As filed with the Securities and Exchange Commission on March 17, 2003.
Registration No. 333-101661
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 1
to
Form SB-2
Registration Statement
under
the Securities Act of 1933
DELCATH SYSTEMS, INC.
----------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 3841 06-1245881
- ---------------------------- --------------------------- -------------------
(State or Other Jurisdiction (Primary Standard Industrial (I. R. S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
1100 Summer Street
Stamford, Connecticut 06905
(203) 323-8668
(Address, including zip code, and telephone number, including area code,
of registrant's executive offices)
----------------------------------------
M. S. KOLY
President and Chief Executive Officer
Delcath Systems, Inc.
1100 Summer Street
Stamford, Connecticut 06905
(203) 323-8668
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications, including communications sent to the agent for
service of process, should be sent to:
Paul G. Hughes Brian C. Daughney
Cummings & Lockwood LLC Goldstein & DiGioia, LLP
Four Stamford Plaza 45 Broadway, 11th Floor
107 Elm Street New York, NY 10006
Stamford, CT 06902 212-599-3322
203-351-4207
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: as soon as
practicable after the registration statement becomes effective.
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 /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment file pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434 under
the Securities Act, please check the following box. / /
Proposed maximum
aggregate offering Amount of
Title of each class of securities to be registered price (1) registration fee
Units, consisting of 5 shares of common stock, par
value $.01 per share, and 5 warrants each to $3,450,000 $318 (8)
purchase 1 share of common stock (2)
Common Stock, $0.01 par value (3)
Warrants to purchase shares of common stock (4)
Shares of common stock underlying the warrants included in
the units (5)(6)
Underwriters warrants to purchase units (7)
Units, consisting of 5 shares of common stock and 5
warrants each to purchase 1 share of common stock (5)
Common stock, $0.01 par value (3)
Warrants to purchase shares of common stock (4)
Units issuable upon exercise of the underwriters warrants (7)
Shares of common stock underlying the warrants issuable upon
exercise of the warrants underlying the underwriters
warrants (5)
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(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(2) Includes units issuable upon exercise of underwriters' over-allotment
option.
(3) Consists of shares of common stock included in the units registered hereby.
(4) Consists of warrants included in the units registered hereby. The warrants
are offered as a component of the units for no additional consideration.
(5) Pursuant to Rule 416 under the Securities Act, this Registration Statement
also registers (i) any additional shares of common stock that become
issuable upon exercise of the warrants and (ii) any additional units that
become exercisable upon the exercise of the underwriters warrants to
purchase units, in each by reason of any stock dividend, stock split,
recapitalization or other similar transaction effected without receipt of
consideration which results in an increase in the number of the outstanding
shares of common stock.
(6) Includes shares issuable pursuant to the exercise of the underwriters
overallotment option.
(7) No registration fee required pursuant to Rule 457(g) under the Securities
Act.
(8) The registration fee was previously paid when the Registration Statement
was originally filed.
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 SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
CROSS REFERENCE SHEET
Showing Location in Prospectus of Information Required by Items of Form SB-2
REGISTRATION STATEMENT
ITEM NUMBER AND HEADING LOCATION IN PROSPECTUS
1. Forepart of Registration Statement and Outside Front Cover Page Outside Front Cover Page
of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Underwriting
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page Prospectus;
Underwriting
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters and Control Persons Management
11. Security Ownership of Certain Beneficial Owners and Principal Stockholders
Management
12. Description of Securities Description of Our Capital Stock
13. Interests of Named Experts and Counsel Validity of Common Stock; Experts
14. Disclosure of Commission Position of Indemnification for Description of Our Capital Stock
Securities Act Liabilities
15. Organization Within Last Five Years Related Party Transactions
16. Description of Business Business
17. Management's Discussion and Analysis or Plan of Operation Plan of Operation
18. Description of Property Business
19. Certain Relationships and Related Transactions Related Party Transactions
20. Market for Common Equity and Related Stockholder Matters Market for Common Equity and Related
Stockholder Matters
21. Executive Compensation Management
22. Financial Statements Index to Consolidated Financial Statements and
Financial Statement Schedule
23. Changes In and Disagreements with Accountants on Accounting and Changes In and Disagreements with
Financial Disclosure Accountants on Accounting and Financial
Disclosure
SUBJECT TO COMPLETION, DATED MARCH 17, 2003.
[LOGO - DELCATH SYSTEMS, INC.]
__________ Units
This is a public offering of $3 million of our securities. Our
securities are being offered in units, with each unit consisting of (i) five
shares of our common stock and (ii) five 2003 Warrants each to purchase one
share of our common stock. The common stock and 2003 Warrants will trade
separately immediately following the sale of the units.
Each 2003 Warrant entitles the holder to purchase one share of our
common stock at a price of 25% of the unit offering price. The exercise price of
our 2003 Warrants is subject to adjustment, including anti-dilution provisions
for corporate events, such as stock splits. Under certain circumstances, we have
the right to redeem the 2003 Warrants.
There is presently no public market for the 2003 Warrants. Our common
stock is currently traded on the Nasdaq Small Cap Market under the symbol "DCTH"
and on the Boston Stock Exchange under the symbol "DCT." At March 12, 2003, our
common stock had a closing price of $1.13 per share and our 2000 Warrants had a
closing price of $0.24 per Warrant on the Nasdaq Small Cap Market. The actual
initial public offering price of the units will be based upon the market price
of our common stock and by negotiations between Roan/Meyers Associates, L.P., as
the representative of the underwriters, and us.
We have applied for listing of our 2003 Warrants on the Nasdaq Small
Cap Market and the Boston Stock Exchange under the symbols " " and " ,"
respectively, and the listing of the additional shares of our common stock
contained in the units. We may not be able to meet the listing requirements for
the Nasdaq Small Cap Market or the Boston Stock Exchange in which event the
underwriters may not proceed with the offering.
Investing in our securities involves a high degree of risk. See "Risk
Factors" beginning on page 4 for factors you should consider before investing in
our securities.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------
Per Unit Total
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Public offering price
Underwriting discount
Proceeds, before expenses
We estimate the expenses of this offering will be approximately
$720,000, which will include a non-accountable expense allowance of 3% of the
gross proceeds of this offering payable to the representative of the
underwriters. We have granted the underwriters a 45-day option to acquire up to
an additional 15% of the units to cover over-allotments.
The underwriters expect to deliver the securities to purchasers on or
about , 2003.
ROAN/MEYERS ASSOCIATES, L.P. VIEWTRADE SECURITIES, INC.
------------------------------
The date of this prospectus is , 2003
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS SUMMARY
Prospectus SummaryThe following is a summary that highlights
information contained elsewhere in this prospectus. You should read the entire
prospectus, including "Risk Factors" beginning on page 4 and our financial
statements (including the notes) carefully before making an investment decision.
Except as otherwise noted, the information contained in this prospectus
assumes that the underwriters' overallotment option is not exercised.
References in this prospectus to the "2003 Warrants" refer to the
warrants included in the units offered hereby. References in this prospectus to
the "2000 Warrants" refer to the warrants included in the units offered in our
initial public offering.
OUR BUSINESS
We have developed a drug-delivery system which is designed to isolate
the liver from the general circulatory system and to administer chemotherapy and
other therapeutic agents directly to the liver. Using the Delcath system, blood
flowing into the liver is:
o infused with the chemotherapy agents;
o redirected out of the patient's body;
o passed through filters which remove most of the chemotherapy
agents; and
o returned to the patient's general circulatory system.
Isolating the liver and filtering the blood before it is returned to
the patient's circulatory system helps protect other parts of the body from the
harmful side effects of chemotherapy agents while allowing higher dosages of
chemotherapy agents to be administered to the diseased organ. While the current
"gold standard" treatment option for liver tumors is surgery, many tumors are
inoperable due to a combination of poor patient health and/or inability to
remove the tumor because of its location. Even if a tumor is surgically removed,
in the event of a recurrence, surgery typically cannot be repeated. We believe
that the use of the Delcath system for delivering chemotherapy agents to the
liver will allow treatment of tumors in patients with poor health and inoperable
tumors and will permit multiple treatments in the event of a recurrence. We also
believe that the Delcath system may provide cost savings in the treatment of
liver cancer to the extent that it can reduce treatment and hospitalization
costs associated with the side-effects of chemotherapy agents.
The Delcath system is not currently approved for marketing by the
United States Food and Drug Administration, and it cannot be marketed in the
United States without FDA pre-marketing approval. With the proceeds of this
offering, we plan to conduct Phase III clinical trials to demonstrate the safety
and efficacy of the Delcath system in administering the chemotherapy agent
doxorubicin to treat malignant melanoma that spreads to the liver and to fund
our Phase I clinical trials and commence Phase II clinical trials to demonstrate
the safety and efficiency of using the Delcath system to deliver the
chemotherapy agent melphalan to treat cancerous tumors in the liver.
Corporate Information
Our executive offices are located at 1100 Summer Street, Stamford,
Connecticut 06905. Our telephone number at this location is (203) 323-8668.
1
THE OFFERING
Securities offered units, each unit consisting
of five shares of common stock and five
2003 Warrants each to purchase one share
of our common stock.
Common stock to be outstanding after this offering shares.
Warrants and options to be outstanding after this [____________] Warrants (including the
offering 2000 Warrants and the 2003 Warrants) and
options to purchase [________________]
shares of our common stock.
Term of the 2003 Warrants Five years from the closing of this
offering.
Exercise price of the 2003 Warrants $
Expiration date of the 2003 Warrants , 2008.
Redemption Commencing one year from the closing
date of this offering, our 2003 Warrants
may be redeemed at our option at a
redemption price of $0.01 per warrant
provided (i) the average closing price
of our common stock for the twenty
trading days prior to the date of notice
of redemption is at least 200% of the
initial unit offering price and (ii)
there is then an effective registration
statement providing for the issuance of
the underlying shares of common stock.
Nasdaq Small Cap Market symbols "DCTH" for our common stock and
" " for our 2003 Warrants.
Boston Stock Exchange symbols "DCT" for our common stock and
" " for our 2003 Warrants.
2
SUMMARY FINANCIAL DATA
The following summary financial data for the two years ended December
31, 2002 and cumulative from inception through December 31, 2002 are derived
from our audited financial statements.
The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information, "Capitalization" and
"Plan of Operation" appearing elsewhere in this prospectus.
Cumulative from
Inception
Years Ended (August 5, 1988)
December 31, to December 31,
2001 2002 2002
---- ---- ----
(in thousands except per share amounts)
Statement of Operations Data:
Total costs and expenses ........... $ 2,069 $ 1,897 $16,714
Operating loss ..................... (2,069) (1,897) (16,714)
Net loss attributable to common
stockholders ....................... (1,876) (1,807)
Net loss per share ................. (0.48) (0.44)
Weighted average number of shares of
common stock outstanding ........ 3,904 4,085
As of December 31, 2002
--------------------------------
As Adjusted(1)
(in thousands)
Balance Sheet Data:
Cash and cash equivalents ............. $1,064 $3,344
Certificate of deposit ................ 370 370
Total assets .......................... 1,812 4,092
Total liabilities ..................... 175 175
Stockholders' equity .................. 1,637 3,917
- ----------------------------
(1) The as adjusted amounts assume net proceeds of $2,280,000 (excluding
proceeds from any exercise of the overallotment option) from the sale of the
units offered hereby.
3
RISK FACTORS
You should consider carefully the following factors, as well as the
other information set forth in this prospectus, prior to making an investment in
the units. If any of the following risks and uncertainties actually occur, our
business, financial condition or operating results may be materially and
adversely affected. In this event, the trading price of our common stock or the
2003 Warrants, as applicable, may decline and you may lose part or all of your
investment.
RISKS RELATED TO OUR BUSINESS AND FINANCIAL CONDITION
The following factors relate to risks that are material to our business
and financial condition. If any of the possible events we describe below turns
out to be the case, our business may be adversely affected and we may be forced
to cease or curtail our operations which may result in the loss of your entire
investment.
Our entire focus has been the development and commercialization of the
Delcath system.
The Delcath system, an enabling technology for the isolation of various
organs in the body to permit the delivery of otherwise unacceptably toxic doses
of drugs, is our only product. If the Delcath system fails as a commercial
product, we have no other products to sell.
Continuing losses may exhaust our capital resources.
We expect to incur significant and increasing losses while generating
minimal revenues over the next few years. From our inception on August 5, 1988
through December 31, 2002, we have incurred cumulative losses of $16 million
which were principally incurred in connection with our product development
efforts. For the years ended December 31, 2001 and December 31, 2002, we
incurred net losses of $1.9 million and $1.8 million, respectively. If we
continue to incur losses we may exhaust our capital resources, including those
raised in this offering. As of December 31, 2002, we had cash and cash
equivalents and short term investments of $1.43 million.
The proceeds of this offering may not be sufficient to complete our
planned clinical trials and our efforts to raise additional financing
may be unsuccessful.
The proceeds of this offering may not be sufficient to enable us to
complete our Phase III clinical trials and obtain FDA pre-marketing approval for
the use of doxorubicin with our Delcath system because of unanticipated delays
or expenses, increased regulatory requirements by the FDA or other factors which
we cannot foresee or control. If we do not obtain any financing that we may
require, we will not be able to complete Phase III clinical trials or obtain FDA
pre-marketing approval for the use of doxorubicin with the Delcath system. Our
ability to complete the Phase III clinical trials could be lessened to the
extent we devote assets to clinical trials using melphalan with the Delcath
system.
If we do not raise any additional capital required to commercialize the
Delcath system, our potential to generate future revenues will be
significantly limited even if we receive FDA pre-marketing approval.
The proceeds of this offering may not be sufficient to complete Phase
III clinical trials using doxorubicin and will be insufficient to fund the costs
of commercializing the Delcath system which will be significant. We have no
commitments for any additional financing. If we are unable to obtain additional
financing as needed, we will not be able to sell the system commercially.
RISKS RELATED TO FDA AND FOREIGN REGULATORY APPROVAL
The following factors relate to risks that are material to obtaining
FDA and foreign regulatory approval. If any of the events we describe below
turns out to be the case, our business may be adversely affected and we may be
forced to cease or curtail our operations which may result in the loss of your
entire investment.
If the FDA refuses to grant pre-marketing approval or limits the
circumstances under which the Delcath system may be used, our ability
to market the Delcath system will be greatly reduced.
Pre-marketing approval requires a determination by the FDA that the
data developed by our clinical trials show that the use of doxorubicin in our
system is safe and effective in the treatment of primary liver cancer and
melanoma
4
which has spread to the liver. The FDA requires that we demonstrate, for each of
primary liver cancer and metastatic melanoma, in a statistically rigorous
manner, increased patient survival times before it will approve our pre-market
application. Even if regulatory approval is granted, the approval may limit the
uses for which the Delcath system may be marketed. If we fail to obtain FDA
pre-marketing approval, we will not be able to market the Delcath system.
Additionally, if we obtain FDA pre-marketing approval with substantial
limitations on uses of the Delcath system, this would greatly reduce the market
for the system.
If we do not obtain FDA pre-marketing approval, we may not be able to
export the Delcath system to foreign markets, which will limit our
sales opportunities.
If the FDA does not approve our pre-marketing application for the
Delcath system, we will not be able to export the Delcath system from the United
States unless approval has been obtained from one of a number of developed
nations. We have not begun to seek foreign regulatory approval and may not be
able to obtain approval from one or more countries where we would like to sell
the Delcath system. If we are unable to market the Delcath system
internationally because we are not able to obtain required approvals, our
international market opportunity will be materially limited.
Because of our limited experience, conduct of Phase III clinical trials
and obtaining FDA pre-marketing approval could be delayed.
We have and may continue to experience delays in beginning, conducting
and completing the trials, caused by many factors, including our lack of
experience in arranging for clinical trials and in evaluating and submitting the
data gathered from clinical trials, in designing trials to conform to the trial
protocols authorized by the FDA, in complying with the requirements of
institutional review boards at the sites where the trials will be conducted and
in identifying clinical test sites and sponsoring physicians. Completion of our
clinical trials will also depend on the ability of the clinical test sites to
identify patients to enroll in the clinical trials. The trials may also take
longer to complete because of difficulties we may encounter in entering into
agreements with clinical testing sites to conduct the trials. Any significant
delay in completing clinical trials or in the FDA's responding to our submission
or a requirement by the FDA for us to conduct additional trials would delay the
commercialization of the Delcath system and our ability to generate revenues.
Third-party reimbursement may not be available to purchasers of the
Delcath system or may be inadequate.
Physicians, hospitals and other health care providers may be reluctant
to purchase our products if they do not receive substantial reimbursement for
the cost of the procedures using our products from third-party payors, including
Medicare, Medicaid and private health insurance plans.
Because the Delcath system currently is characterized by the FDA as an
experimental device, Medicare, Medicaid and private health insurance plans will
not reimburse its use in the United States. We will not begin to seek to have
third-party payors reimburse the cost of the Delcath system until after its use
is approved by the FDA. Each third-party payor independently determines whether
and to what extent it will reimburse for a medical procedure or product.
Third-party payors in the United States or abroad may decide not to cover
procedures using the Delcath system. Further, third-party payors may deny
reimbursement if they determine that the Delcath system is not used in
accordance with established payor protocols regarding cost effective treatment
methods or is used for forms of cancer or with drugs not specifically approved
by the FDA.
New products are under increased scrutiny as to whether or not they
will be covered by the various healthcare plans and the level of reimbursement
which will be applicable to respective covered products and procedures. A
third-party payor may deny reimbursement for the treatment and medical costs
associated with the Delcath system, notwithstanding FDA or other regulatory
approval, if that payor determines that the Delcath system is unnecessary,
inappropriate, not cost effective, experimental or is used for a non-approved
indication.
RISKS RELATED TO MANUFACTURING, COMMERCIALIZATION AND MARKET ACCEPTANCE OF THE
DELCATH SYSTEM
We obtain necessary components for the Delcath system from sole-source
suppliers. Because manufacturers must demonstrate compliance with FDA
specifications, if we change any supplier, the successful completion of
the clinical trials and/or the commercialization of the Delcath system
could be jeopardized if the new supplier cannot demonstrate such
compliance.
We must ensure that the components of the Delcath system are
manufactured in accordance with manufacturing and performance specifications of
the Delcath system on file with the FDA. Many of the components of the Delcath
5
system are manufactured by sole source suppliers. If any of our suppliers fails
to meet our needs, or if we need to seek an alternate source of supply, we may
be forced to suspend or terminate our clinical trials. Further, if we need a new
source of supply after commercial introduction of the Delcath system, we may
face long interruptions in obtaining necessary components, which could
jeopardize our ability to supply the Delcath system to the market.
We do not have any contracts with suppliers for the manufacture of
components for the Delcath system. If we are unable to obtain an
adequate supply of the necessary components, we may not be able timely
to complete our clinical trials.
We do not have any contracts with suppliers for the manufacture of
components for the Delcath system. Certain components are available from only a
limited number of sources. To date, we have only had components of the Delcath
system manufactured for us in small quantities for use in pre-clinical studies
and clinical trials. We will require significantly greater quantities to
commercialize the product. If we are unable to obtain adequate supplies of
components from our existing suppliers or need to switch to an alternate
supplier, commercialization of the Delcath system could be delayed.
Because of our limited experience in marketing products and our lack of
adequate personnel to market and sell products, we may not be
successful in marketing and selling the Delcath system even if it
receives FDA pre-marketing approval.
We have not previously sold, marketed or distributed any products and
currently do not have the personnel, resources, experience or other capabilities
to market the Delcath system adequately. Our success will depend upon our
ability to attract and retain skilled sales and marketing personnel. Competition
for sales and marketing personnel is intense, and we may not be successful in
attracting or retaining such personnel. Our inability to attract and retain
skilled sales and marketing personnel could adversely affect our business,
financial condition and results of operations.
Market acceptance of the Delcath system will depend on substantial
efforts and expenditures in an area with which we have limited
experience.
