drug supplies and related analytical services totaled approximately $265,000. Compensation expense increased as a result of the addition of employees and consultants. Spending on other programs also contributed to the increase in 1995 16 expenditures. Expenses in 1994 consisted primarily of employee and consultant compensation as the Company established its research management team and initiated sponsored research programs at three universities. General and Administrative Expenses In 1995, general and administrative expenses increased $136,821, to $760,040 from $623,219 in 1994. This increase was primarily attributable to additional employee compensation and related taxes and benefits. In addition, general office expenses such as rent, utilities, and supplies increased as a result of increased business activities and employment. Interest Income In 1995, interest income increased $99,301, to $252,548 from $153,247 in 1994 as a result of the investment of proceeds from the Company's private placement of Series A Preferred Stock, which was completed in August 1994. YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993 Revenue In 1993, the Company earned $214,584 for performing certain consulting services unrelated to its planned principal operations. Effective January 1, 1994, the consulting contract was assigned to another corporation. The Company will not earn any revenue or incur any expenses in the future in connection with that consulting contract. Research and Development In 1994, research and development expenses increased $613,714, to $653,714 from $40,000 in 1993. This increase was principally attributable to the Company's establishment of its research management team and initiation of sponsored research programs at three universities. General and Administrative Expenses In 1994, general and administrative expenses increased $187,562, to $623,219 from $435,657 in 1993. This increase was due principally to professional fees related to patent investigations and applications, sponsored research programs and other general corporate expenses. Interest Income Interest income of $153,247 in 1994 was derived primarily from the investment of proceeds from the private placement of Series A Preferred Stock, which was completed in August 1994. The Company earned interest income of $4,433 in 1993 from the investment of capital contributions by the Company's founders. LIQUIDITY AND CAPITAL RESOURCES General In 1995, 1994, and 1993, spending for the Company's product development efforts and related activities resulted in net cash outflows from operations of $1,929,321, $991,928 and $289,277, respectively. Accumulated cash balances at December 31, 1992, which resulted from the Company's initial capitalization together with additional investments by the Company's founders, were sufficient to provide operating funds into 1994. In 1994, in order to initiate its planned product development programs, the Company sold 700,000 shares of Series A Preferred Stock in a private placement, resulting in net proceeds of $6,609,015. A portion of these funds were used to fund the Company's development efforts in 1995 and the first six months of 1996. At June 30, 1996, the Company had cash 17 and cash equivalents of $2,504,603 and current liabilities of $1,254,174. In addition, the Company received $2.0 million from McNeil on July 5, 1996 pursuant to the McNeil License Agreement, of which $500,000 is committed to fund the Company's portion of development costs under the McNeil License Agreement. Without the proceeds of the Offering, the Company believes that current cash and cash equivalents are sufficient to fund a reduced level of operations for at least the next 12 months. The Company expects to invest substantial funds in the development of its products and to continue to generate significant losses for the foreseeable future. Its funding requirements will depend on a number of factors, including the results of the Company's development efforts, the timing and cost of obtaining required regulatory approvals, the development of competing technologies, the amount of resources required for the establishment of marketing and distribution capabilities, the execution of licensing or other collaborative research agreements on terms acceptable to the Company, and the cost of prosecuting and defending patents. The Company currently expects that the proceeds from the Offering will be sufficient to fund its operations for the development of products currently in clinical trials, based upon the Company's presently anticipated schedule of clinical trials, and other working capital requirements for approximately three years. If, however, additional trials are deemed to be necessary, the Company may require additional funds to complete such trials. Accordingly, in the event that the proceeds of the Offering, revenue and income from successful product introductions or other internally generated funds are insufficient for such efforts, the Company will need to raise additional funds by incurring debt, issuing additional equity or through collaborative or license arrangements. See 'Risk Factors -- Need for Additional Funds.' Net Operating Loss Carryforwards At December 31, 1995 and June 30, 1996, the Company had accumulated net operating loss carryforwards of approximately $2,900,000 and $2,100,000, respectively, which expire in 2009 and 2010 and are available to reduce future taxable income recognized in the carryforward period, if any. Due to the uncertainty of future taxable income, the Company has established a valuation allowance for these carryforwards and has not recognized their potential benefit on a current basis. The future utilization of these carryforwards may be limited by Section 382 of the Internal Revenue Code related to changes in Company ownership. Other Generally, the Company's results of operations are not significantly affected by seasonal factors and the Company does not believe that inflation has had or is likely to have a significant impact on its business. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ('SFAS') No. 123 -- 'Accounting for Stock Based Compensation,' which generally requires disclosure of the impact on earnings of stock based employee compensation arrangements. The Company plans to adopt the disclosure requirements of SFAS No. 123 effective January 1, 1996. 18 BUSINESS COMPANY OVERVIEW Algos is a leader in developing a new generation of proprietary pain management products. The Company develops its proprietary pain management products by combining existing analgesic or anesthetic drugs with NMDA antagonist drugs that have been approved for human use in other applications. Independent research and the Company's pre-clinical studies and clinical trials conducted to date have shown that the Company's products may significantly improve pain relief over currently available analgesics, including narcotic drugs such as morphine, hydrocodone and oxycodone and non-narcotic analgesics such as acetaminophen (e.g. Tylenol'r'), ibuprofen (e.g. Advil'r') and naproxen (e.g. Aleve'r'). The Company is also developing a local anesthetic product that has the potential to provide greater anesthetic effect with longer and more controlled duration than existing products. The Company's analgesic and anesthetic products will target markets with combined 1995 U.S. sales estimated at $6.4 billion. In addition, the Company is using its NMDA antagonist technology to develop products to treat urge urinary incontinence and opiate and cocaine addiction. The Company believes that its analgesic and anesthetic products have the potential for more rapid market introduction than many other new drugs because (i) the Company's products combine existing drugs whose separate safety profiles are known and established and (ii) clinical trials for new analgesics and anesthetics historically have achieved statistically significant results with fewer patients than may be required for many other drugs. As a result, the Company currently anticipates that it will file its first NDA with the FDA in 1997. The Company has ten products that have reached Phase II clinical trials or are scheduled for Phase II or Phase III clinical trials in 1996. The Company has completed or is currently conducting eleven clinical trials and has scheduled additional clinical trials to commence in 1996. A pivotal Phase II clinical efficacy trial has been completed with MorphiDex'tm' demonstrating statistically significant superior pain relief over morphine. The Company's products that have reached Phase II clinical trials or are scheduled for Phase II or Phase III clinical trials consist of: (i) four narcotic analgesic/NMDA antagonist combination products: MorphiDex'tm', expected to be used primarily to treat cancer pain, HydrocoDex SR'tm' and HydrocoDex Plus'tm', expected to be used primarily to treat moderate to moderately severe post-operative, musculoskeletal and trauma-related pain, and OxycoDex'tm', expected to be used primarily to treat moderate to moderately severe post-operative pain; (ii) two OTC analgesic/NMDA antagonist combination products: a combination product of an NMDA antagonist with acetaminophen, the largest selling OTC analgesic, and a combination product of an NMDA antagonist with ibuprofen, the largest selling OTC NSAID; (iii) one injectable local anesthetic/NMDA combination product intended to provide greater anesthetic effect with longer and more controlled duration for use in dental procedures and in-patient and out-patient surgeries; (iv) one product that uses an NMDA antagonist intended as a treatment for urge urinary incontinence, a condition which afflicts an estimated five million people in the U.S.; and (v) two products intended as treatments for opiate and cocaine addiction, which the Company expects to develop in collaboration with NIDA, NIH. COMPANY STRATEGY The Company's strategic goal is to establish a leading position in the pain management pharmaceutical market. The Company intends to achieve this goal by implementing the following strategy: Introducing superior proprietary products. Based on the results of independent research, pre-clinical studies and initial clinical trials, the Company believes its products will provide superior efficacy over 19 currently available narcotic, non-narcotic and anesthetic products. The Company intends to build significant market share in both the OTC and prescription pain management markets. Minimizing development time, cost and risk. The Company attempts to reduce drug development time and cost at each stage of the development process. The Company believes that it will be able to develop its initial products faster than other types of new drugs because all of the Company's initial products are combinations of, or forms of, existing approved drugs. For its pre-clinical studies, the Company is able to save time and expense by drawing upon the experience of many highly regarded researchers in the pain management field through its collaborations with established academic research institutions. Similarly, for its clinical trials, the Company collaborates with researchers who have the experience and the facilities to design timely and cost-effective trials. In addition, the Company believes that new analgesic and anesthetic products have the potential for more rapid market introduction than many other types of drugs. Leveraging its proprietary technology across multiple product opportunities. Through extensive pre-clinical research, Algos has identified multiple potential products using NMDA antagonist technology. As a result, Algos has developed ten pharmaceutical products that have progressed to Phase II clinical trials or are scheduled for Phase II or Phase III clinical trials in 1996. Outsourcing to efficiently deploy resources. The Company intends to continue to contract the resources of well-recognized commercial organizations to perform pre-clinical studies, clinical trials and pharmaceutical development on behalf of the Company. In addition, the Company intends to outsource its manufacturing functions to third party suppliers. Maximizing market penetration and margin potential through a combination of Company direct sales and strategic alliances. In market segments with relatively concentrated distribution channels, such as prescription analgesics that are sold to individual hospitals, health maintenance organizations and pharmaceutical buyer groups, the Company plans to maximize its margins by marketing these products through a direct sales force. In market segments that will require large or specialized sales capabilities, such as OTC analgesic products and certain foreign countries, the Company will seek strategic alliances with leading pharmaceutical companies. The Company believes such alliances enhance its ability to identify new products as well as quickly develop and commercialize such products. MARKET OVERVIEW The Company is developing products that will target the narcotic and non-narcotic analgesic markets, the local anesthetic market, the urge urinary incontinence market and the market for treatment of opiate and cocaine addiction. The Analgesic Market The Company's analgesic products will target markets with combined 1995 U.S. sales estimated at $6.4 billion. The Company believes that the analgesic market presents attractive opportunities based upon the following factors: high growth rates partially attributable to the rapidly growing population segment aged 65 and older; increasing recognition of the therapeutic benefits of effective pain treatment including reductions in healing and recovery time; generally concentrated distribution channels that permit more cost-effective selling and marketing; lack of recent product innovation which has resulted in market segments comprised largely of older off-patent drugs; higher profit margins from branded proprietary products; and the potential for rapid acceptance of new pain management pharmaceuticals by members of the medical profession. 20 The following table identifies the estimated size of the U.S. market segments which the Company's analgesic products are expected to target.
ESTIMATED ANALGESIC MARKET SEGMENTS REPRESENTATIVE BRANDS 1995 U.S. SALES - ------------------------------------------- ------------------------------------------- --------------- (IN MILLIONS) Prescription Anti-Arthritics (NSAIDs) Lodine, Voltaren, Relafen $ 1,714 Prescription Anti-Migraine Imitrex 373 Prescription Narcotics: Non-injectable Morphine MS Contin 247 Hydrocodone Based Products Vicodin 315 Oxycodone Based Products Percocet, Percodan 73 Codeine Based Products Tylenol with codeine 87 Synthetic Narcotics Darvon 237 ------- Prescription Narcotics Total 959 Synthetic Non-Narcotics Toradol, Ultram, Stadol NS 500 ------- Prescription Total 3,546 OTC Analgesics: NSAIDs Advil, Motrin, Aleve, Orudis 853 Aspirin Bayer 617 Acetaminophen Tylenol 1,220 Topical Analgesics 213 ------- OTC Analgesics Total 2,903 ------- Total Analgesic Market $ 6,449 ------- -------
- ------------ Source: IMS, Inc. and A.C. Nielsen. The Anesthetic Market In 1995, the injectable local anesthetic market in the U.S. was estimated at $164 million. The market for local anesthetics is believed to present attractive opportunities for a controlled duration product because existing local anesthetics have limited and less controllable duration which restricts their use in surgery. The Company believes that a controlled, extended duration local anesthetic, if successfully developed, would have the potential to significantly expand this market segment. The Urge Urinary Incontinence Market An estimated five million people in the U.S. suffer from urge urinary incontinence. While sales of urge urinary incontinence drugs in the U.S. were estimated at $84 million in 1995, U.S. sales of incontinence supplies (including adult protective undergarments) were significantly higher at an estimated $1.1 billion in 1994. This was due, in part, to a lack of satisfactory pharmaceutical treatments. The Company believes that if satisfactory drugs for treating urge urinary incontinence were introduced, the market size for urge urinary incontinence drugs could grow considerably. The Drug Abuse Treatment Market NIDA estimates that there are two million opiate addicts in the United States and 1.5 to 2 million cocaine abusers. The Company believes that these opiate addict and cocaine abuser populations represent a large potential market for effective pharmaceutical treatment. 21 PRODUCTS The following table describes the ten products developed by Algos that have reached Phase II clinical trials or are scheduled to reach Phase II or Phase III clinical trials in 1996. ALGOS PRODUCTS IN DEVELOPMENT PRODUCT INDICATION STAGE OF DEVELOPMENT - ---------------------------- ----------------------------- ----------------------------------------------- NARCOTIC ANALGESICS MorphiDex'tm' Moderate to severe pain Pivotal Phase II clinical trial completed. (primarily cancer pain) Additional Phase II and III clinical trials in progress or scheduled in 1996. Two Phase I/II clinical trials completed. HydrocoDex SR'tm' and Moderate to moderately severe Phase II clinical trial scheduled in 1996. HydrocoDex Plus'tm' pain (primarily post-operative, musculoskeletal and trauma-related pain) OxycoDex'tm' Moderate to moderately severe Phase II clinical trial in progress. pain (primarily Additional Phase II clinical trial post-operative pain) scheduled in 1996. NON-NARCOTIC ANALGESICS Ibuprofen/NMDA Antagonist OTC analgesic Phase II clinical trial completed. Combination Additional Phase II clinical trial scheduled in 1996. Acetaminophen/NMDA OTC analgesic Phase II clinical trial in progress. Antagonist Combination ANESTHETICS Lidocaine/NMDA Antagonist Extended duration anesthetic Phase I/II clinical trial scheduled in 1996. Combination OTHERS Urge Urinary Incontinence Urge urinary incontinence Phase II clinical trial in progress. Treatment Opiate Addiction Treatment Opiate addiction Phase II clinical trial scheduled in 1996. Cocaine Addiction Treatment Cocaine addiction Phase II clinical trial scheduled in 1996.
NARCOTIC ANALGESICS Narcotic analgesic drugs remain the most common and useful treatment for moderate to severe pain in both acute and chronic conditions. These drugs consist of naturally occurring opiates (e.g. morphine), opiate derivatives (e.g. codeine, hydrocodone, oxycodone), and synthetic opiates (e.g. methadone). One of the most significant drawbacks to these drugs is the development of rapid tolerance and physical dependence. Tolerance refers to the condition under which a drug dose that was initially effective in producing analgesia becomes less effective with repeated administrations. Therefore, to alleviate the same level of pain, the drug dose has to be increased over time. However, increasing the drug dose may produce an increase in unwanted side effects such as mental clouding, nausea and constipation and may also increase the potential for drug dependence. Pre-clinical studies of the Company's narcotic analgesic/NMDA antagonist combination products indicated superior first-dose analgesic effects as compared to equivalent dosage levels of the narcotic analgesic alone and greater efficacy when administered over periods during which the narcotic analgesic 22 administered alone became less effective. The Company believes that its new products, if proven effective in humans in producing superior analgesic effects and reducing tolerance and side effects, could replace a significant portion of the narcotic analgesics currently in use for acute and chronic pain and could be used in chronic pain cases where physicians have been reluctant to use narcotics. MorphiDex'tm' MorphiDex'tm', the Company's most developmentally advanced product, is designed to treat moderate to severe pain and will be used primarily for treating cancer pain. MorphiDex'tm' is the trade name for the Company's patented morphine and dextromethorphan combination product. The addition of an NMDA antagonist to morphine is intended to increase analgesic effectiveness, reduce the development of tolerance to morphine and reduce the development of hyperalgesia in cases of chronic administration. The Company expects to use MorphiDex'tm' to target the market for morphine products. In 1995, U.S. sales of morphine products were approximately $247 million and non-U.S. sales were approximately $500 million. This market is believed to be growing at an estimated rate of 18% per year, which is largely attributable to the rapidly growing population segment aged 65 and older in the United States, Europe and Japan. The Company's research and development activities with respect to MorphiDex'tm' include: (i) pre-clinical pharmacology studies which indicate that morphine tolerance may be significantly reduced by co-administration with an NMDA antagonist; (ii) pre-clinical toxicology and drug safety studies comparing the combination of dextromethorphan and morphine to the individual drugs; (iii) one completed, double blind Phase I/II clinical trial to assess safety and abuse liability which indicates product safety and possible lower abuse potential; (iv) one completed, double blind Phase I/II clinical trial in chronic pain patients which indicates that a combination of morphine or morphine equivalents together with an NMDA antagonist is safe at projected therapeutic dose levels and that such a combination may provide superior pain relief over morphine; and (v) one completed pivotal Phase II clinical efficacy trial in oral surgery patients which indicates statistically significant superior pain relief with MorphiDex'tm' over morphine alone. In addition, four additional clinical trials are currently underway which the Company expects will lead to an NDA filing in the second half of 1997. HydrocoDex'tm' SR and HydrocoDex Plus'tm' Hydrocodone is a narcotic primarily used to treat moderate to moderately severe post-operative, musculoskeletal and trauma-related pain. The analgesic products containing hydrocodone that are sold commercially in the U.S. are combination products containing acetaminophen. In 1995, the market for such products in the U.S. was approximately $315 million with an estimated growth rate of 15% per year. HydrocoDex SR'tm' is the trade name for the Company's sustained release product that combines hydrocodone and dextromethorphan. Currently there are no sustained release hydrocodone products on the market because the dosage size required to achieve a sustained effect when combined with acetaminophen is too large for practical application. The Company expects that, if approved and successfully brought to market, HydrocoDex SR'tm' will provide physicians with the ability to prescribe an effective sustained release hydrocodone analgesic for the first time. HydrocoDex Plus'tm' is the trade name for the Company's immediate release product that combines hydrocodone, dextromethorphan and acetaminophen. The Company believes that HydrocoDex Plus'tm' may broaden the current market for hydrocodone/acetaminophen combination products because equal or greater therapeutic effect may be achieved by administering lower doses of the hydrocodone component of the product, thereby potentially creating a product with a lower abuse potential. 23 The Company is planning to begin a Phase II clinical trial in the second half of 1996 intended to show that the addition of an NMDA antagonist increases the efficacy of products containing hydrocodone. The results of pre-clinical studies for these products have been favorable. OxycoDex'tm' Oxycodone is an opiate narcotic that, in combination with acetaminophen or aspirin, forms the basis for a group of products which are broadly used for the treatment of moderate to moderately severe post-operative and other types of pain. In 1995, the U.S. market for such products was estimated at $73 million. The Company is currently in the process of developing an immediate release combination product consisting of oxycodone, acetaminophen and dextromethorphan. Pre-clinical studies have indicated that an NMDA antagonist may increase the efficacy of oxycodone. In April 1996, the National Institute of Dental Research ('NIDR') commenced a clinical trial comparing the efficacy of oxycodone alone and in combination with an NMDA antagonist. Additional clinical trials are scheduled to be conducted in 1996. NON-NARCOTIC ANALGESICS The Company has two non-narcotic analgesics in development: an ibuprofen/NMDA antagonist combination product and an acetaminophen/NMDA antagonist combination product. In 1995, the OTC NSAID market in the U.S. which included ibuprofen totaled an estimated $853 million. The total U.S. OTC market for acetaminophen was estimated at $1.2 billion. The Company has licensed certain NSAID/NMDA antagonist products (including ibuprofen) and its acetaminophen/NMDA antagonist products to McNeil. See ' -- Corporate and Government Collaborations.' Ibuprofen/NMDA Antagonist Combination Pre-clinical studies have indicated that the analgesic efficacy of several NSAIDs, such as ibuprofen and naproxen, may be increased when combined with an NMDA antagonist. The Company believes that an OTC product based upon a combination of existing dosage levels of an NSAID with an NMDA antagonist would offer analgesic efficacy that is superior to existing OTC analgesics and could have the potential to achieve rapid market acceptance. In addition, at dosage levels where the NSAID indicated no analgesic effect by itself, a significant analgesic effect was indicated by the addition of an NMDA antagonist. As a result, an NSAID/NMDA antagonist combination product may also be formulated to give an equivalent analgesic effect while lowering the NSAID dosage and thus potentially reducing certain dosage related side effects of NSAIDs, such as gastrointestinal bleeding and ulcers. An initial Phase II clinical trial has indicated that an NSAID (ibuprofen) in combination with an NMDA antagonist may have an increased analgesic effect when compared to the NSAID alone in dental surgery patients who experienced greater surgical trauma (i.e. patients who had surgery which lasted longer than 30 minutes). The study also indicated that for dental patients in certain lower trauma categories (i.e. patients whose surgery lasted less than 30 minutes) both ibuprofen alone and ibuprofen in combination with an NMDA antagonist had a significantly better analgesic effect when compared to a placebo and that ibuprofen alone and ibuprofen in combination with an NMDA antagonist were both similarly effective in relieving the patient's pain. Although the Company believes that these results are encouraging, additional clinical trials are necessary in order to submit an NDA to the FDA. Acetaminophen/NMDA Antagonist Combination The Company has sponsored pre-clinical studies to evaluate acetaminophen in combination with NMDA antagonists. The results indicate that combining an NMDA antagonist with acetaminophen may increase the efficacy of acetaminophen. In a placebo-controlled Phase II clinical trial conducted by NIDR, patients taking a scheduled regimen of an NMDA antagonist (dextromethorphan) before and after oral surgery required substantially less acetaminophen after the surgery to relieve pain. 24 ANESTHETICS (LIDOCAINE/NMDA ANTAGONIST COMBINATION) Injectable Anesthetic The injectable local anesthetic market was estimated at $164 million in the U.S. in 1995. Sales consist primarily of older off-patent drugs. Although research indicates that the administration of analgesics preceding surgery may improve surgical outcomes, the limited duration of existing injectable anesthetics limits their use in surgery. The Company, in collaboration with Brigham and Women's Hospital, Harvard Medical School, is conducting research into the potentiation of local anesthetics by NMDA antagonists. Pre-clinical studies have indicated that the NMDA antagonist, dextromethorphan, may increase the depth and duration of anesthesia of lidocaine. With the current emphasis on preemptive analgesia, same day surgery and shorter hospital stays, the Company believes that a longer duration anesthetic may provide greater patient comfort when post surgical pain is most severe. A Phase I/II clinical trial is planned for late 1996. Anti-Migraine Reported results of an independently conducted clinical trial indicate that intra-nasal lidocaine provides rapid relief of migraine headache, but that relapse is common. Since the NMDA antagonist dextromethorphan may enhance the efficacy of lidocaine and is also effective in inhibiting neuropathic pain, an intra-nasal lidocaine/dextromethorphan combination product may be a more effective anti-migraine treatment. Pre-clinical studies are planned for late 1996. OTHERS Urge Urinary Incontinence Treatment An estimated five million people in the U.S. suffer from urge urinary incontinence. While sales of urge urinary incontinence drugs in the U.S. were estimated at $84 million in 1995, U.S. sales of incontinence supplies (including adult protective undergarments) were an estimated $1.1 billion in 1994. This was due, in part, to a lack of satisfactory urge urinary incontinence drugs. Existing urge urinary incontinence drugs generally have unpleasant side effects and low levels of efficacy. The Company believes that if satisfactory drugs for treating urge urinary incontinence are introduced, consumer demand for an urge urinary incontinence drug could increase considerably. Company-sponsored pre-clinical studies have indicated that NMDA antagonists may block the bladder micturition reflex. A Phase II clinical trial is currently being conducted at the Stanford University School of Medicine to evaluate an NMDA antagonist in urge incontinent patients. If successful, these agents may offer a novel, safe and effective treatment for urge urinary incontinence. Opiate and Cocaine Addiction Treatment Drugs NIDA estimates that there are two million opiate addicts in the United States and 1.5 to 2 million cocaine abusers. These opiate addict and cocaine abuser populations represent a large potential market for effective treatment drugs. The Company is developing an NMDA antagonist-based product as an opiate addiction treatment drug. NIDA is planning a Phase II clinical study in collaboration with the Company to test this opiate addiction treatment drug. In addition, the Company is developing a cocaine addiction treatment drug. Pre-clinical studies have indicated that NMDA antagonists may have potential for the treatment of dependence on opiate narcotics and cocaine abuse. SCIENTIFIC OVERVIEW A key element of the Company's technology is the use of NMDA antagonists, which block the NMDA receptor. NMDA receptors are believed to be present in nerve cells in the brain and spinal cord. There is increasing evidence that there may also be peripheral NMDA receptors. The important role of the NMDA receptor in pain response has become recognized among scientists and clinicians. Research indicates that the NMDA receptor plays a role in neuropathic pain, 25 development of tolerance to and dependence on narcotic analgesics, and development of hyperalgesia due to chronic administration of opiate narcotics. According to current scientific theory, activation of this receptor results in a cascade of intracellular events beginning with the influx of extracellular calcium. This influx of calcium results in activation of the enzyme protein kinase C and its subsequent translocation from cytosol to the membrane. Through protein phosphorylation, enduring changes then occur in the membrane constituents including receptors. This cascade of events beginning with the activation of the NMDA receptor has been implicated in numerous neuroplastic phenomena such as post-tetanic potentiation resulting in sensitized and overly active nerve cells and consequently may cause spontaneous pain and/or increased sensitivity to pain. It is believed that narcotic analgesics reduce pain by binding to opiate receptors located on nerve cells in the brain and spinal cord. Although the initial effect of this binding is to inhibit the nerve cell and thereby reduce pain, opiate receptor activation is also believed to stimulate the NMDA receptor leading to the cascade of events described in the previous paragraph. Many researchers believe that increased NMDA receptor activation represents the underlying cellular mechanism of opiate tolerance and dependence. Pre-clinical studies indicate that by blocking the NMDA receptor, tolerance to and dependence on opiates may be reduced and the development of hyperalgesia prevented. The involvement of the NMDA receptor in dependence is also the basis for development of NMDA antagonists to treat drug addiction. CORPORATE AND GOVERNMENT COLLABORATIONS In June 1996, the Company entered into the McNeil License Agreement with McNeil, an affiliate of Johnson & Johnson, pursuant to which the Company granted McNeil the exclusive right to develop acetaminophen/NMDA antagonist combination products and certain NSAID/NMDA antagonist combination products (ibuprofen and certain other NSAIDs approved for OTC use) for the treatment of pain. The McNeil License Agreement provides for an initial payment of $2.0 million by McNeil (funded on July 5, 1996) to the Company and additional payments of up to $8.0 million by McNeil upon the achievement of certain milestones generally relating to product development and patent issuances. In addition, the Company will be entitled to receive royalty payments from McNeil based upon net product sales. McNeil will bear all the costs of developing products it selects, except for approximately $500,000 to be borne by the Company. McNeil will be required to pay minimum royalties commencing a certain time after execution of the agreement, provided that certain conditions have been met, even if McNeil has not commenced marketing of an acetaminophen product or an NSAID product. The McNeil License Agreement extends until the later of the expiration of the Company's patent rights or ten years, provided that the McNeil License Agreement is terminable: (i) by either party in the event of a material breach by the other party upon 90 days' notice or upon certain events of bankruptcy; (ii) by McNeil, at any time after one year from the effective date of the agreement; and (iii) by the Company under certain circumstances. Under certain circumstances, the McNeil License Agreement could terminate with respect to either acetaminophen or NSAID products without terminating with respect to the other category. In the event of a termination by McNeil, McNeil must pay all royalty payments and milestone payments due through the date of termination and the technology licensed by McNeil reverts to the Company. In such event, the Company retains the rights to the results of the two clinical studies funded by the Company, and McNeil retains the rights to the results of the clinical studies funded by McNeil during the term of the McNeil License Agreement. See ' -- Patents, Trade Secrets and Licenses -- Licenses.' In June 1996, the Company entered into a letter of intent with NIDA, NIH, pending formal approval of a CRADA to conduct joint research on a methadone/NMDA antagonist combination drug as a potential treatment for opiate addition. ACADEMIC AND RESEARCH COLLABORATIONS Virginia Commonwealth University, The Medical College of Virginia In 1994, the Company entered into a collaborative research agreement with The Medical College of Virginia with the option for subsequent annual renewals. Under the terms of this agreement, The 26 Medical College of Virginia provides pre-clinical research exclusively to the Company in the field of: (i) prevention of tolerance to and dependence on opiates, opiate derivatives and opioids; (ii) treatment of chronic pain; and (iii) treatment of neuropathic pain, under the direction of David J. Mayer, Ph.D and Donald D. Price, Ph.D., Professors, Department of Anesthesiology, The Medical College of Virginia. Brigham and Women's Hospital In 1995, the Company entered into a research agreement with Brigham and Women's Hospital, Inc., a teaching affiliate of Harvard Medical School. Under the terms of this agreement, Brigham and Women's Hospital performs pre-clinical research exclusively for the Company in the field of long lasting anesthetics under the direction of Gary R. Strichartz, Ph.D., Professor of Anesthesia (Pharmacology). The research is designed to measure certain characteristics and effects of various anesthetic/NMDA antagonist combinations covered by the Company's existing or pending patents. Stanford University The Company has entered into a series of research agreements with Stanford University. Under the direction of Christos E. Constantinou, Ph.D. of the Stanford University School of Medicine, certain NMDA antagonists were tested in pre-clinical studies to assess their potential for use in the treatment of urge urinary incontinence. The studies were conducted with products that are the subject of one of the Company's pending patent applications. In addition, Christopher Payne, M.D. is currently conducting a clinical trial to further test the potential of such NMDA antagonists for the treatment of urge urinary incontinence. CLINICAL TRIAL COLLABORATIONS Clinical trials with several major research institutions and medical centers have commenced, and several others are scheduled for commencement in the near future. The institutions with which the Company collaborates include: Johns Hopkins Bayview Medical Center, Baltimore, Maryland Memorial Sloan-Kettering Cancer Center, New York City, New York Emory University Hospital Medical Center, Atlanta, Georgia Stanford University School of Medicine, Palo Alto, California University of Pennsylvania, Philadelphia, Department of Veterans Affairs Medical Center, Philadelphia, Pennsylvania Royal North Shore Hospital, University of Sydney, Australia National Institute of Dental Research, National Institutes of Health, Bethesda, Maryland Rivers Center Research Corporation, Columbia, Maryland SCIREX Corporation, Austin, Texas The Company generally conducts clinical studies directly with the principal investigators and also by the use of Contract Research Organizations ('CROs') that provide additional manpower as required to manage several study programs simultaneously. The Company's management is experienced at selecting and managing CROs for conducting clinical studies. TECHNICAL DEVELOPMENT AND PRODUCTION The Company generally seeks to contract third parties for formulation development, manufacture of clinical trial materials and scale-up work. The Company generally selects third party contractors that it believes have the capability to commercially manufacture the products. The key advantage to this approach is that the third party contractor which performed the developmental work will have the equipment, operational parameters and validated testing procedures already in place for the commercial manufacture of the Company's products. The Algos management team is experienced in selecting and managing activities at third party contract companies. By selecting qualified third party contractors or 27 by choosing development partners that provide full scale contract manufacturing services, the Company believes it will be able to shorten development time and scale-up to production. MARKETING Algos plans to market its products either directly or through co-marketing or licensing agreements with pharmaceutical companies. The Company's marketing strategy is to develop a direct sales force in the U.S. in market segments with relatively concentrated distribution channels to target hospitals, health maintenance organizations and pharmaceutical buyer groups. Algos does not expect to establish a direct sales capability until such time as one or more of its products in development receives marketing approval from the FDA. In market segments that require large or specialized sales capabilities, such as OTC analgesic products and certain foreign countries, the Company will seek strategic alliances with leading pharmaceutical companies such as the McNeil License Agreement. Implementation of this strategy will depend on the market potential of the Company's products, its financial resources and timely regulatory approvals. COMPETITION The Company's products under development are expected to address several different markets. The Company's proposed products will be competing with currently existing or future products of other companies. Competition among these products will be based on, among other things, product efficacy, safety, reliability, availability, price and patent position. Many of the Company's existing or potential competitors have substantially greater financial, technical and human resources than the Company, may be better equipped to develop, manufacture and market products and have more extensive experience in pre-clinical testing and human clinical trials. These companies may develop and introduce products and processes competitive to those of the Company. The Company competes with pharmaceutical companies that develop, produce and market products in the United States, Europe and elsewhere. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection, discover new drugs or establish collaborative arrangements for drug research. The Company's narcotic analgesic and anesthetic products, when developed and marketed, will compete with products generally marketed by medium-sized pharmaceutical companies. In other analgesic segments, such as antiarthritic and OTC analgesic products, the Company's products, when developed and marketed, will compete with products marketed by some of the largest pharmaceutical companies in the U.S. In these segments, the Company may enter into license agreements with pharmaceutical companies having greater resources than the Company. PATENTS, TRADE SECRETS AND LICENSES Patent Rights The Company seeks to protect is proprietary position by, among other methods, filing United States and foreign patent applications with respect to the development of its products and their uses. The Company plans to prosecute and defend its patent applications, issued patents and proprietary information. The Company's ability to compete effectively will depend in part on its ability to develop and maintain proprietary aspects of its planned products. The Company has an exclusive license for three U.S. patents and six pending U.S. patent applications under its agreement with The Medical College of Virginia, and several corresponding pending foreign patent applications. The Company also owns one pending U.S. patent application and plans to file additional patent applications. Reflecting the Company's major research and development direction, its patent program is primarily focused on securing intellectual property rights to technology for the following categories of its business: (i) the use of pharmacologically acceptable NMDA antagonists for the management of acute, chronic, pre-operative and post-operative pain states, (ii) the use of NMDA antagonists for the potentiation of local anesthesia and (iii) the use of NMDA antagonists for the treatment of other conditions such as urge urinary incontinence. The Company is employing an aggressive dual-level 28 strategy of claiming its drug discoveries mechanistically and in terms of specific therapeutics. This strategy is intended to maximize the Company's opportunities for obtaining the broadest possible patent protection and at the same time, result in issued patents with complementary and mutually reinforcing claims. Of the patents issued to The Medical College of Virginia, U.S. Patent No. 5,321,012 entitled 'Inhibiting the Development of Tolerance to and/or Dependence on a Narcotic Addictive Substance' (issued June 14, 1994) claims compositions and methods for inhibiting the development of tolerance to and/or dependence on a variety of narcotic analgesics including codeine, fentanyl, heroin, hydrocodone, morphine and oxycodone employing any one of several specific nontoxic NMDA antagonists including dextromethorphan and dextrorphan; U.S. Patent No. 5,352,683 entitled 'Method for the Treatment of Chronic Pain' (issued October 4, 1994) claims a method for treating chronic pain employing any one of several specific nontoxic NMDA antagonists such as those previously mentioned and, U.S. Patent No. 5,502,058 entitled 'Method for the Treatment of Pain' (issued March 26, 1996) covers a method of alleviating preexisting or prospectively occurring pain employing dextromethorphan or dextrorphan in combination with lidocaine. The Company has been notified that U.S. Patent No. 5,556,838 will be issued on or about September 17, 1996. This patent claims a composition containing any nontoxic NMDA antagonist, or any nontoxic substance that blocks a major intracellular consequence of NMDA receptor activation, and any one of several addictive substances, including morphine. A related patent application covers a companion method for inhibiting the development of tolerance to and/or dependence on such addictive substances. In addition, the Company has been assigned a pending U.S. patent application covering the treatment of urinary incontinence which has recently been examined. A corresponding regional application designating numerous foreign jurisdictions has been filed. The patent positions of pharmaceutical firms, including the Company, are generally uncertain and involve complex legal and factual questions. Consequently, even though the Company is currently prosecuting its patent applications with the U.S. Patent and Trademark Office ('PTO') and certain foreign patent authorities, the Company does not know whether any of its applications will result in the issuance of any patents, or if any patents issue, whether they will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the U.S. are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, the Company cannot be certain that it was the first creator of inventions claimed by pending patent applications or that the Company was the first to file patent applications for such inventions. See 'Risk Factors -- Uncertain Ability to Protect Proprietary Technology.' The Company also relies upon trade secrets, know-how, continuing innovation and licensing opportunities to develop and maintain its competitive position. It is the Company's current practice to require its employees, consultants, members of its Medical and Research Advisory Board, sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with the Company. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with the Company is to be kept confidential and not disclosed to third parties, subject to certain exceptions. In the case of employees, the agreements provide that all inventions conceived by the individual shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. The Company engages in collaborations and sponsored research agreements and enters into pre-clinical and clinical testing agreements with academic and research institutions and U.S. government agencies, such as NIH. Consistent with pharmaceutical industry and academic standards, and the rules and regulations under the Federal Technology Transfer Act of 1986, these agreements may provide that developments and results will be freely published, that information or materials supplied by the Company will not be treated as confidential and that the Company may be required to negotiate a license to any such developments and results in order to commercialize products incorporating them. There can be no assurance that the Company will be able to successfully obtain any such license at a 29 reasonable cost or that such developments and results will not be made available to competitors of the Company on an exclusive or a non-exclusive basis. The Company's success depends in part on its ability to obtain patent protection for its products and to preserve its trade secrets and operate without infringing on the proprietary rights of third parties. No assurance can be given that the Company's pending patent applications will be approved or that any patents will provide competitive advantages for its products or will not be successfully challenged or circumvented by its competitors. No assurance can be given that patents do not exist or could not be filed which would have an adverse effect on the Company's ability to market its products or maintain its competitive position with respect to its products. The Company's patents may not prevent others from developing competitive products using related technology. Other entities may obtain patents which cover aspects of the Company's products or processes which are necessary for or useful to the development, manufacture or use of the Company's products. As a result, the Company may be required to obtain licenses from others to develop, manufacture or market such products. There can be no assurance that the Company will be able to obtain any such licenses on commercially reasonable terms, if at all. No assurance can be given that any patent issued to, or licensed by, the Company will provide protection that has commercial significance. In this regard the patent position of pharmaceutical compounds and compositions is particularly uncertain. Even issued patents may be later modified or revoked by the PTO in proceedings instituted by the Company or others. In addition, no assurance can be given that the Company's patents will afford protection against competitors with similar compounds or technologies, that others will not obtain patents claiming aspects similar to those covered by the Company's patents or applications, or that the patents of others will not have an adverse effect on the ability of the Company to do business. The Company's patents may not prevent others from developing competitive positions using related technology. Licenses The Company has entered into a license agreement, which was last amended in June 1996 (the 'Amendment'), with The Medical College of Virginia for certain patents or pending patent applications owned by The Medical College of Virginia in the field of pain management in the country in which any such product or part thereof is made, used, sold or manufactured. In consideration for the terms of the Amendment, the Company issued 100,000 shares of Series B Preferred Stock to The Medical College of Virginia. The Company pays no license signing fees or milestone payments. Royalties for the life of the patent equal 4% of net sales. If a product is combined with a drug or other substance for which the Company is paying an additional royalty, the royalty rate paid to The Medical College of Virginia is generally reduced by the amount of such additional royalty. If the Company enters into sublicensing agreements for a covered product, the Company will pay The Medical College of Virginia 50% of royalty payments received from such sublicensees' net sales for each year until the payments total $500,000 for such year, 33% until the payments total an additional $500,000 for such year and 25% thereafter. The McNeil License Agreement is a sublicense agreement of the Company's license agreement with The Medical College of Virginia. The Company has entered into a license agreement with MIT for an exclusive worldwide license in connection with patent rights relating to a patent owned by MIT. This patent covers a process for the ultrasound enhancement of transdermal drug delivery. GOVERNMENT REGULATION In the U.S., pharmaceutical products intended for therapeutic or diagnostic use in humans are subject to rigorous FDA regulation. The process of completing clinical trials and obtaining FDA approvals for a new drug is likely to take a number of years and require the expenditure of substantial resources. There can be no assurance that any product will receive such approval on a timely basis, if at all. See 'Risk Factors -- Government Regulation; No Assurance of United States or Foreign Regulatory Approval.' Applicable FDA regulations treat the Company's combination of dextromethorphan with analgesics such as morphine, acetaminophen and ibuprofen and local anesthetics such as lidocaine as 30 new drugs and require the filing of an NDA and approval by the FDA. However, since each of these drugs has been separately approved by the FDA, management believes that the risks associated with the development of these new proprietary drugs are less than the risks inherent in new molecular drug discovery. The steps required before a new pharmaceutical product for use in humans may be marketed in the U.S. include (i) pre-clinical studies, (ii) submission to the FDA of an Investigational New Drug application ('IND'), which must become effective before human clinical trials commence, (iii) adequate and well-controlled human clinical trials to establish the safety and effectiveness of the product, (iv) submission of an NDA to the FDA, and (v) FDA approval of the NDA prior to any commercial sale or shipment of the product. Pre-clinical studies include laboratory evaluation of product chemistry and formulation, as well as animal studies, to assess the potential safety and effectiveness of the product. The results of the pre-clinical studies are submitted to the FDA as a part of an IND and are reviewed by the FDA prior to the commencement of human clinical trials. Unless the FDA objects to, or otherwise responds to, an IND, the IND will become effective 30 days following its receipt by the FDA. Clinical trials are typically conducted in three sequential phases, although phases may overlap. In Phase I, the investigational new drug usually is administered to healthy human subjects and is tested for safety (adverse effects), dosage, tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited patient population to (i) determine the effectiveness of the investigational new drug for specific indications, (ii) determine dosage tolerance and optimal dosage and (iii) identify possible adverse effects and safety risks. When an investigational new drug is found to be effective and to have an acceptable safety profile in Phase II evaluation, Phase III trials are undertaken to further evaluate clinical effectiveness and to further test for safety within an expanded patient population at geographically dispersed clinical study sites. For analgesic drugs, Phase II analgesic efficacy studies have historically served as the pivotal studies for an NDA. Phase III studies for these products normally focus greater attention on safety in larger patient populations rather than efficacy. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specified time period, if at all, with respect to any of the Company's products subject to such testing. Furthermore, the FDA may suspend clinical trials at any time there is concern that the participants are being exposed to an unacceptable health risk. The results of pharmaceutical development, pre-clinical studies and clinical trials are submitted to the FDA in the form of an NDA for approval of the marketing and commercial shipment of the product. The FDA may require additional testing or information before approving the NDA. The FDA may deny an NDA approval if safety, efficacy or other regulatory requirements are not satisfied. Moreover, if regulatory approval of the product is granted, such approval may require post-marketing testing and surveillance to monitor the safety of the product or may entail limitations on the indicated uses for which the product may be marketed. Finally, product approval may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. At present, pharmaceutical products generally may not be exported from the U.S. for other than research purposes until the FDA has approved the product for marketing in the U.S. However, a company may apply to the FDA for permission to export finished products or partially processed products to a limited number of countries prior to obtaining FDA approval for marketing in the U.S. The Company is also subject to regulation under federal and state laws, including the Occupational Safety and Health Act, the Environmental Protection Act, the Clean Air Act, national restrictions on technology transfer, and import, export and customs regulations. In addition, all of the Company's products that contain narcotics are subject to DEA regulations relating to storage, distribution and physician prescribing procedures. There can be no assurance that any portion of the regulatory framework under which the Company currently operates will not change and that such change will not have a material effect on the current and anticipated operations of the Company. Whether or not FDA approval has been obtained, approval of a pharmaceutical product by comparable governmental regulatory authorities in foreign countries must be obtained prior to the commencement of clinical trials and subsequent marketing of such product in such countries. The 31 approval procedure varies from country to country, and the time required may be longer or shorter than that required for FDA approval. EMPLOYEES At June 30, 1996, the Company had nine employees and two executive consultants, including five Ph.Ds and/or MDs. In addition, the Company engages consultants from time to time to perform services on a per diem or hourly basis. FACILITIES The Company's executive office, located at Collingwood Plaza, 4900 Route 33, Neptune, New Jersey 07753, is leased under a five-year agreement, which expires in 1997. The lease is renewable for two consecutive five-year periods. The leased property consists of approximately 2,000 square feet of office and storage space. The Company is in the process of expanding its facilities to meet anticipated future staffing. LEGAL PROCEEDINGS There are no legal proceedings pending against the Company. 32 MANAGEMENT AND KEY SCIENTIFIC ADVISORS DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES Set forth below is information regarding directors and executive officers of the Company as of August 15, 1996.
NAME AGE POSITION - ------------------------------------------ --- --------------------------------------------------------------- DIRECTORS AND EXECUTIVE OFFICERS John W. Lyle.............................. 52 President and Chief Executive Officer and Director Frank S. Caruso, Ph.D. ................... 59 Executive Vice President for Research and Development Gastone Bello, Ph.D. ..................... 65 Executive Vice President for Technology Transfer and Manufacturing *Donald G. Drapkin........................ 48 Director Roger H. Kimmel........................... 49 Director *James R. Ledley.......................... 49 Assistant Secretary and Director Dieter A. Sulser.......................... 47 Director KEY EMPLOYEES Donald A. Johnson, Ph.D................... 41 Senior Vice President for Pharmaceutical Development Gary R. Anthony........................... 35 Chief Financial Officer
- ------------ * Members of Audit Committee. MR. LYLE has served as President and Chief Executive Officer and a director of the Company since its formation in January 1992. Mr. Lyle served as President and Chief Executive Officer of OmniCorp Holdings, Inc. in 1991. Prior to founding the Company, Mr. Lyle was one of the founders of Osteotech, Inc., an orthopaedic pharmaceutical company formed in 1986. He served as Osteotech's Chairman and Chief Executive Officer from 1989 to 1991 and as President from 1986 to 1989. From 1981 to 1986, Mr. Lyle served as the President of CIBA-GEIGY Corporation's CIBA Self-Medication, Inc. From 1975 to 1981, Mr. Lyle held various positions at Johnson & Johnson. Mr. Lyle holds a B.S. in Marketing Management and a M.B.A. in General Management, both from the University of Southern California. DR. CARUSO joined Algos in 1994. From 1985 to 1993, Dr. Caruso served as Vice President, Research & Development at Roberts Pharmaceutical Corporation with responsibility for worldwide pre-clinical and clinical research and development activities. From 1980 to 1985, Dr. Caruso served as Director, Clinical Pharmacology, for Revlon Health Care. From 1963 to 1980, Dr. Caruso served in various positions at Bristol-Myers Company, including Director, Clinical Research-Analgesics and Central Nervous System. He holds a Ph.D. and a M.S. in Pharmacology, both from the University of Rochester, School of Medicine and Dentistry and a B.S. in Biology from Trinity College. DR. BELLO joined Algos in 1994. During 1992 and 1993, Dr. Bello performed consulting services for the Company. Also in 1992, he served on a task force organized by the U.S. Department of State to assess the status of the pharmaceutical industry in the former Soviet Union. From 1975 to 1991, Dr. Bello served as CIBA-GEIGY Pharmaceutical Division Senior Vice President of Technical Operations and was a member of the Management Committee where he was responsible for chemical and pharmaceutical production, materials management, distribution, engineering, safety and ecology. Dr. Bello served as President and a member of the Board of Directors of CIBA-GEIGY Caribe, Caguas, Puerto Rico from 1990 to 1991. He served as a member of the Board of Directors of Geneva Pharmaceutical from 1982 to 1991 and a member of the Board of Directors of Alza Corporation from 1978 to 1982. Dr. Bello serves on the Board of Overseers, New Jersey Institute of Technology. He received his Ph.D. in Chemistry from the University of Trieste in Trieste, Italy. MR. DRAPKIN has been a director of the Company since January 1994. Mr. Drapkin has been Vice Chairman and Director of MacAndrews and Forbes Holdings, Inc., Revlon Group Incorporated and Andrews Group Incorporated for more than five years and is a director of Revlon, Inc., Marvel Entertainment Group, Inc. and The Coleman Company. 33 MR. KIMMEL has been a director of the Company since July 1996. Mr. Kimmel has been a partner of the law firm of Latham & Watkins for more than five years. Mr. Kimmel is also a director of TSR Paging, Inc. MR. LEDLEY has been a director of the Company since January 1992. Since 1995, he has been a member of the law firm of Kleinberg, Kaplan, Wolff & Cohen, P.C. From 1980 to 1995 he was a member of the law firm of Varet & Fink P.C. (previously known as Milgrim Thomajan & Lee P.C.). MR. SULSER has been a director of the Company since May 1995. Since 1991, Mr. Sulser has served as Head of Investment Banking for the ERB Group of Companies, based in Zurich, Switzerland. Mr. Sulser is also General Manager of Unifina Holding AG, an affiliate of the ERB Group of Companies. DR. JOHNSON joined Algos in 1994. Prior to joining Algos, Dr. Johnson served as President of Pharmaceutical Development Laboratories, Inc., a contract research laboratory. From 1991 to 1993, Dr. Johnson was Business Director of Applied Analytical Industries, Inc. where he developed marketing strategies, research plans and budgets for numerous new drug contract development projects. From 1990 to 1991, he served as Manager of Drug Delivery Systems at Noven Pharmaceuticals and was responsible for the research and development of transdermal drug delivery systems. From 1986 to 1990, Dr. Johnson served as Group Leader of Pharmaceutical Research at Schering-Plough Research. Dr. Johnson holds a Ph.D. and a M.S. in Pharmaceutics and a B.S. in Pharmacy from the University of Wisconsin-Madison. MR. ANTHONY joined Algos in January 1996. Prior to joining Algos, Mr. Anthony engaged in the private practice of accounting, providing services to pharmaceutical companies. From 1987 to 1993, he served as Controller for Roberts Pharmaceutical Corporation where his responsibilities included public company financial reporting, the development and implementation of accounting practices and internal control systems, income tax planning and compliance, cash management and analysis of acquisitions. From 1983 to 1987 he served on the audit staff of Coopers & Lybrand. Mr. Anthony holds a B.S. in Accounting from Monmouth College. EXECUTIVE CONSULTANTS FREDRICK L. MINN, M.D., PH.D., MEDICAL DIRECTOR. Dr. Minn has served as Medical Director since 1994 under the terms of an independent consulting agreement with the Company. From 1989 to 1994, Dr. Minn served as Senior Clinical Research Fellow at the Robert Wood Johnson Pharmaceutical Research Institute ('PRI') and Clinical Research Fellow at McNeil Pharmaceutical from 1976 to 1988. From 1974 to 1980, Dr. Minn served as Consulting Insurance Examiner for Insurance Company of North America and from 1974 to 1976 served as Assistant Director of Clinical Pharmacology for Squibb Institute for Medical Research. RONALD L. BUCHANAN, PH.D., DIRECTOR OF LICENSING. Dr. Buchanan has served as Director of Licensing since 1994 under the terms of an independent consulting agreement with the Company. Prior to becoming Director of Licensing for the Company, Dr. Buchanan served in various positions at Bristol-Myers Squibb, including Senior Director of Licensing, from 1991 to 1993. 34 MEDICAL AND RESEARCH ADVISORY BOARD The Company's objective is to build a proprietary technology base for its products and establish drug development programs as expeditiously and efficiently as possible. To meet this objective, the Company has established consulting relationships with many of the leading scientists and clinicians in pain management. These scientific and medical advisors, at the request of the Company, review the Company's individual research programs, advise on clinical study design and provide direction on new product development. Scientific and medical advisors are compensated on a retainer or per diem basis. The Company's Medical and Research Advisory Board currently includes the following individuals:
NAME POSITION - ------------------------------------------ --------------------------------------------------------------------- William T. Beaver, M.D.................... Professor of Pharmacology and Anesthesia, Department of Pharmacology, Georgetown University School of Medicine. Gary J. Bennett, Ph.D..................... Chief, Neuropathic Pain and Pain Measurement Section, Neurobiology and Anesthesiology Branch, National Institute of Dental Research, National Institutes of Health. Michael J. Cousins, M.D................... Professor and Department Head, Department of Anesthesia and Pain Management, University of Sydney, Royal North Shore Hospital, Australia. George E. Ehrlich, M.D.................... President, George E. Ehrlich Associates and Chairman, FDA Advisory Committee on Rheumatology and Arthritis Drugs. Howard L. Fields, M.D., Ph.D.............. Professor, Departments of Neurology and Physiology and Vice Chairman, Department of Neurology, University of California, San Francisco. Richard H. Gracely, Ph.D.................. Research Psychologist, Neuropathic Pain and Pain Measurement Section, Neurobiology and Anesthesiology Branch, National Institute of Dental Research, National Institutes of Health. Raymond W. Houde, M.D..................... Senior Attending Physician Emeritus, Departments of Medicine and Neurology, Memorial Sloan-Kettering Cancer Center. Jerome H. Jaffe, M.D...................... Director, Office of Scientific Analysis and Evaluation and Associate Director, Center for Substance Abuse Treatment, Substance Abuse and Mental Health Services Administration. Donald R. Jasinski, M.D................... Chief, Center for Chemical Dependence, Francis Scott Key Medical Center, Professor, Departments of Medicine, Anesthesiology and Critical Care Medicine, Johns Hopkins University School of Medicine. Robert Langer, Sc.D....................... Kenneth J. Germeshausen Professor of Chemical and Biomedical Engineering, Massachusetts Institute of Technology and Research Associate, Department of Surgery, Children's Hospital. Louis Lasagna, M.D........................ Dean, Sackler School of Graduate Biomedical Sciences, Academic Dean of the Medical School, Professor of Psychiatry (Clinical Pharmacology), Professor of Pharmacology, Tufts University. David J. Mayer, Ph.D...................... Professor, Department of Anesthesiology, The Medical College of Virginia. Donald D. Price, Ph.D..................... Professor, Department of Anesthesiology, Director of Research, The Medical College of Virginia. Gary R. Strichartz, Ph.D.................. Professor of Anesthesia (Pharmacology), Vice Chairman for Research, Brigham and Women's Hospital, Harvard Medical School. Vittorio Ventafridda, M.D., Ph.D.......... Liaison Officer, World Health Organization Cancer Unit, Scientific Director, Fondazione Floriani, Milano, Italy; Consultant, Instituto Europeo di Oncologia (I.E.O.), Milano, Italy.