Market acceptance of the Delcath system will depend upon a variety of
factors including whether our clinical trials demonstrate a significant
reduction in the mortality rate for the kinds of cancers treated on a
cost-effective basis, our ability to educate physicians on the use of the
Delcath system and our ability to convince healthcare payors that use of the
Delcath system results in reduced treatment costs to patients. We only have
limited experience in these areas and we may not be successful in achieving
these goals. Moreover, the Delcath system replaces treatment methods in which
many hospitals have made a significant investment. Hospitals may be unwilling to
replace their existing technology in light of their investment and experience
with competing technologies. Many doctors and hospitals are reluctant to use a
new medical technology until its value has been demonstrated. As a result, the
Delcath system may not gain significant market acceptance among physicians,
hospitals, patients and healthcare payors.
RISKS RELATED TO PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
Our success depends in large part on our ability to obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties.
Because of the length of time and expense associated with bringing new
medical devices to the market, the healthcare industry has traditionally placed
considerable emphasis on patent and trade secret protection for significant new
technologies. Litigation may be necessary to enforce any patents issued or
assigned to us or to determine the scope and validity of third-party proprietary
rights. Litigation could be costly and could divert our attention from our
business. If others file patent applications with respect to inventions for
which we already have patents issued to us or have patent applications pending,
we may be forced to participate in interference proceedings declared by the
United States Patent and Trademark Office to determine priority of invention,
which could also be costly and could divert our attention from our business. If
a third party violates our intellectual property rights, we may be unable to
enforce our rights because of our limited resources. Use of our limited funds to
defend our intellectual property rights may also affect our financial condition
adversely.
6
Risks related to products liability
We do not currently carry products liability insurance and we may not
be able to acquire sufficient coverage in the future to cover large
claims.
Clinical trials, manufacturing and product sales may expose us to
liability claims from the use of the Delcath system. Though participants in
clinical trials are generally required to execute consents and waivers of
liability, they may still be able to assert products liability claims against
us. Claims for damages, whether or not successful, could cause delays in the
clinical trials and result in the loss of physician endorsement. We do not
currently carry products liability insurance and we may not be able to acquire
products liability insurance at sufficient coverage levels or at an acceptable
cost. A successful products liability claim or recall would have a material
adverse effect on our business, financial condition and results of operations.
Risks related to an investment in our common stock and this offering
The following factors relate to risks that are material to an
investment in our common stock. Any of these factors could result in lowering
the market value of our common stock and our 2003 Warrants.
There is a limited public float of our common stock and, at this time,
no public market for our 2003 Warrants. Because of this, trades of
relatively small amounts of our common stock can have a
disproportionate effect on the market price for our common stock. The
market price of our common stock may be volatile.
Of our outstanding common stock, approximately two-thirds can be
considered to be in the public float. The term "public float" refers to shares
freely and actively tradeable on the Nasdaq Small Cap Market and/or the Boston
Stock Exchange and not owned by officers, directors or affiliates, as such term
is defined under the Securities Act. Because of the relatively small public
float and the limited trading volume of our common stock, purchases and sales of
relatively small amounts of our common stock can have a disproportionate effect
on the market price for our common stock. As a result, the market price of our
common stock can be volatile.
The number of shares eligible for future sale may cause the market
price of our common stock to be below the level it otherwise would.
The potential for sales of substantial amounts of our common stock, or
"equity overhang," could adversely affect the market price of our common stock.
Upon completion of this offering, shares of our common stock will be
outstanding. Of these shares, shares sold in this offering or sold in
our public offering in 2000 will be freely tradable without restriction or
further registration under the Securities Act, except for shares held or
purchased by persons considered to be our "affiliates" or acting as
"underwriters," as those terms are defined under the Securities Act. The
remaining shares of our common stock outstanding and held by existing
stockholders will be considered "restricted securities" under the Securities Act
and eligible for sale in compliance with Rule 144. Rule 144 provides volume and
manner of sale restrictions and holding periods, which expire after the holder
of our common stock ceases to meet the definitions of affiliate or underwriter.
In addition, we may issue substantial amounts of common stock upon
exercise of the 2000 Warrants, the 2003 Warrants or options outstanding under
our stock option plans.
Sales of substantial amounts of common stock following this offering,
or the perception that such sales could occur, could have an adverse effect on
prevailing market prices for our common stock and the 2003 Warrants.
Anti-takeover provisions in our certificate of incorporation and
by-laws and under Delaware law and our stockholders rights agreement
may reduce the likelihood of a potential change of control.
Provisions of our certificate of incorporation, by-laws and Delaware
law may have the effect of discouraging, delaying or preventing a change in
control of us or unsolicited acquisition proposals that a stockholder might
consider favorable. These include provisions:
o providing for a classified board and permitting the removal
of a director only for cause;
7
o authorizing the board of directors to fill vacant
directorships or increase the size of our board of
directors; and
o subjecting us to the provisions of Section 203 of the
Delaware General Corporate Law, which provides that a
Delaware corporation may not engage in any of a broad range
of business combinations with a person or entity who owns
15% or more of the outstanding voting stock of a company for
a period of three years from the date the person or entity
became an interested stockholder unless (a) prior to such
time our board of directors approved either the business
combination or the transaction which resulted in the
stockholder becoming an interested stockholder or (b) upon
consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the
transaction commenced or (c) at or subsequent to such time
the business combination is approved by the board of
directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of
the outstanding voting stock not owned by the interested
stockholder.
Furthermore, our board of directors has the authority to issue shares
of preferred stock in one or more series and to fix the rights and preferences
of the shares of any such series without stockholder approval. Any series of
preferred stock is likely to be senior to the common stock with respect to
dividends, liquidation rights and, possibly, voting rights. Our board's ability
to issue preferred stock may have the effect of discouraging unsolicited
acquisition proposals, thus adversely affecting the market price of our common
stock and the 2003 Warrants.
We also have a stockholders rights agreement which could have the
effect of substantially increasing the cost of acquiring us unless our board of
directors supports the transaction even if the holders of a majority of our
common stock are in favor of the transaction.
Roan/Meyers Associates, L.P. has limited public offering experience
which could affect the price of our common stock after this offering.
We have been advised by Roan/Meyers Associates, L.P., the
representative of the underwriters, that it has not acted as lead underwriter in
any firm commitment public offering in the last three years. This limited public
offering experience could affect the subsequent development of a trading market
of our common stock and the 2003 Warrants. You should consider this lack of
public offering experience in deciding whether to buy our securities in this
offering. To obtain detailed information regarding Roan/Meyers Associates, L.P.
(or any underwriter), you should contact your state regulator or visit the
website of the National Association of Securities Dealers, Inc. at
"www.nasdr.com."
Our stockholders' equity is less than the amount prescribed for
continued listing on the Nasdaq Small Cap Market. If we do not regain
compliance with the continued listing standards, our stock may be
delisted and we may not receive listing approval for the 2003 Warrants.
As of December 31, 2002, we no longer meet the minimum stockholders'
equity requirement prescribed for continued listing on the Nasdaq Small Cap
Market. In order to regain compliance, our stockholders' equity must be at least
$2.5 million.
In order to receive approval to list the 2003 Warrants on the Nasdaq
Small Cap Market, we are required to be in compliance with the continued listing
standards for the Nasdaq Small Cap Market with respect to our common stock. We
are also required to maintain: (i) a minimum bid price of $1.00 per share, (ii)
a certain public float, (iii) a certain number of round lot shareholders and
(iv) one of the following: a net income from continuing operations (in latest
fiscal year or two of the three last fiscal years) of at least
8
$500,000, a market value of listed securities of at least $35 million or a
stockholders' equity of at least $2.5 million. We currently are in compliance
with the minimum bid price, public float and number of round lot holders
requirements. Because we are a development stage company, we do not meet the net
income requirement. We also do not meet market value of listed securities
requirement. In the event we are unable to obtain approval for listing on the
Nasdaq Small Cap Market, we will likely have to apply for listing on the Nasdaq
Over the Counter Bulletin Board or the Nasdaq Bulletin Board Exchange in order
to maintain a public market for the trading of our common stock and the 2003
Warrants. In the event that the Nasdaq Small Cap Market does not allow the
listing of the 2003 Warrants or determines to delist our common stock, the
underwriters may not proceed with the offering.
Our exercise of our right to redeem the 2003 Warrants will prevent the
holders from realizing any additional benefit from the increase in the
price of our common stock.
Commencing one year from the closing date of this offering, we may
redeem the 2003 Warrants at a redemption price of $0.01 per warrant provided (i)
the average closing price of our common stock for the twenty trading days prior
to the date of notice of redemption is at least 200% of the initial unit
offering price and (ii) there is an effective registration statement providing
for the issuance of the underlying shares of common stock. Notice of our
election to redeem the 2003 Warrants would force holders, in order to avoid
accepting the redemption price of $0.01 per warrant, either to exercise the
warrants by paying the exercise price or sell the warrants in the market. A
holder of the 2003 Warrants would be forced to choose between these two actions
at a time when they might otherwise wish to continue to hold the warrants.
A current prospectus and state blue sky registration may be required to
exercise the 2003 Warrants.
A holder of the 2003 Warrants will be able to exercise the warrants
only if the shares of our common stock issuable upon the exercise of the
warrants are registered for sale under the Securities Act of 1933 and a current
prospectus is available for delivery. In addition, the shares of common stock
issuable upon the exercise of the 2003 Warrants must, if required, be registered
or otherwise qualified for sale under the securities laws of the state in which
the holder of the warrants resides.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus, including statements of our
expectations, intentions, plans, objectives and beliefs, including those
contained in or implied by our "Plan of Operation," are "forward-looking
statements," within the meaning of Section 21E of the Securities Exchange Act of
1934, that are subject to certain events, risks and uncertainties that may be
outside our control. These forward-looking statements may be identified by the
use of words such as "expects," "anticipates," "intends," "plans" and similar
expressions. They include statements of our future plans and objectives for our
future operations and statements of future economic performance, information
regarding our expected growth, our capital budget and future capital
requirements, the availability of funds and our ability to meet future capital
needs, the realization of our deferred tax assets and the assumptions described
in this prospectus underlying such forward-looking statements. Actual results
and developments could differ materially from those expressed in or implied by
such statements due to a number of factors, including those described in the
context of such forward-looking statements, our ability to achieve operating
efficiencies, industry pricing and technology trends, evolving industry
standards, domestic and international regulatory matters, general economic and
business conditions, the strength and financial resources of our competitors,
our ability to find and retain skilled personnel, the political and economic
climate in which we conduct operations, the risks discussed in "Risk Factors"
and other risk factors described from time to time in our other documents and
reports filed with the Securities and Exchange Commission. We do not assume any
responsibility to update any of our forward-looking statements regardless of
whether factors change as a result of new information, future events or for any
other reason.
USE OF PROCEEDS
Our net proceeds from the sale of units being offered by this
prospectus, after deducting the underwriting discount and estimated expenses of
this offering, are estimated to be $2,280,000.
9
We expect to use these net proceeds approximately as follows:
Approximate Dollar Approximate Percentage of
Application of Net Proceeds Amount Net Proceeds
--------------------------- ------ ------------
Research and development:
Phase III clinical trials using the Delcath .. $1,486,000 65.2%
system with doxorubicin
Phase I and Phase II clinical trials using the 291,000 12.8%
Delcath system with melphalan
Develop alternative filter for the Delcath system 183,000 8.0%
Working capital and general corporate purposes .. 320,000 14.0%
---------- ----
Total .................................. $2,280,000 100 %
========== ====
Phase III clinical trials using the Delcath system with doxorubicin.
These costs represent:
o the costs of recruiting medical centers to conduct the
trials and patients to participate in the trials;
o the costs of treating patients, including the costs of the
Delcath system and payments for unreimbursed medical
expenses for patients receiving treatment with the system;
o fees and expenses of the clinical research organization and
the statistical evaluation organization which we anticipate
hiring to conduct the trials, collect and process the data
and prepare and file a pre-market approval application; and
o the compensation and benefits of Delcath employees
responsible for overseeing the completion of the clinical
trials and filing a pre-marketing application.
Phase I and Phase II clinical trials using the Delcath system with
melphalan. These costs represent:
o fees payable to the National Cancer Institute for the costs
of treating patients, including the costs of the Delcath
system;
o fees and expenses of the clinical research organization and
the statistical evaluation organization we anticipate hiring
to monitor the trials, collect and process the data and
prepare and file the required FDA reports in order to
receive approval to proceed with the next phase of the
clinical trials; and
o the compensation and benefits of Delcath employees
responsible for overseeing the completion of each phase of
the clinical trials and filing the required FDA report in
order to receive approval to proceed with the next phase of
the trials.
Develop alternative filter for use in the Delcath system. These costs
represent:
o the fees and expenses of a consultant to identify sources
capable of supplying an activated carbon blood filter,
including the design and production of a prototype filter;
and
o the fees of consultants to test the capability of the filter
to cleanse the blood supply of most of the infused
chemotherapy agent and to prepare reports of results to be
submitted to the FDA to obtain approval to use the new
filter with the Delcath System.
Working capital and general corporate purposes. These costs include
general and administrative costs, including the salaries of our executive
officers.
If the underwriters exercise the over-allotment option in full, we will
realize additional net proceeds of $391,500, which we expect we will use for
working capital purposes.
10
The above allocation represents our best estimate of the allocation of
the net proceeds of this offering based upon the current status of our business.
If any of these factors change, we may find it necessary to reallocate a portion
of the proceeds from one category to another or use portions of the proceeds for
other purposes. Our estimates may prove to be inaccurate, new programs or
activities may be undertaken which will require additional expenditures or
unforeseen expenses may occur.
Based upon our current plans and assumptions relating to our business
plan, we anticipate that the net proceeds of this offering will satisfy our
working capital requirements for at least eighteen to twenty four months
following the closing of this offering. If our plans change or our assumptions
prove to be inaccurate, we may need to seek additional financing sooner than
currently anticipated or curtail our operations. The proceeds of this offering
may not be sufficient to fund our clinical trials with respect to the use of the
Delcath system with doxorubicin to treat liver cancer. If we need additional
financing, it may not be available or may be available only on terms that are
not favorable to us.
We will invest proceeds not immediately required for the purposes
described above principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest-bearing
investments.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Units consisting of our common stock and our 2000 Warrants traded on
the Nasdaq Small Cap Market under the symbol "DCTHU" from October 9, 2000, the
effective date of the registration statement under the Securities Act relating
to our initial public offering of our common stock, until October 19, 2001. In
accordance with the terms of our initial public offering, effective October 22,
2001, our common stock and our 2000 Warrants were decoupled from the units
issued October 19, 2000 and commenced separate trading. The shares of common
stock currently trade under the symbol "DCTH" and the 2000 Warrants currently
trade under the symbol "DCTHW." The following table sets forth the per share
range of high and low sales prices of the units and the common stock for the
periods indicated as reported on the Nasdaq Small Cap Market:
Unit Price Range
----------------
2001
----
High Low
---- ---
Quarter ended March 31, 2001 $5.69 $2.19
Quarter ended June 30, 2001 3.20 1.25
Quarter ended September 30, 2001 2.92 1.26
October 1, 2001 - October 19, 2001 1.35 1.00
Common Stock Price Range
------------------------
2001
----
High Low
---- ---
Quarter ended December 31, 2001
(since October 19 only) $1.795 $0.56
2002
----
High Low
---- ---
11
Quarter ended March 31, 2002 $2.90 $0.94
Quarter ended June 30, 2002 1.90 0.68
Quarter ended September 30, 2002 1.11 0.63
Quarter ended December 31, 2002 2.66 0.31
2002
High Low
---- ---
Quarter ending March 31, 2003
(through February 28, 2003) $1.79 $0.94
Our common stock and our 2000 Warrants are also listed on the Boston
Stock Exchange under the symbols "DCT" and "DCT/U," respectively.
As of February 28, 2003, there were approximately 81 stockholders of
record of our common stock and approximately 686 additional beneficial owners of
our common stock.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
As noted above, the effective date of our registration statement
relating to our initial public offering of our common stock was October 19,
2000. A total of 1,200,000 units were sold for $6.00 per unit consisting of one
share of common stock and one redeemable warrant to purchase one share of common
stock for $6.60 per share until October 18, 2005. The initial public offering
resulted in gross proceeds of $7.2 million, $720,000 of which was paid as the
underwriting discount. Cash expenses relating to the offering, including
non-accountable expense reimbursement to the underwriters, totaled approximately
$1.45 million. Our net proceeds were approximately $5.4 million. From the time
of receipt through December 31, 2002, the net proceeds were applied toward:
Application of Net Proceeds Approximate Amount
--------------------------- ------------------
(in thousands)
--------------
Research and development:
Phase III clinical trials using the Delcath system with doxorubicin ........ $2,009
Phase I clinical trials using the Delcath system with melphalan ............ 901
Research and development stage clinical trials for other chemotherapy agents 87
Repayment of indebtedness ..................................................... 270
Working capital and general corporate purposes ................................ 671
------
Total ......................................................................... $3,938
======
DIVIDEND POLICY
We have never paid cash dividends on our common stock and anticipate
that we will continue to retain our earnings, if any, to finance the growth of
our business. Our board of directors has the sole discretion in determining
whether to declare and pay dividends in the future. Whether we pay cash
dividends on our common stock will depend on our profitability, financial
condition, cash requirements, future prospects and other factors deemed relevant
by our board of directors. Our ability to pay cash dividends in the future could
be limited or prohibited by the terms of financing agreements that we may enter
into or by the terms of any preferred stock that we may authorize and issue.
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
2002 and as adjusted for the effect of this offering including the application
of the net proceeds.
December 31, 2002
--------------------------------------
Actual As Adjusted
(in thousands)
12
Common Stock ....................... $ 41 $ 65
Additional paid-in capital ......... 19,049 21,305
Accumulated deficit ................ (17,453) (17,453)
Total stockholders' equity .... 1,637 3,917
-------- --------
Total capitalization .......... $ 1,637 $ 3,917
======== ========
SELECTED FINANCIAL DATA
The following selected financial data for the two years ended December
31, 2002 and cumulative from inception through December 31, 2002 are derived
from our audited financial statements.
The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information, "Capitalization" and
"Plan of Operation" appearing elsewhere in this prospectus.
Cumulative from
Inception (August 5,
Years Ended 1988)
December 31, to December 31,
2001 2002 2002
---- ---- ----
(in thousands except per share amounts)
Statement of Operations Data:
Total costs and expenses ........... $ 2,069 $ 1,897 $ 16,714
Operating loss ..................... (2,069) (1,897) (16,714)
Net loss attributable to common
stockholders ....................... (1,876) (1,807)
Net loss per share ................. (0.48) (0.44)
Weighted average number of shares of 3,904 4,085
common stock outstanding
As of December 31, 2002
-----------------------------------
As Adjusted1
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $1,064 $3,344
Certificate of deposit 370 370
Total assets 1,812 4,092
Total liabilities 175 175
Stockholders' equity 1,637 3,917
- ----------------------------
13
(1) The as adjusted amounts assume net proceeds of $2,280,000 (excluding
proceeds for any exercise of the overallotment option) from the sale of the
units offered hereby.
The above tables do not reflect (i) up to units issuable in connection
with the underwriters' overallotment option, (ii) up to shares of common stock
reserved for issuance upon exercise of stock options issued pursuant to our
stock option plans and (iii) up to shares of common stock issuable upon exercise
of warrants (including warrants we plan to issue in connection with this
offering).
PLAN OF OPERATION
Since our founding in 1988, we have been a development stage company
engaged primarily in developing and testing the Delcath system for the treatment
of liver cancer. A substantial portion of our historical expenses have been for
the development of our medical device, the clinical trials of our product and
the pursuit of patents worldwide, which now total ten. We expect to continue to
incur significant losses from costs for product development, clinical studies,
securing patents, regulatory activities, manufacturing and establishing a sales
and marketing organization without any significant revenues. A detailed
description of the cash used to fund historical operations is in the financial
statements and the notes thereto. Without an FDA-approved product and commercial
sales, we will continue to be dependent upon existing cash and the sale of
equity or debt to fund future activities. While the amount of future net losses
and time required to reach profitability are uncertain, our ability to generate
significant revenue and become profitable will depend on our success in
commercializing our device.
During 2001, we initiated the clinical trial of the system for isolated
liver perfusion using the chemotherapy agent, melphalan. The Phase I clinical
trial at the National Cancer Institute marks an expansion in the potential
labeled usage for the Delcath system beyond doxorubicin, the chemotherapy agent
used in our initial clinical trials. Enrollment of new patients in the Phase I
trial continued throughout 2002.
NCI is currently preparing a clinical trial protocol for a Phase II
trial of melphalan, based on the data collected in the Phase I study. Enrollment
in this Phase II study is expected to begin during 2003. The Principal
Investigator at the NCI has informed us that he plans to publish and/or present
his findings in appropriate medical forums once treatment within Phase I of the
trial is completed.
We also announced that the Sydney Melanoma Unit of the University of
Sydney Sydney Cancer Centre plans to proceed with a Phase III study of our drug
delivery system for inoperable cancer in the liver, pending approval of the
hospital's Institutional Ethics Committee. Other potential sites are not as far
along as Sydney in their preparations to participate in this clinical trial.
Our management continues to speak to potential investors and investment
analysts at a series of meetings in several major U. S. cities and in Europe. On
April 3, 2002 we raised $267,500 upon completion of a private placement of
243,181 shares of common stock with an investment group.
Over the next twelve months, we expect to incur substantial expenses
related to the research and development of our technology, including Phase III
clinical trials using doxorubicin with the Delcath system and Phase I and Phase
II clinical trials using melphalan with the Delcath system. Additional funds,
when available, will be committed to pre-clinical and clinical trials for the
use of other chemotherapy agents with the Delcath system for the treatment of
liver cancer and the development of additional products and components. We will
also continue efforts to qualify additional sources of the key components of our
device, in an effort to further reduce manufacturing costs and minimize
dependency on a single source of supply.
14
LIQUIDITY AND CAPITAL RESOURCES
Without raising additional funds, we currently anticipate that our
available funds will be sufficient to meet our anticipated needs for working
capital and capital expenditures through at least the next twelve months. We are
not projecting any capital expenditures that will significantly affect our
liquidity during the next twelve months. Upon the closing of this offering, we
anticipate hiring an additional employee to serve as Director of Research and
Development. Our cash and cash equivalents and short term investments at
December 31, 2002 totaled $1.43 million.
Our future liquidity and capital requirements will depend on numerous
factors, including the progress of our research and product development
programs, the success or failure of our clinical studies, the timing and costs
of making various United States and foreign regulatory filings, obtaining
approvals and complying with regulations, the timing and effectiveness of
product commercialization activities, including marketing arrangements overseas,
the timing and costs involved in preparing, filing, prosecuting, defending and
enforcing intellectual property rights and the effect of competing technological
and market developments.
Our future results are subject to substantial risks and uncertainties.
We expect to require additional working capital in the future and there can be
no assurance that such working capital will be available on acceptable terms, if
at all.
FUTURE CAPITAL NEEDS, ADDITIONAL FUTURE FUNDING
Our future results are subject to substantial risks and uncertainties.
We have operated at a loss for our entire history and we may never achieve
consistent profitability. We had working capital at December 31, 2002 of $1.4
million. We expect to require additional working capital in the future, and such
working capital may not be available on acceptable terms, if at all. In
addition, we may need additional capital in the future to fully implement our
strategy as set forth herein.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Certain accounting policies have a significant impact on amounts reported in the
financial statements. A summary of those significant accounting policies can be
found in Note 1 to our financial statements included herein. We have not adopted
any significant new accounting policies during the year ended December 31, 2002,
but have reclassified our Statements of Operations to reflect cost and expense
accounts on a functional basis for 2002 and prior.
BUSINESS
GENERAL
We were incorporated under Delaware law in 1988. We are a development
stage company, and we have developed the Delcath system to isolate the liver
from the general circulatory system and to administer chemotherapy and other
therapeutic agents directly to the liver. Since our inception, we have raised
approximately $14 million in funds (net of fundraising expenses), and we have
invested approximately $11 million of those funds in research and development
costs associated with development and testing of the Delcath system.
15
The Delcath system is not currently approved for marketing by the
United States Food and Drug Administration, and it cannot be marketed in the
United States without FDA pre-marketing approval. We plan to conduct Phase III
clinical trials designed to secure marketing approval in the United States and
possibly in foreign markets for use of the Delcath system with a particular
chemotherapy agent, doxorubicin, currently used to treat malignant melanoma that
has spread to the liver. We also plan to continue our clinical trial for the use
of the Delcath system with another chemotherapy agent, melphalan, which is also
currently used to treat malignant melanoma that has spread to the liver.
Additionally, we plan to continue pre-clinical and clinical trials on the use of
the Delcath system with other chemotherapy agents used to treat liver cancer.
STRATEGY
Our objectives are to establish the use of the Delcath system as the
standard technique for delivering chemotherapy agents to the liver and to expand
the Delcath technology so that it may be used in the treatment of other liver
diseases and of cancers in other parts of the body. Our strategy includes the
following:
o Completing clinical trials to obtain FDA pre-marketing
approval for use of the Delcath system with doxorubicin to
treat malignant melanoma that has spread to the liver. Our
highest priority is completing the Phase III clinical
trials, data preparation, statistical analysis and
regulatory documents associated with an application for
pre-market approval of commercial sale of the Delcath system
in the United States for use in administering doxorubicin in
the treatment of melanoma that has spread to the liver.
o Obtaining approval to market the Delcath system in the
United States for the treatment of other forms of liver
cancer using other chemotherapy agents and treatment of
hepatitis using anti-viral drugs. In August 2001, we
commenced a Phase I clinical trial at the National Cancer
Institute using melphalan, a chemotherapy agent. In addition
to researching the use of other chemotherapy agents with the
Delcath system to treat cancer, we plan to research the use
of other compounds with the Delcath system to treat other
diseases, such as hepatitis. Our timing to begin these
studies will depend on our ability to establish strategic
alliances with pharmaceutical manufacturers or other
strategic partners in conjunction with our research into
other therapeutic compounds and to raise additional funds
for these purposes. Additional FDA pre-marketing approval
will be required to market the Delcath system for these
uses.
o Introducing the Delcath system into foreign markets. We will
seek to establish strategic relationships with domestic and
foreign firms that have a recognized presence or experience
in foreign markets that we intend to target. Our strategy is
to focus on markets that have a high incidence of liver
cancer and the means to provide and pay for cancer
treatments. According to the World Health Organization, many
Asian and European countries, including China, Japan,
Greece, Hong Kong, the Philippines, France, Germany, Italy
and Spain, have a higher incidence of liver cancer than the
United States. Additionally, Australia has been cited as
having the highest incidence of skin cancer in the world.
Given that our current Phase III clinical trials are with a
chemotherapy agent that is used to treat malignant melanoma
that has spread to the liver, upon obtaining FDA
pre-marketing approval, we intend to target the Australian
market. We also intend to seek to enter into arrangements
with strategic partners who have experience with obtaining
regulatory approval and marketing medical devices in those
markets and are willing to bear the cost of those
activities.
THE CANCER TREATMENT MARKET
The American Cancer Society projects that about 1,334,100 Americans
will be diagnosed with cancer in 2003. According to the American Cancer
Society's "Cancer Facts and Figures 2003," cancer remains the second leading
cause of death in the United States. While researchers continue to develop
innovative new treatments for some forms of this disease, surgical resection,
chemotherapy, radiation and hormone therapy continue to be the most commonly
used treatments.
16
The financial burden of cancer is great for patients, their families
and society. The National Institutes of Health, in the American Cancer Society's
"Cancer Facts & Figures 2003," estimates the overall costs of cancer in the year
2002 to be $171.6 billion, including $61 billion in direct medical costs, $15.5
billion for indirect morbidity costs attributable to lost productivity due to
illness and $95.2 billion for indirect mortality costs attributable to lost
productivity due to death.
THE LIVER CANCER MARKET
Liver cancer is one of the most prevalent and lethal forms of cancer
throughout the world. There are two forms of liver cancer: primary and
metastatic. Primary liver cancer originates in the liver. Metastatic, or
secondary, liver cancer results from the spread of cancer from other places in
the body to the liver. With our initial Phase III clinical trials, we will seek
to develop data on metastatic melanoma which has spread to the liver. According
to the American Cancer Society's "Cancer Facts & Figures 2003," the five-year
survival rate for liver cancer patients ,both primary and secondary, is
approximately 7%, compared to the 62% for all other forms of cancer combined. In
the liver, tumors can be surgically removed only when they are located in one of
the liver's two lobes. However, since symptoms of liver cancer often do not
appear until the disease has advanced, more than 70% of cancerous liver tumors
cannot be surgically removed at the time of diagnosis. A significant number of
patients treated for primary and metastatic liver cancer will also experience a
recurrence of their disease.
Metastatic liver cancer is characterized by microscopic pieces of other
forms of cancer that detach from the primary site and travel via the blood
stream and lymphatic system into the liver, where they grow into new tumors.
This growth often continues even after removal of the primary cancer or
cancerous organ. When cancer cells enter the liver and develop into tumors, they
tend to grow very quickly. In many cases, the patient dies not from the primary
cancer, but from the tumors in the liver; the liver becomes the "life limiting
organ." People cannot survive without a liver capable of performing its critical
biologic functions: facilitating the conversion of food into energy and
filtering toxic agents from the blood. The liver is one of the three most common
sites to which cancer may spread. Due to numerous factors, including the absence
of viable treatment options, metastatic liver cancer often causes death.
According to the 2002 World Health Report, liver cancer is the third
most common form of cancer worldwide, accounting for 616,000 deaths. The
American Cancer Society in its "Cancer Facts & Figures 2003" has projected that
in the United States there will be approximately 17,300 new cases of primary
melanoma and 54,200 new cases of malignant melanoma.
Primary liver cancer is particularly prevalent in Southern Europe, Asia
and developing countries, where the primary risk factors for the disease are
present. These risk factors include: hepatitis-B, hepatitis-C, relatively high
levels of alcohol consumption, aflatoxin, cigarette smoking and exposure to
industrial pollutants.
CURRENT LIVER CANCER TREATMENTS
The prognosis for primary and secondary liver cancer patients is poor.
Although limited treatment options are currently available for liver cancer,
they are typically ineffective, are generally associated with significant
side-effects and can even cause death. Traditional treatment options, discussed
in more detail below, include surgery, chemotherapy, cryosurgery, percutaneous
ethanol injection and radiation.
Surgery
While surgery is considered the "gold standard" treatment option to
address liver tumors, an estimated 75% of liver tumors are unresectable, which
means they do not qualify for surgical removal. This is most often due to the
following:
o Operative risk: limited liver function or poor patient
health threatens survival as a result of the surgery; or
o Technical feasibility: the proximity of a cancerous tumor to
a critical organ or artery or the size, location on the
liver or number of tumors makes surgery not feasible.
For the patients who qualify for surgery, there are significant
complications related to the procedure. Recurrence of tumors is common, and in
that event, surgery typically cannot be repeated.
17
We believe that delivery of drugs with the Delcath system may enable
surgical removal in some of the cases which are currently inoperable by reducing
the size and number of tumors sufficiently to make resection feasible. Shrinking
a tumor using chemotherapy and then removing the tumor is a procedure known as
adjuvant therapy. After resection, chemotherapy can be administered through the
Delcath system with the objective of destroying micro metastases in the liver
that may remain undetected, thus preventing or delaying any recurrence of tumor
growth.
Chemotherapy
The most prevalent form of liver cancer treatment is intravenous
chemotherapy. The effectiveness of this treatment, however, is limited by its
side effects. Generally, the higher the dosage of chemotherapy administered, the
greater its ability to kill cancer cells. However, due to the toxic nature of
chemotherapy agents, the higher the dosage administered, the greater damage
chemotherapy agents cause to healthy tissues. As a result, the dosage of
chemotherapy required to kill cancer cells can be lethal to patients.
The side effects caused by doxorubicin, the drug we are seeking to have
approved for use in the Delcath system, are representative of the side-effects
associated with many chemotherapy agents. Doxorubicin causes irreversible heart
tissue damage. Depending on dosage levels, the damage caused by doxorubicin can
be serious and lead to congestive heart failure. Doxorubicin can also cause
severe mucositis leading to ulceration of the mouth and digestive organs, damage
to a patient's immune system through destruction of bone marrow cells, as well
as acute nausea, severe vomiting, dermatological problems and hair loss. The use
of doxorubicin can be fatal even when it is administered with careful patient
monitoring.
The limited effectiveness of intravenous chemotherapy treatment and its
debilitating, often life-threatening, side-effects makes the decision to undergo
chemotherapy treatment difficult. In some instances, in an attempt to shrink
tumors, a physician may prescribe a radically high-dose of chemotherapy, despite
its side effects. In other cases, recognizing the inevitable result of liver
cancer, the physician and patient choose only to manage the patient's discomfort
from cancer with pain killers while foregoing treatment.
To address this trade-off between the efficacy of intravenous
chemotherapy treatment and its dire side effects, physicians have experimented
with techniques to isolate the liver from the general circulatory system and to
achieve a targeted delivery of chemotherapy agents to the liver. In the 1980's,
a physician developed a procedure in which he surgically diverted the blood flow
from the liver while infusing high dosages of chemotherapy agents into the
liver. A filtration circuit reduced drug concentrations before returning the
diverted blood to the patient. The treatment, however, was not embraced by the
medical community because it is highly invasive, resulting in prolonged recovery
times, long hospital stays and very high costs. Other physicians have
experimented with the delivery of chemotherapy agents to the liver by catheter,
attempting to use one or more catheters to remove chemotherapy agents before
they enter the general circulatory system. We are unaware of any system,
however, which contains the patented attributes of the Delcath design.
Cryosurgery
Cryosurgery is the destruction of cancer cells using sub-zero
temperatures in an open surgical procedure. During cryosurgery, multiple
stainless steel probes are placed into the center of the tumor and liquid
nitrogen is circulated through the end of the device, creating an ice ball.
Cryosurgery involves a cycle of treatments in which the tumor is frozen, allowed
to thaw and then refrozen.
While cryosurgery is considered to be relatively effective, we believe
adoption of this procedure has been limited because:
o It is not an option for patients who cannot tolerate an open
surgical procedure;
o It involves significant complications which are similar to
other open surgical procedures, as well as liver fracture
and hemorrhaging caused by the cycle of freezing and
thawing;
o It is associated with mortality rates estimated to be
between one and five percent; and
o It is expensive compared to other alternatives.
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Percutaneous Ethanol Injection
Percutaneous ethanol injection, or PEI, involves the injection of
alcohol into the center of the tumor. The alcohol causes cells to dry out and
cellular proteins to disintegrate, ultimately leading to tumor cell death.
While PEI can be successful in treating some patients with primary
liver cancer, it is generally considered ineffective on large tumors as well as
metastatic tumors. Patients are required to receive multiple treatments, making
this option unattractive for many patients. Complications include pain and
alcohol introduction to bile ducts and major blood vessels. In addition, this
procedure can cause cancer cells to be deposited along the needle track when the
needle is withdrawn.
Radiation Therapy
Radiation therapy uses high dose x-rays to kill cancer cells. Radiation
therapy is not considered an effective means of treating liver cancer and is
rarely used for this purpose. Radiation is often used as an adjunct to other
treatments for liver cancer .
Implanted Infusion Pumps
Implanted infusion pumps can be used to better target the delivery of
chemotherapy agents to the tumor. Arrow International markets an implantable
pump typically used to treat colorectal cancer which has metastasized to the
liver. This pump, however, lacks a means of preventing the entry of chemotherapy
agents into the patient's general circulation after it passes through the liver.
This technique does not enable physicians to prescribe higher doses of
chemotherapy.
Other Methods of Treatment
Still other liver cancer treatments include liver transplants,
embolization, removal of tumors through the use of radio frequency waves and the
use of biological response modulators, monoclonal antibodies and liposomes. The
effectiveness of these treatments is limited, many have dose limiting
side-effects and none is widely used.
Treatment with the Delcath System
The Delcath system is designed to address the critical shortcomings of
conventional intravenous chemotherapy delivery. The Delcath system isolates the
liver from the general circulatory system during liver cancer treatments with
chemotherapy agents and then returns the blood exiting the liver to the general
circulatory system only after the chemotherapy agent has been substantially
removed by filtration outside the body. We believe that the protection from the
side-effects of chemotherapy to other parts of the body that is provided by the
Delcath system allows for higher chemotherapy doses to the liver than can be
administered by conventional intravenous delivery. By filtering out a
substantial portion of the chemotherapy agent before the blood is returned to
the blood stream, other organs of the body receive less exposure than the liver
to the chemotherapy agent. Therefore, these organs are less likely to suffer
from the harmful side-effects of chemotherapy, including the cumulative harmful
effect that doxorubicin has on the heart muscle.
The Delcath system kit includes the following disposable components
that we purchase from third-party suppliers:
o Infusion catheter -- a thin-walled arterial infusion
catheter used to deliver chemotherapy to the liver;
o Double balloon catheter -- a multi-passageway catheter used
to isolate and divert the drug-laden blood exiting the
liver;
o Extracorporeal filtration circuit -- a blood tubing circuit
incorporating the disposable components used with a blood
pump to push the isolated blood through the system's filters
and guide the cleansed blood back to the patient;
o Filters -- activated carbon blood filters used to remove
most of the chemotherapy agent from the isolated blood after
it has flowed through the liver and before it returns to the
patient's general circulation; and
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o Return catheter -- a thin-walled blood sheath used to
deliver the filtered blood from the extracorporeal
filtration circuit back into one of the major veins
returning blood to the right atrium of the heart.
The double balloon catheter has one large passageway and three smaller
passageways. Each of two low-pressure balloons is inflated through one of the
three smaller passageways. Blood flows out of the liver through the large
passageway to the filtration system. A separate access port attaches to the
large passageway and is designed for sampling fluid or flushing the system. The
third smaller passageway allows blood exiting the legs and kidneys to bypass the
liver and return to the heart.
The Delcath system involves a series of three catheter insertions, each
of which is made through the skin. During test procedures, patients are treated
with intravenous sedation and local anesthesia at catheter insertion sites. In
some cases general anesthesia has been used. An infusion catheter is inserted
into the artery through which blood normally flows to the liver. A second
catheter -- the Delcath double balloon catheter -- is inserted through the
inferior vena cava, a major vessel of the heart . The balloons on the double
balloon catheter are then inflated. This procedure prevents the normal flow of
blood from the liver to the heart through the inferior vena cava because the
inferior vena cava has been blocked. A chemotherapy agent is then infused into
the liver through the infusion catheter. The infused blood is prevented from
flowing to the heart, but leaves the liver through perforations on the double
balloon catheter and flows through this catheter out of the body where the
infused blood is pumped through activated charcoal filters to remove most of the
chemotherapy agent. The filtered blood is returned to the patient through the
jugular vein which leads to the superior vena cava, another major vessel of the
heart, thus restoring the cleansed blood to normal circulation. Infusion is
administered over a period of thirty minutes. Filtration occurs during infusion
and for thirty minutes afterward. The catheters are removed and manual pressure
is maintained on the catheter puncture sites for approximately fifteen minutes.
The entire procedure takes approximately two to three hours to administer.
During Phase I and Phase II clinical trials, patients remained in the
hospital overnight for observation after undergoing treatment with the Delcath
system. Once physicians become familiar with using the Delcath system, we expect
the procedure to be performed on an outpatient basis, with the patient resuming
normal activities the day after the procedure is performed. We expect a patient
to undergo an average of four treatments, one every three weeks. A new Delcath
system kit is used for each treatment.
Integral to our research and development efforts is our program of
clinical research with prominent researchers and physicians that is being
conducted presently at The National Cancer Institute and was previously
conducted at Yale University, M.D. Anderson Cancer Center and Wright Patterson
Air Force Base.
OUR PHASE III CLINICAL TRIALS
Phase III clinical trials are a prerequisite for FDA approval of
Delcath's pre-marketing application. During these trials, administration of
doxorubicin through the Delcath system must be proven to be safe and effective
for the treatment of liver cancer. The FDA requires us to demonstrate that
delivering doxorubicin using the Delcath system results in patient survival
times that are longer than those obtained from administering chemotherapy agents
intravenously.