35 COMPENSATION OF OUTSIDE DIRECTORS Non-employee members of the Board of Directors will receive cash compensation of $1,500 per meeting attended as consideration for their services as directors of the Company and are reimbursed for reasonable travel expenses incurred in connection with their attendance of such meetings. Non-employee directors upon appointment or election to the Board of Directors will receive an option grant under the Company's 1996 Non-Employee Director Stock Option Plan to purchase 10,000 shares of Common Stock, at the fair market value on the date of grant, vesting over a three-year period upon each anniversary of the date of grant. In addition, on the date of each annual meeting of stockholders held after the date of the Offering, each non-employee director who will continue to serve as a director for the following year, and also has served as a director for the last six months prior to the date of the annual meeting, shall receive an option to purchase 5,000 shares of Common Stock, at the fair market value at the date of grant, vesting over a one year period. See 'Stock Option Plans.' EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS Executive Compensation The following tables set forth the annual, long-term, and other compensation of the Company's Chief Executive Officer and other most highly compensated executives (collectively, the 'Named Officers') whose annual base salaries equal or exceed $100,000. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ---------------------------------------- OTHER ANNUAL NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION - ------------------------------ ---- -------- ------- ------------ John W. Lyle, President and Chief Executive Officer........... 1995 $235,000 $75,000 -- Frank S. Caruso, Executive Vice President for Research and Development.... 1995 165,000 25,000 -- LONG-TERM COMPENSATION -------------------------------------------- AWARDS ------------------- PAYOUTS RESTRICTED OPTIONS ---------------------- STOCK (# OF LTIP ALL OTHER NAME AND PRINCIPAL POSITION AWARDS SHARES) PAYOUTS COMPENSATION - ---------------------------------------- ------- ------- ------------ John W. Lyle, President and Chief Executive Officer........... -- -- -- -- Frank S. Caruso, Executive Vice President for Research and Development.... -- -- -- --
The following table sets forth for each of the named executive officers the value realized from stock options exercised during 1995 and the number and value of exercisable and unexercisable stock options held at December 31, 1995: AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR END OPTION VALUES
NUMBER OF SHARES OF UNDERLYING SHARES UNEXERCISED OPTIONS ACQUIRED ON VALUE ---------------------------- EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE ----------- -------- ----------- ------------- John W. Lyle........ 74,700 -- 74,700 149,400 Frank S. Caruso..... 49,800 -- 49,800 99,600 VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS(2) ---------------------------- EXERCISABLE UNEXERCISABLE ------------ ------------- John W. Lyle........ -- -- Frank S. Caruso..... -- --
- ------------ (1) All such options were exercised in January 1995. The Board of Directors determined that the exercise price of the options did not exceed the fair market value of the Common Stock at the time of exercise. Accordingly, there was no value realized at the time of exercise. (2) Based on the fair market value of the Common Stock as of December 31, 1995 ($0.12 per share) as determined by the Board of Directors, the Company determined that there were no in-the-money options at December 31, 1995. Employment Agreements Each of Mr. Lyle and Drs. Caruso and Bello has an employment agreement with the Company which expires December 31, 1997. Each employment agreement is automatically renewable for 36 successive one-year terms unless terminated by either the employee or the Company. Mr. Lyle's agreement provides that Mr. Lyle will be employed as the President and Chief Executive Officer of the Company and that the Company will use its best efforts to cause Mr. Lyle to be elected to the Board of Directors for the term of the agreement. Dr. Caruso's agreement provides that he will be employed as the Executive Vice President for Research and Development. Dr. Bello's agreement provides that he will be employed as the Executive Vice President for Technology Transfer and Manufacturing. Under the agreements, each executive will be entitled to certain upward adjustments to the preceding year's base salary. Drs. Caruso and Bello are entitled to receive continuing payments amounting to twelve months and six months salary, respectively, in the event of their termination by the Company without cause. Each executive may also receive bonuses for individual accomplishment of key milestone events in such amounts and on such terms as the Board of Directors may determine. Mr. Lyle's agreement acknowledges that during the employment period he will also serve as Chief Executive Officer of U.S. Medical Development, Inc. ('USMDI'), a Delaware corporation incorporated on January 4, 1994 by the founders of the Company. The agreements provide the executives with certain rights under the 1994 Stock Option Plan. See 'Stock Option Plans.' STOCK OPTION PLANS 1994 Stock Option Plan Effective January 1994, the Company established the Algos Pharmaceutical Corporation 1994 Stock Option Plan (the '1994 Option Plan') under which key employees may be granted options to purchase shares of the Common Stock. The 1994 Option Plan is intended to assist the Company in attracting and retaining employees of outstanding ability and to promote the identification of their interests with those of the stockholders of the Company. The Company has reserved a total of 830,000 shares of Common Stock for issuances under the plan. Unless sooner terminated by the Board of Directors, the 1994 Option Plan will expire ten years after its inception. The 1994 Option Plan is administered by the Board of Directors, which has the authority to select eligible employees, grant options under the plan and determine the terms, price, and form of payment for each grant. Awards under the 1994 Option Plan will generally be granted at an exercise price equal to the then fair market value per share of Common Stock. Options granted under the 1994 Option Plan shall not be transferable and upon an employee's death, all options that have been granted to such employee are generally deemed to be exercisable. 1996 Stock Option Plan In April 1996, the Company adopted the Algos Pharmaceutical Corporation 1996 Stock Option Plan (the '1996 Option Plan'). The 1996 Option Plan is intended to assist the Company in attracting and retaining key employees and independent consultants of outstanding ability and to promote the identification of their interests with those of the stockholders of the Company. The 1996 Option Plan permits the grant of non-qualified stock options and incentive stock options to purchase shares of Common Stock covering 415,000 authorized but unissued or reacquired shares of Common Stock, subject to adjustment to reflect events such as stock dividends, stock splits, recapitalizations, mergers or reorganizations of or by the Company. Unless sooner terminated by the Board of Directors, the 1996 Option Plan will expire on January 31, 2006. Such termination will not affect the validity of any option outstanding under the 1996 Option Plan on the date of termination. Prior to the Offering, the Board of Directors will administer the 1996 Stock Option Plan. Following the closing of the Offering, the Compensation Committee of the Board of Directors (the 'Committee') will administer the 1996 Stock Option Plan (which is intended to satisfy the requirements of Rule 16b-3 under the Exchange Act, and Section 162(m) of the Internal Revenue Code of 1986, as amended (the 'Code')). Subject to the terms and conditions of the 1996 Option Plan, the Committee has the authority to select the persons to whom grants are to be made, to designate the number of shares of Common Stock to be covered by such grants, to determine the exercise price of options, to establish the period of exercisability of options, and to make all other determinations and to take all other actions necessary or advisable for the administration of the 1996 Option Plan. The dates on which options first become exercisable and on which they expire shall be set forth in individual option agreements setting 37 forth the specific terms of the options, subject to the requirements of the 1996 Stock Option Plan. Such agreements will generally provide that options expire within one year following the termination of the optionee's status as an employee or consultant of the Company (or a subsidiary) although the Committee may provide that options continue to be exercisable following a termination without 'Cause' (as defined in the 1996 Stock Option Plan) or otherwise. The Committee also may, in its discretion, provide by the terms of an option that such option will expire at specified times following, or become exercisable in full upon, the occurrence of certain specified 'extraordinary corporate events' including a merger, consolidation or dissolution of the Company, or a sale of substantially all of the Company's assets, but in such event the Committee may also give optionees the right to exercise their outstanding options in full during some period prior to such event, even though the rights have not yet otherwise become fully exercisable. Notwithstanding the foregoing, upon a 'Corporate Transaction' (as defined in the 1996 Stock Option Plan), all outstanding options shall become immediately exercisable if not assumed by the surviving corporation. Incentive stock options ('Incentive Stock Options') granted under the 1996 Stock Option Plan will be designed to comply with the provisions of the Code and will be subject to certain restrictions contained in the Code. Among such restrictions, Incentive Stock Options must have an exercise price not less than the fair market value of a share of Common Stock on the date of grant, may only be granted to employees, must expire within a specified period of time following the optionee's termination of employment, and must be exercised within the ten years after the date of grant. In the case of an incentive stock option granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of stock of the Company, the exercise price must be at least 110% of the fair market value of a share of Common Stock on the date of grant and must expire five years after grant. Furthermore, the 1996 Option Plan provides that the aggregate fair market value (determined at the time the option is granted) of shares with respect to which incentive stock options may be exercisable for the first time during any calendar year, may not exceed $100,000 per employee. Options for shares, the fair market value of which exceeds the $100,000 per year limit, will be treated as non-qualified stock options. Options intended to satisfy the requirements for 'performance-based compensation' under Section 162(m) of the Code must also have an exercise price of not less than fair market value on the date granted and must comply with other limitations and restrictions. The 1996 Option Plan may be amended by the Committee, subject to stockholder approval if such approval is then required by applicable law or in order for the 1996 Option Plan and options granted thereunder to continue to satisfy the requirements of Rule 16b-3 under the Exchange Act or Section 162(m) of the Code. The 1996 Option Plan permits the payment of the option exercise price to be made in cash (which may include an assignment of the right to receive the cash proceeds from the sale of Common Stock subject to the option pursuant to a 'cashless exercise' procedure) or by delivery of shares of Common Stock valued at their fair market value on the date of exercise or delivery of other property, or by a recourse promissory note payable to the Company, or by a combination of the foregoing. As a condition of exercise, optionees must also provide for the payment of withholding tax obligations of the Company in connection with such exercise. Options granted under the 1996 Option Plan shall not be transferable otherwise than by will, by the laws of descent and distribution or pursuant to a qualified domestic relations order (as defined in the Code), and may be exercised during the optionee's lifetime only by the optionee or, in the event of the optionee's legal disability, by the optionee's legal representative. 1996 Non-Employee Director Stock Option Plan In April 1996, the Company also adopted the 1996 Non-Employee Director Stock Option Plan (the 'Director Plan') covering 83,000 authorized but unissued or reacquired shares of Common Stock, subject to adjustment to reflect events such as stock dividends, stock splits, recapitalizations, mergers or reorganizations of or by the Company. The Director Plan is intended to assist the Company in attracting and retaining qualified non-employee directors ('Outside Directors'). Following the consummation of the Offering, the Director Plan will be administered by the Board of Directors and options granted under the Director Plan are intended to satisfy the requirements of 38 Rule 16b-3 under the Exchange Act. The Director Plan provides for automatic grants of non-qualified stock options to purchase 10,000 shares of Common Stock to each Outside Director at the time of appointment or election to the Board of Directors. The exercise price of the options shall be the fair market value of a share of Common Stock on the date of grant. Each option shall become exercisable in cumulative annual installments of one-third on each of the first three annual meetings of the Company's stockholders following the date of grant so long as the Outside Director continues to serve as a director of the Company; provided, however, to the extent permitted by Rule 16b-3, the Board of Directors may accelerate the exercisability of options upon the occurrence of certain specified extraordinary corporate transactions or events and provided further, that in any event, upon the occurrence of a 'Corporate Transaction' of the Company (as defined in the Director Plan) all outstanding options shall become immediately exercisable. No portion of an option shall be exercisable after the tenth anniversary of the date of grant and no portion of an option shall become exercisable following termination of the Outside Director's services as director of the Company. Unless sooner terminated by the Board of Directors, the Director Plan will expire ten years after the date of its adoption. Such expiration will not affect the validity of any option outstanding on the date of termination. Each Outside Director serving as a director of the Company as of the close of each subsequent annual stockholders' meeting at which directors are elected shall be granted an option to purchase 5,000 shares of Common Stock. CERTAIN FEDERAL INCOME TAX CONSEQUENCES WITH RESPECT TO OPTIONS UNDER THE 1994 OPTION PLAN, 1996 OPTION PLAN AND THE DIRECTOR PLAN An optionee generally will not recognize taxable income on the grant of a non-qualified stock option under the 1994 Option Plan, 1996 Option Plan or the Director Plan, but will recognize ordinary income on the exercise of such option. The amount of income recognized on the exercise of an option generally will be equal to the excess, if any, of the fair market value of the shares at the time of exercise over the aggregate exercise price paid for the shares, regardless of whether the exercise price is paid in cash or in shares or other property. Where ordinary income is recognized by an optionee in connection with the exercise of an option, the Company generally will be entitled to a deduction equal to the amount of ordinary income so recognized. An optionee generally will not recognize taxable income upon either the grant or exercise of an incentive stock option granted under the 1996 Option Plan. Generally, upon the sale or other taxable disposition of the shares of the Common Stock acquired upon exercise of an incentive stock option, the optionee will recognize long-term capital gain in an amount equal to the excess, if any, of the amount realized in such disposition over the option exercise price, provided that no disposition of the shares has taken place within either (a) one year from the date of exercise or (b) two years from the date of grant of the incentive stock option. If the shares of the Common Stock are sold or otherwise disposed of before the end of the one-year and two-year periods specified above, the difference between the incentive stock option exercise price and the fair market value of the shares on the date of the incentive stock option's exercise generally will be taxable as ordinary income; the balance of the amount realized from such disposition, if any, will be taxed as capital gain. If the shares of the Common Stock are disposed of before the expiration of the one-year and two-year periods and the amount realized is less than the fair market value of the shares at the date of exercise, the optionee's ordinary income generally is limited to excess, if any, of the amount realized in such disposition over the option exercise price paid. The Company (or other employer corporation) generally will be entitled to a tax deduction with respect to an incentive stock option only to the extent the optionee has ordinary income upon sale or other disposition of the shares of the Common Stock. The rules governing the tax treatment of options and an optionee's receipt of shares in connection with such grants are quite technical, so that the above description of tax consequences is necessarily general in nature and does not purport to be complete. Moreover, statutory provisions are, of course, subject to change, as are their interpretations, and their application may vary in individual circumstances. Finally, the tax consequences under applicable state law may not be the same as under the federal income tax laws. 39 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as of August 15, 1996 (after giving effect to the automatic conversion of the Series A Preferred Stock into Common Stock upon consummation of the Offering) by (i) each person who is known by the Company to own beneficially more than 5% of the Common Stock, (ii) each director, (iii) each executive officer and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated, the address of each beneficial owner is c/o the Company, Collingwood Plaza, 4900 Route 33, Neptune, New Jersey 07753.
PERCENTAGE OF SHARES BENEFICIALLY OWNED -------------------- NUMBER OF SHARES PRIOR TO AFTER NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED (a) OFFERING OFFERING - ---------------------------------------------------------------------- ---------------------- -------- -------- DIRECTORS AND EXECUTIVE OFFICERS John W. Lyle(b).................................................. 1,517,516 12.5% 9.7% Frank S. Caruso(c)............................................... 240,700 2.0 1.5 Gastone Bello.................................................... 116,200 * * Donald G. Drapkin(d)............................................. 16,600 * * Roger H. Kimmel(e)............................................... 1,592,526 13.2 10.2 James R. Ledley.................................................. 103,750 * * Dieter A. Sulser(f).............................................. 153,550 1.3 * Directors and Executive Officers as a group(g)........................ 3,740,842 30.8 23.9 OTHER PRINCIPAL STOCKHOLDERS Unifina Holding AG and related investors(h)...................... 1,734,700 14.2 11.0 Karen Lyle(i).................................................... 1,517,516 12.5 9.7 Michael Hyatt(j)................................................. 1,193,561 9.9 7.7 Lawrence Canarelli(k)............................................ 871,500 7.2 5.6 Gilbert Goldstein(l)............................................. 850,750 7.1 5.5 Paul Shapiro(m).................................................. 809,250 6.7 5.2 Morris J. Kramer(n).............................................. 809,246 6.7 5.2 Inez Kimmel(o)................................................... 707,193 5.9 4.5 Gail Albert(p)................................................... 664,000 5.5 4.3
- ------------ * represents less than 1.0% (a) For purposes of this table, a person or group is deemed to have 'beneficial ownership' of any shares which such person has the right to acquire within 60 days after the date of this Prospectus. For purposes of calculating the percentage of outstanding shares held by each person named above, any shares which such person has the right to acquire within 60 days after the date of the Prospectus are deemed to be outstanding, but not for the purpose of calculating the percentage ownership of any other person. (b) Includes (i) 74,700 shares of Common Stock owned directly by Mr. Lyle, (ii) 1,363,966 shares of Common Stock and options to purchase 4,150 shares of Common Stock owned by Karen Lyle, wife of Mr. Lyle, as to which Mr. Lyle disclaims beneficial ownership, (iii) options to purchase 74,700 shares of Common Stock, and excludes 664,000 shares of Common Stock held in a trust for the benefit of the children of Mr. and Mrs. Lyle, as to which shares Mr. Lyle has neither the power of disposition nor the power to vote. (c) Excludes a total of 24,900 shares held in trust for the benefit of the children of Dr. Caruso, as to which shares Dr. Caruso has neither the power of disposition nor the power to vote. (d) Excludes a total of 809,246 shares of Common Stock held in six trusts for the benefit of the children of Mr. Drapkin, as to which shares Mr. Drapkin has neither the power of disposition nor the power to vote. (e) Includes (i) 707,193 shares of Common Stock owned directly by Inez Kimmel, wife of Mr. Kimmel, and certain trusts related to the estate and (ii) 885,333 shares held in two trusts for which Mr. Kimmel serves as trustee and as to which shares Mr. Kimmel holds either the sole or the shared power of disposition and power to vote, and excludes 343,060 shares of Common Stock held in two trusts for the benefit of the children of Mr. and Mrs. Kimmel, as to which shares Mr. Kimmel has neither the power of disposition nor the power to vote. (f) Includes 141,100 shares of Common Stock and 12,450 warrants to purchase shares of Common Stock owned directly by Gaby Sulser, wife of Mr. Sulser, as to which Mr. Sulser disclaims beneficial ownership and excludes 1,734,700 shares beneficially owned by Unifina Holding AG, as to which shares Mr. Sulser disclaims beneficial ownership. Mr. Sulser is the General Manager of Unifina Holding AG. (g) Includes options and warrants to purchase 91,300 shares of Common Stock. 40 (footnotes continued from previous page) (h) Consists of 1,577,000 shares of Common Stock and 157,700 warrants to purchase shares of Common Stock held by EBC Zurich AG. The address of Unifina Holding AG is Zurcherstrasse 62; CH 8406, Winterthur, Switzerland and the address of EBC Zurich AG is Bellariastrasse 23; CH 8027, Zurich, Switzerland. Excludes (i) 166,000 shares of Common Stock and warrants to purchase 16,600 shares of Common Stock held by Mr. Rolf P. Erb, Chairman of EBC Zurich AG and a member of the board of directors of Unifina Holding AG, as to which shares each of Unifina Holding AG and EBC Zurich AG disclaim beneficial ownership and (ii) 141,100 shares of Common Stock and warrants to purchase 12,450 shares of Common Stock beneficially owned by Mr. Sulser, General Manager of Unifina Holding AG, as to which shares Unifina Holding AG disclaims beneficial ownership. (i) Includes (i) 1,363,966 shares of Common Stock and options to purchase 4,150 shares of Common Stock, owned directly by Mrs. Lyle and (ii) 74,700 shares of Common Stock and options to purchase 74,700 shares of Common Stock owned by directly by John Lyle, husband of Mrs. Lyle, as to which Mrs. Lyle disclaims beneficial ownership, and excludes 664,000 shares of Common Stock held in a trust for the benefit of the children of Mr. and Mrs. Lyle, as to which shares Mrs. Lyle has neither the power of disposition nor the power to vote. (j) Includes (i) 829,751 shares of Common Stock owned directly by Mr. Hyatt and (ii) 363,810 shares held in three trusts for which Mr. Hyatt serves as trustee and as to which shares Mr. Hyatt holds either the sole or the shared power of disposition or the power to vote, and excludes 221,333 shares of Common Stock held in a trust for the benefit of the children of Mr. Hyatt, as to which shares Mr. Hyatt has neither the power of disposition nor the power to vote. (k) Includes 664,000 shares of Common Stock deemed to be beneficially owned by each of Mrs. Albert and Mr. Canarelli in their shared capacity as trustees for a trust as to which shares each of Mrs. Albert and Mr. Canarelli share the power of disposition and the power to vote. (l) Includes 809,250 shares of Common Stock deemed to be beneficially owned by Mr. Goldstein in his capacity as trustee for a trust as to which shares Mr. Goldstein has the shared power of disposition and power to vote. (m) Includes 809,250 shares of Common Stock deemed to be beneficially owned by Mr. Shapiro in his capacity as trustee for a trust as to which shares Mr. Shapiro has the shared power of disposition and power to vote. (n) Includes 809,246 shares of Common Stock deemed to be beneficially owned by Mr. Kramer in his capacity as trustee for a trust as to which shares Mr. Kramer holds the power of disposition and the power to vote. (o) Excludes (i) 885,333 shares of Common Stock beneficially owned by Roger Kimmel, husband of Mrs. Kimmel, as trustee and as to which Mr. Kimmel holds either the sole or shared power of disposition and power to vote and (ii) 343,060 shares of Common Stock held in two trusts for the benefit of the children of Mr. and Mrs. Kimmel. (p) Includes 664,000 shares of Common Stock deemed to be beneficially owned by each of Mrs. Albert and Mr. Canarelli in their shared capacity as trustees for a trust as to which shares each of Mrs. Albert and Mr. Canarelli share the power of disposition and the power to vote. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Roger H. Kimmel, a director of the Company, is a partner at Latham & Watkins which performs legal services for the Company from time to time. See 'Legal Matters.' Mr. James R. Ledley, a director of the Company, is a member of the law firm of Kleinberg, Kaplan, Wolff & Cohen, P.C. which performs legal services for the Company from time to time. 41 DESCRIPTION OF CAPITAL STOCK Upon consummation of the Offering, the authorized capital stock of the Company will consist of 50,000,000 shares of Common Stock, $.01 par value per share, and 10,000,000 shares of Preferred Stock, $.01 par value per share, 100,000 of which have been designated as Series B Preferred Stock. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Holders of Common Stock are not entitled to cumulative voting rights. Holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. The Company does not anticipate any cash dividends on Common Stock will be paid in the foreseeable future. See 'Dividend Policy.' In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, and payments to holders of Preferred Stock. The holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock. All the outstanding shares of Common Stock are, and the shares of Common Stock into which the Preferred Shares will be converted upon completion of the Offering will be, validly issued, fully paid and non-assessable. PREFERRED STOCK Under its Amended and Restated Certificate of Incorporation, the Company has authority to issue 10,000,000 shares of Preferred Stock, $.01 par value per share. The Board of Directors has the authority, without approval of the stockholders, to issue shares of Preferred Stock in one or more series and to fix the number of shares and the rights, preferences, privileges, qualifications, restrictions and limitations of each series. Prior to the Offering, 100,000 shares of Series B Preferred Stock were issued and outstanding and such shares will remain issued and outstanding upon consummation of the Offering. The Series B Preferred Stock is convertible, at the option of the holder, into Common Stock at any time after February 1, 1997. The holders of Series B Preferred Stock will receive one share of Common Stock for each share of Series B Preferred Stock owned by such holder, subject to certain anti-dilution provisions. REGISTRATION RIGHTS The holders of the Common Stock and Series A Preferred Stock prior to the Offering (the 'Stockholders'), are parties to a stockholders' agreement (the 'Stockholders' Agreement') which provides such Stockholders with certain registration rights. Under the Stockholders' Agreement, and upon the automatic conversion of the Series A Preferred Stock to shares of Common Stock, the Stockholders are entitled to certain registration rights with respect to shares of Common Stock, including a demand registration right which is exercisable on one occasion after 270 days from the date of this Prospectus and certain 'piggyback' registration rights which are exercisable in connection with registrations of shares initiated by the Company. At any time after February 1, 1997, holders of the Series B Preferred Stock have the right to require the Company to register the resale of the Common Stock that such holders receive upon conversion of the Series B Preferred Stock. DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS Upon the consummation of the Offering, the Company will be subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a 'business combination' with an 'interested stockholder' for a period of three years after the date of the transaction in which the person became an interested stockholder unless such transaction was approved in a prescribed manner or another prescribed exception applies. For purposes of Section 203, a 'business combination' is defined broadly to include a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and subject to certain exceptions, an 'interested stockholder' is a person who, together with affiliates and associates owns (or within three years prior, did own) 15% or more of the corporation's voting stock. Upon consummation of the Offering, the Company's Amended and Restated By-Laws provide for a Board of Directors classified into three classes, with the Directors elected at the Company's 1996 annual meeting divided into three classes and serving initial terms expiring at the 1997, 1998 and 1999 42 annual stockholders' meetings, respectively. Thereafter, Directors in each class will be elected for three year terms. No determination has yet been made as to the selection of any of the current directors for nomination for election in a particular class. All directors elected to the Company's classified Board of Directors will serve until the election and qualification of their successors or their earlier resignation or removal. The Board of Directors is authorized to create new directorships and to fill such positions so created and is permitted to specify the class to which such new position is assigned, and the person filling such position would serve for the term applicable to that class. The Board of Directors (or its remaining members, even though less than a quorum) is also empowered to fill vacancies on the Board of Directors occurring for any reason for the remainder of the term of the class of Directors in which the vacancy occurred. After classification of the Board of Directors, Directors may only be removed for cause. These provisions are likely to increase the time required for stockholders to change the composition of the Board of Directors. The Company's Amended and Restated By-Laws also provide that, for nomination to the Board of Directors or for other business to be properly brought by a stockholder before a meeting of stockholders, the stockholder must first have given timely notice thereof in writing to the Secretary of the Company. To be timely, a stockholder's notice generally must be delivered not less than sixty days nor more than ninety days prior to the annual meeting. If the meeting is not an annual meeting, the notice must generally be delivered not more than ninety days prior to the special meeting and not later than the later of sixty days prior to the special meeting and ten days following the day on which public announcement of the meeting is first made by the Company. Only such business shall be conducted at a special meeting of stockholders as is brought before the meeting pursuant to the Company's notice of meeting. The notice by a stockholder must contain, among other things, certain information about the stockholder delivering the notice and, as applicable, background information about the nominee or a description of the proposed business to be brought before the meeting. The Company's Amended and Restated Certificate of Incorporation also requires that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by a consent in writing. Special meetings may be called only by the Chairman of the Board or the President of the Company or by the majority of the whole Board of Directors. The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or by-laws, unless the corporation's certificate of incorporation or by-laws, as the case may be, requires a greater percentage. The Company's Amended and Restated Certificate of Incorporation requires the affirmative vote of the holders of at least 66 2/3% of the outstanding voting stock of the Company to amend or repeal any of the provisions discussed in this section entitled 'Delaware Law and Certain Charter and By-Law Provisions' relating to the Amended and Restated Certificate of Incorporation or to reduce the number of authorized shares of Common Stock and Preferred Stock. Such 66 2/3% vote is also required for any amendment to or repeal of the Company's Amended and Restated By-Laws by the stockholders. The Amended and Restated By-Laws may also be amended or repealed by a majority vote of the Board of Directors. Such 66 2/3% stockholder vote would be in addition to any separate class vote that might in the future be required pursuant to the terms of any Preferred Stock that might then be outstanding. The provisions of the Company's Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws discussed above could make more difficult or discourage a proxy contest or other change in the management of the Company or the acquisition or attempted acquisition of control by a holder of a substantial block of the Company's stock. It is possible that such provisions could make it more difficult to accomplish, or could deter, transactions which stockholders may otherwise consider to be in their best interests. As permitted by the Delaware General Corporation Law, the Company's Amended and Restated Certificate of Incorporation provides that Directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of their fiduciary duties as Directors, except for liability (i) for any breach of their duty of loyalty to the Company and its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions, as provided 43 in Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the Director derives an improper personal benefit. The Company's Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws provide that the Company shall indemnify its Directors and officers to the fullest extent permitted by Delaware law and advance expenses to such Directors and officers to defend any action for which rights of indemnification are provided. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 15,544,123 shares of Common Stock outstanding (assuming no exercise of any of the outstanding options and warrants to purchase Common Stock outstanding as of June 30, 1996 and assuming the Underwriters' over-allotment option is not exercised), of which 12,044,123 are 'restricted' shares within the meaning of Rule 144 under the Securities Act of 1933, as amended (the 'Securities Act'), and may not be resold except pursuant to an effective registration statement under the Securities Act or an applicable exemption from registration, including Rule 144 of the Securities Act. In general, under Rule 144, as currently in effect, a person (or persons whose shares are aggregated), including an 'affiliate', as defined in the Securities Act, is entitled to sell in any three-month period a number of shares beneficially owned for at least two years that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and the availability of current public information about the Company. A person who is not an affiliate and has beneficially held such shares for at least three years is entitled to sell such shares under Rule 144(k) without regard to the volume, manner of sale, notice or public information requirements. Subject to the agreement with the underwriters described in the next paragraph, as of August 22, 1996, 11,640,743 of the restricted shares became eligible for sale in the public market in reliance on Rule 144, 3,912,054 of which may be sold without regard to volume limitations. For a period of 180 days after the closing of the Offering, without the written consent of Lehman Brothers Inc., the Company and all of its existing stockholders have agreed not to offer, sell or contract to sell, grant any offer to purchase or otherwise dispose of any shares of Common Stock other than issuances pursuant to employee compensation plans, transfers among such stockholders, pledges, transfers in the case of death or permanent disability and the making of certain limited charitable donations. An employee, officer or director of or consultant to the Company who purchased or was awarded shares or options to purchase shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provision of Rule 701 under the Securities Act, which permits Affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the Effective Date and permits non-affiliates to sell their Rule 701 shares without having to comply with the holding period, public information, volume and notice provisions of Rule 144. Under the Stockholders' Agreement, holders of shares of Common Stock issued prior to the Offering or issuable under certain options and warrants outstanding prior to the Offering are entitled to certain registration rights with respect to their shares, including a demand registration right which is exercisable on one occasion after 270 days from the date of this Prospectus and certain 'piggyback' registration rights which are exercisable in connection with registrations of shares initiated by the Company. The Series B Preferred Stock is convertible into an aggregate of 100,000 shares of Common Stock, subject to certain anti-dilution provisions, at any time after February 1, 1997. See 'Description of Capital Stock -- Registration Rights.' Prior to the Offering, there has been no public market for securities of the Company. No predictions can be made as to the effect, if any, that sales of shares or the availability of shares for sale will have on the prevailing market price of the Common Stock. In addition, the Company cannot predict the number of shares that may be sold in the future pursuant to Rule 144 or the timing of such sales. Sales of a substantial number of Restricted Shares could have a significant adverse effect on the market price of the Common Stock. 