We have conducted Phase I and II clinical trials at three United States
medical centers under investigational device and investigational new drug
exemptions granted by the FDA. The trials were designed to demonstrate the
system's "functionality," or its ability to administer to and extract from the
liver approved and marketed chemotherapy agents. Forty-four patients
participated in the trials. Twenty-one of these test subjects had primary liver
cancer or melanoma which had spread to the liver and were treated with
doxorubicin. The remaining twenty-three test subjects suffered from other forms
of liver cancer and/or were treated with another chemotherapy agent, 5-FU. These
trials demonstrated that the Delcath system was capable of extracting
approximately 70% to 85% of the chemotherapy agent administered to the liver.
Therefore, the Delcath system permits the delivery of higher dosages of
chemotherapy agents to the cancer site while at the same time minimizing damage
to healthy tissue.
We believe the results of the clinical trials we have conducted
indicate that the Delcath system delivered:
o more chemotherapy agent to the tumor site; and
20
o less chemotherapy agent to the general circulation than
delivered by administration of the same dose by intravenous
means.
In addition, clinicians involved in the Phase I and Phase II clinical
trials observed:
o reduction in tumor size; and
o the safety of the system at higher dosage levels of
chemotherapy than those used in conventional intravenous
chemotherapy delivery.
Further, though not demonstrated in a statistically significant manner
because of the limited number of patients tested, clinicians observed survival
times of patients treated with the Delcath system which exceeded those that
would generally be expected in patients receiving chemotherapy treatment through
conventional intravenous means of delivery.
Based on the results of our Phase I and Phase II clinical trials, we
submitted to the FDA our application for pre-marketing approval of the Delcath
system as a medical device. In response to our application, the FDA classified
the Delcath system as a drug delivery system which requires us to obtain
approval of new labeling for the drug being used in the clinical trials. The
application to change the labeling must be filed by a drug manufacturer holding
an existing new drug application or an abbreviated new drug application. We have
reached a preliminary verbal understanding with a drug manufacturer holding an
existing license for doxorubicin to submit an application to the FDA supporting
the new labeling based on data from the Phase III clinical trial. The
pre-marketing approval and drug relabeling applications must demonstrate the
clinical utility of a particular drug when administered through the Delcath
system. To do so, we must demonstrate, in a statistically meaningful manner,
that administering chemotherapy agents with the Delcath system results in
survival times of patients that are longer than those obtained from
administering chemotherapy agents intravenously.
With a substantial portion of the proceeds that we receive from this
offering, we intend to conduct Phase III clinical trials designed to demonstrate
that administering doxorubicin with the Delcath system to treat malignant
melanoma that has spread to the liver results in patient survival times that are
longer than those obtained from administering chemotherapy agents intravenously.
In December 1999, the FDA approved our protocols for conducting the
Phase III clinical trials.
We expect the Phase III clinical trials to be conducted at several
medical centers such as the NCI and the Sydney Cancer Center and to involve a
minimum of 122 test subjects who will be treated for malignant melanoma that has
spread to the liver. Half of these test subjects will be treated with
doxorubicin administered using the Delcath system and the other half, the
control group, will be treated with either of two specified chemotherapy agents
delivered intravenously. Trials will commence upon approval of a budget by the
respective institutions. Once a budget is approved, the trials will commence at
that institution. We expect that trials will begin in 2003. However, our
timetable is subject to uncertainty and we cannot assure you that we can meet
our planned schedule. We do not know whether all of the medical centers we have
identified will be available to conduct the clinical trials when we are in a
position to have them commence or that we will be ready to commence the trials
within any particular time period.
We intend to hire a contract research organization ("CRO") to conduct
these trials. The CRO represents the clinical trial sponsor. They ensure that
the principal investigator follows the established protocol and collects the
clinical data. We have not begun negotiations with a CRO and we cannot assure
you that we will be able to engage a CRO on acceptable terms and conditions in a
timely manner or at all. The CRO and principal investigators conducting the
clinical trials are not our employees. As a result, we have limited control over
their activities and can expect that only limited amounts of their time will be
dedicated to our clinical trials. They may fail to meet their contractual
obligations or fail to meet regulatory standards in the performance of their
obligations, and we may not be able to prevent or correct their failures.
Failure of the CRO to perform as expected or required, including failure of the
principal investigators to enroll a sufficient number of patients for our
trials, could result in the failure of the clinical trials and the failure to
obtain FDA
21
pre-marketing approval. We believe that we will acquire sufficient data to seek
FDA pre-marketing approval of the Delcath system within twelve to eighteen
months of the last patient enrolled.
We do not know how long the FDA may take to evaluate our submission,
and they may require that additional trials be conducted or may not grant
approval.
The FDA pre-marketing approval we are currently seeking is limited to
administration of doxorubicin with our Delcath system to treat patients
suffering from metastatic melanoma which has spread to the liver. If we are
granted this approval, we plan to seek additional FDA pre-marketing approvals
for using the Delcath system with other chemotherapy agents for treatment of
other liver cancers and with anti-viral drugs for treatment of other diseases,
such as hepatitis. In many instances, the process of applying for and obtaining
regulatory approvals involves rigorous pre-clinical and clinical testing. The
time, resources and funds required for completing necessary testing and
obtaining approvals is significant, and FDA pre-marketing approval may never be
obtained for some medical devices or drug delivery systems. If we fail to raise
the additional capital required or enter into strategic partnerships to finance
this testing or if we fail to obtain the required approvals, our potential
growth and the expansion of our business would likely be limited.
OUR CLINICAL TRIAL AND AGREEMENT WITH THE NATIONAL CANCER INSTITUTE
In June 2001, the Company announced that The National Institutes of
Health/The National Cancer Institute approved a clinical study protocol for
administering escalating doses of another chemotherapy agent, melphalan, through
the Delcath system to patients with unresectable cancer of the liver.
The Phase I clinical trial conducted at The National Cancer Institute
("NCI") began in September 2001 and involved a total of 24 patients, all
experiencing metastatic liver cancer. The goal of a Phase I Clinical trial is to
determine the maximum tolerated dose of melphalan that can be administered
before it becomes toxic to the patient's system.
This clinical trial, which will also include a Phase II study, is
subject to the terms and conditions of the Cooperative Research and Development
Agreement (the "CRADA") between us and NCI. We obtained FDA approval to conduct
the Phase I clinical trial; however, further FDA approval is necessary to
conduct Phase II studies. The goal of a Phase II clinical trial is to determine
various factors such as the appropriate dosage, the timing of each dose and the
efficacy of the proposed dose. We cannot estimate how long it will be until we
receive FDA approval to commence the Phase II study. The scope of the study is:
o To develop a Delcath system-based Phase I treatment protocol for
the regional therapy of organs using escalating doses of
melphalan delivered through the utilization of the Delcath
system; and
o To develop Delcath system-based Phase II treatment protocols as
a follow-up to Phase I studies. The Phase II study will involve
patients with specific histologies (diseases) who have
unresectable cancers confined to the liver using the maximum
tolerated dose of melphalan administered using the Delcath
system.
The patients will be treated with up to four series of infusions based
upon toxicity and response to treatment. The Phase II study is expected to begin
shortly after completion of the Phase I study and to take twelve to eighteen
months.
22
The CRADA commits NCI to perform the research necessary under the Phase
I and Phase II protocols approved by the FDA with Delcath acting as the sponsor
and NCI providing the principal investigator. Delcath will provide funding to
NCI in the amount of $918,750 payable in quarterly installments over the
five-year term of the agreement unless the CRADA is terminated early. The CRADA
can be terminated at any time by either party. In the event of an early
termination, we would be responsible for unfunded costs incurred prior to the
termination date and all reasonable termination costs. The term of the agreement
is intended to allow for what the parties expect to be the potential maximum
amount of time necessary to complete and evaluate Phase I and Phase II trials.
An amendment to the CRADA would be necessary if the parties decide to initiate
additional clinical trials using other chemotherapy agents. We are using money
raised in our initial public offering and will use a portion of the net proceeds
this offering to fund this project. If the results of the Phase I and Phase II
trials are successful, we will probably need additional capital to pay for the
expenses associated with a Phase III clinical trial.
RESEARCH FOR HEPATITIS TREATMENT
Another disease that attacks the liver is viral hepatitis. The
incidence of viral hepatitis in the United States and worldwide is increasing.
The long-range effects of some forms of hepatitis can include massive death of
liver cells, chronic active hepatitis, cirrhosis and hepatoma. The current
treatment for viral hepatitis is limited and includes long-term injections of
interferon alpha, which is similar to chemotherapy in its toxicity and dosage
limitations. We plan to seek a strategic partner to conduct clinical trials to
determine the feasibility of using the Delcath system to administer anti-viral
drugs, including interferon alpha, in the treatment of viral hepatitis. We have
not entered into any arrangements, understandings or agreements with potential
strategic partners.
SALES AND MARKETING
We intend to focus our marketing efforts on the sixty-one NCI
designated Cancer Centers in the United States recognized by NCI, beginning with
the hospitals participating in the Phase III clinical trials, as well as key
foreign institutions including the Sydney Melanoma Unit of the University of
Sydney Sydney Cancer Centre. We will focus these efforts on two distinct groups
of medical specialists in these comprehensive cancer centers:
o oncologists who have primary responsibility for the patient; and
o interventional radiologists who are members of the hospital
staff and work with catheter-based systems.
Upon diagnosis of cancer, a patient is usually referred to a medical
oncologist. This physician generally provides palliative treatments
(non-curative) and refers the patient to a surgical oncologist if surgery
appears to be an option. Both medical and surgical oncologists will be included
in our target market. Generally, oncologists do not position catheters. This is
done either by an interventional radiologist or a surgeon.
We plan to hire a marketing director at such time as we receive an
indication from the FDA that approval of the Delcath system is forthcoming and
then hire a sales manager and four sales representatives to market the system in
the United States.
In addition, if we can establish foreign testing and marketing
relationships, we plan to utilize one or more corporate partners to market
products outside the United States. We believe distribution or corporate
partnering arrangements will be cost effective, will be implemented more quickly
than a direct sales force established by us in such countries and will enable us
to capitalize on local marketing expertise in the countries we target.
Since we plan to sell the Delcath system to a large number of hospitals
and physician practices, we do not expect to be dependent upon one or a few
customers.
Market acceptance of the Delcath system will depend upon:
23
o the ability of our clinical trials to demonstrate against the
control group a statistically measurable increase in life
expectancy for the kinds of cancers treated at a cost effective
price;
o our ability to educate physicians on the use of the system and
its benefits compared to other treatment alternatives; and
o our ability to convince healthcare payors that use of the
Delcath system results in reduced treatment costs of patients.
This will require substantial efforts and expenditures.
NISSHO AGREEMENT
In December 1996, we entered into an agreement with Nissho Corporation,
a large manufacturer and distributor of medical devices and pharmaceuticals
based in Osaka, Japan which grants to Nissho the exclusive right to distribute
the Delcath system in Japan, China, Korea, Hong Kong and Taiwan until December
31, 2004. Nissho, at that time, invested $1,000,000 in Delcath.
Products covered by the agreement include the Delcath system for the
treatment of cancer in the liver and the lower extremities, as well as new
products that may be added by mutual agreement. Nissho is required to purchase
products from Delcath in connection with clinical trials and for resale in its
market at prices to be determined by mutual agreement. Nissho has agreed, in its
territory, not to engage in the business of manufacturing, distributing or
selling systems similar to the Delcath system for the liver or other organs or
body regions.
THIRD-PARTY REIMBURSEMENT
Because the Delcath system is characterized by the FDA as an
experimental device, its use is not now reimbursable in the United States. We
will not seek to have third-party payors, such as Medicare, Medicaid and private
health insurance plans, reimburse the cost of the Delcath system until after its
use is approved by the FDA.
We believe that the Delcath system will provide significant cost
savings in that it should reduce treatment and hospitalization costs associated
with the side-effects of chemotherapy. Our planned wholesale price to the
hospitals for the Delcath system kit is approximately $4,000. A patient normally
undergoes four treatments with the Delcath system, each requiring a new system
kit. Each treatment with the Delcath system, including the cost of the treatment
kit, has an estimated cost of approximately $12,000, resulting in a total
estimated treatment cost of approximately $48,000. This compares to a total
estimated cost of conventional aggressive chemotherapy treatment of
approximately $160,000 to $180,000, which includes the hospitalization and
treatment costs associated with the side-effects of the systemic delivery of
chemotherapy agents.
MANUFACTURING
We plan to utilize contract manufacturers to manufacture the components
of the Delcath system. In order to maintain quality control, we plan to perform
final assembly and packaging in our own facility. If we undertake these
operations, our facility will be required to comply with the FDA's good
manufacturing practice and quality system requirements. If we sell the Delcath
system in some foreign markets, our facility will also need ISO 9000 approval
from the European Union which is a required approval that European manufacturers
must obtain from the International Organization for Standardization.
The double balloon catheter is being manufactured domestically by the
Burron OEM division of B. Braun Medical, Inc. of Germany. The double balloon
catheter must be manufactured in accordance with manufacturing and performance
specifications that are on file with the FDA. Burron has demonstrated that the
components it manufactures meet these specifications. Burron's manufacturing
facility is ISO 9000 approved, which will allow the use of the catheter in
European markets. B. Braun has experience in obtaining regulatory approval for
medical products in European markets and has indicated informally that it will
assist us in this process. We have not entered into a written agreement with
Burron to manufacture the catheter either for the clinical trials or for
commercial sale.
Medtronic USA, Inc. manufactures the components of the blood filtration
circuit located outside of the body, including the medical tubing through which
a patient's blood flows and various connectors, as well as the blood filtration
24
pump head. Medtronic is a manufacturer of components used for extracorporeal
blood circulation during cardiac surgery. The components manufactured by
Medtronic have been cleared by the FDA for other applications and can,
therefore, be sourced off the shelf. These components, however, must comply with
manufacturing and performance specifications for the Delcath system that are on
file with the FDA. Medtronic has demonstrated that the components it
manufactures meet these specifications. Medtronic's manufacturing facility is
also ISO 9000 approved and, thus, the components it manufactures may be used in
European markets.
Currently, we purchase the activated charcoal filters used in the
Delcath system from Asahi Medical Products of Japan. Asahi has informed us that
it will discontinue manufacturing these filters in the near future. We have
ordered a final shipment of filters from Asahi which we expect will be
sufficient to meet our needs for the next twelve months. However, as part of our
application process with the FDA, we obtained approval to utilize filters from
any manufacturer that falls within certain performance parameters and meets the
specifications on file with the FDA. Therefore, we are currently actively
seeking an alternative filter manufacturer that is capable of providing us with
the quality of filters that are required to meet the specifications on file with
the FDA in the quantity that we will require to conduct future clinical trials
and to market the Delcath system commercially. We have already identified one
potential supplier in the United States.
COMPETITION
The healthcare industry is characterized by extensive research efforts,
rapid technological progress and intense competition from numerous
organizations, including biotechnology firms and academic institutions.
Competition in the cancer treatment industry, and specifically the markets for
systems and devices to improve the outcome of chemotherapy treatment for cancer,
is intense. We believe that the primary competitive factors for products
addressing cancer include safety, efficacy, ease of use, reliability and price.
We also believe that physician relationships, especially relationships with
leaders in the interventional radiology and oncology communities, are important
competitive factors.
The Delcath system competes with all forms of liver cancer treatments
that are alternatives to resection including radiation, intravenous chemotherapy
and chemotherapy through implanted infusion pumps, liver transplants,
embolization, cryosurgery, radiowave ablation and the use of biological response
modulators, monoclonal antibodies and liposomes. Many of Delcath's competitors
have substantially greater financial, technological, research and development,
marketing and personnel resources. In addition, some of our competitors have
considerable experience in conducting clinical trials and other regulatory
approval procedures. Our competitors may develop more effective or more
affordable products or treatment methods, or achieve earlier product development
or patent protection, in which case our chances to achieve meaningful revenues
or profitability will be substantially reduced.
Many large pharmaceutical companies and research institutions are
developing systems and devices to improve the outcome of chemotherapy treatment
for cancer. Arrow International currently markets an implantable infusion pump,
which has been successful in facilitating regional drug delivery. However,
Arrow's pump lacks a means of preventing the entry of these agents into the
patient's general circulation after they pass through the liver. Other
companies, including Merck & Co., Inc., are developing various chemotherapy
agents with reduced toxicity, while other companies are developing products to
reduce the toxicity and side-effects of chemotherapy treatment. In addition,
gene therapy, vaccines and other minimally invasive procedures are currently
being developed as alternatives to chemotherapy.
Technological developments are expected to continue at a rapid pace in
both industry and academia which could result in a short product life cycle for
our Delcath system.
GOVERNMENT REGULATION
General. The manufacture and sale of medical devices and drugs are
subject to extensive governmental regulation in the United States and in other
countries. The Delcath system is regulated in the United States as a drug
delivery system by the FDA under the Federal Food, Drug and Cosmetic Act. As
such, it requires approval by the FDA of a pre-marketing application prior to
commercial distribution.
Doxorubicin, the drug that we are initially seeking to have approved
for delivery by the Delcath system, is a widely used chemotherapy agent that has
been approved by the FDA. Melphalan, the drug that will be administered through
the Delcath system in the NCI-sponsored study, is a chemotherapy agent that has
also been approved by the FDA. Like all approved drugs, the approved labeling
includes indications for use, method of action, dosing, side-effects
25
and contraindications. Because the Delcath system delivers doxorubicin through a
mode of administration and at a dose strength that differs from those currently
approved, approval for revised labeling of doxorubicin and melphalan products
permitting their use with the Delcath system must be obtained. The application
to change the labeling must be filed by a drug manufacturer holding an existing
new drug application or an abbreviated new drug application. We are currently in
discussions with a drug manufacturer who holds an existing license for
doxorubicin for the manufacturer to submit an application supporting the new
labeling, assuming data from the Phase III clinical trial is favorable. We are
also currently in discussions with the drug manufacturers that hold a new drug
application or an abbreviated new drug application and plan actively to solicit
one of them to file an application for new labeling with the FDA for
doxorubicin.
Under the Federal Food, Drug and Cosmetic Act, the FDA regulates the
pre-clinical and clinical testing, design, manufacture, labeling, distribution,
sales, marketing, post-marketing reporting, advertising and promotion of medical
devices and drugs in the United States. Noncompliance with applicable
requirements could result in different sanctions such as:
o suspension or withdrawal of clearances or approvals;
o total or partial suspension of production, distribution,
sales and marketing;
o fines;
o injunctions;
o civil penalties;
o recall or seizure of products; and
o criminal prosecution of a company and its officers and
employees.
Our contract manufacturers are also subject to numerous federal, state
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances.
Medical Devices. The Delcath system is a Class III medical device.
Class III medical devices are those which are subject to the most stringent
regulatory controls because insufficient information exists to assure safety and
efficacy solely through general or special controls such as labeling
requirements, mandatory performance standards and post-market surveillance. As
such, FDA pre-marketing approval is required for Class III medical devices. It
is subject to the most stringent controls applied by the FDA to assure
reasonable safety and effectiveness. An application for pre-marketing approval
must be supported by data concerning the device and its components, including
the manufacturing and labeling of the device and the results of animal and
laboratory testing and human clinical trials. The conduct of Phase III clinical
trials is subject to regulations and to continuing oversight by institutional
review boards at hospitals and research centers that sponsor the trials and by
the FDA. These regulations include required reporting of adverse events from use
of the device during the trials. Before commencing clinical trials, we obtained
an investigational device exemption providing for the initiation of clinical
trials. We also obtained approval of our investigational plan, including the
proposed protocols and informed consent statement that patients sign before
undergoing treatment with the Delcath system, by the institutional review boards
at the sites where the trials were conducted. Under the Federal Food, Drug, and
Cosmetic Act, clinical studies for "significant risk" Class III devices require
obtaining such approval by institutional review boards and the filing with the
FDA of an investigational device exemption at least thirty days before
initiation of the studies.
Given the short life expectancy of patients suffering from metastatic
melanoma of the liver, we believe the FDA will review our pre-market application
expeditiously and respond to our submission of the Delcath system for commercial
sale within three months. However, approval of the Delcath system may take
longer if the FDA requests substantial additional information or clarification,
or if any major amendments to the application are filed. In addition, the FDA
may refer this matter to an advisory committee of experts to obtain views about
the Delcath system. This process is referred to as a "panel review," and could
delay the approval of the Delcath system. The FDA will usually inspect the
applicant's manufacturing facility to ensure compliance with quality systems
regulations prior to approval of an application. The FDA also may conduct
bio-research monitoring inspections of the clinical trial sites and the
applicant to ensure data integrity and that the studies were conducted in
compliance with the applicable FDA regulations, including good clinical practice
regulations.