44 CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS The following is a general discussion of certain United States federal income and estate tax consequences of the ownership and disposition of Common Stock by a holder who is not a United States person (a 'Non-U.S. Holder'). For these purposes, the term 'United States person' is defined as any person who is a citizen or resident of the United States, a corporation or a partnership or other entity created or organized in the United States or under the laws of the United States or of any State, or an estate or trust whose income is includible in gross income for United States federal income tax purposes regardless of its source. An individual may, subject to certain exceptions, be deemed to be a resident alien (as opposed to a non-resident alien) for federal income tax purposes in several circumstances, including by virtue of being present in the United States on at least 31 days in the calendar year and for an aggregate of at least 183 days during the three-year period ending in the current calendar year (counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to United States federal tax as if they were United States citizens and residents. This discussion is based on provisions of the Internal Revenue Code of 1986, as amended (the 'Code'), existing and proposed regulations promulgated thereunder and administrative and judicial interpretations thereof as of the date hereof, all of which are subject to change. This discussion does not address all aspects of United States federal income and estate taxes and does not deal with non-United States and U.S. state and local consequences that may be relevant to Non-U.S. Holders in light of their personal circumstances. Each prospective purchaser of Common Stock is advised to consult a tax advisor with respect to current and possible future tax consequences of acquiring, holding and disposing of Common Stock. DIVIDENDS The Company does not currently intend to pay cash dividends on shares of Common Stock. See 'Dividend Policy.' In the event that dividends are paid on shares of Common Stock, except as described below, such dividends paid to a Non-U.S. Holder of Common Stock generally will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are effectively connected with the conduct of a trade or business of the Non-U.S. Holder within the United States (or attributable to a U.S. permanent establishment of the Non-U.S. Holder, if an income tax treaty applies). Under current United States Treasury regulations, dividends paid to an address outside the United States, absent definite knowledge to the contrary, may be presumed to be paid to a resident of such country for purposes of the withholding discussed above, and, under the current interpretation of United States Treasury regulations, for purposes of determining the applicability of a reduced rate of withholding under a tax treaty. Thus, Non-U.S. Holders receiving dividends at addresses outside the United States currently are not required to file forms with the payor in order to obtain the benefit of an applicable treaty rate. Under proposed United States Treasury regulations not currently in effect, however, a Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable treaty rate would be required to satisfy applicable certification and other requirements. If the dividend is effectively connected with the conduct of a United States trade or business of a Non-U.S. Holder who has properly filed a Form 4224 (or similar statement) with the withholding agent with respect to the taxable year in which the dividend is paid, no withholding is required. Instead the dividend (as adjusted by any applicable deductions) would be subject to regular United States federal income tax. In addition, all or a portion of any such effectively connected dividends received by a non-U.S. corporation may, under certain circumstances, be subject to an additional 'branch profits tax' at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. A Non-U.S. Holder of Common Stock eligible for a reduced rate of United States withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the Internal Revenue Service ('IRS'). 45 GAIN ON DISPOSITION OF COMMON STOCK A Non-U.S. Holder generally will not be subject to United States federal income tax (and no tax generally will be withheld) with respect to gain recognized on a sale or other disposition of Common Stock so long as (i) the gain is not effectively connected with a trade or business of the Non-U.S. Holder within the United States, (ii) in the case of a Non-U.S. Holder who is a non-resident alien individual and holds the Common Stock as a capital asset, such holder is not present in the United States for 183 or more days in the taxable year of the sale or other disposition, and (iii) the Company is not and has not been within the preceding five years a 'United States real property holding corporation' for United States federal income tax purposes (assuming the Common Stock is regularly traded on an established securities market). The Company believes that it is not, has at no time been, and does not anticipate becoming a 'United States real property holding corporation' for United States federal income tax purposes. In addition, the Company believes that the Common Stock will be treated as regularly traded on an established securities market. If the capital gain is effectively connected with the conduct of a trade or business of the Non-U.S. Holder within the United States, or if the Company is or has been within the preceding five years a United States real property holding corporation and the Non-U.S. Holder is more than a five percent stockholder (applying certain attribution rules), the capital gain would be subject to regular United States federal income tax. In addition, with respect to corporate Non-U.S. Holders, the 'branch profits tax' described above may also apply. An individual Non-U.S. Holder who is present in the United States for 183 days or more in the taxable year of sale or other disposition and holds the Common Stock as a capital asset will generally be taxed at a rate of 30% on any net capital gain recognized during any year on such stock if either (i) such individual has a 'tax home' (as defined for United States federal income tax purposes) in the United States or (ii) the gain is attributable to an office or other fixed place of business maintained by such individual in the United States and no treaty exemption applies. UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX The Company must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, such holder. These information reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authority in the country in which the Non-U.S. Holder resides. Under temporary United States Treasury regulations, United States backup withholding tax (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish certain information under the United States information reporting requirements) and information reporting with respect to such tax will generally not apply to dividends paid on Common Stock to a Non-U.S. Holder at an address outside the United States. As a general matter, backup withholding and information reporting also will not apply to a payment of the proceeds of a sale of Common Stock by or through a foreign office of a foreign broker. Information reporting requirements (but not backup withholding) will apply, however, to a payment of the proceeds of a sale of Common Stock by a foreign office of a broker that is a United States person, that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, or that is a 'controlled foreign corporation' (generally, a foreign corporation controlled by United States stockholders) with respect to the United States, unless the broker has documentary evidence in its records that the holder is a Non-U.S. Holder and certain other conditions are met, or the holder otherwise establishes an exemption. Payment by a United States office of a broker of the proceeds of a sale of Common Stock is subject to both backup withholding and information reporting unless the holder certifies under penalties of perjury that it is a Non-U.S. Holder, or otherwise establishes an exemption. Backup withholding (at a flat 31% rate) is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a Non-U.S. Holder may obtain a refund by filing the appropriate claim for refund with the IRS. 46 These backup withholding and information reporting rules are under review by the United States Treasury, and their application to the Common Stock could be changed prospectively by future regulations. On April 15, 1996, the IRS issued proposed Treasury Regulations concerning the withholding of tax and reporting for certain amounts paid to non-resident individuals and foreign corporations. The proposed regulations would, among other changes, eliminate the presumption under current regulations with respect to dividends paid to addresses outside the United States. See 'Dividends on Common Stock.' The proposed Treasury Regulations, if adopted in their present form, would be effective for payments made after December 31, 1997. Prospective purchasers of Common Stock should consult their tax advisors concerning the potential adoption of such Treasury Regulations and the potential effect on the Common Stock. FEDERAL ESTATE TAXES Common Stock held (or treated as owned) by an individual Non-U.S. Holder at the time of death will be included in such holder's gross estate for United States federal estate tax purposes and may be subject to United States federal estate tax, unless an applicable estate tax treaty provides otherwise. Estates of non-resident aliens are generally allowed a statutory credit which is the equivalent of an exclusion of $60,000 of assets from U.S. estate tax. Tax treaties may permit a larger credit. 47 UNDERWRITING Under the terms and subject to the conditions contained in the Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, the Underwriters named below, for whom Lehman Brothers Inc. and Cowen & Company are acting as representatives (the 'Representatives'), have severally agreed to purchase from the Company, and the Company has agreed to sell to each Underwriter, the aggregate number of shares of Common Stock set forth opposite the name of each such Underwriter below:
NUMBER OF UNDERWRITERS SHARES - ------------------------------------------------------------------------------------------- --------- Lehman Brothers Inc. ...................................................................... Cowen & Company............................................................................ --------- Total................................................................................. 3,500,000 --------- ---------
The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page hereof, and to certain dealers at such initial public offering price less a selling concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other Underwriters or to certain other brokers or dealers. After the initial offering to the public, the offering price and other selling terms may be changed by the Representatives. The Underwriting Agreement provides that the obligations of the Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to approval of certain legal matters by counsel and to certain other conditions, including the condition that no stop order suspending the effectiveness of the Registration Statement is in effect and no proceedings for such purpose are pending or threatened by the Securities and Exchange Commission and that there has been no material adverse change or any development involving a prospective material adverse change in the condition of the Company from that set forth in the Registration Statement otherwise than as set forth or contemplated in this Prospectus, and that certain certificates, opinions and letters have been received from the Company and its counsel. The Underwriters are obligated to take and pay for all of the above shares of Common Stock if any such shares are taken. The Company and the Underwriters have agreed in the Underwriting Agreement to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Company has granted to the Underwriters an option to purchase up to an additional 525,000 shares of Common Stock, exercisable solely to cover over-allotments, at the initial public offering price, less the underwriting discounts and commissions shown on the cover page of this Prospectus. Such option may be exercised at any time until 30 days after the date of the Underwriting Agreement. To the extent that the option is exercised, each Underwriter will be committed to purchase a number of the additional shares of Common Stock proportionate to each Underwriter's initial commitment as indicated in the preceding table. The Representatives of the Underwriters have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. For a period of 180 days after the closing of the Offering, without the written consent of Lehman Brothers Inc., the Company and all of its existing stockholders have agreed not to offer, sell or contract to sell, grant any offer to purchase or otherwise dispose of any shares of common stock other than issuance pursuant to employee compensation plans, transfers among such stockholders, pledges, transfers in the case of death or permanent disability and the making of certain limited charitable donations. At the request of the Company, the Underwriters have reserved up to 300,000 shares of Common Stock for sale at the initial public offering price to certain of the Company's employees and certain 48 other persons. The number of shares of Common Stock available for sale to the general public will be reduced to the extent these persons purchase such reserved shares. If such reserved shares are not purchased by such employees and other persons, they will be offered by the Underwriters to the public upon the same terms and conditions set forth in this Prospectus. Johnson & Johnson Development Corporation, an affiliate of Johnson & Johnson, has expressed an interest in purchasing 10% of the Offering, up to $6.5 million worth of the shares of Common Stock offered hereby, at the public offering price. See 'Business -- Corporate and Government Collaborations.' Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price was negotiated between the Company and the Representatives. Among the factors considered in determining the initial public offering price of the Common Stock, in addition to the prevailing market conditions, were the Company's historical performance, capital structure, estimates of the business potential and earnings prospects of the Company, an assessment of the Company's management and consideration of the above factors in relation to market values of companies in related business and other factors deemed relevant. LEGAL MATTERS Certain legal matters in connection with the Offering will be passed upon for the Company by Latham & Watkins. Roger Kimmel, a director of the Company, is a partner of Latham & Watkins and is the executor of the estate of Mrs. Inez Kimmel, his deceased wife, which owns shares of the Common Stock directly and through certain related trusts. In addition, two trusts that have been established for the benefit of Mr. Kimmel's children own shares of the Common Stock. See 'Principal Stockholders.' In addition, certain other partners of Latham & Watkins, in the aggregate, own less than 2.0% of the Common Stock. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Kramer, Levin, Naftalis & Frankel. EXPERTS The balance sheets of Algos Pharmaceutical Corporation (a development stage enterprise) as of December 31, 1995 and 1994 and the statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995, included in this Prospectus, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The statements in this Prospectus set forth under the captions 'Risk Factors -- Uncertain Ability to Protect Proprietary Technology' and 'Business -- Patents, Trade Secrets and Licenses' have been reviewed and approved by Dilworth & Barrese, patent counsel to the Company, as experts on such matters, and are included herein in reliance upon such review and approval. Mr. Peter Dilworth, a partner of Dilworth & Barrese, owns less than 1.0% of the Common Stock. 49 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the 'Commission'), Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the offices of the Commission at 450 Fifth Street, N.W. Washington D.C. 20549, and copies of all or any part of the Registration Statement may be obtained from the public Reference Section of the Commission, Washington, D.C. 20549 upon the payment of the fees prescribed by the Commission. The Commission also maintains a site on the World Wide Web, the address of which is http://www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers, such as the Company, that file reports electronically with the Commission. 50 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants.......................................................................... F-2 Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited).............................. F-3 Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and six months ended June 30, 1995 and 1996 (unaudited) and cumulative from inception to June 30, 1996 (unaudited)..................... F-4 Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and six months ended June 30, 1995 and 1996 (unaudited) and cumulative from inception to June 30, 1996 (unaudited)..................... F-5 Statements of Changes in Stockholders' Equity from date of inception (January 1, 1992) to December 31, 1995 and the six months ended June 30, 1996 (unaudited)....................................................... F-6 Notes to Financial Statements.............................................................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders ALGOS PHARMACEUTICAL CORPORATION: We have audited the accompanying balance sheets of Algos Pharmaceutical Corporation (a development stage enterprise) as of December 31, 1995 and 1994, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Algos Pharmaceutical Corporation as of December 31, 1995 and 1994 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Princeton, New Jersey February 7, 1996, except as to the fourth paragraph of Note 9, for which the date is May 21, 1996 F-2 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS
DECEMBER 31, -------------------------- JUNE 30, 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents (Notes 2 and 3)....................... $ 5,633,971 $ 3,707,100 $ 2,504,603 Accounts receivable (Note 8).................................... -- -- 2,000,000 Prepaid expenses................................................ 16,533 11,057 17,629 ----------- ----------- ----------- Total current assets....................................... 5,650,504 3,718,157 4,522,232 Property and equipment, net (Notes 2 and 4).......................... 113,986 100,704 82,506 Other assets......................................................... 916 1,591 298,531 ----------- ----------- ----------- Total assets............................................... $ 5,765,406 $ 3,820,452 $ 4,903,269 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................ $ 55,926 $ 158,297 $ 550,326 Other current liabilities (Note 5).............................. 91,175 141,335 703,848 ----------- ----------- ----------- Total current liabilities.................................. 147,101 299,632 1,254,174 ----------- ----------- ----------- Commitments (Note 7) -- -- -- Stockholders' equity: Preferred stock, $.01 par value: 10,000,000 shares authorized: Convertible Series A; 872,000 shares authorized; 702,500, 702,500, and 707,500, respectively, issued and outstanding; $10,537,500, $10,537,500, and $10,612,500, respectively, aggregate liquidation preference........... 7,025 7,025 7,075 Convertible Series B; 100,000 shares authorized; 0, 0 and 100,000, respectively, issued and outstanding; $0, $0 and $100,000, respectively, aggregate liquidation preference............................................... -- -- 1,000 Common stock, $.01 par value; 50,000,000 shares authorized; 5,810,415, 6,010,030, and 6,171,876, respectively, issued and outstanding................................................... 58,104 60,100 61,719 Additional paid-in-capital...................................... 7,318,936 7,341,890 9,434,961 Unearned compensation expense................................... -- -- (912,708) Deficit accumulated during the development stage................ (1,765,760) (3,888,195) (4,942,952) ----------- ----------- ----------- Total stockholders' equity................................. 5,618,305 3,520,820 3,649,095 ----------- ----------- ----------- Total liabilities and stockholders' equity................. $ 5,765,406 $ 3,820,452 $ 4,903,269 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-3 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FOR THE SIX MONTHS CUMULATIVE FROM DECEMBER 31, ENDED JUNE 30, INCEPTION TO ------------------------------------- ------------------------- JUNE 30, 1993 1994 1995 1995 1996 1996 --------- ----------- ----------- ----------- ----------- --------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Revenues (Note 8).......... $ 214,584 $ -- $ -- $ -- $ 1,500,000 $ 1,811,000 --------- ----------- ----------- ----------- ----------- --------------- Operating expenses: Research and development (Note 2).................. 40,000 653,714 1,614,943 800,784 1,003,585 3,437,242 General and administrative expenses............ 435,657 623,219 760,040 396,458 1,628,184 3,816,446 --------- ----------- ----------- ----------- ----------- --------------- Total operating expenses....... 475,657 1,276,933 2,374,983 1,197,242 2,631,769 7,253,688 --------- ----------- ----------- ----------- ----------- --------------- Loss from operations....... (261,073) (1,276,933) (2,374,983) (1,197,242) (1,131,769) (5,442,688) Interest income............ 4,433 153,247 252,548 138,673 77,012 499,736 --------- ----------- ----------- ----------- ----------- --------------- Net loss................... $(256,640) $(1,123,686) $(2,122,435) $(1,058,569) $(1,054,757) $(4,942,952) --------- ----------- ----------- ----------- ----------- --------------- --------- ----------- ----------- ----------- ----------- --------------- Pro forma (unaudited) (Note 2): Net loss per common share............... $(0.17) $(0.09) ------- ------- ------- ------- Weighted average number of common shares outstanding......... 12,199,217 12,328,907 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. F-4 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1993 1994 1995 --------- ----------- ----------- Cash flows from operating activities: Net loss................................ $(256,640) $(1,123,686) $(2,122,435) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...... 8,065 18,115 35,782 Amortization of unearned compensation..................... -- -- -- Common stock issued for technology....................... 25,000 -- -- Preferred stock issued for services rendered......................... -- 25,000 -- Preferred stock issued under license agreement................ -- -- -- Changes in assets and liabilities: Accounts receivable........... -- -- -- Prepaid expenses.............. 3,737 (14,096) 5,476 Other assets.................. 1,237 600 (675) Accounts payable.............. (7,038) 25,549 102,371 Other current liabilities..... (63,638) 76,590 50,160 --------- ----------- ----------- Net cash used in operating activities.................. (289,277) (991,928) (1,929,321) --------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment..... (425) (106,757) (22,500) --------- ----------- ----------- Net cash used in investing activities... (425) (106,757) (22,500) --------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of preferred stock, net of offering costs.......... -- 6,609,015 -- Proceeds from issuance of common stock and capital contributions............. 125,000 50 24,950 Deferred financing costs................ -- -- -- --------- ----------- ----------- Net cash provided by financing activities............................ 125,000 6,609,065 24,950 --------- ----------- ----------- Net increase (decrease) in cash and cash equivalents................................ (164,702) 5,510,380 (1,926,871) Cash and cash equivalents, beginning of period..................................... 288,293 123,591 5,633,971 --------- ----------- ----------- Cash and cash equivalents, end of period..... $ 123,591 $ 5,633,971 $ 3,707,100 --------- ----------- ----------- --------- ----------- ----------- CUMULATIVE FOR THE SIX MONTHS ENDED FROM JUNE 30, INCEPTION -------------------------- TO JUNE 30, 1995 1996 1996 ---- ---- ---- (UNAUDITED) (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss................................$ (1,058,569) $(1,054,757) $(4,942,952) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...... 17,383 22,253 89,512 Amortization of unearned compensation..................... -- 198,432 198,432 Common stock issued for technology....................... -- -- 125,000 Preferred stock issued for services rendered......................... -- -- 25,000 Preferred stock issued under license agreement................ -- 915,000 915,000 Changes in assets and liabilities: Accounts receivable........... -- (2,000,000) (2,000,000) Prepaid expenses.............. (458) (6,572) (17,629) Other assets.................. (675) -- (1,591) Accounts payable.............. 70,686 149,029 307,326 Other current liabilities..... (1,175) 562,513 703,848 ------------ ----------- ----------- Net cash used in operating activities.................. (972,808) (1,214,102) (4,598,054) ------------ ----------- ----------- Cash flows from investing activities: Purchases of property and equipment..... (8,772) (4,055) (172,018) ------------ ----------- ----------- Net cash used in investing activities... (8,772) (4,055) (172,018) ------------ ----------- ----------- Cash flows from financing activities: Proceeds from issuance of preferred stock, net of offering costs.......... -- 50,000 6,659,015 Proceeds from issuance of common stock and capital contributions............. 24,900 19,600 669,600 Deferred financing costs................ -- (53,940) (53,940) ------------ ----------- ----------- Net cash provided by financing activities............................ 24,900 15,660 7,274,675 ------------ ----------- ----------- Net increase (decrease) in cash and cash equivalents................................ (956,680) (1,202,497) 2,504,603 Cash and cash equivalents, beginning of period..................................... 5,633,971 3,707,100 -- ------------ ----------- ----------- Cash and cash equivalents, end of period.....$ 4,677,291 $ 2,504,603 $ 2,504,603 ------------ ----------- ----------- ------------ ----------- -----------
The accompanying notes are an integral part of these financial statements. F-5 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK COMMON STOCK ----------------- ------------------- SHARES AMOUNT SHARES AMOUNT -------- ------ --------- ------- Balance, January 1, 1992 (Inception) Issuance of common stock, January 1992, $.10 per share........................................... -- $-- 4,841,664 $48,417 Issuance of common stock for technology, January 1992, $.10 per share............................ -- -- 968,336 9,683 Net loss.......................................... -- -- -- -- -------- ------ --------- ------- Balance, December 31, 1992........................ -- -- 5,810,000 58,100 Capital contributions, including $25,000 of technology...................................... -- -- -- -- Net loss.......................................... -- -- -- -- -------- ------ --------- ------- Balance, December 31, 1993........................ -- -- 5,810,000 58,100 Issuance of preferred stock, May through August 1994, $10.00 per share, net of offering costs... 700,000 7,000 -- -- Issuance of preferred stock for services rendered, May 1994, $10.00 per share...................... 2,500 25 -- -- Exercise of stock options......................... -- -- 415 4 Net loss.......................................... -- -- -- -- -------- ------ --------- ------- Balance, December 31, 1994........................ 702,500 7,025 5,810,415 58,104 Exercise of stock options......................... -- -- 199,615 1,996 Net loss.......................................... -- -- -- -- -------- ------ --------- ------- Balance, December 31, 1995........................ 702,500 7,025 6,010,030 60,100 Exercise of stock options (unaudited)............. -- -- 161,846 1,619 Exercise of preferred stock warrants (unaudited)..................................... 5,000 50 -- -- Issuance of Series B preferred stock under license agreement, June 1996, $9.15 per share (unaudited)..................................... 100,000 1,000 -- -- Unearned compensation expense (unaudited)......... -- -- -- -- Amortization of unearned compensation expense (unaudited)..................................... -- -- -- -- Net loss (unaudited).............................. -- -- -- -- -------- ------ --------- ------- Balance, June 30, 1996 (unaudited)................ 807,500 $8,075 6,171,876 $61,719 -------- ------ --------- ------- -------- ------ --------- ------- DEFICIT ACCUMULATED ADDITIONAL UNEARNED DURING THE TOTAL PAID-IN COMPENSATION DEVELOPMENT STOCKHOLDERS' CAPITAL EXPENSE STAGE EQUITY ------------ ------------ ------------ ------------- Balance, January 1, 1992 (Inception) Issuance of common stock, January 1992, $.10 per share...........................................$ 451,583 $ -- $ -- $ 500,000 Issuance of common stock for technology, January 1992, $.10 per share............................ 90,317 -- -- 100,000 Net loss.......................................... -- -- (385,434) (385,434) ------------ ------------ ------------ ------------- Balance, December 31, 1992........................ 541,900 -- (385,434) 214,566 Capital contributions, including $25,000 of technology...................................... 150,000 -- -- 150,000 Net loss.......................................... -- -- (256,640) (256,640) ------------ ------------ ------------ ------------- Balance, December 31, 1993........................ 691,900 -- (642,074) 107,926 Issuance of preferred stock, May through August 1994, $10.00 per share, net of offering costs... 6,602,015 -- -- 6,609,015 Issuance of preferred stock for services rendered, May 1994, $10.00 per share...................... 24,975 -- -- 25,000 Exercise of stock options......................... 46 -- -- 50 Net loss.......................................... -- -- (1,123,686) (1,123,686) ------------ ------------ ------------ ------------- Balance, December 31, 1994........................ 7,318,936 -- (1,765,760) 5,618,305 Exercise of stock options......................... 22,954 -- -- 24,950 Net loss.......................................... -- -- (2,122,435) (2,122,435) ------------ ------------ ------------ ------------- Balance, December 31, 1995........................ 7,341,890 -- (3,888,195) 3,520,820 Exercise of stock options (unaudited)............. 17,981 -- 19,600 Exercise of preferred stock warrants (unaudited)..................................... 49,950 -- -- 50,000 Issuance of Series B preferred stock under license agreement, June 1996, $9.15 per share (unaudited)..................................... 914,000 -- -- 915,000 Unearned compensation expense (unaudited)......... 1,111,140 (1,111,140) -- -- Amortization of unearned compensation expense (unaudited)..................................... -- 198,432 -- 198,432 Net loss (unaudited).............................. -- -- (1,054,757) (1,054,757) ------------ ------------ ------------ ------------- Balance, June 30, 1996 (unaudited)................$ 9,434,961 $ (912,708) $(4,942,952) $ 3,649,095 ------------ ------------ ------------ ------------- ------------ ------------ ------------ -------------
The accompanying notes are an integral part of these financial statements. F-6 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) (INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996 AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED) NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION Algos Pharmaceutical Corporation (the 'Company'), is engaged primarily in the development of proprietary pain management pharmaceuticals. Since its formation in January 1992, the Company has devoted a substantial portion of its efforts to developing products, licensing technology, filing regulatory applications and raising capital and has earned no significant revenue from its planned principal operations. The Company is subject to a number of risks common to companies in similar stages of development including, but not limited to, the lack of assurance of successful product development, the absence of manufacturing facilities, the need to raise substantial additional funds and risk of technological obsolescence. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. DEVELOPMENT STAGE ENTERPRISE The accompanying statements have been prepared in accordance with the provisions of Statement of Financial Accounting Standard (SFAS) No. 7, 'Accounting and Reporting by Development Stage Enterprises.' CASH AND CASH EQUIVALENTS The Company considers securities with maturities of three months or less, when purchased, to be cash equivalents. PROPERTY AND EQUIPMENT, NET Property and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the assets which range from three to seven years. Gains and losses on depreciable assets retired or sold are recognized in the statement of operations in the year of disposal. Repairs and maintenance expenditures are expensed as incurred. REVENUE License fees are recognized as revenue when earned in accordance with the terms of the underlying agreements. F-7 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) (INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996 AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) RESEARCH AND DEVELOPMENT COSTS Expenditures for research and development are expensed as incurred. INCOME TAXES The Company accounts for income taxes under the provisions of SFAS No. 109, 'Accounting for Income Taxes.' SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. STOCK BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, 'Accounting for Stock Based Compensation.' Beginning in 1996, SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages, but does not require, the recognition of employee compensation expense related to stock compensation based on the fair value of the equity instrument granted. Companies that do not adopt the fair value recognition provisions of SFAS No. 123 and continue to follow the existing APB Opinion 25 rules to recognize and measure compensation, will be required to disclose the pro forma amounts of net income and earnings per share that would have been reported had the company elected to follow the fair value recognition of SFAS No. 123. The Company has elected to adopt the disclosure requirements of this pronouncement. EARNINGS PER SHARE Pro forma net loss per common share is based on the net loss and the weighted average number of common shares after giving effect to the conversion of all preferred stock as of January 1, 1995. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all common shares and stock options and warrants granted by the Company during the twelve months prior to the filing date of the Registration Statement have been included in the calculation of weighted average common shares and common share equivalents outstanding as if they were outstanding for all periods presented. Outstanding stock options and warrants granted prior to this twelve-month period have not been included in the calculation of historical net loss per common share because inclusion of such shares would be antidilutive. Historical net loss per common share is as follows:
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------- ---------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- Net loss per common share........................ $(0.04) $(0.19) $(0.35) $(0.18) $(0.17) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares and common share equivalents outstanding........................ 5,810,000 5,810,050 6,002,635 5,982,922 6,144,700 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Historical net loss per common share is based on the weighted average number of common shares outstanding during the periods presented. F-8 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) (INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996 AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INTERIM FINANCIAL INFORMATION The financial information presented as of June 30, 1996, and for the six months ended June 30, 1995 and 1996 and the cumulative amounts from the date of inception is unaudited but, in the opinion of management, reflects all adjustments (which consist of normal accruals) necessary for a fair presentation of such financial statements. 3. CONCENTRATION OF CREDIT RISK Cash and cash equivalents consist primarily of shares of a money market fund which invests primarily in securities of the United States government. 4. PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following:
DECEMBER 31, -------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- Office furniture................................................... $ 58,354 $ 61,119 $ 61,119 Computer equipment................................................. 56,370 73,453 77,508 Office equipment................................................... 24,617 26,447 26,447 Leasehold improvements............................................. 6,121 6,944 6,944 -------- -------- -------- 145,462 167,963 172,018 Less accumulated depreciation...................................... 31,476 67,259 89,512 -------- -------- -------- $113,986 $100,704 $ 82,506 -------- -------- -------- -------- -------- --------
5. OTHER CURRENT LIABILITIES Other current liabilities consist of the following:
DECEMBER 31, ------------------- JUNE 30, 1994 1995 1996 ------- -------- -------- Deferred revenue..................................................... $ -- $ -- $500,000 Accrued compensation................................................. 79,000 118,100 68,100 Accrued research expenses............................................ -- 23,235 135,748 Advances payable..................................................... 12,175 -- -- ------- -------- -------- $91,175 $141,335 $703,848 ------- -------- -------- ------- -------- --------
6. INCOME TAXES Prior to March 1, 1994, the Company had elected to be treated as an S Corporation for federal income tax reporting purposes. Under this election, the Company's stockholders were responsible for reporting the Company's federal taxable loss on their personal tax returns. In connection with the issuance of Series A Preferred Stock, the Company's S status terminated and the corporation converted to C Corporation status. The C Corporation assumed the tax bases of the assets and liabilities of the S Corporation as of the termination date. Accordingly, the Company records deferred taxes for the effect of cumulative temporary differences in accordance with the provisions of SFAS No. 109, 'Accounting for Income Taxes' for federal tax purposes as of the termination date. For state tax purposes, the Company has been treated as a C Corporation since inception. F-9 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) (INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996 AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1995, the Company had available net operating loss carryforwards and research and development credits for federal income tax purposes of approximately $2,997,000 and $70,000, respectively, which expire in the years 2009 through 2010. At June 30, 1996, the Company had available net operating loss carryforwards of approximately $2,100,000. Due to the uncertainty of their realization, no income tax benefits have been recorded by the Company for these net operating loss or credit carryforwards as valuation allowances have been established for any such benefits. The use of these net operating loss and credit carryforwards may be subject to limitations under section 382 of the Internal Revenue Code pertaining to changes in stock ownership. The increase in the valuation allowance amounted to $406,100 and $906,300 in 1994 and 1995, respectively. Deferred tax assets and (liabilities) for federal and state income taxes consist of the following:
DECEMBER 31, ------------------------ 1994 1995 --------- ----------- Net operating loss carryforwards............................................ $ 382,000 $ 1,236,800 Research and development tax credits........................................ 20,000 70,000 Depreciation and amortization............................................... 2,500 2,400 Accrued liabilities and other............................................... 1,600 3,200 --------- ----------- Total deferred tax assets.............................................. 406,100 1,312,400 Valuation allowance......................................................... (406,100) (1,312,400) --------- ----------- Net deferred tax assets................................................ $ 0 $ 0 --------- ----------- --------- -----------
7. COMMITMENTS AND CONTINGENT LIABILITIES COLLABORATIVE RESEARCH AGREEMENTS In 1994, the Company entered into collaborative research agreements with three universities. Under the terms of the agreements, the universities agreed to provide research exclusively to the Company in the field of pain management in exchange for funding of the research by the Company. The Company was granted rights to enter into exclusive, worldwide licenses to make, have made, use and sell products under any patent application and patent rights resulting from the research agreement and is required to pay royalties on sales of products incorporating licensed technology. The Company expensed $10,000, $182,000 and $118,000 in 1993, 1994 and 1995, respectively, and $510,000 cumulatively from the date of inception, under these agreements. Quarterly expenses are mutually agreed to by the Company and each university. In addition, the Company has entered into various research and consulting agreements which are generally one year or less in duration. LICENSING AGREEMENTS The Company has a license agreement with a university for certain pain management technology which requires the Company to pay royalties of 4% of sales of licensed products and a share of royalties received from sublicensees. A second license agreement requires annual maintenance fees of $10,000 in addition to royalties based on sales. F-10 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) (INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996 AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) EMPLOYMENT AGREEMENTS The Company has employment agreements with certain officers and employees which provide them with continued compensation for periods of six months to two years in the event of their termination, without cause, by the Company. As of December 31, 1995, the aggregate amount of the Company's minimum obligation under these agreements is $751,000. LEASES In April 1992, the Company entered into a five year lease agreement for its office facilities with minimum lease payments of approximately $1,900 per month. This lease may be canceled by the Company upon four and one-half months notice and payment of not more than $3,500. The Company is responsible for all operating expenses associated with the facility. Rent expense amounted to $11,000, $12,608 and $21,841 for the years ended December 31, 1993, 1994, and 1995, respectively, $11,240 in the six months ended June 30, 1996, and $64,939 cumulatively from the date of inception. 8. REVENUES In June 1996, the Company entered into a license agreement with McNeil Consumer Products Company, an affiliate of Johnson & Johnson, which provides McNeil with exclusive worldwide marketing rights to certain of the Company's products under development. The Company received an initial payment of $2,000,000 in July 1996 and may receive additional payments based on the achievement of certain milestones. McNeil will be responsible for substantially all of the remaining development costs in excess of $500,000. In addition, the Company will receive royalties based on sales of licensed products, if any. The agreement may be terminated by McNeil after one year. The Company recorded accounts receivable of $2,000,000, revenue of $1,500,000, and deferred revenue of $500,000 in connection with the transaction. Prior to 1994 the Company had an agreement to provide consulting services. Revenues recognized under this agreement amounted to $214,584 in the year ended December 31, 1993 which represented all of the Company's revenues. The Company expensed $104,000 in 1993 which was paid to an executive of the Company for services provided relating to this agreement. Revenues and expenses recognized under this agreement, since inception were $311,000 and $214,500, respectively. This agreement was not related to pain management technology and was assigned to a new corporation in January 1994. The Company will not receive any additional revenue related to this contract. 9. STOCKHOLDERS' EQUITY The Company is authorized to issue shares of preferred stock with rights, preferences and limitations determined by the Board of Directors of the Company, 872,500 of which have been designated Series A and 100,000 of which have been designated Series B. Shares of Series A Preferred Stock have preference to Common Stock in liquidation and are convertible into shares of Common Stock and will automatically convert upon the consummation of an initial public offering. The Series A Preferred stockholders are entitled to receive dividends payable on Common Stock based upon the number of shares of Common Stock into which a share of Series A Preferred Stock is then convertible. In addition, the Series A Preferred stockholders are entitled to vote as a class to elect one member of the Board of Directors of the Company. In June 1996, the Company issued 100,000 shares of convertible Series B Preferred Stock in connection with an amendment to a license agreement with a university and recorded an administrative F-11 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) (INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996 AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) expense of $915,000. Shares of Series B Preferred Stock carry dividend rights equal to shares of Series A Preferred Stock and are convertible into an equal number of shares of Common Stock at any time on or after February 1, 1997. On May 21, 1996, the Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission for the sale of Common Stock. If the offering pursuant to the registration statement is consummated under the terms presently anticipated, all shares of the Series A Preferred Stock will convert to Common Stock and the Preferred Stock warrants will convert to Common Stock warrants. The Series A Preferred Stock and Preferred Stock warrants will convert at a rate of 8.30 common shares for each preferred share or underlying warrant. In addition, the Board of Directors authorized a 8.30-for-1 split of all outstanding shares of Common Stock and authorized an increase in the authorized number of common shares to 50,000,000. Such split and increase in the authorized number of common shares shall be consummated upon the effective date of the registration statement. In addition, upon the closing of the initial public offering, the total number of shares of preferred stock authorized will be 10,000,000 par value $.01. All references to common stock, options and per share data have been restated to give effect to this split. The Company maintains stock options plans under which options to purchase shares of common stock have been granted to directors and employees which vest over periods of up to four years. Information with respect to options under the plans is as follows:
OPTIONS OUTSTANDING ------------------------ AVAILABLE PRICE FOR GRANT SHARES PER SHARE --------- -------- ------------ Balance, December 31, 1993..................................... -- -- $ -- Authorized..................................................... 834,150 -- -- Granted........................................................ (772,730) 772,730 .12 - .13 Exercised...................................................... -- (415) .12 --------- -------- Balance, December 31, 1994..................................... 61,420 772,315 .12 - .13 Authorized..................................................... 41,500 -- -- Granted........................................................ (24,900) 24,900 .12 Exercised...................................................... -- (199,615) .12 - .13 --------- -------- Balance, December 31, 1995..................................... 78,020 597,600 .12 - .13 Authorized..................................................... 498,000 -- -- Granted........................................................ (243,190) 243,190 .12 - .13 Exercised...................................................... -- (161,850) .12 --------- -------- Balance, June 30, 1996......................................... 332,830 678,940 .12 - .13 --------- -------- --------- --------
As of December 31, 1995, 217,460 options were exercisable at prices ranging from $0.12 to $0.13 per share. In connection with certain option grants made in March and April 1996, the Company has recorded unearned compensation expense amounting to $1,111,140, which will be amortized over the vesting period. Options to purchase 24,900 shares are exercisable immediately, the remainder vest over a four year period. In connection with the sale of Series A Preferred Stock, certain selling agents received warrants to purchase an aggregate of 40,750 shares of Series A Preferred Stock at an exercise price of $10.00 per share which expire on the earlier of 2004 or five years after an initial public offering of stock by the Company. Warrants to purchase 5,000 shares were exercised in May 1996. F-12 ALGOS PHARMACEUTICAL CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) (INFORMATION RELATING TO THE SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996 AND CUMULATIVE FROM THE DATE OF INCEPTION IS UNAUDITED) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. RELATED PARTY TRANSACTION A director of the Company has been associated with law firms that rendered various legal services to the Company. The Company paid approximately $3,000, $95,000 and $16,000 in 1993, 1994 and 1995, respectively, and $22,000 for the six months ended June 30, 1996, and $165,000 cumulatively from the date of inception, for these services. A second director of the Company, appointed in July 1996, is associated with a law firm which performs legal services for the Company from time to time. The Company paid approximately $0, $68,000 and $0 in 1993, 1994 and 1995, respectively, and $68,000 cumulatively from the date of inception for these services and has accrued approximately $217,000 for services rendered in the six months ended June 30, 1996, primarily related to the initial public offering. 11. SUBSEQUENT EVENT (UNAUDITED) -- TRANSFER OF INTANGIBLE ASSETS In August 1996, the Company contributed certain intangible assets having no book value to PharmaDyn, Inc. ('PharmaDyn'), a newly formed company, and received preferred stock with an aggregate par value and liquidation preference of $2,800,000 and all of PharmaDyn's common stock. The common stock was subsequently distributed to the Company's stockholders, warrant holders and certain of its employees. The preferred stock provides for an annual cumulative dividend of 30% which may be paid in the form of cash or PharmaDyn common stock and a share of other earnings. The preferred stock may be redeemed at any time for par plus accrued dividends at PharmaDyn's option and at the Company's option at the end of two years. The Company recorded no gain in connection with the transactions as management believes that at the present time realization of the redemption value is not assured. F-13 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] ____________________________________ ___________________________________ NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................................................................................................... 3 Risk Factors........................................................................................................... 6 Use of Proceeds........................................................................................................ 12 Dividend Policy........................................................................................................ 12 Capitalization......................................................................................................... 13 Dilution............................................................................................................... 14 Selected Financial Information......................................................................................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 16 Business............................................................................................................... 19 Management and Key Scientific Advisors................................................................................. 33 Principal Stockholders................................................................................................. 40 Certain Relationships and Related Transactions......................................................................... 41 Description of Capital Stock........................................................................................... 42 Shares Eligible for Future Sale........................................................................................ 44 Certain United States Federal Tax Considerations for Non-United States Holders......................................... 45 Underwriting........................................................................................................... 48 Legal Matters.......................................................................................................... 49 Experts................................................................................................................ 49 Additional Information................................................................................................. 50 Index to Financial Statements.......................................................................................... F-1
------------------------ UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 3,500,000 SHARES [LOGO] ALGOS PHARMACEUTICAL CORPORATION COMMON STOCK -------------------------- PROSPECTUS , 1996 -------------------------- LEHMAN BROTHERS COWEN & COMPANY ____________________________________ ___________________________________ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of the Common Stock being registered. All amounts are estimates except the registration and filing fees:
DESCRIPTION AMOUNT - ----------------------------------------------------------------------------------------- ----------- Securities and Exchange Commission registration fee...................................... $ 22,207.05 NASD filing fee.......................................................................... 6,940.00 Printing and engraving expenses.......................................................... * Legal fees and expenses.................................................................. * Accounting fees and expenses............................................................. * Blue Sky fees and expenses............................................................... * Transfer Agent & Registrar fees.......................................................... * Nasdaq listing fees...................................................................... 50,000.00 Miscellaneous expenses................................................................... * ----------- Total............................................................................... $800,000.00 ----------- -----------
- ------------ * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law (the 'DGCL') and Article SEVENTH of the Amended and Restated Certificate of Incorporation provide for indemnification of the Company's directors and officers in a variety of circumstances, which may include liabilities under the Securities Act of 1933, as amended (the 'Securities Act'). Article SEVENTH provides that unless otherwise determined by the Board of Directors, the Company shall indemnify, to the full extent permitted by the laws of Delaware as from time to time in effect, the persons described in Section 145 of DGCL. The general effect of the provisions in the Amended and Restated Certificate of Incorporation and the DGCL is to provide that the company shall indemnify its directors and officers against all liabilities and expenses actually and reasonably incurred in connection with the defense or settlement of any judicial or administrative proceedings in which they have become involved by reason of their status as corporate directors or officers, if they acted in good faith and in the reasonable belief that their conduct was neither unlawful (in the case of criminal proceedings) nor inconsistent with the best interests of the Company. With respect to legal proceedings by or in the right of the Company in which a director or officer is adjudged liable for improper performance of his duty to the Company or another enterprise for which such person served in a similar capacity at the request of the Company, indemnification is limited by such provisions to that amount which is permitted by the court. Reference is made to the proposed form of Underwriting Agreement filed as Exhibit 1.1 which provides for indemnification of the directors and officers of the Company signing the Registration Statement and certain controlling persons of the Company against certain liabilities, including certain liabilities under the Securities Act, by the Underwriters. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the past three years, the following securities were sold by the Company without registration under the Securities Act: Pursuant to Subscription and Stock Purchase Agreements, dated May 9, June 30, July 15, August 12 and August 22, 1994, the Company issued 70 Units, each Unit consisting of 10,000 shares of Series A Preferred Stock, $.01 par value, of the Company to management, certain existing stockholders and a limited number of other investors for an aggregate purchase price of $7,000,000 in a transaction that was exempt from registration under the Securities Act pursuant to Regulation D under the Securities Act. II-1 On June 27, 1996, the Company issued 100,000 shares of its Series B Preferred Stock to The Medical College of Virginia in consideration of certain amendments to its license agreement in a transaction that was exempt from registration under the Securities Act pursuant to Section 4(2) thereof. On July 18, 1994, November 10, 1995, March 22, 1996, April 1, 1996, and July 2, 1996 the Company issued options to purchase 772,730 shares, 24,900 shares, 52,290 shares, 190,900 shares and 10,000 shares, respectively, to its employees and directors pursuant to its 1994 Stock Option Plan, 1994 Directors Stock Option Plan, 1995 Directors Stock Option Plan, 1996 Stock Option Plan and 1996 Non-Employee Director Stock Option Plan in transactions that were exempt from registration under the Securities Act pursuant to Section 4(2) thereof. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits:
EXHIBIT NO. TITLE - --------- ----------------------------------------------------------------------------------------------------- ***1.1 Form of Underwriting Agreement. **3.1 Form of Amended and Restated Certificate of Incorporation of Algos Pharmaceutical Corporation. **3.2 Form of Amended and Restated By-laws of Algos Pharmaceutical Corporation. ***4.1 Form of Stock Certificate of Common Stock. **5.1 Opinion of Latham & Watkins as to the validity of the Common Stock. **10.1.1 Employment Agreement with respect to John W. Lyle. **10.1.2 Employment Agreement with respect to Gastone Bello. **10.1.3 Employment Agreement with respect to Frank S. Caruso. **10.2.1 1994 Stock Option Plan. **10.2.2 Form of 1996 Stock Option Plan. **10.2.3 Form of 1996 Non-Employee Director Stock Option Plan. **10.3.1 Algos Pharmaceutical Corporation Stockholders' Agreement. **10.4.1 License Agreement with The Medical College of Virginia.`D'`D' **10.4.2 License Agreement with McNeil.`D'`D' **10.4.3 Registration Rights Agreement with The Medical College of Virginia. ***10.5.1 Lease Agreement between Collingwood Plaza Associates and U.S. Medical Technologies, Inc., predecessor to the Company. **11 Statement regarding computation of per share earnings. **21 Subsidiaries of the Registrant. ***23.1 Consent of Coopers & Lybrand L.L.P. ***23.2 Consent of Dilworth & Barrese. **23.3 Consent of Latham & Watkins (included in Exhibit 5.1). **24 Powers of Attorney. `D'27 Financial Data Schedule.
- ------------ * To be filed by amendment. ** Previously filed. *** Filed herewith. `D' Included in EDGAR filing only. `D'`D' Portions of this Exhibit have received confidential treatment pursuant to Rule 406(b) under the Securities Act. (b) Financial Statement Schedules: None. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-2 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed by the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on September 17, 1996. ALGOS PHARMACEUTICAL CORPORATION By: /s/ John W. Lyle ................................... JOHN W. LYLE PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------------------------ -------------------------------------------- ------------------- /S/ JOHN W. LYLE* President, Chief Executive Officer and September 17, 1996 ......................................... Director (JOHN W. LYLE) DONALD G. DRAPKIN* Director September 17, 1996 ......................................... (DONALD G. DRAPKIN) JAMES R. LEDLEY* Assistant Secretary and Director September 17, 1996 ......................................... (JAMES R. LEDLEY) DIETER A. SULSER* Director September 17, 1996 ......................................... (DIETER A. SULSER) /S/ ROGER H. KIMMEL Director September 17, 1996 ......................................... (ROGER H. KIMMEL) /S/ GARY ANTHONY Chief Financial Officer and Principal September 17, 1996 ......................................... Accounting Officer (GARY ANTHONY) *By: /s/ John W. Lyle ......................................... JOHN W. LYLE (ATTORNEY-IN-FACT)
II-4 EXHIBIT INDEX
EXHIBIT NO. TITLE PAGE - --------- ---------------------------------------------------------------------------------------------- ----- ***1.1 Form of Underwriting Agreement................................................................ **3.1 Form of Amended and Restated Certificate of Incorporation of Algos Pharmaceutical Corporation................................................................................. **3.2 Form of Amended and Restated By-laws of Algos Pharmaceutical Corporation...................... ***4.1 Form of Stock Certificate of Common Stock..................................................... **5.1 Opinion of Latham & Watkins as to the validity of the Common Stock............................ **10.1.1 Employment Agreement with respect to John W. Lyle............................................. **10.1.2 Employment Agreement with respect to Gastone Bello............................................ **10.1.3 Employment Agreement with respect to Frank S. Caruso.......................................... **10.2.1 1994 Stock Option Plan........................................................................ **10.2.2 Form of 1996 Stock Option Plan................................................................ **10.2.3 Form of 1996 Non-Employee Director Stock Option Plan.......................................... **10.3.1 Algos Pharmaceutical Corporation Stockholders' Agreement...................................... **10.4.1 License Agreement with The Medical College of Virginia`D'`D'.................................. **10.4.2 License Agreement with McNeil`D'`D'........................................................... **10.4.3 Registration Rights Agreement with The Medical College of Virginia............................ ***10.5.1 Lease Agreement between Collingwood Plaza Associates and U.S. Medical Technologies, Inc., predecessor to the Company ................................................................. **11 Statement regarding computation of per share earnings......................................... **21 Subsidiaries of the Registrant................................................................ ***23.1 Consent of Coopers & Lybrand L.L.P. .......................................................... ***23.2 Consent of Dilworth & Barrese................................................................. **23.3 Consent of Latham & Watkins (included in Exhibit 5.1)......................................... **24 Powers of Attorney............................................................................ `D'27 Financial Data Schedule.
- ------------ * To be filed by amendment. ** Previously filed. *** Filed herewith. `D' Included in EDGAR filing only. `D'`D' Portions of this Exhibit have received confidential treatment pursuant to Rule 406(b) under the Securities Act. STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as....... 'tm' The dagger symbol shall be expressed as.......... `D' EX-1 2 EXHIBIT 1.1 [KL Draft 8/27/96] 3,500,000 SHARES ALGOS PHARMACEUTICAL CORPORATION COMMON STOCK UNDERWRITING AGREEMENT _____ __, 1996 LEHMAN BROTHERS INC. COWEN & COMPANY As Representatives of the several Underwriters named in Schedule 1, c/o Lehman Brothers Inc. Three World Financial Center New York, New York 10285 Dear Sirs: Algos Pharmaceutical Corporation, a Delaware corporation (the "Company"), proposes to sell 3,500,000 shares (the "Firm Stock") of the Company's common stock, par value $0.01 per share (the "Common Stock"). In addition, the Company proposes to grant to the Underwriters named in Schedule 1 hereto (the "Underwriters") an option to purchase up to an additional 525,000 shares of the Common Stock on the terms and for the purposes set forth in Section 4 (the "Option Stock"). The Firm Stock and the Option Stock, if purchased, are hereinafter collectively called the "Stock." This is to confirm the agreement concerning the purchase of the Stock from the Company by the Underwriters. 1. Representations, Warranties and Agreements of the Company. The Company represents, warrants and agrees that: (a) A registration statement on Form S-1 (No. 333-04313), including amendments thereto, with respect to the Stock has been prepared by the Company in conformity with the requirements of the Securities Act of 1933 (the "Securities Act") and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission under the Securities Act; no other document with respect to such registration statement has heretofore been filed with the Commission; a [second] amendment to such registration statement, including a final prospectus as part thereof is now proposed to be filed with the Commission. Copies of such registration statement, the amendments thereto and the form of such final prospectus have been delivered by the Company to you as the representatives (the "Representatives") of the Underwriters. As used in this Agreement, "Effective Time" means the date and the time as of which such registration statement is declared effective by the Commission; "Effective Date" means the date of the Effective Time; "Preliminary Prospectus" means each prospectus included in such registration statement or amendments thereof before it becomes effective under the Securities Act and any prospectus filed by the Company with the consent of the Representatives pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement" means such registration statement, as amended at the Effective Time, including all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section 5(a) hereof and deemed to be a part of the Registration Statement as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus" means such final prospectus, as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations with any changes thereto made by the Company with the consent of the Representatives. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. "Rule 462(b) Registration Statement" means a registration statement filed pursuant to Rule 462(b) of the Rules and Regulations relating to the offering covered by the Registration Statement. (b) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will, when they become effective or are filed with the Commission, as the case may be, conform in all respects to the requirements of the Securities Act and the Rules and Regulations and do not and will not, as of the applicable effective date (as to the Registration Statement and any amendment thereto) and as of the applicable filing date (as to the Prospectus and any amendment or supplement thereto) contain an untrue statement of a material fact or omit to state a material fact required to be stated or necessary to make the statements therein not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. (c) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which its ownership or lease of property or the conduct of its business requires such qualification, and has all power and authority necessary to own or hold its properties and to conduct the business in which it is engaged; and the Company has no subsidiaries. (d) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus. - 2 - (e) The unissued shares of the Stock to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and non-assessable; and the Stock will conform to the description thereof contained in the Prospectus. (f) This Agreement has been duly authorized, executed and delivered by the Company. (g) The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease, license or other agreement or instrument to which the Company is a party or by which the Company is bound or to which any of the property or assets of the Company is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or any statute or any order, rule or regulation of any court or government agency or body having jurisdiction over the Company or any of its properties or assets; and except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Securities Exchange Act of 1934 (the "Exchange Act") and applicable state securities laws in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby, other than such actions as are contemplated in the Prospectus or such actions as have already been taken. (h) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act. (i) Except as described in the Prospectus, the Company has not sold or issued any shares of Common Stock during the six-month period preceding the date of the Prospectus, including any sales pursuant to Rule 144A under, or Regulations D or S of, the Securities Act. There is no commitment, plan or arrangement to issue, and no outstanding option, warrant or other right calling for the issuance of, any share of capital stock of the Company or of any subsidiary or any security or other instrument that by its terms is convertible into exercisable for, or exchangeable for capital stock of the Company, except as described in the Prospectus. - 3 - (j) The Company has not sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus nor has the Company incurred or undertaken any liability or obligation, direct or contingent that are material to the Company except for liabilities or obligations (i) incurred or undertaken in the ordinary course of business or (ii) described in the Registration Statement; and, since such date, there has not been any change in the capital stock or long-term debt of the Company or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company, otherwise than as set forth or contemplated in the Prospectus. (k) The financial statements (including the related notes) filed as part of the Registration Statement or included in the Prospectus present fairly the financial condition and results of operations of the entity purported to be shown thereby, at the dates and for the periods indicated, and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. The pro forma financial statements and other pro forma financial information (including the notes thereto) included in the Registration Statement and the Prospectus (i) present fairly the information shown therein, (ii) have been prepared in accordance with the applicable requirements of Rule 11-02 of the Rules and Regulations, (iii) have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and (iv) have been properly compiled on the basis described therein and the assumptions used in the preparation of the pro forma financial statements and other pro forma information (including the notes thereto) and included in the Registration Statement and the Prospectus are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (l) Coopers & Lybrand L.L.P., who have certified certain financial statements of the Company, whose report appears in the Prospectus and who have delivered the initial letter referred to in Section 7(g) hereof, are independent public accountants as required by the Securities Act and the Rules and Regulations. (m) The statements in the Prospectus set forth under the captions "Risk Factors--Uncertain Ability to Protect Proprietary Technology" and "Business--Patents, Trade Secrets and Licenses,--Patents" have been reviewed and approved by Dilworth & Barrese, patent counsel to the Company, as experts on such matters, and are included therein in reliance upon such review and approval. (n) The Company does not own any real property. The Company has good and marketable title to all personal property owned by it, free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use - 4 - made and proposed to be made of such property by the Company; and all real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company. (o) The Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties. (p) The Company owns or possesses adequate rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark regulations, copyrights, licenses and other intangible properties and assets necessary for the conduct of its business and has no reason to believe that the conduct of its business will conflict with, and has not received any notice of any claim of conflict with, any such rights of others, nor, to the best of the Company's knowledge is there an infringement by others of such rights of the Company. (q) There are no legal or governmental proceedings pending to which the Company is a party or of which any property or assets of the Company is the subject which, if determined adversely to the Company, might have a material adverse effect on the financial position, stockholders' equity, results of operations, business or prospects of the Company; and to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. (r) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been properly described in the Prospectus and filed as exhibits to the Registration Statement. (s) No relationship, direct or indirect, exists between or among the Company on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company on the other hand, which is required to be described in the Prospectus which is not so described. (t) No labor disturbance by the employees of the Company exists or, to the knowledge of the Company, is imminent which might be expected to have a material adverse effect on the financial position, stockholders' equity, results of operations, business or prospects of the Company. (u) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of - 5 - ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (v) The Company has filed all federal state and local income and franchise tax returns required to be filed through the date hereof and has paid all taxes due thereon, and no tax deficiency has been determined adversely to the Company which has had (nor does the Company have any knowledge of any tax deficiency which, if determined adversely to the Company, might have) a material adverse effect on the financial position, stockholders' equity, results of operations, business or prospects of the Company. (w) Since the date as of which information is given in the Prospectus through the date hereof, and except as may otherwise be disclosed in the Prospectus, the Company has not (i) issued or granted any securities, (ii) incurred any liability or obligation, direct or contingent, other than liabilities and obligations which were incurred in the ordinary course of business, (iii) entered into any transaction not in the ordinary course of business or (iv) declared or paid any dividend on its capital stock. (x) The Company (i) makes and keeps accurate books and records and (ii) maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its assets is permitted only in accordance with management's authorization and (D) the reported accountability for its assets is compared with existing assets at reasonable intervals. (y) The Company (i) is not in violation of its charter or by-laws, (ii) is not in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement, lease, license or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject or (iii) except for any violation or failure to obtain that would not have a material adverse effect on the Company, is not in violation in any respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject or has failed to obtain any license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business. Each such indenture, mortgage, deed of trust, loan agreement, lease, license or other agreement is in full force and effect. - 6 - (z) Neither the Company, nor any director, officer, agent, employee or other person associated with or acting on behalf of the Company, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (aa) There has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company (or, to the knowledge of the Company, any of its predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company in material violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not have, or could not be reasonably likely to have, singularly or in the aggregate with all such violations and remedial actions, a material adverse effect on the financial position, stockholders' equity or results of operations of the Company; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or with respect to which the Company has knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which would not have or would not be reasonably likely to have, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, a material adverse effect on the financial position, stockholders' equity or results of operations of the Company; and the terms "hazardous wastes", "toxic wastes", "hazardous substances" and "medical wastes" shall have the meanings specified in any applicable local state, federal and foreign laws or regulations with respect to environmental protection. (bb) The Company is not "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. 