26
If the FDA's evaluations of the application, clinical study sites and
manufacturing facilities are favorable, the FDA will issue either an approval
letter or an "approvable letter" containing a number of conditions that must be
met in order to secure approval of an application. If and when those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue an
order approving the application, authorizing commercial marketing of the device
under specified conditions of use. If the FDA's evaluation of the application,
the clinical study sites or the manufacturing facilities is not favorable, the
FDA will deny approval of the application or issue a "not approvable letter."
The FDA may also determine that additional pre-clinical testing or human
clinical trials are necessary before approval, or that post-approval studies
must be conducted.
The FDA's regulations require agency approval of an application
supplement for changes to a device if they affect the safety and effectiveness
of the device, including new indications for use; labeling changes; the use of a
different facility or establishment to manufacture, process or package the
device; changes in vendors supplying components for the device; changes in
manufacturing methods or quality control systems; and changes in performance or
design specifications. Changes in manufacturing procedures or methods may be
implemented and the device distributed thirty days after the FDA is provided
with notice of these changes unless the FDA advises the pre-market approval
application holder within thirty days of receipt of the notice that the notice
is inadequate or that pre-approval of an application supplement is required.
Approved medical devices remain subject to extensive regulation.
Advertising and promotional activities are subject to regulation by the FDA and
by the Federal Trade Commission. Other applicable requirements include the FDA's
medical device reporting regulations, which require that we provide information
to the FDA on deaths or serious injuries that may have been caused or
contributed to by the use of marketed devices, as well as product malfunctions
that would likely cause or contribute to a death or serious injury if the
malfunction were to recur. If safety or efficacy problems occur after the
product reaches the market, the FDA may take steps to prevent or limit further
marketing of the product. Additionally, the FDA actively enforces regulations
prohibiting marketing or promoting of devices or drugs for indications or uses
that have not been cleared or approved by the FDA. Further, the Food, Drug and
Cosmetic Act authorizes the FDA to impose post-market surveillance requirements
with respect to a Class III device which is reasonably likely to have a serious
adverse health consequence or which is intended to be implanted in the human
body for more than one year or to be a life sustaining or life supporting device
used outside a hospital or ambulatory treatment center.
The Food, Drug and Cosmetic Act regulates a device manufacturer's
design control, quality control and manufacturing procedures by requiring the
manufacturer to demonstrate and maintain compliance with quality systems
regulations including good manufacturing practices and other requirements. These
regulations require, among other things, that:
o design controls, covering initial design and design changes
be in place;
o the manufacturing process be regulated, controlled and
documented by the use of written procedures; and
o the ability to produce devices which meet the manufacturer's
specifications be validated by extensive and detailed
testing of every aspect of the process.
The FDA monitors compliance with quality systems regulations, including
good manufacturing practice requirements, by conducting periodic inspections of
manufacturing facilities. If violations of the applicable regulations are found
during FDA inspections, the FDA will notify the manufacturer of such violations
and the FDA, administratively or through court enforcement action, can prohibit
further manufacturing, distribution, sales and marketing of the device until the
violations are cured. If violations are not cured within a reasonable length of
time after the FDA provides notification of such violations, the FDA is
authorized to withdraw approval of the pre-marketing approval application.
Investigational devices that require FDA pre-marketing approval in the
United States but have not received such approval may be exported to countries
belonging to the European Union, European Economic Area and some other specified
countries, provided that the device is intended for investigational use in
accordance with the laws of the importing country, has been manufactured in
accordance with the FDA's good manufacturing practices or ISO standards, is
labeled on the outside of the shipping carton "for export only," is not sold or
offered for sale in the United States and complies with the specifications of
the foreign purchaser. The export of an investigational device for
investigational use
27
to any other country requires prior authorization from the FDA. An
investigational device may be exported for commercial use only as described
below, under "Foreign Regulation."
Drugs. A manufacturer of a chemotherapy agent must obtain an amendment
of a supplemental new drug application for a chemotherapy product providing for
its use with the Delcath system before the system may be marketed in the United
States to deliver that agent to the liver or any other site. The FDA-approved
labeling for both doxorubicin and melphalan does not provide for its delivery
with the Delcath system. We must partner with the holders of an approved new
drug application for doxorubicin and melphalan to make this change to the
labeling of both agents. We are seeking to partner with drug companies for this
purpose, but we have no assurance that we will find partners or that the FDA
will approve the application. If this approval is obtained, it would not have a
negative effect on the manufacturers of either doxorubicin or melphalan. Rather,
the drug manufacturer would have the opportunity to expand the use of the drugs
as a result of changing their label to include the Delcath labeling.
Phase III clinical trial protocols using doxorubicin have been approved
by the FDA under our investigational new drug application. FDA regulations also
require that prior to initiating the trials the sponsor of the trials obtain
institutional review board approval from each investigational site that will
conduct the trials. We are seeking the approval of institutional review boards
at several medical centers by assembling and providing them with information
with respect to the trials.
The FDA requires that, in order to obtain approval to re-label
doxorubicin for delivery using the Delcath system, we demonstrate that
delivering doxorubicin using the system results in patient survival times that
are longer than those obtained from administering chemotherapy agents
intravenously.
The approved Phase III clinical trial protocols are designed to obtain
approval of both new drug labeling and a pre-marketing approval application
providing for the use of doxorubicin with the Delcath system. The trial
protocols were approved by both the FDA division that approves new drugs and the
division that reviews applications to market new devices. All of the data
generated in the trials will be submitted to both of these FDA divisions. The
foregoing facts will also apply if our clinical trial using melphalan is
successful in Phases I, II and III.
If we successfully complete the clinical trials with both agents, we
believe the manufacturers of doxorubicin and melphalan will submit to the FDA an
application to deliver the agent to the liver through the Delcath system. Under
the Food, Drug and Cosmetic Act, the Delcath system cannot be marketed until the
new drug application, or supplemental new drug application and the pre-marketing
approval application are approved, and then only in conformity with any
conditions of use set forth in the approved labeling.
Foreign Regulation. In order for Nissho or any other foreign strategic
partner to market our products in Asia, Europe, Latin America and other foreign
jurisdictions, they must obtain required regulatory approvals or clearances and
otherwise comply with extensive regulations regarding safety and manufacturing
processes and quality. These regulations, including the requirements for
approvals or clearances to market, may differ from the FDA regulatory scheme. In
addition, there may be foreign regulatory barriers other than pre-marketing
approval or clearance.
In April 1996, legislation was enacted that permits a medical device
which requires FDA pre-marketing approval but which has not received such
approval to be exported to any country for commercial use, provided that the
device:
o complies with the laws of that country;
o has valid marketing authorization or the equivalent from the
appropriate authority in any of a list of industrialized
countries including Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa and countries in the
European Economic Union; and
o meets other regulatory requirements regarding labeling,
compliance with the FDA's good manufacturing practices or
ISO manufacturing standards, and notification to the FDA.
In order for us to market and sell the Delcath system in the European
Community, we must obtain a CE mark, which is the official marking required by
the European Community for all electric and electronic equipment that will be
sold anywhere in the European Union, except for limited use as a clinical trial
device. Supplemental device approvals also might be required to market and sell
the Delcath system.
28
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
Our success depends in large part on our ability to obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. Because of the length of time and expense
associated with bringing new products through development and regulatory
approval to the marketplace, the health care industry has traditionally placed
considerable emphasis on obtaining patent and trade secret protection for
significant new technologies, products and processes. We hold the following
seven United States patents, as well as three corresponding foreign patents in
Canada, Europe and Japan:
Summary Description of Patents Patent No.
- ------------------------------ ----------
Isolated perfusion method for cancer treatment U.S. #5,069,662
Isolated perfusion device -- catheter for use in
isolated perfusion in cancer treatment U.S. #5,411,479
Device and method for isolated pelvic perfusion U.S. #5,817,046
Catheter design to allow blood flow from renal veins
and limbs to bypass occluded segment of IVC U.S. #5,893,841
Balloon inside catheter to restrict blood flow or
prevent catheter from moving U.S. #5,897,533
Catheter with slideable balloon to adjust isolated segment U.S. #5,919,163
Isolated perfusion method for kidney cancer U.S. #6,186,146
We plan to enforce our intellectual property rights vigorously. In
addition, we will conduct searches and other activity relating to the protection
of existing patents and the filing of new applications.
In addition to patent protection, we rely on unpatented trade secrets
and proprietary technological expertise. We rely, in part, on confidentiality
agreements with our marketing partners, employees, advisors, vendors and
consultants to protect our trade secrets and proprietary technological
expertise. These agreements may not provide meaningful protection of our
proprietary technologies or other intellectual property if unauthorized use or
disclosure occurs.
EMPLOYEES
As of February 28, 2003, we had 5 full-time employees. Upon completion
of this offering, we intend to recruit additional personnel. None of our
employees is represented by a union and we believe relationships with our
employees are good.
In addition to our full-time employees, we engage the services of
medical and scientific consultants.
Facilities
We currently occupy approximately 3,600 square feet of office space at
1100 Summer Street, Stamford, Connecticut, pursuant to a lease which will expire
in 2003. We have occupied these facilities since 1992 and the space is adequate
for our current needs. If we require additional space in the future, we believe
that satisfactory space will be available at commercially reasonable rates in or
near our current facility.
The Company believes that its facilities and equipment are in good
condition and are suitable for its operations as presently conducted and for its
foreseeable future operations.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
Name Age Position
---- --- --------
M. S. Koly 62 President, Chief Executive Officer,
Treasurer and Director
Samuel Herschkowitz, M.D. 53 Chairman, Chief Technical Officer
and Director
Thomas S. Grogan 51 Chief Financial Officer
Mark A. Corigliano 39 Director
Daniel Isdaner 38 Director
29
Victor Nevins 81 Director
M. S. Koly has been our President, Chief Executive Officer and Treasurer since
1999. In 1988, Mr. Koly was elected to our board of directors. From 1987 until
June 1998, Mr. Koly managed Venkol Ventures, L.P. and Venkol Ventures, Ltd.,
firms he co-founded with Dr. Herschkowitz. From 1983 to 1987, Mr. Koly was
president of Madison Consulting Corporation, a firm he founded. From 1978 to
1983, Mr. Koly was president of Becton-Dickinson Respiratory Systems. Prior to
that time, he held various senior management positions at Abbott Laboratories,
Stuart Pharmaceuticals and National Patent Development Corp. He received a B.A.
from American University and an M.B.A. in marketing and finance from
Northwestern University.
Samuel Herschkowitz, M.D., has been our Chief Technical Officer since 1999. In
1988, Dr. Herschkowitz was elected the Chairman of our board of directors. In
1987, he co-founded Venkol Ventures L.P. and Venkol Ventures, Ltd., two
affiliated venture capital funds specializing in medical technology investments,
which are no longer active. Dr. Herschkowitz is board certified in psychiatry
and neurology. He is an assistant professor at New York University Medical
Center, and has held academic positions at Beth Israel Hospital, Mount Sinai
Medical School and Downstate Medical Center. Dr. Herschkowitz graduated from
Syracuse University and received his medical degree from Downstate Medical
Center College of Medicine.
Thomas S. Grogan was appointed the Company's Chief Financial Officer in
September 2001. Prior to joining Delcath, Mr. Grogan was Vice President of
Business Development for The Jockey Club from 2000-2001. In 1999, he was the
Chief Financial Officer for U.S. Homecare Corporation, a publicly traded
provider of home healthcare services. From 1998-1999, he was the Chief Financial
Officer of the healthcare division of Fairchild Properties, a privately held
owner and operator of skilled nursing facilities. From 1993-1998, he was the
Chief Financial Officer of NHS National Health Services, Inc., a privately held
provider of medical services to corporations, industrial sites and corrections
institutions. He is a CPA, and holds a B.A. degree from Fordham University and
an M.B.A. degree from Cornell University.
Mark A. Corigliano was elected to our board of directors in 2001. Since 1991,
Mr. Corigliano has been Managing Director of Coast Cypress Associates, a company
that designs and implements microcomputer systems. His specialty is the design
and installation of accounting systems. Since 1993, he has also served in a
senior financial capacity as Controller and Manager of Special Projects for DC
Associates, a restaurant management organization located in New York City. Mr.
Corigliano also serves as Treasurer of Rolls Royce Owners' Club, a non-profit
organization with 8,500 members worldwide. He holds a B.S. degree in accounting
from Seton Hall University.
Daniel Isdaner was elected to our board of directors in 2001. Since 1994, Mr.
Isdaner has been the owner and director of Camp Mataponi, Inc., a children's'
summer camp located in Naples, Maine. He also serves on the board of directors
of the American Camping Association-New England Division and the Jewish
Community Center of Southern New Jersey. Mr. Isdaner holds a B.S.B.A. degree
from the Boston University School of Management.
Victor Nevins was elected to our board of directors in 2001. Since 1957, Mr.
Nevins has been Chief Executive Officer of Max Abramson Enterprises, a
medium-sized privately held conglomerate headquartered in Flushing, New York. He
also is a licensed real estate broker and, in 1962, he founded Victor Nevins
Realty. From 1968-1997, he served on the board of directors of Flushing Hospital
and Medical Center as Vice President of the Board, member of the Finance
Committee, Chairman of both the House and Grounds and Human Resources Committees
and liaison to the Medical Board. He currently is a Director and past President
of the Flushing Chamber of Commerce, a Director of the Flushing Merchants
Association, and a Director of the American Red Cross, North Shore Chapter.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of the
board of directors will be elected each year. These provisions, together with
the provisions of our amended and restated certificate of incorporation and
by-laws, allow the board of directors to fill vacancies on or increase the size
of the board of directors, and may deter a stockholder from removing incumbent
directors and filling such vacancies with its own nominees in order to gain
control of the board.
Each of our directors has been elected to serve until his successor has
been elected and duly qualified. The directorship terms of Mr. Nevins and Mr.
Corigliano will expire at the annual meeting of stockholders in 2003, the
30
directorship term of Mr. Isdaner will expire at the annual meeting of
stockholders in 2004 and the directorship terms of Dr. Herschkowitz and Mr. Koly
will expire at the annual meeting of stockholders in 2005.
COMMITTEES OF THE BOARD OF DIRECTORS
We have established an audit committee and a compensation and stock
option committee.
The audit committee approves the selection of our independent
accountants and meets and interacts with the independent accountants to discuss
questions in regard to financial reporting. In addition, the audit committee
reviews the scope and results of the audit with the independent accountants,
reviews with management and the independent accountants our annual and quarterly
operating results, considers the adequacy of our internal accounting procedures
and considers and reports to the board of directors with respect to other
auditing and accounting matters. The audit committee also reviews the fees to be
paid to and the performance of our independent accountants. Currently, the
members of the audit committee are of Messrs. Corigliano and Isdaner. Messrs.
Corigliano and Isdaner satisfy the requirements for independent directors
contained in the rules governing companies listed on the Nasdaq Stock Market.
The compensation and stock option committee reviews the salaries and
benefits of all officers and stock option grants of all employees, consultants,
directors and other individuals compensated by us. The compensation and stock
option committee is empowered by the board of directors to act independently.
The compensation and stock option committee also administers our stock option
and other employee benefits plans. Currently, the members of the compensation
and stock option committee are Messrs. Nevins and Corigliano.
DIRECTOR COMPENSATION
Our current policy regarding compensation of directors provides that
directors may be paid a fixed sum for their attendance at each meeting of the
board of directors or a stated salary as a director, and each may be reimbursed
for his or her expenses. Currently, directors who are also employees do not
receive any compensation for serving on the board of directors. Non-employee
directors receive $750 for each meeting of the board of directors attended in
person or participated in telephonically. Currently, non-employee directors do
not receive any other compensation. In addition, each non-employee director that
served on our board of directors in 1999 received a one-time grant in January
1999 of options to purchase 34,505 shares of common stock at a price of $4.93
per share, all of which are vested, and received a separate one-time grant in
December 1999 of options to purchase 22,428 shares of common stock at a price of
$2.90 per share, all of which are vested. In December 2001, each non-employee
director received an option to purchase 30,000 shares of common stock at a
purchase price of $0.85 per share that vest as to 50% of the shares covered on
the first and second anniversaries of the date of grant.
On September 17, 2002, our compensation and stock option committee
granted stock options to Mr. Koly and Dr. Herschkowitz, at an exercise price
equal to $0.71 per share, the fair market value at the close of trading on that
date as reported by The Wall Street Journal. On September 17, 2002, our
compensation and stock option committee granted stock options to directors other
than Mr. Koly and Dr. Herschkowitz, at an exercise price of $0.71 per share, the
fair market value at the close of trading on that date as reported by The Wall
Street Journal. The stock options granted to the directors during 2002 are
indicated below:
Name Incentive Stock Options Non-Qualified Stock Options
---- ----------------------- ---------------------------
M. S. Koly 100,000 0
Samuel Herschkowitz, M.D. 30,000 0
Mark Corigliano 0 30,000
Daniel Isdaner 0 30,000
Victor Nevins 0 30,000
31
KEY EMPLOYEES
James P. Bartley has been the Director of Operations since March of
2001. Mr. Bartley has a professional background in healthcare administration and
is a Diplomate in the American College of Healthcare Executives. He possesses a
Masters degree in Education from the University of Virginia, as well as a
masters degree in Healthcare Policy and Management from New York Medical
College. Prior to his current position, he served in several management
positions at Lawrence Hospital, St. Vincent's Hospital and the North Shore Long
Island Jewish Health System.
SCIENTIFIC ADVISORS AND CONSULTANTS
We seek to expand the breadth of expertise and experience available to
us through the use of consultants and advisors. We coordinate these advisors,
including nine M.D.'s and Ph.D.'s to organize, conduct and monitor clinical and
pre-clinical testing, regulatory filings and responses, product development and
manufacturing and publication and presentation of the results of our research.
These individuals bring a broad range of competencies to our operations. The
scientific advisors are independent professionals who meet on an individual
basis with management when so requested. We seek as scientific advisors
recognized experts in relevant sciences or clinical medicine to advise us about
present and long-term scientific planning, research and development.
There is no fixed term of service for the scientific advisors. Current
members may resign or be removed at any time and additional members may be
appointed. Members do not serve on an exclusive basis with Delcath, are not
under contract, other than with respect to confidentiality obligations, and are
not obligated to present corporate opportunities to us. To our knowledge, none
of the members is working on the development of competitive products. Inventions
or products developed by a scientific advisor who is not otherwise affiliated
with us will not become our property.
Scientific advisors who are not affiliated with us are paid a per diem
fee for their services. All members receive reimbursement for expenses incurred
in traveling to and attending meetings on behalf of Delcath.
Our scientific advisors and collaborators include the following doctors
in the fields of surgical oncology and interventional radiology:
Name Title Specialty Relationship to Delcath
---- ----- --------- -----------------------
Morton G. Glickman, M.D. Professor Emeritus of Cardiovascular and Founder and Stockholder
Diagnostic Radiology, Interventional Radiology
Yale University School of
Medicine
William N. Hait, M.D., Director, The Cancer Medical Consultant and Founder and Stockholder
Ph.D. Institute of New Jersey Scientific Advisor
T.S. Ravikumar, M.D. Chairman, Department of Surgical Oncology Former Principal
Surgery, Montefiore Investigator of the
Medical Center Delcath system
Morton G. Glickman, M.D. was educated at Cornell University (B.A.) and
Washington University (M.D.). He also received an honorary M.A. from Yale. He
was a resident at the University of California. He served as the Chief of Neuro
and Vascular Radiology at San Francisco General Hospital from 1969 to 1973 and
has held numerous academic and professional appointments at Yale University
School of Medicine, currently serving as associate Dean and Vice Chairman of
Diagnostic Radiology and Surgery. Dr. Glickman is a founder of Delcath.
William N. Hait, M.D., Ph.D. was educated at the University of
Pennsylvania (B.A.) and The Medical College of Pennsylvania (M.D., Ph.D.). He
was a resident in internal medicine and held numerous academic and professional
appointments at Yale University School of Medicine, including Chief of Medical
Oncology. Dr. Hait is currently director of The Cancer Institute of New Jersey.