2. Purchase of the Stock by the Underwriters. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement, the Company agrees to sell 3,500,000 shares of the Firm Stock to the several Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase the number of shares of the Firm Stock set opposite that Underwriter's name in Schedule 1 hereto. The respective purchase obligations of the Underwriters with respect to the Firm Stock shall be rounded among the Underwriters to avoid fractional shares, as the Representatives may determine. - 7 - In addition, the Company grants to the Underwriters an option to purchase up to 525,000 shares of Option Stock. Such option is granted solely for the purpose of covering overallotments in the sale of Firm Stock and is exercisable as provided in Section 4 hereof. Shares of Option Stock shall be purchased severally for the account of the Underwriters in proportion to the number of shares of Firm Stock set opposite the name of such Underwriters in Schedule 1 hereto. The respective purchase obligations of each Underwriter with respect to the Option Stock shall be adjusted by the Representatives so that no Underwriter shall be obligated to purchase Option Stock other than in 100 share amounts. The price of both the Firm Stock and any Option Stock shall be [$_____] per share. The Company shall not be obligated to deliver any of the Stock to be delivered on the First Delivery Date or the Second Delivery Date (as hereinafter defined), as the case may be, except upon payment for all the Stock to be purchased on such Delivery Date as provided herein. 3. Offering of Stock by the Underwriters. Upon authorization by the Representatives of the release of the Firm Stock, the several Underwriters propose to offer the Firm Stock for sale upon the terms and conditions set forth in the Prospectus. It is understood that [____________] shares of the Firm Stock will initially be reserved by the several Underwriters for offer and sale upon the terms and conditions set forth in the Prospectus and in accordance with the rules and regulations of the National Association of Securities Dealers, Inc. to employees and persons having business relationships with the Company who have heretofore delivered to the Representatives indications of interest to purchase shares of Firm Stock in form satisfactory to the Representatives, and that any allocation of such Firm Stock among such persons will be made in accordance with timely directions received by the Representatives from the Company; provided, that under no circumstances will the Representatives or any Underwriter be liable to the Company or to any such person for any action taken or omitted in good faith in connection with such offering to employees and persons having business relationships with the Company. It is further understood that any shares of such Firm Stock which are not purchased by such persons will be offered by the Underwriters to the public upon the terms and conditions set forth in the Prospectus. 4. Delivery of and Payment for the Stock. Delivery of and payment for the Firm Stock shall be made at the offices of Lehman Brothers Inc., Three World Financial Center, New York, New York 10285, at 10:00 A.M., New York City time, on the [third] full business day following the Effective Date or at such other date or place as shall be determined by agreement between the Representatives and the Company. This date and time are sometimes referred to as the "First Delivery Date." On the First Delivery Date the Company shall deliver or cause to be delivered certificates representing the Firm Stock to the Representatives for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by certified or official bank check or checks payable in New York Clearing House (same-day) funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. - 8 - Upon delivery, the Firm Stock shall be registered in such names and in such denominations as the Representatives shall request in writing not less than two full business days prior to the First Delivery Date. For the purpose of expediting the checking and packaging of the certificates for the Firm Stock, the Company shall make the certificates representing the Firm Stock available for inspection by the Representatives in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the First Delivery Date. At any time on or before the thirtieth day after the Effective Date the option granted in Section 2 may be exercised by written notice being given to the Company by the Representatives. Such notice shall set forth the aggregate number of shares of Option Stock as to which the option is being exercised, the names in which the shares of Option Stock are to be registered, the denominations in which the shares of Option Stock are to be issued and the date and time, as determined by the Representatives, when the shares of Option Stock are to be delivered; provided, however, that this date and time shall not be earlier than the First Delivery Date nor earlier than the second business day after the date on which the option shall have been exercised nor later than the fifth business day after the date on which the option shall have been exercised. The date and time the shares of Option Stock are delivered are sometimes referred to as the "Second Delivery Date" and the First Delivery Date and the Second Delivery Date are sometimes each referred to as a "Delivery Date". Delivery of and payment for the Option Stock shall be made at the place specified in the first sentence of the first paragraph of this Section 4 (or at such other place as shall be determined by agreement between the Representatives and the Company) at 10:00 A.M., New York City time, on the Second Delivery Date. On the Second Delivery Date, the Company shall deliver or cause to be delivered the certificates representing the Option Stock to the Representatives for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by certified or official bank check or checks payable in New York Clearing House (next-day) funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall be registered in such names and in such denominations as the Representatives shall request in the aforesaid written notice. For the purpose of expediting the checking and packaging of the certificates for the Option Stock, the Company shall make the certificates representing the Option Stock available for inspection by the Representatives in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the Second Delivery Date. 5. Further Agreements of the Company. The Company agrees: (a) To prepare the Prospectus in a form approved by the Representatives and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than the Commission's close of business on the day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act; to make no further amendment or any supplement to the Registration Statement or to the Prospectus except as permitted herein; to advise the Representatives, promptly after it receives notice thereof, of the time when - 9 - any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof; to advise the Representatives, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Stock for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal; (b) To furnish promptly to each of the Representatives and to counsel for the Underwriters a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith; (c) To deliver promptly to the Representatives such number of the following documents as the Representatives shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case excluding exhibits other than this Agreement) and (ii) each Preliminary Prospectus, the Prospectus and any amended or supplemented Prospectus; and, if the delivery of a prospectus is required at any time after the Effective Time in connection with the offering or sale of the Stock or any other securities relating thereto and if at such time any events shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the fight of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary to amend or supplement the Prospectus in order to comply with the Securities Act, to notify the Representatives and, upon their request, to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of an amended or supplemented Prospectus which will correct such statement or omission or effect such compliance. (d) To file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the reasonable judgment of the Company or the Representatives, be required by the Securities Act or requested by the Commission; (e) Prior to filing with the Commission any amendment to the Registration Statement or supplement to the Prospectus or any Prospectus pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to the Representatives - 10 - and counsel for the Underwriters and obtain the consent of the Representatives to the filing; (f) As soon as practicable after the Effective Date, to make generally available to the Company's security holders and to deliver to the Representatives an earning statement of the Company (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158); (g) For a period of five years following the Effective Date, to furnish to the Representatives copies of all materials furnished by the Company to its stockholders and all public reports and all reports and financial statements furnished by the Company to the principal national securities exchange upon which the Common Stock may be listed pursuant to requirements of or agreements with such exchange (or the Nasdaq National Market if the Common Stock is so listed thereon) or to the Commission pursuant to the Exchange Act or any rule or regulation of the Commission thereunder; (h) Promptly from time to time to take such action as the Representatives may reasonably request to quality the Stock for offering and sale under the securities laws of such jurisdictions as the Representatives may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of the Stock; provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (i) For a period of 180 days from the date of the Prospectus, not to, directly or indirectly, offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock (other than the Stock and shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing on the date hereof or pursuant to currently outstanding options, warrants or rights), sell or grant options, rights or warrants with respect to any shares of Common Stock (other than the grant of options pursuant to option plans existing on the date hereof), or waive the restrictions on sale contained in any agreement or award letter to which the options or shares of Common Stock of any officer or director of the Company are subject without the prior written consent of Lehman Brothers Inc.; and to cause each person that was a stockholder of the Company prior to the issuance of the Stock to be sold hereunder to agree not to, directly or indirectly, offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock for a period of 180 days from the date of the Prospectus, without the prior written consent of Lehman Brothers Inc.; - 11 - (j) Prior to the Effective Date, to apply for the inclusion of the Stock on the Nasdaq National Market System and to use its best efforts to complete that inclusion, subject only to official notice of issuance or the effectiveness of the Registration Statement and evidence of satisfactory distribution, prior to the First Delivery Date; (k) Prior to filing with the Commission any reports on Form SR pursuant to Rule 463 of the Rules and Regulations, to furnish a copy thereof to the counsel for the Underwriters and receive and consider its comments thereon, and to deliver promptly to the Representatives a signed copy of each report on Form SR filed by it with the Commission; (l) To apply the net proceeds from the sale of the Stock being sold by the Company as set forth in the Prospectus; and (m) To comply with all registration, filings and reporting requirements of the Exchange Act, which may from time to time be applicable to the Company and to comply with all provisions of all undertakings contained in the Registration Statement. 6. Expenses. The Company agrees to pay (a) the costs incident to the authorization, issuance, sale and delivery of the Stock and any taxes payable in that connection; (b) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement and any amendments and exhibits thereto; (c) the costs of distributing the Registration Statement as originally filed and each amendment thereto and any post-effective amendments thereof (including, in each case, exhibits), any Preliminary Prospectus, the Prospectus and any amendment or supplement to the Prospectus, all as provided in this Agreement; (d) the costs of printing and distributing this Agreement and any other related documents in connection with the offering, purchase, sale and delivery of the Stock; (e) the filing fees and expenses (including related fees and expenses of counsel to the Underwriters) incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of sale of the Stock; (f) any applicable listing or other fees; (g) the fees and expenses of qualifying the Stock under the securities laws of the several jurisdictions as provided in Section 5(h) and of preparing, printing and distributing a Blue Sky Memorandum (including related fees and expenses of counsel to the Underwriters); and (h) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement; provided that, except as provided in this Section 6 and in Section 11 the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Stock which they may sell and the expenses of advertising any offering of the Stock made by the Underwriters. 7. Conditions of Underwriters' Obligations. The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company contained herein, to the performance by the Company of its obligations hereunder, and to each of the following additional terms and conditions: - 12 - (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 5(a); no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (b) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Kramer, Levin, Naftalis & Frankel, counsel for the Underwriters, is material or omits to state a fact which in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Stock, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (d) Latham & Watkins shall have furnished to the Representatives their written opinion, as counsel to the Company, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, is duly qualified to do business and is in good standing as a foreign corporations in each jurisdiction in which its ownership or lease of property or the conduct of its businesses requires such qualification, except where the failure to be so qualified or in good standing would not have a material adverse effect on the Company, and has all power and authority necessary to own or hold its properties and conduct the business in which it is engaged; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus; the shares of Stock being delivered on such Delivery Date have been duly and validly authorized and issued, and, when issued and delivered to and paid for by the Underwriters pursuant to the terms of this Agreement, will be fully paid and non-assessable; and the shares of Stock being delivered on such Delivery Date conform to the - 13 - description thereof contained in the Prospectus. Upon delivery of the payment for the Stock to be sold by the Company to the Underwriters pursuant to this Agreement, each Underwriter (assuming that it acquires such Shares without notice of any adverse claim, as such term is used in Section 8-302 of the Uniform Commercial Code in effect in the State of New York) will acquire good and marketable title to the Stock so sold and delivered to it, free and clear of all liens, pledges, charges, claims, security interests, restrictions on transfer, agreements or other defects of title whatsoever (other than those resulting from any action taken by such Underwriter); (iii) Other than as set forth in the Prospectus, there are no preemptive or other rights to subscribe for or to purchase, nor any outstanding option, warrant or other right calling for the issuance of any share of capital stock of the Company or other instrument that by its terms is convertible into, exercisable for or exercisable for capital stock of the Company, nor any rights, by contract or otherwise, to require registration under the Securities Act of shares of Stock, nor any restriction upon the voting or transfer of, any shares of the Stock pursuant to the Company's charter or by-laws or any agreement or other instrument known to such counsel; (iv) To the best of such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company is a party or of which any property or assets of the Company is the subject which, if determined adversely to the Company, might have a material adverse effect on the financial position, stockholders' equity, results of operations, business or prospects of the Company; and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (v) The Registration Statement was declared effective under the Securities Act as of the date and time specified in such opinion, the Prospectus was filed with the Commission pursuant to the subparagraph of Rule 424(b) of the Rules and Regulations specified in such opinion on the date specified therein and no stop order suspending the effectiveness of the Registration Statement has been issued and, to the knowledge of such counsel, no proceeding for that purpose is pending or threatened by the Commission; (vi) The Registration Statement and the Prospectus and any further amendments or supplements thereto made by the Company prior to such Delivery Date (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations; (other than the financial statements and related schedules therein, as to which such counsel need express no opinion), when they were filed with the - 14 - Commission complied as to form in all material respects with the requirements of and the rules and regulations of the Commission thereunder; (vii) To the best of such counsel's knowledge, there are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations; (viii) This Agreement has been duly authorized, executed and delivered by the Company, and when duly executed by the proper officers of the Company and delivered by the Company will constitute a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (wither considered in a proceeding in equity or at law) or an implied covenant of good faith and fair dealing; (ix) The Common Stock is duly authorized for listing on the Nasdaq National Market, subject only to official notice of issuance; (x) The issue and sale of the shares of Stock being delivered on such Delivery Date by the Company and the compliance by the Company with all of the provisions of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or result in a material breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease, license or other agreement or instrument known to such counsel to which the Company is a party or by which the Company is bound or to which any of the property or assets of the Company is subject, nor will such action result in any violation of the provisions of the charter or by-laws of the Company, nor will such actions result in any violation of any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company or any of its properties or assets; and, except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby; (xi) To the best of such counsel's knowledge, there are no contracts, agreements or understandings between the Company and any person - 15 - granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act; and (xii) No consent of any party to any material contract, agreement, instrument, lease or license known to such counsel to which the Company is a party, or to which any of its properties or assets are subject, is required for the execution, delivery, or performance of this Agreement, or the sale or delivery of the Stock. In rendering such opinion, such counsel may state that its opinion is limited to matters governed by the Federal laws of the United States of America, the laws of the State of New York and the General Corporation Law of the Sate of Delaware. Such counsel shall also have furnished to the Representatives a written statement, addressed to the Underwriters and dated such Delivery Date, in form and substance satisfactory to the Representatives, to the effect that (x) such counsel has acted as counsel to the Company on a regular basis and has acted as counsel to the Company in connection with the preparation of the Registration Statement, and (y) based on the foregoing, no facts have come to the attention of such counsel which lead it to believe that the Registration Statement, as of the Effective Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that the Prospectus as of the Closing Date contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no view with respect to the financial statements and schedules and other financial, accounting and statistical data included therein, or with respect to the exhibits to the Registration Statement or with respect to any information furnished by or on behalf of the Underwriters). (e) The Representatives shall have received from Kramer, Levin, Naftalis & Frankel, counsel for the Underwriters, such opinion or opinions, dated such Delivery Date, with respect to the issuance and sale of the Stock, the Registration Statement, the Prospectus and other related matters as the Representatives may reasonably require, and the Company shall have finished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (f) At the time of execution of this Agreement, the Representatives shall have received from Coopers & Lybrand L.L.P. a letter, in form and substance satisfactory to the Representatives, addressed to the Underwriters and dated the date hereof (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date hereof (or, with respect to matters involving changes or - 16 - developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants' "comfort letters" to underwriters in connection with registered public offerings. (g) With respect to the letter of Coopers & Lybrand L.L.P. referred to in the preceding paragraph and delivered to the Representatives concurrently with the execution of this Agreement (the "initial letter"), the Company shall have furnished to the Representatives a letter (the "bring-down letter") of such accountants, addressed to the Underwriters and dated such Delivery Date (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter. (h) The Company shall have furnished to the Representatives a certificate, dated such Delivery Date, of its Chairman of the Board or its President and its chief financial officer stating that: (i) The representations, warranties and agreements of the Company in Section 1 are true and correct as of such Delivery Date; the Company has complied with all its agreements contained herein; and the conditions set forth in Sections 7(a) and 7(l) have been fulfilled; and (ii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion (A) as of the Effective Date, the Registration Statement and Prospectus did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) since the Effective Date no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement or the Prospectus. (i) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion flood, or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus or (ii) since such date there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any - 17 - development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company and its subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is, in the judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (j) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market, shall have been suspended or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by Federal or state authorities, (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the judgment of a majority in interest of the several Underwriters, impracticable or inadvisable to proceed with the public offering or delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (k) The Nasdaq National Market shall have approved the Stock for inclusion subject only to official notice of issuance or effectiveness of the Registration Statement and evidence of satisfactory distribution. (l) The National Association of Securities Dealers, Inc., upon review of the terms of the underwriting arrangements for the public offering of the Stock, shall have raised no objection thereto. (m) Prior to any Delivery Date, the Company shall have furnished to the Representatives such other information, Certificates and documents as they may reasonably request. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters. 8. Indemnification and Contribution. (a) The Company shall indemnify and hold harmless each Underwriter, its officers and employees and each person, if any, who controls any Underwriter within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any - 18 - action in respect thereof (including, but not limited to, any loss, claim damage, liability or action relating to purchases and sales of Stock), to which that Underwriter, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto or (B) in any blue sky application or other document prepared or executed by the Company (or based upon any written information furnished by the Company) specifically for the purpose of qualifying any or all of the Stock under the securities laws of any state or other jurisdiction (any such application, document or information being hereinafter called a "Blue Sky Application"), (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon matters covered by clause (i) or (ii) above (provided that the Company shall not be liable under this clause (iii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct), and shall reimburse each Underwriter and each such officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter, officer, employee or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any such amendment or supplement, or in any Blue Sky Application, in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Underwriter or to any officer, employee or controlling person of that Underwriter. The foregoing indemnity agreement with respect to any Preliminary Prospectus, Prospectus or Registration Statement shall not inure to the benefit of any Underwriter from whom the person asserting any such loss, claims, damages or liabilities purchased Stock (its officers and employees or any person who controls such Underwriter within the meaning of the Securities Act) if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if such is required by law, at or prior to the written confirmation of the sale of such Stock to such person and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability; provided, that the - 19 - Company has complied with its obligation under Section 5(c) of this Agreement to provide copies of the Prospectus to such Underwriter. (b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, each of its officers who signed the Registration Statement, each of its directors, and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company or any such director, officer or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of that Underwriter specifically for inclusion therein, and shall promptly reimburse the Company and any such director, officer or controlling person for any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to the Company or any such director, officer, employee or controlling person. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 8 except to the extent it has been materially prejudiced by such failure; and provided further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnifying party, otherwise than under this Section 8. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the Representatives shall have the right to employ counsel to represent jointly the Representatives and those other Underwriters and their respective officers, employees and controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by - 20 - the Underwriters against the Company under this Section 8 if, in the reasonable judgment of the Representatives, it is advisable for the Representatives and those Underwriters, officers, employees and controlling persons to be jointly represented by separate counsel, and in that event the fees and expenses of such separate counsel shall be paid by the Company. No indemnifying party shall (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such class action, suit or proceeding, or (ii) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with the consent of the indemnifying party or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or 8(b) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Stock purchased under this Agreement (after deducting expenses) received by the Company, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Stock purchased under this Agreement, on the other hand, bear to the total net proceeds from the offering of the shares of the Stock under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 8 shall be - 21 - deemed to include, for purposes of this Section 8(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Stock underwritten by it and distributed to the public was offered to the public exceeds the amount of any damages which such Underwriter has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 8(d) are several in proportion to their respective underwriting obligations and not joint. (e) The Underwriters severally confirm and the Company acknowledges that the statements with respect to the public offering of the Stock by the Underwriters set forth on the cover page of, the legend concerning over-allotments on the inside front cover page of, and the first two paragraphs appearing under the caption "Underwriting" in, the Prospectus are correct and constitute the only information concerning such Underwriters furnished in writing to the Company by or on behalf of the Underwriters specifically for inclusion in the Registration Statement and the Prospectus. 9. Defaulting Underwriters. If, on either Delivery Date, any Underwriter defaults in the performance of its obligations under this Agreement, the remaining non-defaulting Underwriters shall be obligated to purchase the Stock which the defaulting Underwriter agreed but failed to purchase on such Delivery Date in the respective proportions which the number of shares of the Firm Stock set opposite the name of each remaining non-defaulting Underwriter in Schedule 1 hereto bears to the total number of shares of the Firm Stock set opposite the names of all the remaining non-defaulting Underwriters in Schedule 1 hereto; provided, however, that the remaining non-defaulting Underwriters shall not be obligated to purchase any of the Stock on such Delivery Date if the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed but failed to purchase on such date exceeds 9.09% of the total number of shares of the Stock to be purchased on such Delivery Date, and any remaining nondefaulting Underwriter shall not be obligated to purchase more than 110% of the number of shares of the Stock which it agreed to purchase on such Delivery Date pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the remaining non-defaulting Underwriters, or those other underwriters satisfactory to the Representatives who so agree, shall have the right, but shall not be obligated, to purchase, in such proportion as may be agreed upon among them, all the Stock to be purchased on such Delivery Date. If the remaining Underwriters or other underwriters satisfactory to the Representatives do not elect to purchase the shares which the defaulting Underwriter or Underwriters agreed but failed to purchase on such Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the obligation of the Underwriters to purchase, and of the Company to sell, the Option Stock) shall terminate without liability on the part of any non-defaulting Underwriter or the Company, except that the Company will continue to be liable for the payment of expenses to the extent set forth in Sections 6 and 11. As used in this Agreement, - 22 - the term "Underwriter" includes, for all purposes of this Agreement unless the context requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to this Section 9, purchases Firm Stock which a defaulting Underwriter agreed but failed to purchase. Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company for damages caused by its default. If other underwriters are obligated or agree to purchase the Stock of a defaulting or withdrawing Underwriter, either the Representatives or the Company may postpone the Delivery Date for up to seven full business days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Underwriters may be necessary in the Registration Statement, the Prospectus or in any other document or arrangement. 10. Termination. The obligations of the Underwriters hereunder may be terminated by the Representatives by notice given to and received by the Company prior to delivery of and payment for the Firm Stock if, prior to that time, any of the events described in Sections 7(i) or 7(j) shall have occurred or if the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement. 11. Reimbursement of Underwriters' Expenses. If the Company shall fail to tender the Stock for delivery to the Underwriters by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled, the Company will reimburse the Underwriters for all reasonable out-of-pocket expenses (including fees and disbursements of counsel) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Stock, and upon demand the Company shall pay the full amount thereof to the Representatives. If this Agreement is terminated pursuant to Section 9 by reason of the default of one or more Underwriters, the Company shall not be obligated to reimburse any defaulting Underwriter on account of those expenses. 12. Notices, etc. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) if to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to Lehman Brothers Inc., Three World Financial Center, New York, New York 10285, Attention: Syndicate Department (Fax: 212-526- 6588), with a copy, in the case of any notice pursuant to Section 8(c), to the Director of Litigation, Office of the General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY 10285; (b) if to the Company, shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: John W. Lyle (Fax:____________); provided, however, that any notice to an Underwriter pursuant to Section 8(c) shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its - 23 - acceptance telex to the Representatives, which address will be supplied to any other party hereto by the Representatives upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the Representatives. 13. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company, and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (A) the representations, warranties, indemnities and agreements of the Company contained in this Agreement shah also be deemed to be for the benefit of the person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act and (B) the indemnity agreement of the Underwriters contained in Section 8(b) of this Agreement shall be deemed to be for the benefit of directors of the Company, officers of the Company who have signed the Registration Statement and any person controlling the Company within the meaning of Section 15 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 13, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 14. Survival. The respective indemnities, representations, warranties and agreements of the Company and the Underwriters contained in this Agreement or made by or on behalf on them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Stock and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them. 15. Definition of the Term "Business Day". For purposes of this Agreement, "business day" means any day on which the New York Stock Exchange, Inc. is open for trading. 16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF NEW YORK. 17. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. 18. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. - 24 - [Balance of Page Intentionally Blank] - 25 - If the foregoing correctly sets forth the agreement of the Company and the Underwriters, please indicate your acceptance in the space provided for that purpose below. Very truly yours, ALGOS PHARMACEUTICAL CORPORATION By:_________________________________ Name: Title: Accepted: LEHMAN BROTHERS INC. COWEN & COMPANY For themselves and as Representatives of the Several Underwriters named in Schedule 1 hereto By LEHMAN BROTHERS INC. By ______________________________ Authorized Representative By COWEN & COMPANY By ______________________________ Authorized Representative - 26 - SCHEDULE 1