Dr. Hait is a founder of Delcath.
T. S. Ravikumar, M.D. was educated in India at Madras University and
Madras Medical College. He is currently the Chairman of the Department of
Surgery at Montefiore Medical Center. He was the associate director of
32
The Cancer Institute of New Jersey from 1993 through 1998. He also served as a
resident in general surgery at Maimonides Medical Center at S.U.N.Y. --
Downstate and was a fellow in surgical oncology at the University of Minnesota.
Dr. Ravikumar won a National Reserve Service Award in surgical oncology and
served as a fellow at Brigham and Women's Hospital and the Dana Farber Cancer
Institute from 1982 through 1984. He has had a number of academic appointments,
including at Harvard Medical School, Yale University School of Medicine, and
hospital appointments, including at Yale Comprehensive Cancer Center and Robert
Wood Johnson University Hospital.
In addition, Delcath uses the services of the following medical and
scientific consultants for technical expertise:
Name Title Specialty
---- ----- ---------
Harvey J. Ellis, C.C.P. Chief of Cardiac Perfusion, Bridgeport Perfusion Consultant
Hospital
Seymour H. Fein, M.D. President, Fein & Associates Regulatory and Medical Oncology
Durmus Koch President, Bipore, Inc. Manufacturing
James H. Muchmore, M.D. Associate Professor of Surgery, Tulane Oncology and Perfusion Consultant
University School of Medicine
John Quiring, Ph.D. Principal, QST Consulting Biostatistician
OTHER KEY CONSULTANTS
Jonathan A. Foltz, CFA, 40, consults with us on identifying alternative
product sources and potential partnering opportunities. He was our Director of
Operations from 1992 until August 2001. Mr. Foltz was senior associate of Venkol
Ventures from 1989 to 1992. During 1988 to 1989, he provided investment and
acquisition research, consulting to corporations and brokerage firms including
First Montauk Securities, Inc., Gilford Securities Inc., Texas American Energy
Corporation and Computer Memories Inc. He was the research director of Nicholas,
Lawrence and Co., a regional stock brokerage firm, reorganizing and managing
their equity research department. Mr. Foltz earned a B.S. in finance and
computer science from Lehigh University, an M.B.A. from the University of
Connecticut and is a chartered financial analyst.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended December 31,
2002, 2001 and 2000, certain compensation paid by us, including salary, bonuses
and certain other compensation, to our Chief Executive Officer and all other
executive officers whose annual compensation for the year ended December 31,
2002, exceeded $100,000.
Summary Compensation Table
Securities
Name and Principal Position Year Salary Bonus ($) Underlying All Other
- --------------------------- ---- ------- --------- Options (#) Compensation
($) ----------- ------------
--- ($)
M.S. Koly
President, Chief Executive Officer and Treasurer 2002 187,500 0 100,000 0
2001 164,750 17,500 (1) 100,000 0
2000 98,200 0 102,000 0
Samuel Herschkowitz
Chairman of the Board and Chief Technical Officer 2002 136,667 0 30,000 0
2001 120,000 10,000 (1) 30,000 0
33
Thomas S. Grogan
Chief Financial Officer 2002 122,500 0 30,000 0
- -----------------------
(1) Bonuses were declared in 2001, payable in January 2002.
Equity Compensation Plan Information
(a) (b) (c)
Number
of
securities
remaining available for
Number of securities to be future issuance under equity
issued upon exercise of Weighted-average exercise compensation plans
outstanding options, price of outstanding (excluding securities
warrants and rights options, warrants and rights reflected in column (a))
----------------------- ---------------------------- --------------------------
Equity compensation plans 885,684 $2.94 631,858
approved by security holders
Equity compensation plans not 0 0 0
approved by security holders
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options
which were granted during 2002 to the executive officers named in the Summary
Compensation Table.
Number of Shares of
Common Stock Percent of Total Options Granted
Underlying to Employees in 2002 Exercise Price ($/Sh.) Expiration Date
Name Option (1) -------------------- ---------------------- ---------------
---- ----------
M. S. Koly 100,000 58.8% 0.71 September 2007
S. Herschkowitz 30,000 17.6% 0.71 September 2007
T. Grogan 30,000 17.6% 0.71 September 2007
(1) Options vest equally over two years on anniversary dates.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the
executive officers named in the Summary Compensation Table concerning the
exercise of options during the year ended December 31, 2002 and unexercised
options held as of the end of fiscal 2002.
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options at
Shares Options at FY- FY-End ($) (1)
Received Value End Exercisable/ Exercisable/
Name Year on Exercise Realized Unexercisable Unexercisable
34
M. S. Koly 2002 0 0 291,746/150,000 52,500/146,500
S. Herschkowitz 2002 0 0 159,836/45,000 12,000/40,200
T. Grogan 2002 0 0 6,000/54,000 4,800/47,400
- -----------------------
(1) Calculated based on the fair market value of $1.65 per share at the close
of trading on December 31, 2002 as reported by The Wall Street Journal,
minus the exercise price of the option.
EMPLOYMENT AGREEMENTS
On October 30, 2001 we amended the employee agreements dated April 30,
1996, with M. S. Koly and Samuel Herschkowitz, M.D. The agreement provides for a
lump-sum severance payment of one year's base salary upon notice of termination
at any time without cause. In the event of termination without cause due to a
change in control (as defined in the employment agreement), Mr. Koly is entitled
to a lump sum severance payment equal to the greater of two years' base salary
or the base salary due for the remaining term of the agreement. Mr. Koly's
amended employment agreement provides for a base salary of $225,000 per annum
and extends the term of the agreement until December 1, 2004. The amendment also
provides that in the event we close on a private placement or public offering
with gross proceeds of at least $5,000,000, a new three-year term of employment
shall commence upon the closing.
The initial term of Dr. Herschowitz's employment agreement was three
years with automatic successive one year renewal periods thereafter. In addition
to the termination provisions set forth in the employment agreement, either
party may terminate the employment agreement by providing a minimum of three
months' prior written notice. The agreement provides for a lump-sum severance
payment of one year's base salary upon notice of termination at any time without
cause. In the event of termination without cause due to a change in control (as
defined in the employment agreement), Dr. Herschowitz is entitled to a lump sum
severance payment equal to the greater of one year's base salary or the base
salary due for the remaining term of the agreement. Dr. Herschkowitz's amendment
provides for a base salary of $140,000 per annum.
STOCK OPTION PLANS
On October 15, 1992, our board of directors and stockholders adopted
our 1992 Incentive Stock Option Plan and our 1992 Non-Incentive Stock Option
Plan. On June 15, 2000, the board of directors adopted our 2000 Stock Option
Plan (the "2000 Plan"). On May 8, 2001, the board of directors adopted the 2001
Stock Option Plan (the "2001 Plan"). The 2000 Plan and the 2001 Plan were each
approved by the shareholders at the Annual Meeting of Shareholders held on June
12, 2001. On November 13, 2001, our board of directors authorized the amendment
of the 2001 Plan to give the compensation and stock option committee discretion
to issue stock options with net issuance provisions. We have reserved 236,359
shares of common stock for issuance upon exercise of options granted from time
to time under the 1992 Incentive Stock Option Plan, 207,030 shares of common
stock for issuance upon exercise of options granted from time to time under the
1992 Non-Incentive Stock Option Plan; 300,000 shares of common stock for
issuance from time to time under the 2000 Plan and 750,000 shares of common
stock for issuance from time to time under the 2001 Plan. The stock option plans
are intended to assist us in securing and retaining key employees, directors and
consultants by allowing them to participate in our ownership and growth through
the grant of incentive and non-qualified options.
Under the 1992 Incentive Stock Option Plan we may grant incentive stock
options only to employees. Under the 1992 Non-Incentive Stock Option Plan, we
may grant non-qualified options to our employees, officers, directors,
consultants, agents and independent contractors. Under the 2000 Plan and the
2001 Plan, we may grant incentive options to employees, and non-qualified
options to employees and non-employees including directors, consultants, agents
and independent contractors. The stock option plans are administered by the
compensation and stock option committee, appointed by our board of directors.
Subject to the provisions of each of the stock option plans, the
compensation and stock option committee will determine who will receive options,
the number of shares of common stock that may be purchased under the options,
the time and manner of exercise of options and exercise prices. The term of
options granted under each of the stock option plans may not exceed ten years,
or five years for an incentive stock option granted to an optionee owning more
than 10% of our voting stock. The exercise price for incentive stock options
shall be equal to or greater than 100% of the fair
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market value of the shares of the common stock at the time granted; provided
that incentive stock options granted to an optionee owning more than 10% of our
voting stock shall be exercisable at a price equal to or greater than 110% of
the fair market value of the common stock on the date of the grant. The exercise
price for non-qualified options will be set by the committee, in its discretion,
but in no event shall the exercise price be less than the fair market value of
the shares of common stock on the date of grant.
As of December 31, 2002, we have granted incentive stock options to
purchase 236,359 shares of common stock under our 1992 Incentive Stock Option
Plan at a weighted average price of $4.02 and non-incentive stock options to
purchase 205,305 shares of common stock under our 1992 Non-Incentive Stock
Option Plan at a weighted average price of $4.26. All of these options were
granted to employees and directors and terminate on the fifth anniversary of
their grant date. We will not grant any additional options under these plans. As
of December 31, 2002, we have granted incentive stock options to purchase
150,600 shares of common stock under our 2000 Plan at a weighted average price
of $2.96 and non-qualified stock options to purchase 133,420 shares, net of
84,000 expired options, of common stock under our 2000 Plan at a weighted
average price of $1.65. As of December 31, 2002, we have granted incentive stock
options to purchase 330,000 shares of common stock under our 2001 Plan at a
weighted average price of $0.70 and we have granted non-qualified stock options
to purchase 90,000 shares of common stock under our 2001 Plan at a price of
$0.71.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known by us
regarding the beneficial ownership of our common stock as of February 28, 2003,
for (i) each stockholder known by us to own beneficially 5% or more of the
outstanding shares of our common stock, (ii) each executive officer and director
and (iii) all directors and executive officers as a group.
The address for each listed director and officer is c/o Delcath
Systems, Inc., 1100 Summer Street, Stamford, Connecticut 06905.
Directors, Shares Percentage of
Executive Officers Beneficially Common Shares
and 5% Stockholders: (1) Owned (2) Outstanding (3)
------------------------ --------- ---------------
M. S. Koly (4) 1,627,848 36.9%
Venkol Trust (5) 1,245,864 30.2%
Samuel Herschkowitz, M.D. (6) 178,074 4.2%
Yenom X Partners (7) 263,446 6.4%
Mark A. Corigliano (8) 28,000 *
Daniel Isdaner (9) 30,500 *
Victor Nevins (10) 37,100 *
Thomas S. Grogan (11) 6,000 *
All directors and executive officers as a group (6 1,907,522 41.2%
persons) (12)
- ----------------------------
* Less than 1% of total voting securities
(1) Except as otherwise noted in the footnotes to this table, each person or
entity named in the table has sole voting and investment power with respect to
all shares owned, based on the information provided to us by the persons or
entities named in the table.
(2) Shares of common stock subject to options or warrants exercisable within 60
days of February 28, 2003 are deemed outstanding for computing the percentage of
the person or entity holding such options or warrants.
(3) Percentage of beneficial ownership is calculated on the basis of the amount
of outstanding securities (common stock) at February 28, 2003 (4,118,897 common
shares) plus, for each person or entity, any securities that the person or
entity has the right to acquire within 60 days pursuant to stock options or
other rights.
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(4) Mr. Koly is a director of Delcath. Includes 78,507 shares held by Mr. Koly,
11,731 shares held by M. Ted Koly, Mr. Koly's minor son and approximately
181,000 shares held by the Venkol Trust in which Mr. Koly has a pecuniary
interest. The figure above also includes the vested portion (291,746 shares) of
stock options to purchase shares of common stock.
(5) Mr. Koly is the trustee of Venkol Trust and is deemed the beneficial owner
of its shares.
(6) Dr. Herschkowitz is the Chairman of the board of directors of Delcath. The
figure above includes 18,238 shares held by Dr. Herschkowitz. The figure
excludes approximately 181,000 shares held by Venkol Trust. The figure also
includes the vested portion (159,836 shares) of an stock options to purchase
shares of common stock.
(7) The figure above represents 243,181 shares owned directly by Yenom X
Partners and 20,265 shares which could be acquired within 60 days upon exercise
of warrants.
(8) Mr. Corigliano is a director of Delcath. The figure above represents 11,500
shares owned directly by him and 1,500 shares issuable upon exercise of
warrants. The figure above also includes the vested portion (15,000 shares) of
stock options to purchase shares of common stock.
(9) Mr. Isdaner is a director of Delcath. The figure above represents 8,000
shares directly owned by him or jointly with his wife and 7,500 shares issuable
upon exercise of warrants. The figure above also includes the vested portion
(15,000 shares) of stock options to purchase shares of common stock.
(10) Mr. Nevins is a director of Delcath. The figure above represents 16,100
shares owned directly by him and 4,000 shares issuable upon exercise of
warrants. The above figure also represents 1,000 shares owned directly by his
wife and 1,000 shares issuable upon the exercise of warrants. The figure above
also includes the vested portion (15,000 shares) of stock options to purchase
shares of common stock.
(11) Mr. Grogan is the Chief Financial Officer of Delcath. The figure above
represents the vested portion of stock options to purchase shares of common
stock.
(12) The number of shares beneficially owned by all directors and executive
officers as a group includes 502,582 shares of common stock issuable within 60
days of February 28, 2003 upon exercise of certain stock options granted to
directors and executive officers pursuant to our various stock option plans and
14,000 shares of common stock issuable upon exercise of warrants.
RELATED PARTY TRANSACTIONS
In August and September 2000, Delcath borrowed an aggregate of $230,000
for which it issued promissory notes due on May 27, 2001. The promissory notes
bore interest at an annual rate of 22%. Of these loans, $205,000 was borrowed
from existing stockholders or relatives of existing stockholders of Delcath.
M.S. Koly, Chief Executive Officer, President and a director of Delcath, and
Mary Herschkowitz, the mother of Samuel Herschkowitz, M.D., Chairman and Chief
Technical Officer of Delcath, provided $50,000 and $40,000 of the loans,
respectively. Each of the promissory notes was timely re-paid.
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We believe that each of the transactions with our officers, directors
and principal stockholders and their affiliates were on terms no less favorable
than could have been obtained from unaffiliated third parties. All future
transactions, including loans that may legally be made between us and our
officers, directors and stockholders beneficially owning 5% or more of our
outstanding voting securities, or their affiliates, will be on terms no less
favorable to us than could be obtained in arm's length transactions from
unaffiliated third parties. Further, all transactions and loans that may legally
be made and any forgiveness of indebtedness owed by any of our officers,
directors and stockholders beneficially owning 5% or more of our outstanding
voting securities, or their affiliates, to us, must be approved by a majority of
our independent directors who do not have an interest in the transactions and
who have access, at our expense, to either our legal counsel or independent
legal counsel.
DESCRIPTION OF OUR CAPITAL STOCK AND OTHER SECURITIES
Our authorized capital stock consists of 35,000,000 shares of common
stock, $.01 par value per share and 10,000,000 shares of preferred stock, $.01
par value per share, whose rights and designation have not yet been established.
The description in the sections below of our certificate of incorporation and
by-laws refers to our Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws, respectively.
UNITS
Each unit offered consists of five shares of common stock and five
warrants each to purchase one share of common stock. The common stock and the
0003 Warrants will trade separately immediately following the sale of the units.
Immediately prior to the closing of this offering, there will be shares of
common stock outstanding. After giving effect to the issuance of the shares of
common stock included in the units offered by this prospectus, assuming the
underwriters do not exercise their over-allotment option, there will be shares
of common stock outstanding upon the closing of this offering.
Holders of common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of
common stock voting for the election of directors can elect all of the
directors. Holders of common stock are entitled to share in all dividends that
the board of directors, in its discretion, declares from legally available
funds. In any liquidation, dissolution or winding up of Delcath, each
outstanding share entitles its holder to participate pro rata in all assets that
remain after payment of liabilities and after providing for each class of stock,
if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other
subscription rights and there are no redemption provisions applicable to the
common stock. The rights of the holders of common stock are subject to any
rights that may be fixed for holders of preferred stock, when and if any
preferred stock is issued. All outstanding shares of common stock are, and the
shares underlying all options and warrants will be, duly authorized, validly
issued, fully paid and non-assessable upon our issuance of these shares.
WARRANTS
2003 Warrants
General. Each 2003 Warrant will entitle the holder of the 2003 Warrant
to purchase one share of common stock at a price of per share, subject to
adjustment, at any time up to five years from the date of closing of this
offering.
The 2003 Warrants will be issued in registered form under a warrant
agreement by and among Delcath, American Stock Transfer & Trust Company, as
warrant agent, and the underwriters. Reference is made to the warrant agreement,
which has been filed as an exhibit to the registration statement in which this
prospectus is included, for a complete description of the terms and conditions
thereof.
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Redemption. We may redeem some or all of the 2003 Warrants at a price
of $0.01 per warrant, upon thirty days' notice, at any time commencing one year
from the closing date of this offering provided that the average closing bid
quotation of our common stock on all twenty trading days ending on the day on
which we give notice has been at least 200% of the initial unit offering price
and there is then an effective registration statement providing for the issuance
of the underlying shares of common stock. The warrant holders shall have the
right to exercise their 2003 Warrants until the close of business on the date
fixed for redemption. Redemption of the 2003 Warrants could force the holders to
exercise the warrants and pay the exercise price at a time when it may be
disadvantageous for the holders to do so, to sell the warrants at the then
current market price when they might otherwise wish to hold the warrants or to
accept the redemption price, which is likely to be substantially less than the
market value of the warrants at the time of redemption.
Exercise. The 2003 Warrants included in the units offered hereby may be
exercised upon surrender of the warrant certificate on or prior to the
expiration date at the offices of the warrant agent, with the exercise form on
the reverse side of the warrant certificate completed and executed as indicated,
accompanied by full payment of the exercise price to the warrant agent for the
number of warrants being exercised. The warrant holders do not have the rights
or privileges of holders of common stock.
No 2003 Warrants will be exercisable unless, at the time of exercise,
Delcath has an effective registration statement under the Securities Act
covering the shares of common stock issuable upon exercise of the 2003 Warrants
and the shares have been registered or qualified or deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of the warrant. We will use our best efforts to have all
the shares so registered or qualified on or before the exercise date and to
maintain a current prospectus relating thereto until the expiration of the
warrants, subject to the terms of the warrant agreement. We may not, however, be
able to have a prospectus in effect when this prospectus is no longer current.
No fractional shares will be issued upon exercise of the 2003 Warrants.
However, if a warrant holder exercises all 2003 Warrants then owned of record by
him or her, we will pay to the warrant holder, in lieu of the issuance of any
fractional share which is otherwise issuable, an amount in cash based on the
market value of the common stock on the last trading day prior to the exercise
date.
Adjustment of Exercise Price. The exercise price and number of shares
of common stock or other securities issuable on exercise of the 2003 Warrants
included in the units offered hereby are subject to adjustment in specified
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of Delcath. However, the 2003 Warrants
are not subject to adjustment for issuances of common stock at prices below the
exercise price of the 2003 Warrants.
2000 Warrants
In accordance with the terms of our initial public offering, effective
October 22, 2001, our common stock and 2000 Warrants that constituted the units
we sold in 2000 commenced separate trading. A description of the material terms
of the 2000 Warrants is set forth below.
General. Each 2000 Warrant entitles the holder of the warrant to
purchase one share of common stock at a price of $6.60, subject to adjustment,
until October 2005.
The 2000 Warrants were issued in registered form under a warrant
agreement by and among Delcath, American Stock Transfer & Trust Company, as
warrant agent, and Whale Securities Co., L.P., the underwriter.