Number of Underwriters Shares - ------------ --------- Lehman Brothers Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . Cowen & Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- 27 - EX-4 3 EXHIBIT 4.1 SEE REVERSE FOR CERTAIN DEFINITION ALGOS PHARMACEUTICAL CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE COMMON STOCK THIS IS TO CERTIFY that CUSIP is the owner of full-paid and non-assessable shares of Common Stock of the par value of One Cent ($.01) each of ALGOS PHARMACEUTICAL CORPORATION CERTIFICATE OF STOCK transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent. WITNESS the facsimile seal of the Corporation and the signatures of its duly authorized officers. Dated [SEAL] /s/ James Ledley /s/ John W. Lyle ASSISTANT SECRETARY PRESIDENT COUNTERSIGNED AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, N.Y.) BY TRANSFER AGENT AUTHORIZED SIGNATURE AMERICAN BANKNOTE COMPANY 800 BLAIR MILL ROAD MONGHAN, PA 19011 215-857-3480 SALESPERS0N- J. NAPOLITANO-212-657-8100 /home/ed/inprogress/home11/Algos46284 PRODUCTION COORDINATOR - ALBERT DERMOVSPSIAN - 215-620-2100 PROOF OF SEPTEMBER 9, 1998 ALGOS PHARMACEUTICAL H46264bk Opr. eg NEW /net/banknote/home11/A The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - __________Custodian___________ TEN ENT - as tenants by the portfolios (Cust) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act_____________ in common (State)
Additional abbreviations may also be used though not in the above list. For Value Received, _______________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ___________________________________ ______________________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVENT PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. AMERICAN BANKNOTE COMPANY 850 BLAIR MILL ROAD HORGHAM, PA 19316 215-857-3100 SALESPERS0N- J. NAPOLITANO-212-657-8100 /home/ed/inprogress/home11/Algos46284 PRODUCTION COORDINATOR - ALBERT DERMOVSPSIAN - 215-620-2100 PROOF OF SEPTEMBER 9, 1998 ALGOS PHARMACEUTICAL H46264bk Opr. eg NEW /net/banknote/home11/A EX-10 4 EXHIBIT 10.5.1 COLLINGWOOD PLAZA LEASE AGREEMENT with U.S. MEDICAL TECHNOLOGIES, INC. INDEX
Section Page No. 1 DESCRIPTION 1 2 LANDLORD'S WORK AND ROOF REPAIR 2 3 TERM 2 4 BASIC RENT 2 5 ASSIGNMENT, SUBLETTING 3 6-A RULES, REGULATIONS 5 6-B REFUSE ADMISSION 6 7 DAMAGES TO BUILDING/WAIVER OF SUBROGATION 6 8 EMINENT DOMAIN 8 9-A BANKRUPTCY OF TENANT 9 9-B DEFAULT OF TENANT 10 10 LESSOR'S REMEDIES ON DEFAULT 10 11 DEFICIENCY 11 12 SUBORDINATION OF LEASE 13 13 SECURITY DEPOSIT 14 14 RIGHT TO CURE LESSEE'S BREACH 15 15 MECHANIC'S LIENS 16 16 RIGHT TO INSPECT AND REPAIR 16 17 SERVICES TO BE PROVIDED BY LESSOR/LESSOR'S EXCULPATION 16
ii INDEX
Section Page No. 18 INTERRUPTION OF SERVICES OR USE 17 19 UTILITIES 18 20 ADDITIONAL RENT 18 21 LESSEE'S ESTOPEL 22 22 RIGHT TO SHOW PREMISES 22 23 WAIVER OF JURY TRIAL/NON MANDATORY COUNTERCLAIMS 23 24 LATE CHARGE 23 25 INSURANCE 23 -A LESSEE'S INSURANCE 23 -B LESSOR'S INSURANCE 27 -C WAIVER OF SUBROGATION 28 26 NO OTHER REPRESENTATIONS 28 27 QUIET ENJOYMENT 28 28 INDEMNITY 28 29 APPLICABILITY TO HEIRS AND ASSIGNS 29 30 PARKING SPACES 30 31 LESSOR'S EXCULPATION 30 32 RULES OF CONSTRUCTION/APPLICABLE LAW 31 33 BROKER 32
iii INDEX
Section Page No. 34 PERSONAL LIABILITY 33 35 NO OPTIONS 33 36 DEFINITIONS 34 37 LEASE COMMENCEMENT 35 38 NOTICES 36 39 ACCORD AND SATISFACTION 36 40 EFFECT OF WAIVERS 37 41 MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE 37 42 LESSOR'S RESERVED RIGHTS 38 43 CORPORATE AUTHORITY 38 44 GOVERNMENT REQUIREMENTS 39 45 ADDITIONAL CHARGES 39 46 INTERPRETATION 39 47 HOLDING OVER 39 48 TENANT'S OPTION TO EXPAND OR CANCEL 40 49 TENANT'S OPTION TO EXTEND 40
iv LEASE, made the 3rd day of March, 1992, between COLLINGWOOD PLAZA ASSOCIATES (hereinafter called 'Lessor or Landlord'), whose address is 4900 Route 33, Wall Township, New Jersey 07719, and U.S. MEDICAL TECHNOLOGIES, INC., of the State of New Jersey (hereinafter called 'Lessee or Tenant'), whose address is 28 Inlet Terrace, Belmar, New Jersey 07719. WITNESSETH: For and in consideration of the covenants herein contained, and upon the terms and conditions herein set forth, Lessor and Lessee agree as follows: 1. DESCRIPTION. Lessor hereby leases to Lessee, and Lessee hereby hires from Lessor, for use as executive offices and/or sales offices, the following space: Approximately 999 (867 square feet office space and 132 square feet common area) rentable square feet on the second (2nd) floor along with an option, at tenants discretion to rent 1,000 square feet basement storage space (hereinafter called 'Demised Premises' or 'Premises') which includes an allocable share of the Common Facilities, as shown on the plan or plans, initialed by the parties hereto, marked Exhibit A attached hereto and made part of this Lease in the building known as Collingwood Plaza located at 4900 Route 33, Wall Township, New Jersey, Lot 54, Block 907, on the tax map of the Township of Wall, (hereinafter called the 'Building'), which is situated on that certain parcel of land (hereinafter called 'Office Building Area') as described on 1 Exhibit A attached hereto and made part of this Lease, together with the right to use in common with other leases of the Building, their invitee, customers and employees, those public areas of the Common Facilities as hereinafter defined. 2. LANDLORD'S WORK AND ROOF REPAIR. (a) Landlord's Work. Landlord agrees to make the improvements in the Demised Premises specified in Exhibit B annexed hereto, if any such work is specified thereon and said work (hereinafter called 'Landlord's Work') shall be substantially completed prior to the commencement of the term of this Lease. Architecture, materials used in construction, and structural details of the Landlord's Work shall be the choice of Landlord except as may otherwise be specifically provided in Exhibit B. Landlord may substitute material provided they are equal in quality. (b) Roof Repair. Notwithstanding anything herein to the contrary, any presently existing roof leakage in the Demised Premises will be repaired and all ceiling tiles replaced at Landlord's expense and Landlord agrees to immediately correct at its own expense any subsequent leakage or damage to the roof, ceiling, tiles, interior space and furnishings in the Demised Premises. 3. TERM. The Premises are leased for a term of five (5) years, commencing on April 1, 1992 and to end at 12:00 midnight on March 31, 1997 (hereinafter referred to as the 'Term' or 'Lease Term'). 4. BASIC RENT. The Lessee shall pay to Lessor during 2 the Lease Term basic rent in the amount set forth in the following schedule (hereinafter 'rent' or 'basic rent'), payable in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The basic rent shall be payable in advance on the first day of each calendar month during the Lease Term in the amount indicated in the following schedule:
RENTAL RATE ANNUALLY MONTHLY - -------------------------------------------------------------------------------------- ---------- ------- Years 1, 2 & 3: $11.00 psf plus utility & janitorial $10,989.00 $915.75 * 1,000 square feet storage at $5.25 psf $ 5,250.00 $437.50 Year 4 and 5: $11.50 psf plus utility & janitorial $11,488.50 $957.37 * 1,000 square feet storage at $5.475 psf $ 5,475.00 $456.25
5. ASSIGNMENT, SUBLETTING. Tenant shall not assign, mortgage or encumber this Lease, or sublet, underlet, license or permit the Demised Premises or any part thereof to be used by others, whether voluntarily or by operation of law or otherwise, without the prior written consent of Landlord in each instance which consent shall not be unreasonably withheld or delayed, except that tenant may sublet the demised premises for any lawful purpose to any subtenant consistent with the quality of tenants in the building. The sale or transfer of greater than FIFTY PERCENT (50%) of the stock of Tenant, if Tenant be a corporation, or, if Tenant be a partnership or joint venture, a sale of an interest in such partnership or joint venture shall be deemed an - -------------------------------------------------------------------------------- * Optional storage space 3 assignment of this Lease, unless (i) it is made amongst the existing stockholders, partners or joint venturers of Tenant; or (ii) it results from the death of a stockholder, partner or joint venturer of Tenant. Any form or manner of merger or reorganization of a corporate Tenant which results in a shift of control or management rights to new principals or stockholders shall be deemed to be an assignment of this Lease. If this Lease be assigned or if the Demised Premises or any part thereof be underlet or occupied by any person or entity other than Tenant, Landlord may collect rent from the assignee, undertenant or occupant, and apply the net amount collected to all rent and/or additional charges herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant or the acceptance of the assignee, undertenant or occupant as tenant, or a release of any performance of the covenants on Tenant's part herein contained. Any consent by Landlord to an assignment or underletting shall not in any manner be construed to relieve Tenant or any assignee or undertenant from obtaining the consent in writing of Landlord to any further assignment or underletting. Valid consent shall not be unreasonably delayed or withheld. Any assignment or sublease made by Tenant without Landlord's prior written consent shall be void and a default under this Lease, giving Landlord the right to exercise all of its remedies hereunder, including but not limited to the right to terminate this lease. Included within and in addition to any other conditions 4 or obligations imposed upon Tenant or its successor in the event of an assumption and/or assignment are the following: (i) the cure of any monetary defaults and the reimbursement or pecuniary loss within not more than thirty (30) days of assumption and/or assignment; and (ii) the use of the Demised Premises for the permitted uses unchanged; and (iii) in the case of any proceedings under the U.S. Bankruptcy Code the reorganized debtor or assignee of such debtor in possession or of Tenant's trustee demonstrates in writing that it has sufficient background including, but not limited to, substantial rental experience in office buildings of comparable size and financial ability to operate a similar business establishment out of the leased premises in the manner contemplated in this Lease and meet all other reasonable criteria of Landlord as did Tenant upon execution of this Lease; and (iv) the prior written consent of any mortgagee to which this Lease has been assigned as collateral security; and (v) the Demised Premises, at all times, remains substantially the same and no physical changes of any kind may be made to the premises unless in compliance with the applicable provisions of this Lease. 6. A. RULES, REGULATIONS. Tenant agrees that at all times during the term of this lease it shall comply with all rules and regulations together with all reasonable amendments, modifications, deletions and other reasonable rules and regulations for the use and occupancy of the Office Building as Landlord may from time to time promulgate, on written notice to 5 Lessee, for the safety, care and cleanliness of the Building and the comfort, quiet and convenience of other occupants of the Building. Rules and Regulations, when published must be reasonable and uniformly applied to all tenants. Lessee shall not place a load upon any floor of the Demised Premises exceeding the floor load per square foot which it was designed to carry and which is allowed by law. Lessor reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Lessee, at Lessee's expense, in settings sufficient, in Lessor's judgment, to absorb and prevent vibration, noise and annoyance. B. REFUSE ADMISSION. Landlord reserves the right to refuse admissions to the Office Building and the Demised Premises, outside of ordinary business hours, to any person not known to any watchman in charge or properly identified to eject any person from the Office Building whose conduct may tend to be harmful to the safety and interests of the tenants and the property therein; to close any part of the Office Building during any riot or other commotion where person or property may be imperiled. 7. DAMAGES TO BUILDING/WAIVER OF SUBROGATION. If the Building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Lessor, will equal or exceed twenty-five (25%) percent of the replacement value of the Building (exclusive of foundations) just prior to 6 the occurrence of the damage or if any damage to the Premises costing more than Fifty Thousand and 00/100 ($50,000.00) Dollars occurs within the last twelve (12) months of the Lease Term, then Lessor may, no later than the sixtieth (60th) day following the damage, give Lessee a notice of election to terminate this Lease, or, if the cost of restoration will equal or exceed fifty (50%) percent of such replacement value and if the Premises shall not be reasonably usable for the purpose for which they are leased hereunder, then Lessee may, no later than the sixtieth (60th) day following the damage, give Lessor a notice of election to terminate this Lease. In either said event of election, this Lease shall be deemed to terminate on the thirtieth (30th) day after the giving of said notice, and Lessee shall surrender possession of the premises within a reasonable time thereafter; and the basic rent, and any Additional Rent paid for any period beyond the latter of the thirtieth (30th) day after said notice or the date Lessee surrenders possession shall be repaid to Lessee. If the cost of restoration shall not entitle Lessor to terminate this Lease, or if, despite the cost, Lessor does not elect to terminate this Lease pursuant to any right contained herein or if Lessor shall have no such right, Lessor shall restore the Building and the Premises with reasonable promptness, subject to Force Majeure, as hereinafter defined. In any case in which use of the Premises is affected by any damage to the Building, there shall be either an abatement or an equitable reduction in basic rent based upon any decrease in 7 usable square footage depending on the period for which and the extent to which the Premises are not reasonably usable for the purpose for which they are leased hereunder. The words 'restoration' and 'restore' as used in this Section shall include repairs. If the damage results from the fault of Lessee, or Lessee's agents, servants, visitors or licensees, Lessee shall not be entitled to any abatement or reduction in basic rent, except to the extent of any rent insurance received by Lessor. Notwithstanding the provisions of this Section of the Lease, in the event of any loss or damage to the Building, the Premises and/or any contents (herein 'property damage'), each party waives all claims against the other for any such loss or damage and each party shall look only to any insurance which it has obtained to protect against such loss (or in the case Lessee, waives all claims against any tenant of the Building that has similarly waived claims against such Lessee) and each party shall obtain, for each policy of such insurance, provisions waiving any claims against the other party (and against any other tenant(s) in the Building that has waived subrogation against the Lessee) for loss or damage within the scope of such insurance. 8. EMINENT DOMAIN. If Lessee's use of the Premises is materially affected due to the taking by eminent domain of (a) the Premises or any part thereof or any estate therein; or (b) any other part of the Building; then, in either event, this Lease shall terminate on the date when title vests pursuant to such taking. The rent, and any Additional Rent, shall be apportioned 8 as of said termination date and any basic or Additional Rent paid for any period beyond said date shall be repaid to Lessee. In the event of a partial taking which does not affect a termination of this Lease but does deprive Lessee of the use of a portion of the Demised Premises, there shall either be an abatement or an equitable reduction of the basic rent based upon any decrease in usable square footage depending on the period for which and the extent to which the Premises so taken are not reasonably usable for the purpose for which they are leased hereunder. Lessee shall not be entitled to any part of the award for such taking or any payment in lieu thereof, but Lessee may file a separate claim for any taking of fixtures and improvements owned by Lessee which have not become Lessor's property, and for moving expenses, provided the same shall in no way affect or diminish Lessor's award. 9. BANKRUPTCY OF TENANT. A. Upon the filing of a petition by or against Tenant under the Bankruptcy Code, Tenant, as debtor and as debtor in possession, and any trustee who may be appointed agree as follows: (i) to perform each and every obligation of Tenant under this Lease until such time as this Lease is either rejected or assumed by order of the United States Bankruptcy Court; and (ii) to pay monthly in advance on the first day of each month as reasonable compensation for use and occupancy of the Demised Premises an amount equal to all rent and other charges otherwise due pursuant to this Lease; and (iii) to reject or assume this Lease within sixty (60) days of the filing 9 of such petition under Chapter 7 of the Bankruptcy Code or within one hundred twenty (120) days (or such shorter term as Landlord, in its sole discretion, may deem reasonable so long as notice of such period is given) of the filing of a petition under any other Chapter; and (iv) to give Landlord at lease forty-five (45) days prior written notice of any proceeding relating to any assumption of this Lease; and (v) to give at least thirty (30) days prior written notice of any abandonment of the Demised Premises; any such abandonment to be deemed a rejection of this Lease; and (vi) to do all other things of benefit to Landlord otherwise required under the Bankruptcy Code; and (vii) to be deemed to have rejected this Lease in the event of the failure to comply with any of the above; and (viii) to have consented to the entry of an order by an appropriate United States Bankruptcy Court providing all of the above, waiving notice and hearing of the entry of same. B. No default of this Lease by Tenant, either prior to or subsequent to the filing of such a petition, shall be deemed to have been waived unless expressly done so in writing by Landlord. 10. LESSOR'S REMEDIES ON DEFAULT. If Lessee defaults in the payment of basic rent, or any Additional Rent, or defaults in the performance of any of the other covenants and conditions hereof or permits the Premises to become deserted, abandoned or vacated, Lessor may give Lessee notice of such default, and if Lessee does not cure any basic rent or Additional Rent default 10 within five (5) days of the giving of such notice within forty-eight (48) hours of the giving of such notice or any other default within fifteen (15) days after giving of such notice (or if such other default is of such nature that it cannot be completely cured within such period, if Lessee does not commence such curing within such fifteen (15) days and thereafter proceed with reasonable diligence and in good faith to cure such default), then lessor may terminate this Lease on not less than ten (10) days' notice to Lessee, and on the date specified in said notice, Lessee's right to possession of the Demised Premises shall cease, and Lessee shall then quit and surrender the Premises to Lessor, but Lessee shall remain liable as hereinafter provided. If this Lease shall have been so terminated by Lessor, Lessor may at any time thereafter resume possession of the Premises by any lawful means and remove Lessee or other occupants and their effects. 11. DEFICIENCY. In any case where Lessor has recovered possession of the Premises by reason of Lessee's default, Lessor may, at Lessor's option, occupy the Premises or cause the Premises to be redecorated, altered, divided, consolidated with other adjoining premises, or otherwise changed or prepared for reletting, and may relet the Premises or any part thereof as agent of Lessee or otherwise, for a term or terms to expire prior to, at the same time as, or subsequent to, the original expiration date of this Lease, at Lessor's option, and receive the rent therefor. Rent so received shall be applied first to 11 the payment of such expenses as Lessor may have incurred in connection with the recovery of possession, redecorating, altering, dividing, consolidating with other adjoining premises, or otherwise changing or preparing for reletting, and the reletting, including brokerage and reasonable attorney's fees, and then to the payment of damages in amounts equal to the rent hereunder and to the costs and expenses of performance of the other covenants of Lessee as herein provided. Lessee agrees, in any such case, whether or not Lessor has relet, to pay to Lessor damages equal to the basic and Additional Rent and other sums herein agreed to be paid by Lessee, as and when due, less the net proceeds of the reletting, if any, as ascertained from time to time, as of the due date, and the same shall be payable by Lessee on the several rent days above specified, Lessee shall not be entitled to any surplus accruing as a result of any such reletting, nor shall any surplus be applied to offset the damages referred to in the preceding sentence. In reletting the Premises as aforesaid, Lessor may grant rent concessions, and Lessee shall not be credited therewith. No such reletting shall constitute a surrender and acceptance or be deemed evidence thereof. If Lessor elects, pursuant hereto, actually to occupy and use the Premises or any part thereof during any part of the balance of the Lease Term as originally fixed or since extended, there shall be allowed against Lessee's obligation for rent or damages as herein defined, during the period of Lessor's occupancy, the reasonable value of such occupancy, not to exceed in any event 12 the basic and Additional Rent herein reserved and such occupancy shall not be construed as a release of Lessee's liability hereunder. Said damages shall become due and payable to Lessor immediately upon such breach of this Lease and without regard to whether this Lease be terminated or not, and if this Lease be terminated, without regard to the manner in which it is terminated. In the computation of such damages, the difference between any installments of rent (basic and Additional) thereafter becoming due and the fair and reasonable rental value of the Premises for the period for which such installment was payable shall be discounted to the date of such default at the rate of not more than four (4%) percent per annum. Lessee hereby waives all right of redemption to which Lessee or any person under Leases might be entitled by any law now or hereafter in force. Lessor's remedies hereunder are in addition to any remedy allowed by law and notwithstanding any provision above to the contrary. Lessor shall at all times have the duty to mitigate its damages hereunder. Lessee agrees to pay, as Additional Rent, all reasonable attorney's fees and other expenses incurred by the Lessor in enforcing any of the obligations under this Lease, this covenant to survive the expiration or sooner termination of this Lease. 18. SUBORDINATION OF LEASE. This Lease and any option 13 contained herein shall, at Lessor's option, or at the option of any holder of any underlying lease or holder of any first mortgage or trust deed, be subject and subordinate to any such underlying leases and to any such first mortgage which may now or hereafter affect the real property of which the Premises form a part, and also to all renewals, modifications, consolidations and replacements of said underlying leases and said first mortgage. Although no instrument or act on the part of Lessee shall be necessary to effectuate such subordination, Lessee will, nevertheless, execute and deliver such further instruments confirming such subordination of this Lease as may be desired by the holders of said first mortgage or by any of the lessors under such underlying leases. If any underlying lease to which this Lease is subject terminates, Lessee shall, on timely request, attorn to the owner of the reversion. 13. SECURITY INTEREST. Lessee shall deposit with Lessor on the signing of this Lease a sum equal to one month rent as referred to in Paragraph 4 as security for the performance of Lessee's obligations under this Lease, including without limitation, the surrender of possession of the Premises to Lessor as herein provided. If Lessor applies any part of said deposit to cure any default of Lessee, Lessee shall on demand deposit with Lessor the amount so applied so that Lessor shall have the full deposit on hand at all times during the Term of this Lease. In the event of a bona fide sale, subject to this Lease, Lessor shall have the right to transfer the security to the vendee and 14 Lessor shall be considered released by Lessee from all liability for the return of such security; and Lessee agrees to look solely to the new Lessor for the return of said security, and it is agreed that this shall apply to every transfer or assignment made of the security to a new lessor. The security deposited as provided for herein shall not be mortgaged, assigned or encumbered by Lessee without the written consent of Lessor. In the event of the insolvency as defined by the U.S. Bankruptcy Code of Lessee, or in the event of the entry of a judgment of bankruptcy in any court against Lessee which is not discharged within thirty (30) days after entry, or in the event a petition is filed by or against Lessee under any chapter of the bankruptcy laws of the State of New Jersey or the United States of America, then in such event, Lessor may require the Lessee to deposit additional security in an amount equal to one (1) year's basic rent and Additional Rent (which Additional Rent shall be reasonably estimated by Lessor) to adequately assure Lessee's performance of all of its obligations under this Lease including all payments subsequently accruing. Failure of Lessee to deposit the security required by this Section within ten (10) days after Lessor's written demand shall constitute a material breach of this Lease by Lessee. Notwithstanding anything herein to the contrary, the security deposits shall be returned by Landlord to tenant within 18 months of the commencement of the term of the lease. 14. RIGHT TO CURE LESSEE'S BREACH. If Lessee breaches 15 any covenant or condition of this Lease, Lessor may, on reasonable written notice to Lessee (except that no notice need be given in case of emergency), cure such breach at the expense of Lessee and the reasonable amount of all expenses, including attorneys' fees, incurred by Lessor in so doing (whether paid by Lessor or not) shall be deemed Additional Rent payable on demand. 15. MECHANIC'S LIENS. Lessee shall, within fifteen (15) days after notice from Lessor, discharge or satisfy by bonding or otherwise any mechanic's liens for materials or labor claimed to have been furnished to the Premises on Lessee's behalf. Lessee shall not permit any Notice of Intentions to be filed against the Premises or Building or Office Building Area as a result of Lessee's acts and shall cause any such filings to be terminated within three (3) days. 16. RIGHT TO INSPECT AND REPAIR. Lessor may enter the Premises but shall not be obligated to do so (except as required by any specific provision of this Lease) at any reasonable time on reasonable notice to Lessee (except that no notice need be given in case of emergency) for the purpose of inspection or the making of such repairs, replacement or additions, in, to, on and about the Premises or the Building, as Lessor deems necessary or desirable. Lessee shall have no claims or cause of action against Lessor by reason thereof. 17. SERVICES TO BE PROVIDED BY LESSOR/LESSOR'S EXCULPATION. Subject to intervening laws, ordinances, regulations and executive orders, while Lessee is not in default 16 under any of the provisions of this Lease, Lessor agrees to furnish, except on holidays as set in Lessor's Rules and Regulations: A. Cold and hot water for drinking and lavatory purposes. B. Elevator service during Building Hours. C. Restroom supplies and exterior window cleaning when reasonably required, minimum twice yearly. D. Heating, Ventilation and Air Condition (HVAC) (at tenants' expense as referred to in paragraph 19). E. Refuse collection (by outside dumpster). 18. INTERRUPTION OF SERVICES OR USE. Interruption or curtailment of any service maintained in the Building or at the Office Building Area (unless caused by Force Majeure, as hereinafter defined) shall not entitle Lessee to any claim against Lessor or to any abatement of basic rent or Additional Rent, and shall not constitute a constructive or partial eviction, unless Lessor fails to take measures as may be reasonable under the circumstances to restore the service. If Lessor fails to take such measures as may be reasonable under the circumstances to restore the curtailed service, Lessee's remedies shall be limited to an abatement of basic rent or Additional Rent for the duration of the curtailment beyond said reasonable period or to a claim of constructive eviction. If the Premises are rendered untenantable in whole or in part, for a period of ten (ten) consecutive business days, by the making of repairs, 17 replacements or additions, other than those made with Lessee's consent or caused by misuse or neglect by Lessee, or Lessee's agents, servants, visitors or licensees, there shall be a proportionate abatement of rent from and after said tenth (10th) consecutive business day and continuing for the period of such untenantability. In no event shall Lessee be entitled to claim a constructive eviction from the Premises unless Lessee shall first have notified Lessor in writing of the condition or conditions giving rise thereto, and, if the complaints be justified, unless Lessor shall have failed, within a reasonable time after receipt of such notice, to remedy, or commence and proceed with due diligence to remedy, such condition or conditions, all subject to Force Majeure, as hereinafter defined. 19. UTILITIES. Tenant shall pay directly to the utility company, all charges for electricity, and natural gas consumed in or upon the Demised Premises, which shall be separately metered. 20. ADDITIONAL RENT. It is expressly agreed that Lessee will pay in addition to the basic rent, provided in Section 3 above, an additional rental to cover Lessee's Proportionate Share, as hereinafter defined, of the increased cost to Lessor, for each of the categories enumerated herein, over the 'Base Period Costs' (as hereinafter defined) for each of said categories. A. Tax Escalation. If the Real Estate Taxes for the Building and Office Building Area at which the Demised Premises 18 are located for any Lease Year or proportionate part thereof, during the Lease Term, shall be greater than the Base Real Estate Taxes (adjusted proportionately for periods less than a Lease Year), then Lessee shall pay to Lessor as Additional Rent, its Proportionate Share, as hereinafter defined, of all such excess Real Estate Taxes and, conversely, in the event of a reduction in Real Estate Taxes there shall be a reduction in Additional Rent on the same basis. As used in the Subsection 20(A), the words and terms which follow mean and include the following: (i) The Base Period Costs for Real Estate Taxes, herein the 'Base Real Estate Taxes,' shall be those real estate taxes assessed against the Building and Office Building Area during Calendar Year 1992 or such year thereafter as the site is reassessed to include the completed office building. (ii) 'Real Estate Taxes' shall mean the property taxes and assessments imposed upon the Building and Office Building Area, or upon the rent, as such, payable to Lessor, including, but not limited to, real estate, city, county, village, school and transit taxes, or taxes, assessments or charges levied, imposed, or assessed against the Building and Office Building Area by any other taxing authority, whether general or specific, ordinary or extraordinary, foreseen or unforeseen. If due to a future change in 19 the method of taxation, any franchise, income or profit tax shall be levied against Lessor in substitution for, or in lieu of, or in addition to, any tax which would otherwise constitute a Real Estate Tax, such franchise, income or profit tax shall be deemed to be a Real Estate Tax for the purposes hereof; conversely, any additional real estate tax hereafter imposed in substitution for, or in lieu of, any franchise, income or profit tax (which is not in substitution for, or in lieu of, or in addition to, a Real Estate Tax as hereinbefore provided) shall not be deemed a Real Estate Tax for the purposes hereof. Notwithstanding anything contained herein to the contrary, Lessee shall assume and pay to Lessor in full at the time of paying the basic rent any excise, sales, use, gross receipts or other taxes (other than a net income or excess profit tax) which may be imposed on or measured by such Fixed Basic Rent or may be imposed on or on account of the letting and which Lessor may be required to pay or collect under any law now in effect or hereafter enacted. B. Lease Year. As used in this Lease, Lease Year shall mean the twelve (12) month period commencing on the Commencement Date and each twelve (12) month period thereafter. Once the base costs are established, in the event any lease period is less than twelve (12) months, then the Base Period 20 Costs for the categories listed above shall be adjusted to equal the proportion that said period bears to twelve (12) months, and Lessee shall pay to Lessor as Additional Rent for such period, an amount equal to Lessee's Proportionate Share, as hereinafter defined, of the excess for said period over the adjusted base with respect to each of the aforesaid categories. C. Books and Records. For the protection of Lessee, Lessor shall maintain books of account which shall be open to Lessee and its representatives at all reasonable times so that Lessee can determine that such tax Costs have, in fact, been paid or incurred. Any disagreement with respect to any one or more of said charges if not satisfactorily settled between Lessor and Lessee shall be referred by either party to an independent certified public accountant to be mutually agreed upon, and if such an accountant cannot be agreed upon, the American Arbitration Association may be asked by either party to select an arbitrator, whose decision on the dispute will be final and binding upon both parties, who shall jointly share any cost of such arbitration. Pending resolution of said dispute, Lessee shall pay to Lessor the sum so billed by Lessor subject to its ultimate resolution as aforesaid. D. Right of Review. Once Lessor shall have finally determined said Tax Costs at the expiration of a Lease Year, then as to the item so established, Lessee shall only be entitled to dispute said charge as finally established for a period of six (6) months after such charge is finally established, and Lessee 21 specifically waives any rights to dispute any such charge at the expiration of said six (6) month period. 