Redemption. We may redeem some or all of the 2000 Warrants at a price
of $.10 per warrant, upon thirty days' notice, at any time, provided that the
closing bid quotation of our common stock on all twenty trading days ending on
the third day prior to the day on which we give notice has been at least 150% of
the then effective exercise price of the 2000 Warrants and we have received the
written consent of the underwriter for the redemption. The warrant holders shall
have the right to exercise their 2000 Warrants until the close of business on
the date fixed for redemption. Redemption of the 2000 Warrants could force the
holders to exercise the warrants and pay the exercise price at a time when it
may be disadvantageous for the holders to do so, to sell the warrants at the
then current market price when they might otherwise wish to hold the warrants or
to accept the redemption price, which is likely to be substantially less than
the market value of the warrants at the time of redemption.
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Exercise. The 2000 Warrants may be exercised upon surrender of the
warrant certificate on or prior to the expiration date at the offices of the
warrant agent, with the exercise form on the reverse side of the warrant
certificate completed and executed as indicated, accompanied by full payment of
the exercise price to the warrant agent for the number of warrants being
exercised. The warrant holders do not have the rights or privileges of holders
of common stock.
No 2000 Warrant will be exercisable unless, at the time of exercise, we
have an effective registration statement under the Securities Act covering the
shares of common stock issuable upon exercise of the warrant and the shares have
been registered or qualified or deemed to be exempt from registration or
qualification under the securities laws of the state of residence of the holder
of the warrant. We will use our best efforts to have all the shares so
registered or qualified on or before the exercise date and to maintain a current
prospectus relating thereto until the expiration of the 2000 Warrants, subject
to the terms of the warrant agreement.
No fractional shares will be issued upon exercise of the 2000 Warrants.
However, if a warrant holder exercises all 2000 Warrants then owned of record by
him or her, we will pay to the warrant holder, in lieu of the issuance of any
fractional share which is otherwise issuable, an amount in cash based on the
closing price or last reported sale price of the common stock on the last
trading day prior to the exercise date.
Adjustment of Exercise Price. The exercise price and number of shares
of common stock or other securities issuable on exercise of the 2000 Warrants
are subject to adjustment in specified circumstances, including in the event of
a stock dividend, recapitalization, reorganization, merger or consolidation of
Delcath. However, the 2000 Warrants are not subject to adjustment for issuances
of common stock at prices below the exercise price of the 2000 Warrants.
PREFERRED STOCK
Under our certificate of incorporation, our board of directors is
authorized, subject to limitations prescribed by law, without further
stockholder approval, from time to time to issue up to an aggregate of
10,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series. Each series may have different rights, preferences and
designations and qualifications, limitations and restrictions that may be
established by our board of directors without approval from the stockholders.
These rights, designations and preferences may include:
o the number of shares to be issued;
o dividend rights;
o the right to convert the preferred stock into a different
type of security;
o voting rights, if any, attributable to the preferred stock;
o the obligation to set aside assets for payments relating to
the preferred stock; and
o amounts to be paid upon redemption of the preferred stock or
a liquidation or bankruptcy type event.
If our board of directors decides to issue any preferred stock, that
issuance could have the effect of delaying or preventing a third-party from
taking control of us. This is because the terms of the preferred stock could be
designed to make it prohibitively expensive for any unwanted third party to make
a bid for our shares. In addition, the issuance of preferred stock with voting
or conversion rights could adversely affect the voting power or other rights of
the holders of our common stock. We have no present plans to issue any shares of
preferred stock.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION AND BY-LAWS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or that person's affiliate or associate who is an owner of 15% or more
of our outstanding voting stock for a period of three years from the date that
this person became an interested stockholder unless (a) prior to such time our
board of directors approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder or (b) upon
consummation of the transaction which resulted in the stockholder
40
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced or (c) at or subsequent to such time the business
combination is approved by our board of directors and authorized at an annual or
special meeting of stockholders by the affirmative vote of at least 66 2/3% of
the outstanding voting stock not owned by the interested stockholder.
Our board of directors is divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of the
board of directors will be elected each year. These provisions, when coupled
with the provisions of our amended and restated certificate of incorporation
authorizing the board of directors to fill vacant directorships or increase the
size of the board of directors, may deter a stockholder from removing incumbent
directors and simultaneously gaining control of the board of directors by
filling the vacancies created by that removal with its own nominees.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As authorized by the Delaware General Corporation Law, our certificate
of incorporation provides that none of our directors will be personally liable
to us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability for:
o any breach of the director's duty of loyalty to Delcath or
its stockholders;
o acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock redemptions
or repurchases; or
o any transaction from which the director derives an improper
personal benefit.
This provision limits our rights and the rights of our stockholders to
recover monetary damages against a director for breach of the fiduciary duty
except in the situations described above. This provision does not limit our
rights or the rights of any stockholder to seek injunctive relief or rescission
if a director breaches his duty of care. In addition, our certificate of
incorporation provides that if the Delaware General Corporation Law is amended
to permit further limits on the liability of a director, then the liability of
the directors shall be eliminated or limited to the fullest extent permitted by
such amendment. These provisions do not alter the liability of directors under
federal securities laws.
Our certificate of incorporation further provides for the
indemnification of any and all persons who serve as a director, officer,
employee or agent to the fullest extent permitted under the Delaware General
Corporation Law.
We maintain a policy of insurance under which our directors and
officers are insured, subject to the limits of the policy, against certain
losses arising from claims made against our directors and officers by reason of
any acts or omissions covered under this policy in their capacities as directors
or officers, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons under
the above provisions, or otherwise, we have been advised that, in the opinion of
the SEC, such indemnification is against public policy as expressed in the
Securities Act and is unenforceable.
RIGHTS AGREEMENT
On October 30, 2001, we entered into a Rights Agreement with American
Stock Transfer & Trust Company (the "Rights Agreement"). The purposes of the
Rights Agreement are to deter and protect our shareholders from certain coercive
and otherwise unfair takeover tactics and to enable the board of directors to
represent effectively the interests of stockholders in the event of a takeover
attempt. The Rights Agreement does not deter negotiated mergers or business
combinations that the board of directors determines to be in the best interests
of us and our stockholders.
To implement the Rights Agreement the board of directors declared a
dividend of one common stock purchase right (a "Right") for each share of our
common stock outstanding at the close of business on November 14, 2001 (the
"Record Date") or issued by us on or after such date and prior to the earlier of
the Distribution Date, the Redemption Date or the Final Expiration Date (as such
terms are defined in the Rights Agreement). The dividend was issued on
41
November 14, 2001 to stockholders of record on the Record Date. Each Right
entitles the registered holder to purchase from us one share of common stock at
a price of $5.00 per share, subject to adjustment (the "Purchase Price").
Rights Attached to Common Stock Initially
Common stock certificates will evidence the Rights. A notation on the
certificates will incorporate the Rights Agreement and advise the certificate
holder of the existence of the Rights. Until triggered, the Rights are
transferred only with the common stock. Common stock certificates issued after
November 14, 2001 contain a legend referencing the existence of the Rights
Agreement. The transfer of outstanding common stock prior to the occurrence of a
Distribution Date will also constitute the transfer of the Rights associated
with the common stock.
Distribution of Rights
The Rights will separate from the common stock on the Distribution
Date. The Distribution Date will be the date the Rights separate from the common
stock and will be the earlier to occur of the following two events:
o the close of business on the first day of a public
announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired
beneficial ownership of 15% or more of the outstanding
common stock; or
o ten business days following the commencement of, or
announcement of an intention to make, a tender or exchange
offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of
such outstanding common stock.
As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the common stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights. The Rights are not exercisable until the Distribution Date. The Rights
will expire on October 30, 2011, unless earlier redeemed or extended by the
board of directors.
Right to Purchase Company Stock
In the event a person becomes the owner of 15% or more of the
outstanding shares of common stock and thus becomes an Acquiring Person (a
"Flip-In Event"), the Rights not held by the Acquiring Person "flip-in" and,
instead of continuing as rights to buy one share of common stock, become rights
to buy from us shares of common stock having a value equal to two times the
Purchase Price under the Right. In other words, a Rights holder (other than the
Acquiring Person) may purchase common stock at a 50% discount.
In the event there is insufficient common stock to permit exercise in
full of the Rights, we must issue cash, property or other securities of the
Company with an aggregate value equal to twice the Purchase Price.
Upon the occurrence of any Flip-In Event, any Rights owned by an
Acquiring Person, its affiliates and associates and certain transferees thereof
shall become null and void.
Right to Purchase Acquiring Person Stock
In the event that a person becomes an Acquiring Person and the Company
is then merged with the common stock being exchanged or converted in the merger,
then each Right (other than those formerly held by the Acquiring Person, which
became void) would "flip-over" and be exercisable for a number of shares of
common stock of the acquiring company having a market value of two times the
Purchase Price under the Right. In other words, a Rights holder may purchase the
acquiring company's common stock at a 50% discount.
Exchange of Rights for Common Stock
After a Flip-In Event occurs but before a "flip-over" event (as
described above) occurs and before an Acquiring Person becomes the owner of 50%
or more of our common stock, the board of directors may cause the Rights (either
in whole or in part) to be exchanged for shares of common stock (or equivalent
securities of equal value) at a one-to-one
42
exchange ratio or pursuant to an equivalent cashless exercise method. Rights
held by the Acquiring Person, however, which became void upon the Flip-In Event
would not be entitled to participate in such exchange.
Redemption
The Rights may be redeemed by the Board at a redemption price of $0.01
per Right at any time prior to the earlier of:
o the time that a person or a group becomes an Acquiring
Person, or
o October 30, 2011, the expiration date of the Rights
Agreement.
Immediately upon redemption and without further action and without any
notice, the right to exercise the Rights will terminate and the only right of
the holders will be to receive the redemption price.
Expiration of Rights
The Rights will expire on October 30, 2011, unless the expiration date
is extended by amendment or unless the Rights are earlier redeemed or exchanged
by us as described above.
Amendments or Supplements
For so long as the Rights are redeemable, the terms of the Rights may
be amended or supplemented by the board of directors at any time and from time
to time without the consent of the holders of the Rights. At any time when the
Rights are not redeemable, the board of directors may amend or supplement the
terms of the Rights, provided that such amendment does not adversely affect the
interests of the holders of the Rights.
No Rights as Stockholders
Until a Right is exercised, the holder thereof will have no rights as a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends.
Miscellaneous
In order to prevent dilution, the Purchase Price, the number of shares
of common stock or other securities or property purchasable upon exercise of
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in the Rights Agreement.
We are not required to issue fractions of Rights or to distribute Right
Certificates which evidence fractional Rights (except as may be provided for in
the Rights Agreement). In lieu of such fractional Rights, we will pay to the
registered holders of the Right Certificates with respect to which such
fractional Rights would otherwise be issuable, an amount of cash equal to the
same fraction of the current market value of a whole Right.
Transfer Agent and Warrant Agent
The transfer agent for the units offered hereby, our common stock, the
2000 Warrants and the 2003 Warrants is American Stock Transfer & Trust Company.
43
SHARES ELIGIBLE FOR FUTURE SALE
After the closing of this offering, we will have shares of
common stock issued and outstanding of which the shares included
in the units offered by this prospectus will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares purchased by any affiliate of us. An affiliate of us is generally a
person who has a controlling position with regard to us. Any shares purchased by
our affiliates will be subject to the resale limitations of Rule 144 promulgated
under the Securities Act.
Of the approximately remaining shares of common stock that
will be outstanding, are restricted securities as that term is
defined under Rule 144.
Approximately of these shares are immediately eligible for
public sale and the remaining shares will become eligible for
public resale, at various times, in accordance with Rule 144 under the
Securities Act.
In general, under Rule 144, as currently in effect, a person or group
of persons whose shares are aggregated, who has beneficially owned restricted
shares for at least one year would be entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of:
o 1% of the then outstanding common stock; or
o the average weekly trading volume of our common stock during
the four calendar weeks preceding the sale, provided, that
public information about us as required by Rule 144 is
available and the seller complies with manner of sale
provisions and notice requirements.
The volume limitations described above, but not the one-year holding
period, also apply to sales of our non-restricted securities by our affiliates.
A person who is not an affiliate, has not been an affiliate within
three months before the sale and has beneficially owned the restricted
securities for at least two years, is entitled to sell restricted shares under
Rule 144 without regard to any of the limitations described above.
We cannot predict the effect, if any, that sales of, or the
availability for sale of, our common stock will have on the market price of our
common stock prevailing from time to time. Nevertheless, the possibility that
substantial amounts of common stock in the public market, including shares
issuable upon the exercise of outstanding warrants or options, could adversely
affect the prevailing market price of our common stock and could impair our
ability to raise capital in the future through the sale of securities.
UNDERWRITING
We and the underwriters for this offering have entered into an
underwriting agreement with respect to the units being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase, and we
have agreed to sell to them, severally, the respective number of units set forth
opposite their names at the public offering price less the underwriting
discounts and commission set forth on the cover page of this prospectus below.
Roan/Meyers Associates L.P., is the representative of the underwriters.
Underwriters Number of Units
Roan/Meyers Associates, L.P. ................... ______________
ViewTrade Securities, Inc.
Total...................................
==============
The underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the units offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
units offered by this prospectus if any
44
units are taken except for those covered by the overallotment option. These
conditions include requirements that no stop order be in effect and that no
proceedings for such purpose be instituted or threatened by the Securities and
Exchange Commission.
The representative has informed us that the underwriters propose to
offer the units directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ per unit below the public offering price.
Any underwriter may allow, and such dealers may re-allow, a concession not in
excess of $ a unit to other dealers including the underwriters.
We have granted to the underwriters an option, exercisable for 45 days
from the date of this prospectus, to purchase up to an aggregate of an
additional 15% of the total units sold at the public offering price set forth on
the cover page hereof, less underwriting discounts and commissions. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the units
offered hereby. To the extent such option is exercised, each underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional units as the number set forth next to such
underwriter's name in the preceding table bears to the total number of units set
forth next to the names of all underwriters in that table.
We have also agreed to issue to the representative a unit option
agreement granting the representative the right to purchase up to 10% of the
units sold (not including the possible exercise of the overallotment option) at
an exercise price equal to 165% of the initial offering price of the units. The
exercise price and the number of underlying securities in the warrants contained
in the representative's units are subject to adjustment upon the same terms as
contained the 2003 Warrants being sold in the units. The sale price of the unit
option is $0.001 multiplied by the number of units covered by the option. The
securities to be delivered upon exercise of the representative's warrants are
the same as the units being sold to the public in this offering; provided,
however, the exercise price of the representative's warrant received upon
exercise of its unit option agreement is equal to 165% of the exercise price of
the 2003 Warrants. These warrants are exercisable during the four-year period
beginning one year from the date of effectiveness of the registration statement
of which this prospectus forms a part. The representative's Unit Purchase Option
will be restricted from sale, transfer, assignment or hypothecation for a period
of one year from the effective date of the offering except to officers or
partners (not directors) of the underwriter and members of the selling group
and/or their officers or partners in compliance with NASD Rule 2710(c) (7) (A).
The representative's unit purchase option is not redeemable by us. In
addition, we have agreed to certain "demand and piggyback" registration rights
for the securities underlying the representative's unit purchase option. The
holder of the representative's unit purchase option can demand, on one occasion,
at anytime until five years from the effective date of the registration
statement, that we register the shares and warrants for resale under the
Securities Act. The "piggyback" registration provisions provide that we will
include the underlying shares and 2003 Warrants in any registration statement
filed by us during the five-year period commencing after the effective date with
certain exceptions.
The holder of the representative's unit purchase option will have, in
that capacity, no voting, dividend or other stockholder rights. Any profit
realized by the representative on the sale of the securities issuable upon
exercise of the representative's unit purchase option may be deemed to be
additional underwriting compensation. The securities underlying the
representative's unit purchase option are being registered in the registration
statement. During the term of the representative's unit purchase option, the
holders thereof are given the opportunity to profit from a rise in the market
price of our common stock. We may find it more difficult to raise additional
equity capital while the representative's unit purchase options are outstanding.
We have agreed, in connection with the exercise of the 2003 Warrants
pursuant to solicitation following a notice of redemption from the Company, to
pay to Roan/Meyers a fee of 5% of the exercise price for each 2003 Warrant
exercised; provided, however, that Roan/Meyers will not be entitled to receive
such compensation in connection with warrant exercise transactions in which (i)
the market price of our common stock at the time of exercise is lower than the
exercise price of the 2003 Warrants; (ii) the 2003 Warrants are held in any
discretionary account; (iii) disclosure of compensation arrangements is not
made, in addition to the disclosure provided in this prospectus, in documents
provided to holders of the 2003 Warrants at the time of exercise; (iv) at the
time of exercise, the holder of the 2003 Warrant that is electing to exercise
has not confirmed in writing that Roan/Meyers solicited such exercise; or (v)
the solicitation or exercise of the 2003 Warrants was in violation of Regulation
M under the Securities and Exchange Act of 1934. In addition, unless granted an
exemption by the Securities and Exchange Commission from Regulation M,
Roan/Meyers
45
will be prohibited from engaging in any market making activities or solicited
brokerage activities until the later termination of such solicitation activity
or the termination by waiver or otherwise of any right Roan/Meyers may have to
receive a fee for the exercise of the 2003 Warrants following such solicitation.
Such a prohibition, while in effect, could impair the liquidity and market price
of the securities offered pursuant to this offering.
We have also previously paid to Roan/Meyers $45,000 on account of the
underwriters expenses in connection with this offering to be applied to the
non-accountable expense allowance equal to 3% of the gross proceeds of the
offering (including proceeds from the sale, if any, of the over-allotment option
securities).
REGULATION M
In order to facilitate the offering of the units, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the units. Specifically, the underwriters may sell more shares than they are
obligated to purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no greater than the
number of units available for purchase by the underwriters under the
over-allotment option. The underwriters can close out a covered short sale by
exercising the over-allotment option or purchasing units in the open market. In
determining the source of units to close out a covered short sale, the
underwriters will consider, among other things, the open market price of the
units compared to the price available under the over-allotment option. The
underwriters may also sell units in excess of the over-allotment option,
creating a naked short position. The underwriters must close out any naked short
position by purchasing units in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the unit in the open market after pricing that
could adversely affect investors who purchase in the offering. As an additional
means of facilitating the offering, the underwriters may bid for, and purchase,
units in the open market to stabilize the price of the units. The underwriting
syndicate may also reclaim selling concessions allowed to an underwriter or a
dealer for distributing the units in the offering, if the syndicate repurchases
previously distributed units to cover syndicate short positions or to stabilize
the price of the unit (commonly referred to as the imposition of "penalty
bids"). These activities may raise or maintain the market price of the units
offered hereby above independent market levels or prevent or retard a decline in
the market price of the units offered hereby. The underwriters are not required
to engage in these activities and may end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
DETERMINATION OF OFFERING PRICE
The initial public offering price of the units offered by this
prospectus and the exercise price of the 2003 Warrants were determined by
negotiation between us and the representatives. Among the factors considered in
determining the initial public offering price of the units and the exercise
price of the warrants were:
o our history and our prospects;
o the trading price of our common stock prior to the date of
this prospectus;
o the industry in which we operate;
o the status and development prospects for our proposed
products;
o our past and present operating results;
o the previous experience of our executive officers; and
o the general condition of the securities markets at the time
of this offering.
46
The offering price stated on the cover page of this prospectus should
not be considered an indication of the actual value of the units. The price of
our common stock and the 2003 Warrants is subject to change as a result of
market conditions and other factors, and the market value of s hares
of our common stock and 2003 Warrants may be less than the initial
public offering price of a unit offered hereby.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
On April 12, 2002, KPMG LLP resigned as our independent auditors. The
report of KPMG on our balance sheet as of December 31, 2001 and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the two-year period ended December 31, 2001 and for the period from
August 5, 1988 (inception) to December 31, 2001 did not contain any adverse
opinion or disclaimer of opinion, nor were they modified as to uncertainty,
audit scope or accounting principles.
In connection with the audits of the periods described above, and the
subsequent interim period through April 12, 2002, there were no disagreements
between us and KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to KPMG's satisfaction, would have caused KPMG to
make reference to the subject matter of the disagreement(s) in connection with
its reports.
On April 25, 2002, we engaged Eisner LLP, formerly Richard A. Eisner &
Company, LLP, New York, New York, as our independent auditors.
LEGAL MATTERS
The validity of the units, the common stock and the 2003 Warrants
offered hereby will be passed upon for Delcath by Cummings & Lockwood LLC,
Stamford, Connecticut, counsel for Delcath. Goldstein & DiGioia LLP, New York,
New York, has served as counsel for the underwriters.