21. LESSEE'S ESTOPPEL. (A) Lessee shall, from time to time, within ten (10) days of Lessor's written request, execute, acknowledge and deliver to Lessor a written statement certifying that the Lease is unmodified and in full force and effect, or that the Lease is in full force and effect as modified and listing the instruments of modification; the dates to which the rents and charges have been paid to the best of Lessee's knowledge, whether or not Lessor is in default hereunder, and, if so, specifying the nature of the default; and any such other reasonable information as Lessor may request. It is intended that any such statement delivered pursuant to this Section may be relied on by a prospective purchaser of Lessor's interest or mortgagee of Lessor's interest or assignee of any mortgage of Lessor's interest. B. Lessee's failure to deliver such statement within such time shall be conclusive upon Lessee that: (i) this Lease is in full force and effect and not modified except as Lessor may represent; (ii) not more than one month's rent has been paid in advance; (iii) there are no such defaults; and, (iv) notices to Lessee shall be sent to Lessee's mailing address as set forth in this Lease. Notwithstanding the presumptions of this Section, Lessee shall not be relieved of its obligation to deliver said statement. 22. RIGHT TO SHOW PREMISES. Lessor may show the 22 Premises to prospective purchasers and mortgagees; and, during the twelve (12) months prior to termination of this Lease, to prospective tenants, during business hours on reasonable notice to Lessee. 23. WAIVER OF JURY TRIAL/NON-MANDATORY COUNTERCLAIMS. If Lessor commences any summary proceedings or an action for nonpayment of Rent, Tenant shall not interpose any non-mandatory counterclaim of any nature or description in any such proceedings or action. Lessee and Lessor both waive a trial by jury of any or all issues arising in any action or proceeding between the parties hereto or their successors, under or connected with this Lease, or any of its provisions. 24. LATE CHARGE. Anything in this Lease to the contrary notwithstanding, at Lessor's option, Lessee shall pay a 'Late Charge' of eight (8%) percent of any installment of basic rent or Additional Rent paid more than five (5) days after Landlords written notice to tenant the due date thereof for each monthly period or portion thereof that the same remains unpaid, such Late Charge to cover the extra expenses involved in handling delinquent payments. 25. INSURANCE. A. Lessee's Insurance. (1) Lessee covenants and represents, said representation being specifically designed to induce Lessor to execute this Lease, that during the entire Lease Term hereof, at its sole cost and expense, Lessee 23 shall obtain, maintain and keep in full force and effect the following insurance: (a) Comprehensive General Liability Insurance coverage to include personal injury, bodily injury, broad form property damage, operations hazard, owner's protective coverage, contractual liability, products and completed operations liability naming Lessor and Lessor's mortgagee or trust deed holder and ground lessors (if any) as additional named insured in limits of not less than Five Hundred Thousand and 00/100 ($500,000.00) Dollars, combined single limit. (b) Worker's Compensation insurance in form and amount as required by law. (c) Any other form or forms of insurance or any increase in the limits of any of the aforesaid enumerated coverage or other forms of insurance as Lessor or the mortgagees or ground lessors (if any) of Lessor may reasonably require from time to time if in the reasonable opinion of Lessor or said mortgagees or ground lessors said coverage and/or limits become inadequate or less than that commonly maintained by prudent tenants in similar buildings in the area by tenants making similar uses. (2) Tenant shall supply a certificate of 24 insurance from Traveler's Insurance Company within 30 days of the date of commencement of this lease. (3) In the event of damage to or destruction of the Building and/or Premises entitling Lessor or Lessee to terminate this Lease pursuant to the terms hereof, and if this Lease be so terminated, Lessee will immediately pay to Lessor all of its insurance proceeds, if any, relating to the leasehold improvements and alterations (but no Lessee's trade fixtures, equipment, furniture or other personal property of Lessee in the premises) which have become Lessor's property on installation or would have become Lessor's property at the Lease Term's expiration or sooner termination. If the termination of the Lease, at Lessor's election, is due to damage to the Building, and if the Premises have not been so damaged, Lessee will deliver to Lessor, in accordance with the provisions of this Lease, the improvements and alterations to the Premises which have become on installation or would have become at the Lease Term's expiration, Lessor's property. (4) Lessee agrees that it will not keep or use or offer for sale (if sales of goods is a permitted use pursuant to this Lease) in or upon the Premises or within the Building or Office Building Area any article which may be prohibited by any insurance policy in 25 force from time to time covering the Building or Office Building Area. In the event Lessee's occupancy or conduct of business in or on the Premises or Building or Office Building Area, whether or not Lessor has consented to the same, results in any increase in premiums for insurance carried from time to time by Lessor with respect to the Building or Office Building Area, Lessee shall pay such increase in premiums as Additional Rent within ten (10) days after being billed therefore by Lessor. In determining whether increased premiums are a result of Lessee's use and occupancy a schedule issued by the organization computing the insurance rate on the Building or Office Building Area showing the components of such rate shall be conclusive evidence of the items and charges making up such rate. Lessee shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Building, Office Building Area or Premises. (5) If any insurance policy carried by Lessor, as provided herein, shall be cancelled or cancellation shall be threatened or the coverage thereunder reduced or threatened to be reduced in any way by reason of the use or occupation of the Premises, Office Building Area or Building or any part thereof by Lessee or any assignee or sublessee of Lessee or anyone permitted by 26 Lessee to be upon the Premises, and if Lessee fails to remedy the conditions giving rise to said cancellation or threatened cancellation or reduction in coverage or before (i) forty-eight (48) hours after notice thereof from Lessor, or (ii) prior to said cancellation or reduction becoming effective, Lessee shall be in default hereunder and Lessor shall have all of the remedies available to Lessor pursuant to this Lease. B. Lessor's Insurance. Lessor covenants and agrees that throughout the Lease Term it will insure the Building (excluding any property with respect to which Lessee is obligated to insure pursuant this lease) against damage by fire and standard extended coverage perils and public liability insurance in such reasonable amounts with such reasonable deductibles as required by any mortgagee or ground lessor if none as would be carried by a prudent owner of a similar building in the area. Lessee further acknowledges that the exculpatory provisions of this Lease and the provisions of this Section as to Lessor's insurance are designed to insure adequate coverage as to Lessee's property and business without regard to fault and avoid Lessor obtaining similar coverage for said loss for its negligence or that of its agents, servants or employees which would result in double coverage for the same perils includable as part of Operating Expenses which are payable in part by Lessee. Lessor will not carry insurance of any kind on Lessee's furniture or furnishings, or on any fixtures, equipment, appurtenances or 27 improvements of Lessee under this Lease and Lessor shall not be obligated to repair any damage thereto or replace the same. C. Waiver of Subrogation. Any policy or policies of fire, extended coverage or similar casualty insurance, which either party obtains in connection with the Premises, Building or Office Building Area shall include a clause or endorsement denying the insurer any rights of subrogation against the other party (i.e. Lessor or Lessee) for all perils covered by said policy. Should such waiver not be available then the policy for which the waiver is not available must name the other party as an additional named insured affording it the same coverage as that provided the party obtaining said coverage. 26. NO OTHER REPRESENTATIONS. No representations or promises shall be binding on the parties hereto except those representations and promises contained herein or in some future writing signed by the party making such representation(s) or promise(s). 27. QUIET ENJOYMENT. Lessor covenants that if, and so long as, Lessee pays the rent, and any Additional Rent as herein provided, and performs the covenants hereof, Lessor shall do nothing to affect Lessee's right to peaceably and quietly have, hold and enjoy the Premises for the Lease Term herein mentioned, subject to the provisions of this Lease. 28. INDEMNITY. Lessee shall indemnify and save harmless Lessor and its agents against and from (a) any and all claims (i) arising from (x) the conduct or management by Lessee, 28 its subtenants, licensees, its or their employees, agents, contractors or invitee on the Demised Premises or of any business therein, or (y) any work or thing whatsoever done, or any condition created (other than by Lessor for Lessor's account) in or about the Demised Premises during the Term of this Lease or during the period of time, if any, prior to the Commencement Date that Lessee may have been given access to the Demised Premises, or (ii) arising from any negligent or otherwise wrongful act or omission of Lessee or any of its subtenants or licensees or its or their employees, agents, contractors or invitee, and (b) all costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon. In case any action or proceeding be brought against Lessor by reason of any such claim, Lessee, upon notice from Lessor, shall resist and defend such action or proceeding. 29. APPLICABILITY TO HEIRS AND ASSIGNS. The provisions of this Lease shall apply to, bind and inure to the benefit of Lessor and Lessee and their respective heirs, successors, legal representatives and assigns. It is understood that the term 'Lessor' as used in this Lease means only the owner, a mortgagee in possession or a term lessee of the Building, so that in the event of any sale of the Building or of any lease thereof or if a mortgage shall take possession of the Premises, Lessor named herein shall be and hereby is entirely freed and relieved of all covenants and obligations of Lessor hereunder accruing thereafter, and it shall be deemed without further agreement that 29 the purchaser, the term lessee of the Building, or the mortgagee in possession has assumed and agreed to carry out any and all covenants and obligations of Lessor hereunder. 30. PARKING SPACES. Lessee's occupancy of the Demised Premises shall include the use of the parking lot, for a reasonable number of cars operated by Lessee and its subtenants, licensees, invitee, concessionaires, officers and employees. If any vehicle of Lessee, or of any subtenant, licensee, concessionaire, or of their respective officers, agents or employees, is parked in any part of the Common Facilities other than the employee parking area(s) designated therefor by Lessor, and if, after reasonable written notice by Lessor to Lessee for the removal of an offending vehicle, it's not removed, then Lessee shall pay to Lessor such reasonable costs of removal as may be incurred by Lessor from time to time. Lessor reserves the right to reassign assigned parking to comparable facilities in connection with any modification to the Building or Office Building Area permitted pursuant to this Lease. Nothing contained herein shall be deemed to impose any obligation on Lessor to police the parking area. 31. LESSOR'S EXCULPATION. Lessor shall not be liable to Lessee for any loss suffered by Lessee under any circumstances, including, but not limited to (i) that arising from the negligence of Lessor, its agents, servants or invitee, or from defects, errors or omissions in the construction or design of the Premises and/or the Building and Office Building Area including 30 the structural and nonstructural portions thereof or (ii) for loss of or injury to Lessee or to Lessee's property or that for which Lessee is legally liable from any cause whatsoever, including but not limited to theft or burglary; or (iii) for that which results from or is incidental to the furnishing of or failure to furnish or the interruption in connection with the furnishing of any service which lessor is obligated to furnish pursuant to this Lease; or (iv) for that which results from any inspection, repair, alteration or addition or the failure thereof undertaken or failed to be undertaken by Lessor; or (v) for any interruption to Lessee's business, however occurring, but this exculpatory provision shall not preclude Lessee's remedies with respect to interruption of services or use or in the case of Lessor's wilful or gross negligence. The aforesaid exculpatory Section is to induce the Lessor, in its judgment, to avoid or minimize covering risks which are better quantified and covered by Lessee either through insurance or self-insurance or combination thereof thereby permitting potential cost savings in connection with the Operating Expenses borne by Lessee. 32. RULES OF CONSTRUCTION/APPLICABLE LAW. Any table of contents, captions, headings and titles in this Lease are solely for convenience of reference and shall not affect its interpretation. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. If any words or phrases 31 in this Lease shall have been stricken out or otherwise eliminated, whether or not any other words or phrases have been added, this Lease shall be construed as if the words or phrases so stricken out or otherwise eliminated were never included in this Lease and no implication or inference shall be drawn from the fact that said words or phrases were so stricken out or otherwise eliminated. Each covenant, agreement, obligation or other provision of this Lease on Lessee's part to be performed, shall be deemed and construed as a separate and independent covenant of Lessee, not dependent on any other provision of this Lease. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. This Lease shall be governed and construed in accordance with the laws of the State of New Jersey. If any of the provisions of this Lease, or the application thereof to any person or circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. 33. BROKER. Lessee represents and warrants to Lessor that SITAR REALTY GROUP is the sole broker with whom Lessee has negotiated in bringing about this Lease, and Lessee agrees to 32 indemnify and hold Lessor and its mortgagee(s) harmless from any and all claims of other brokers and expenses in connection therewith arising out of or in connection therewith arising out of or in connection with the negotiation of or the entering into this Lease by Lessor and Lessee. Lessor makes the same representations to Lessee and similarly indemnifies and holds Lessee harmless. In no event shall Lessor's mortgagee(s) have any obligation to any broker involved in this transaction. 34. PERSONAL LIABILITY. Notwithstanding anything in the contrary provided in this Lease, it is specifically understood and agreed, such agreement being a primary consideration for the execution of this Lease by Lessor, that there shall be absolutely no personal liability on the part of Lessor, its constituent members (to include but not be limited to officers, directors, partners and trustees), their respective successors, assigns or any mortgagee in possession (for the purpose of this Section, collectively referred to as "Lessor"), with respect to any of the terms, covenants and conditions of this Lease, and that Lessee shall look solely to the equity of Lessor in the Building for the satisfaction of each and every remedy of Lessee in the event of any breach by Lessor of any of the terms, covenants and conditions of this Lease to be performed by Lessor, such exculpation of liability to be absolute and without any exceptions whatsoever. A deficit capital account of any portion in Lessor shall not be deemed an asset or property of Lessor. 35. NO OPTION. The submission of this Lease Agreement 33 for examination does not constitute a reservation of or option for the Premises, and this Lease Agreement becomes effective as a Lease Agreement only upon execution and delivery thereof by Lessor and Lessee. 36. DEFINITIONS. A. Common Facilities. Common facilities shall include, by way of example and not by way of limitation, the non-assigned parking areas; lobby; elevator(s); fire stairs; public hallways; public lavatories; all other general Building facilities that service all Building tenants; air conditioning rooms; fan rooms; janitors' closets; electrical closets; telephone closets; elevator shafts and machine rooms; flues; stacks; pipe shafts; and vertical ducts with their enclosing walls. Lessor may at any time close temporarily any Common Facilities to make repairs or changes therein or to effect construction, repairs or changes within the Building or Office Building Area, or to discourage non-tenant parking, and may do such other acts in and to the Common Facilities as in its judgment may be desirable to improve the convenience thereof but shall always in connection therewith endeavor to minimize any inconvenience to Lessee. B. Force Majeure. Force Majeure shall mean and include those situations beyond a party's control, including by way of example and not by way of limitation, acts of God; accidents; repairs; strikes; shortages of labor, supplies or materials; inclement weather; or, where applicable, the passage of time while waiting for an adjustment of insurance proceeds. 34 Any time limits required to be met by either party hereunder, whether specifically made subject to Force Majeure or not, except those related to the payment of rent or Additional Rent, shall, unless specifically stated to the contrary elsewhere in this Lease, be automatically extended by the number of days by which any performance called for is delayed due to Force Majeure. C. Building Hours. As used in this Lease, the Building Hours shall be Monday through Friday, 7:00 a.m. to 7:00 p.m., and Saturdays from 8:00 a.m. to 1:00 p.m., excluding those holidays as set forth in Lessor's Rules and Regulations, except that Common Facilities lighting in the Building and Office Building Area shall be maintained for such additional hours as, in Lessor's sole judgment, is necessary or desirable to insure proper operation of the Building and Office Building Area. D. Additional Rent. As used in this Lease, Additional Rent shall mean all sums in addition to basic rent payable by Lessee to Lessor pursuant to the provisions of this Lease. 37. LEASE COMMENCEMENT. Notwithstanding anything contained herein to the contrary, if Lessor, for any reason whatsoever, including Lessor's negligence, or failure to complete Landlord's work, cannot deliver possession of the Premises to Lessee at the commencement of the agreed Lease Term as set forth in Section 3, this Lease shall not be void or voidable, nor shall Lessor be liable to Lessee for any loss or damage resulting therefrom, but in that event, the Lease Term shall be for the full term as specified above to commence from and after the date 35 Lessor shall have delivered possession of the Premises to Lessee or from the date Lessor would have delivered possession of the Premises to Lessee but for any reason attributable to Lessee (herein the 'Commencement Date') and to terminate midnight of the day immediately preceding said first (1st) anniversary of the Commencement Date, and if requested by Lessor, Lessor and Lessee shall, by a writing signed by the parties, ratify and confirm said commencement and termination dates. 38. NOTICES. Any notice by either party to the other shall be in writing and shall be deemed to have been duly given only if sent by registered mail or certified mail in a postpaid envelope addressed, if to Lessee, at 28 Inlet Terrace, Belmar, New Jersey 07719; if to Lessor, at Lessor's address as set forth above; or, to either at such other address as Lessee or Lessor, respectively, may designate in writing. Notice shall be deemed to have been duly given upon the tenth (10th) day after the mailing thereof. 39. ACCORD AND SATISFACTION. No payment by Lessee or receipt by Lessor of a lesser amount than the rent and additional charges payable hereunder shall be deemed to be other than a payment on account of the earliest stipulated basic rent and Additional Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment for rent or Additional Rent be deemed an accord and satisfaction, and Lesser may accept such check or payment without prejudice to Lessor's right to recover the balance of such rent and Additional Rent or 36 pursue any other remedy provided herein or by law. 40. EFFECT OF WAIVERS. No failure by Lessor to insist upon the strict performance of any covenant, agreement, term or condition of this Lease, or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No consent or waiver, express or implied, by Lessor to or of any breach of any covenant, condition or duty of Lessee shall be construed as a consent or waiver to or of any other breach of the same or any other covenant, condition or duty, unless in writing signed by Lessor. 41. MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE. Lessee agrees to give any mortgagees by registered mail, a copy of any notice of default served upon Lessor, provided that, prior to such notice, Lessee has been notified in writing (by way of notice of assignment of rents and leases or otherwise) of the address of such mortgagees and/or trust deed holders. Lessee further agrees that, if Lessor shall have failed to cure such default within the time provided for in this Lease, then the mortgagees and/or trust deed holders shall have an additional thirty (30) days within which to cure such default, or if such default cannot be cured within that time, then such additional time as may be necessary, if within such thirty (30) days, any mortgagee and/or trust deed holder has commenced and is diligently pursuing the remedies necessary to cure such default 37 (including but not limited to commencement of foreclosure proceedings if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. 42. LESSOR'S RESERVED RIGHTS. Lessor and Lessee acknowledge that the Premises are in a Building which is not open to the general public. Access to the Building is restricted to Lessor, Lessee, their agents, employees and to their invited visitors. In the event of a labor dispute including a strike, picketing, informational or associational activities directed at Lessee or any other tenant, Lessor reserves the right unilaterally to alter Lessee's ingress and egress to the Building or make any other change in operating conditions to restrict pedestrian, vehicular or delivery ingress and egress to a particular location. Additionally, Lessor reserves unto itself all rights not granted Lessee, including by way of example and not be way of limitation, the right to change the name by which the Building is commonly known. 43. CORPORATE AUTHORITY. If Lessee is a corporation, Lessee represents and warrants that this Lease and the undersigned's execution of this Lease has been duly authorized and approved by the corporation's Board of Directors. The undersigned officers and representatives of the corporation executing this Lease on behalf of the corporation represent and warrant that they are officers of the corporation with authority to execute this Lease on behalf of the corporation, and within 38 fifteen (15) days of execution hereof, Lessee will provide Lessor with a corporate resolution confirming the aforesaid. 44. GOVERNMENT REQUIREMENTS. In the event of the imposition of federal, state, or local governmental control, rules, regulations, or restrictions on the use or consumption of energy or other utilities or with respect to any other aspect of this Lease during the Term, both Lessor and Lessee shall be bound thereby. In the event of a difference in interpretation of any governmental control, rule, regulation or restriction between Lessor and Lessee, the interpretation of Landlord shall prevail, and Lessor shall have the right to enforce compliance, including the right of entry into the Premises to effect compliance. 45. ADDITIONALS, CHARGES. Whenever in this Lease Tenant is required to pay an "additional charge(s)" or other monies to Landlord, the same shall be deemed to be additional rent, and Landlord shall have all remedies for the collection thereof that Landlord has for the non-payment of rent hereunder. 46. INTERPRETATION. The laws of the State of New Jersey shall govern the validity, performance and enforcement of this Lease. The invalidity or unenforceability of any provision hereof shall not affect or impair any other provision. 47. HOLDING OVER. In the event that Tenant shall remain in occupancy of the Demised Premises for any period beyond the expiration of the term of this Lease or any renewals or extensions thereof, such occupancy shall be deemed to be a month-to-month tenancy at twice the Rent for the last lease year of the 39 term, subject to all the other provisions of this Lease prevailing upon such expiration; and the acceptance of rent or additional charges by Landlord shall not be deemed to create a new or additional tenancy other than aforesaid. 48. TENANT'S OPTION TO EXPAND OR CANCEL. Tenant shall have the right, at its election, to expand or cancel the lease as follows: (a) Notwithstanding anything hereunto the contrary, tenant shall have the option to lease approximately 500 square feet of space immediately adjacent to the Demised Premises on the same terms and conditions as the initial Demised Premises for a term co-terminus with that of the initial Demised Premises. (b) Tenant may, upon nine (9) months notice to landlord, cancel this lease and void all obligations hereunder provided that in that case the tenant shall pay to the landlord the following: 1. Cancellation during . . . first year: 80% of $17,500.00 or $14,000.00 second year: 60% of $17,500.00 or $10,500.00 third year: 40% of $17,500.00 or $7,000.00 fourth year: 20% of $17,500.00 or $3,500.00 49. TENANT'S OPTION TO EXTEND LEASE. Tenant shall have the right, at its election, to extend the original term of this lease for two additional periods of five (5) years each, exercisable upon the following terms and conditions: (a) Tenant shall give Landlord written notice of such 40 election to extend the term hereof not later than twelve (12) months prior to the expiration of the then current term of this Lease; (b) At the time of the exercise of such election: (i) Tenant shall have a satisfactory net worth equal to not less than Tenant's net worth at the commencement of the term of this Lease; and (ii) Tenant shall not then be in default under this Lease; and (c) Each such extended term shall be upon the same terms and conditions as during the original term hereof except that: (i) During each year of the first additional term, Tenant shall pay rent at a rate to be negotiated between Lessor and Lessee but no more than the prevailing rate in the surrounding geographic area increase with a maximum of TWENTY-FIVE PERCENT (25%) increase over the previous year's rate payable in equal monthly installments; and (ii)Tenant shall have no further election to extend the term of this Lease beyond the second (2nd) additional term. Anything contained herein to the contrary notwithstanding, it is understood and agreed that no exercise of its election to extend shall be effective if Tenant shall be in default under this Lease at the commencement of such extended term. 41 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written. COLLINGWOOD PLAZA ASSOCIATES, Lessor By /s/ W. PETER RAGAN .................................. Dated: 3/3/92 W. PETER RAGAN, Authorized Partner Dated: 3/3/92 U.S. MEDICAL TECHNOLOGIES, INC. Lessee By /s/ JOHN LYLE .................................. JOHN LYLE PRESIDENT ..................................... ASST. SECRETARY 42 AMENDMENT TO LEASE AGREEMENT BETWEEN COLLINGWOOD PLAZA ASSOCIATES, LANDLORD AND U.S. MEDICAL TECHNOLOGIES, INC., TENANT THIS AMENDMENT TO LEASE AGREEMENT is made this day of July, 1993, by and between COLLINGWOOD PLAZA ASSOCIATES ('Landlord') and U.S. Medical Technologies, Inc. ('Tenant'), for the purpose of amending a certain Lease Agreement between Landlord and Tenant dated March 3, 1992 (the 'Lease Agreement'). WITNESSETH For and in consideration of the covenants contained herein, and upon the terms and conditions herein set forth, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Landlord and Tenant agree to amend the Lease Agreement as follows: 1 Paragraph 48 of the Lease Agreement is hereby deleted and the following is substituted in lieu thereof: 48. TENANT'S OPTION TO EXPAND OR CANCEL. Tenant shall have the right, at its election, to expand or cancel the lease as follows: (a) Notwithstanding anything contained herein to the contrary, Tenant shall have the option to lease approximately 500 square feet of space immediately adjacent to the Demised Premises on the same terms and conditions as the initial Demised Premises for a term co-terminus with that of the initial Demised Premises. Landlord agrees that the said approximately 500 square feet of adjacent space shall be available and ready for occupancy by Tenant not later than 60 days following the receipt by Landlord of written notice from Tenant exercising this option. (b) Tenant may, upon four and one-half (4 1/2) months notice to Landlord, cancel this lease and void all obligations hereunder provided that in that case the tenant shall pay to the Landlord the following: 1. Cancellation during . . . first year: 80% of $17,500.00 or $14,000.00 second year: 60% of $17,500.00 or $10,500.00 third year: 40% of $17,500.00 or $ 7,000.00 fourth year: 20% of $17,500.00 or $ 3,500.00 2. In the event of any inconsistency between the terms of the Lease Agreement and the terms of this Amendment, the terms of this Amendment shall be controlling. IN WITNESS WHEREOF, the undersigned parties execute this Amendment on the date first above appearing, intending to be bound hereby and to amend the terms of the Lease Agreement. COLLINGWOOD PLAZA ASSOCIATES Landlord Dated: 8/16/93 By /s/ W. PETER RAGAN .................................. W. Peter Ragan, a General Partner U.S. MEDICAL TECHNOLOGIES, INC. Tenant Dated: 8/16/93 By /s/ JOHN W. LYLE .................................. John W. Lyle, President SECOND AMENDMENT TO LEASE AGREEMENT BETWEEN COLLINGWOOD PLAZA ASSOCIATES, LANDLORD and U.S MEDICAL TECHNOLOGIES, INC., TENANT THIS SECOND AMENDMENT TO LEASE AGREEMENT is made this 27 day of June, 1994, by and between COLLINGWOOD PLAZA ASSOCIATES ("Landlord") and Algos Pharmaceutical Corp. (formerly known as U.S. Medical Technologies, Inc.) ("Tenant"), for the purpose of amending a certain Lease Agreement between Landlord and Tenant dated March 3, 1992 (the "Lease Agreement"), and an amendment thereto dated July, 1993 and executed on August 16, 1993 (the "First Amendment"). W I T N E S S E T H For and in consideration of the covenants contained herein, and upon the terms and conditions herein set forth, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Landlord and Tenant agree to amend the Lease Agreement as follows: 1 Paragraph 48 of the Lease Agreement as amended by the First Amendment is hereby deleted and the following is substituted in lieu thereof: 48. TENANT'S OPTION TO EXPAND OR CANCEL. Tenant shall have the right, at its election, to expand or cancel the lease as follows: (a) Notwithstanding anything contained herein to the contrary, Tenant shall have the option to lease approximately 400 square feet of space immediately adjacent to the Demised Premises on the same terms and conditions as the initial Demised Premises for a term co-terminus with that of the initial Demised Premises. Tenant agrees to exercise the said option and to take possession of the said space on the thirtieth (30th) day following written notice from Landlord; provided, however, that the Tenant shall not be obligated to take possession of the premises until it is in move-in condition. For purposes of this Paragraph 48(a), the term "move-in condition" shall be understood to mean that all of the "Landlord's Work" as defined in Paragraph 2(a) of the Lease Agreement and the Collingwood Plaza Workletter appended to the Lease Agreement shall be completed at Landlord's sole cost. Landlord and Tenant agree that in the event Tenant reaches agreement with Enterprise Rent-A-Car to purchase the work-station furniture and room dividers currently in the space, then Tenant shall be entitled to the first month's rent on the 400 square feet of space free of charge, in consideration for which Landlord shall have no obligation to perform the Landlord's Work as defined in Paragraph 2(a) of the Lease Agreement and the Collingwood Plaza Workletter appended thereto on the said 400 square feet of space. (b) Tenant may, upon four and one-half (4 1/2) months' notice to Landlord, cancel this lease and void all obligations hereunder provided that in that case the Tenant shall pay to the Landlord the following: 1. Cancellation during . . . first year: 80% of $17,500.00 or $14,000.00 second year: 60% of 17,500.00 or 10,500.00 third year: 40% of 17,500.00 or 7,000.00 fourth year: 20% of 17,500.00 or 3,500.00 "Combined rent shall mean the annual rent that Tenant would otherwise have been obligated to pay to Landlord for the year in which the lease was cancelled based upon the amount of space being occupied by Tenant at the time of notice of cancellation. (c) Notwithstanding anything contained herein to the contrary, Landlord agrees to lease to Tenant approximately 500 square feet of space located at the northwesterly corner of the building on the same terms and conditions as the initial Demised Premises for a term co-terminus with that of the Initial Demised Premises. Landlord agrees to make said approximately 500 square feet of additional space available and ready for occupancy by July 10, 1994. Landlord agrees that it will perform at its own cost the Landlord's Work on this space in accordance with Paragraph 2(a) of the Lease Agreement and the Collingwood Plaza Workletter appended thereto, which work will include but not necessarily be limited to repainting the space, installing carpeting to match Tenant's existing carpeting, and removing the closet and restoring the wall. Landlord further agrees that Tenant shall be entitled to the same allowances with respect to this space as were provided in connection with the initial Demised Premises. (d) Landlord agrees to divide evenly with Tenant the cost of installing new carpeting in the hallway extending from the initial Demised Premises to the exit door at the northwesterly corner of the building, which carpeting will match Tenant's existing carpeting in the initial Demised Premises. 2. In the event of any inconsistency between the terms of the Lease Agreement, the terms of the First Amendment and the terms of this Second Amendment, the terms of this Second Amendment shall be controlling. IN WITNESS WHEREOF, the undersigned parties execute this Amendment on the date first above appearing, intending to be bound hereby and to amend the terms of the Lease Agreement. COLLINGWOOD PLAZA ASSOCIATES Landlord Dated: 6/27/94 By: /s/ W. PETER RAGAN -------------------------------------- W. Peter Ragan, a General Partner ALGOS PHARMACEUTICAL CORP. (formerly U.S. Medical Technologies, Inc.) Tenant Dated: 6/27/94 By: /s/ JOHN W. LYLE -------------------------------------- John W. Lyle, President EX-23 5 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report dated February 7, 1996, except as to the fourth paragraph of Note 9 for which the date is May 21, 1996, on our audits of the financial statements of Algos Pharmaceutical Corporation. We also consent to the reference to our firm under the captions 'Selected Financial Information' and 'Experts.' COOPERS & LYBRAND L.L.P. Princeton, New Jersey September 16, 1996 EX-23 6 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF PATENT COUNSEL We consent to the reference to our firm under the caption 'Experts' in the Registration Statement on Form S-1. DILWORTH & BARRESE September 17, 1996 -----END PRIVACY-ENHANCED MESSAGE-----