EXPERTS
Our financial statements as of December 31, 2002 and for each of the
two years then ended and cumulative from inception (August 5, 1988) to December
31, 2002 have been included in this prospectus in reliance upon the report of
Eisner LLP, independent auditors, appearing elsewhere herein, and upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file periodic reports under the Securities Exchange Act of 1934, as
amended, that include information about us. We have also filed with the SEC in
Washington, D.C., a registration statement under the Securities Act with the
respect to the units offered by this prospectus. 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 us and
the units, we refer you to the registration statement and the exhibits and
schedules filed therewith. The registration statement and the exhibits and
schedules forming a part thereof may be inspected without charge at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and copies of such materials can be obtained from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information regarding the public reference facilities. In addition, the SEC
maintains a website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC at
http:// www.sec.gov.
Statements made in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the registration statement, we refer you to the exhibit to the registration
statement referencing the item for a more complete description of the matter
involved, and each such statement is qualified in its entirety by reference
thereto.
47
DELCATH SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements as of December 31, 2002 and for each of the two
years in the period ended December 31, 2002, and cumulative from inception
(August 5, 1988) to December 31, 2002:
Page
Independent Auditors' Report................................................F-2
Balance Sheet as of December 31, 2002.......................................F-3
Statements of Operations for the years ended December 31, 2001
and 2002 and cumulative from inception (August 5, 1988) to
December 31, 2002...........................................................F-4
Statements of Stockholders' Equity for the years ended December
31, 2001 and 2002 and cumulative from inception (August 5,
1988) to December 31, 2002..................................................F-5
Statements of Cash Flows for the years ended December 31, 2001
and 2002 and cumulative from inception (August 5, 1988) to
December 31, 2002...........................................................F-6
Notes to Financial Statements...............................................F-7
F-1
Independent Auditors' Report
The Board of Directors
Delcath Systems, Inc.:
We have audited the accompanying balance sheet of Delcath Systems, Inc. (a
development stage company) as of December 31, 2002, and the related statements
of operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 2002 and for the period from August 5, 1988
(inception) to December 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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 enumerated above present fairly, in all
material respects, the financial position of Delcath Systems, Inc. (a
development stage company) as of December 31, 2002, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2002 and for the period from August 5, 1988 (inception) to December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
Eisner LLP
New York, NY
February 6, 2003
F-2
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Balance Sheet
December 31,
2002
-----------
Assets
Current assets:
Cash and cash equivalents ................................................. $ 1,063,650
Certificate of deposit .................................................... 370,000
Interest receivable ....................................................... 5,406
Prepaid insurance ......................................................... 96,583
------------
Total current assets .................................... 1,535,639
Furniture and fixtures, net .................................................... 13,750
Deferred costs in connection with a proposed
financing transaction ..................................................... 238,571
Due from affiliate ............................................................. 24,000
------------
Total assets ............................................ $ 1,811,960
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ..................................... $ 175,170
------------
Total current liabilities ............................... 175,170
------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding ........................... --
Common stock, $.01 par value; 15,000,000 shares authorized;
4,146,997 shares issued and 4,118,897 outstanding ...................... 41,189
Additional paid-in capital ................................................ 19,049,406
Deficit accumulated during development stage .............................. (17,453,805)
------------
Total stockholders' equity ................................. 1,636,790
------------
Total liabilities and stockholders' equity ................. $ 1,811,960
============
See accompanying notes to financial statements
F-3
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
Cumulative
from inception
Year ended December 31, (August 5, 1988)
------------------ ----------------- to
2001 2002 December 31, 2002
------------------ ----------------- --------------------------
Costs and expenses:
General and administrative expenses ........ $ 953,652 $ 723,763 $ 5,303,309
Research and development costs ............. 1,115,004 1,173,275 11,410,881
------------------ ----------------- ----------------
Total costs and expenses ................ 2,068,656 1,897,038 16,714,190
------------------ ----------------- ----------------
Operating loss .......................... (2,068,656) (1,897,038) (16,714,190)
Other income (expense):
Interest income ............................ 208,220 89,992 930,463
Interest expense ........................... (15,571) -- (171,473)
------------------ ----------------- ----------------
Net loss ................................ $ (1,876,007) $ (1,807,046) $ (15,955,200)
================= ================ ================
Common share data:
Basic and diluted loss per share ........... $ (0.48) $ (0.44)
================= ================
Weighted average number of basic
and diluted common shares
outstanding .......................... 3,903,816 4,085,049
================ =================
See accompanying notes to financial statements.
F-4
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Stockholders' Equity
Years ended December 31, 2002 and 2001 and
cumulative from inception (August 5, 1988) to December 31, 2002
Common stock $.01 par value Preferred Stock
-------------------------------------------------------------------------- ----------------
Issued In treasury Outstanding $.01 par value
------------------------- --------------------- ---------------------- ----------------
No. of No. of No. of No. of
shares Amount shares Amount shares Amount shares Amount
------------ -------- --------- ---------- ---------- -------- ------ ------
Shares issued in connection with the
formation of the Company as of
August 22, 1988 ............... 621,089 $ 6,211 -- $ -- 621,089 $ 6,211 -- $ --
Sale of preferred stock,
August 22, 1988 ............... -- -- -- -- -- -- -- --
Shares returned as of March 8, 1990 -- -- (414,059) (4,141) (414,059) (4,141) -- --
Sale of stock, October 2, 1990 ..... -- -- 17,252 173 17,252 173 -- --
Sale of stock, January 23, 1991 .... -- -- 46,522 465 46,522 465 -- --
Sale of stock, August 30, 1991 ..... -- -- 1,353 14 1,353 14 -- --
Sale of stock, December 31, 1992 ... -- -- 103,515 1,035 103,515 1,035 -- --
Sale of stock, July 15, 1994 ....... -- -- 103,239 1,032 103,239 1,032 -- --
Sale of stock, December 19, 1996 ... -- -- 39,512 395 39,512 395 -- --
Shares issued in connection with
conversion of short-term
borrowings as of
December 22, 1996 ............. 58,491 585 98,388 984 156,879 1,569 -- --
Sale of stock, December 31, 1997 ... 53,483 535 -- -- 53,483 535 -- --
Exercise of stock options .......... 13,802 138 3,450 35 17,252 173 -- --
Shares issued as compensation ...... 2,345 23 828 8 3,173 31 -- --
Amortization of compensatory
stock options granted ......... -- -- -- -- -- -- -- --
Forfeiture of stock options ........ -- -- -- -- -- -- -- --
Shares issued in connection with
exercise of warrants .......... 21,568 216 -- -- 21,568 216 -- --
Sale of stock, January 16, 1998 ... 34,505 345 -- -- 34,505 345 -- --
Sale of stock, September 24, 1998 .. 3,450 35 -- -- 3,450 35 -- --
Shares returned, April 17, 1998 .... (3,450) (35) -- -- (3,450) (35) -- --
Amortization of compensatory
stock options granted ......... -- -- -- -- -- -- -- --
Forfeiture of stock options ........ -- -- -- -- -- -- -- --
Exercise of stock options .......... 8,626 86 -- -- 8,626 86 -- --
Sale of stock, June 30, 1999 ....... 46,987 470 -- -- 46,987 470 -- --
Amortization of compensatory
stock options granted ......... -- -- -- -- -- -- -- --
Forfeiture of stock options ........ -- -- -- -- -- -- -- --
Shares issued in connection with
exercise of warrants .......... 2,300 23 -- -- 2,300 23 -- --
Sale of stock, April 14, 2000 ...... 230,873 2,309 -- -- 230,873 2,309 -- --
Dividends paid on preferred stock .. 690,910 6,909 -- -- 690,910 6,909 -- --
Conversion of preferred stock ...... 833,873 8,339 -- -- 833,873 8,339 -- --
Sale of stock, October 19, 2000 .... 1,200,000 12,000 -- -- 1,200,000 12,000 -- --
Shares issued as compensation
for stock sale ................ 85,000 850 -- -- 85,000 850 -- --
Stock options issued as
compensation .................. -- -- -- -- -- -- -- --
Deficit accumulated from inception
to December 31, 2000 .......... -- -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ---------- ----- ----
Balance at December 31, 2000 ....... 3,903,852 39,039 -- -- 3,903,852 39,039 -- --
Sum of fractional common shares
cancelled after year 2000
stock splits .................. (36) (1) -- -- (36) (1) -- --
Stock warrants issued as
compensation .................. -- -- -- -- -- -- -- --
Net loss for year ended
December 31, 2001 ............. -- -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ---------- -- -----
Balance at December 31, 2001 ....... 3,903,816 39,038 -- -- 3,903,816 $ 39,038 -- $ --
Sale of stock on April 3, 2002 ..... 243,181 2,432 -- -- 243,181 2,432 -- --
Repurchases of stock, November ..... -- -- (28,100) (281) (28,100) (281) -- --
and December 2002
Net loss for year ended ............ -- -- -- -- -- -- -- --
December 31, 2002 ............. -- -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ---------- -- -----
Balance at December 31, 2002 ....... 4,146,997 $ 41,470 (28,100) $ (281) 4,118,897 $ 41,189 -- $ --
============ ============ ============ ============ ============ ========== == =====
Class A Class B
preferred stock preferred stock
----------------------- ---------------------- Deficit
$.01 par value $.01 par value accumulated
----------------------- ---------------------- Additional during
No. of No. of paid-in development
shares Amount shares Amount capital stage Total
---------- ---------- ---------- ---------- ------------ ----------- -------------
Shares issued in connection with the
formation of the Company as of
August 22, 1988 ............... -- $ -- -- $ -- $ (5,211) $ -- $ 1,000
Sale of preferred stock,
August 22, 1988 ............... 2,000,000 20,000 -- -- 480,000 -- 500,000
Shares returned as of March 8, 1990 -- -- -- -- 4,141 -- --
Sale of stock, October 2, 1990 ..... -- -- -- -- 24,827 -- 25,000
Sale of stock, January 23, 1991 .... -- -- 416,675 4,167 1,401,690 -- 1,406,322
Sale of stock, August 30, 1991 ..... -- -- -- -- 9,987 -- 10,001
Sale of stock, December 31, 1992 ... -- -- -- -- 1,013,969 -- 1,015,004
Sale of stock, July 15, 1994 ....... -- -- -- -- 1,120,968 -- 1,122,000
Sale of stock, December 19, 1996 ... -- -- -- -- 999,605 -- 1,000,000
Shares issued in connection with
conversion of short-term
borrowings as of
December 22, 1996 ............. -- -- -- -- 1,703,395 -- 1,704,964
Sale of stock, December 31, 1997 ... -- -- -- -- 774,465 -- 775,000
Exercise of stock options .......... -- -- -- -- 30,827 -- 31,000
Shares issued as compensation ...... -- -- -- -- 34,454 -- 34,485
Amortization of compensatory
stock options granted ......... -- -- -- -- 2,496,347 -- 2,496,347
Forfeiture of stock options ........ -- -- -- -- (279,220) -- (279,220)
Shares issued in connection with
exercise of warrants .......... -- -- -- -- 234,182 -- 234,398
Sale of stock, January 16, 1998 ... -- -- -- -- 499,655 -- 500,000
Sale of stock, September 24, 1998 .. -- -- -- -- 56,965 -- 57,000
Shares returned, April 17, 1998 .... -- -- -- -- (4,965) -- (5,000)
Amortization of compensatory
stock options granted ......... -- -- -- -- 1,166,418 -- 1,166,418
Forfeiture of stock options ........ -- -- -- -- (407,189) -- (407,189)
Exercise of stock options .......... -- -- -- -- 67,414 -- 67,500
Sale of stock, June 30, 1999 ....... -- -- -- -- 775,722 -- 776,192
Amortization of compensatory
stock options granted ......... -- -- -- -- 98,186 -- 98,186
Forfeiture of stock options ........ -- -- -- -- (554,371) -- (554,371)
Shares issued in connection with
exercise of warrants .......... -- -- -- -- 24,975 -- 24,998
Sale of stock, April 14, 2000 ...... -- -- -- -- 499,516 -- 501,825
Dividends paid on preferred stock .. -- -- -- -- 992,161 (1,498,605) (499,535)
Conversion of preferred stock ...... (2,000,000) (20,000) (416,675) (4,167) 15,828 -- --
Sale of stock, October 19, 2000 .... -- -- -- -- 5,359,468 -- 5,371,468
Shares issued as compensation
for stock sale ................ -- -- -- -- (850) -- --
Stock options issued as
compensation .................. -- -- -- -- 3,800 -- 3,800
Deficit accumulated from inception
to December 31, 2000 .......... -- -- -- -- -- (12,272,147) (12,272,147)
------------ ------------ ----------- ------------ ------------ ------------ ------------
Balance at December 31, 2000 ....... -- -- -- -- 18,637,159 (13,770,752) 4,905,446
Sum of fractional common shares
cancelled after year 2000
stock splits .................. -- -- -- -- 1 -- --
Stock warrants issued as
compensation .................. -- -- -- -- 198,000 -- 198,000
Net loss for year ended
December 31, 2001 ............. -- -- -- -- -- (1,876,007) (1,876,007)
------------ ------------ ----------- ------------ ------------ ------------ ------------
Balance at December 31, 2001 ....... -- $ -- -- $ -- $ 18,835,160 $(15,646,759) $ 3,227,439
Sale of stock on April 3, 2002 ..... -- -- -- -- 265,068 -- 267,500
Repurchases of stock, November ..... -- -- -- -- (50,822) -- (51,103)
and December 2002
Net loss for year ended ............ -- -- -- -- -- (1,807,046) (1,807,046)
December 31, 2002 ............. -- -- -- -- -- -- --
------------ ------------ ----------- ------------ ------------ ------------ ------------
Balance at December 31, 2002 ....... -- $ -- -- $ -- $ 19,049,406 $(17,433,805) $ 1,636,790
============ ============ =========== ============ ============ ============ ============
F-5
DELCATH SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
Cumulative
from inception
Year ended December 31, (August 5, 1988)
----------------------------------- to
2001 2002 December 31, 2002
---------------------------------- -----------------------------
Cash flows from operating activities:
Net loss .......................................... $ (1,876,007) $ (1,807,046) $(15,955,200)
Adjustments to reconcile net loss to
net cash used in operating activities:
Stock option compensation expense ............. -- -- 2,520,170
Stock and warrant compensation expense
issued for consulting services .............. 198,000 -- 236,286
Depreciation expense .......................... 5,014 6,410 21,174
Amortization of organization costs ............ -- -- 42,165
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses ....... (501) (26,916) (96,583)
Decrease (increase) in interest receivable .... (20,920) 47,882 (5,406)
Due from affiliate ............................ -- -- (24,000)
(Decrease) increase in accounts
payable and accrued expenses ................ (622,835) (910) 175,170
------------ ------------ ------------
Net cash used in operating activities ..... (2,317,249) (1,780,580) (13,086,224)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of furniture and fixtures ................ (13,260) (6,664) (34,924)
Purchase of short-term investments ................ (1,500,000) (370,000) (2,900,000)
Proceeds from maturities of short-term
investments ..................................... -- 1,500,000 2,530,000
Organization costs ................................ -- -- (42,165)
------------ ------------ ------------
Net cash provided by (used in)
investing activities ................ (1,513,260) 1,123,336 (447,089)
------------ ------------ ------------
Cash flows from financing activities:
Deferred costs in connection with a proposed
financing transaction ........................... -- (238,571) (238,571)
Net proceeds from sale of stock and exercise
of stock options and warrants ................... -- 267,500 13,681,208
Repurchases of outstanding common stock ........... -- (51,103) (51,103)
Dividends paid .................................... -- -- (499,535)
(Repayments of) proceeds from short-term borrowings (230,000) -- 1,704,964
------------ ------------ ------------
Net cash (used in) provided by financing
activities ................................ (230,000) (22,174) 14,596,963
------------ ------------ ------------
(Decrease) increase in cash and cash
equivalents .......................... (4,060,509) (679,418) 1,063,650
Cash and cash equivalents at beginning of period ...... 5,803,577 1,743,068 --
------------ ------------ ------------
Cash and cash equivalents at end of period ............ $ 1,743,068 $ 1,063,650 $ 1,063,650
============ ============ ============
Cash paid for interest ................................ $ 36,141 $ -- $ 171,473
============ ============ ============
Supplemental non-cash activities:
Conversion of debt to common stock ................ $ -- $ -- $ 1,704,964
============ ============ ============
Common stock issued for preferred stock dividends . $ -- $ -- $ 999,070
============ ============ ============
Conversion of preferred stock to common stock ..... $ -- $ -- $ 24,167
============ ============ ============
Common stock issued as compensation
for stock sale .................................. $ -- $ -- $ 510,000
============ ============ ============
See accompanying notes to financial statements
F-6
Delcath Systems, Inc.
Notes to Audited Financial Statements
December 31, 2001 and 2002
(1) Description of Business and Summary of Significant Accounting Policies
(a) Description of Business
Delcath Systems, Inc. (the "Company") is a development stage
company which was founded in 1988 for the purpose of developing
and marketing a proprietary drug delivery system capable of
introducing and removing high dose chemotherapy agents to a
diseased organ system while greatly inhibiting their entry into
the general circulation system. It is hoped that the procedure
will result in a meaningful treatment for cancer. In November
1989, the Company was granted an IDE (Investigational Device
Exemption) and an IND status (Investigational New Drug) for its
product by the FDA (Food and Drug Administration). The Company is
seeking to complete clinical trials in order to obtain FDA
pre-marketing approval for the use of its delivery system using
doxorubicin and melphalan, chemotherapeutic agents, to treat
malignant melanoma that has spread to the liver.
(b) Basis of Financial Statement Presentation
The accounting and financial reporting policies of the Company
conform to accounting principles generally accepted in the United
States of America. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make assumptions and estimates that impact the
amounts reported in those statements. Such assumptions and
estimates are subject to change in the future as additional
information becomes available or as circumstances are modified.
Actual results could differ from these estimates.
(c) Furniture and Fixtures
Furniture and fixtures are recorded at cost and are being
depreciated on a straight line basis over the estimated useful
lives of the assets of five years. Accumulated depreciation
amounted to $21,074 at December 31, 2002.
(d) Income Taxes
The Company accounts for income taxes following the asset and
liability method in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." Under such method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
The Company's income tax returns are prepared on the cash basis of
accounting. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
that the asset is expected to be recovered or the liability
settled.
(e) Stock Option Plan
The Company has historically accounted for its employee stock
option plans in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. As such,
compensation expense is recorded on the date of grant only if the
current fair market value of the underlying stock exceeds the
exercise price. Fair market values of the Company's Common Stock
at the dates options
F-7
were granted, prior to the Company's stock becoming publicly
traded, were based on third party sales of stock at or around the
dates options were granted, or in the absence of such
transactions, based on a determination by the board of directors
based on current available information. Such cost is then
recognized over the period the recipient is required to perform
services to earn such compensation. If a stock option does not
become vested because an employee fails to fulfill an obligation,
the estimate of compensation expense recorded in previous periods
is adjusted by decreasing compensation expense in the period of
forfeiture.
In 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income (loss) and pro forma earnings (loss) per
share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
Had compensation cost for the Company's stock option grants been
determined based on the fair value at the grant dates consistent
with the methodology of SFAS No. 123, the Company's net loss and
net loss per share for the years ended December 31, 2001 and 2002
would have been increased to the pro forma amounts indicated as
follows:
2001 2002
---- ----
Net loss $ (1,876,007) $ (1,807,046)
Stock-based employee compensation
expense included in net loss, net of
related tax effects
0 0
Stock-based employee compensation
determined under the fair value based
method, net of related tax effects
(133,263) (44,769)
Pro forma net loss (2,009,270) (1,851,815)
Loss per share (basic and diluted):
As reported $ (0.48) $ (0.44)
Pro forma (0.51) (0.45)
The per share weighted average fair value of stock options granted
during 2001 and 2002 was $.28 and $.30, respectively, estimated on
the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for the
grants for 2001 and 2002, respectively: risk free interest rates
of 2.84% and 3.6%-4.95% respectively, and volatility of 41% and
26.7% - 36.3%, respectively, while no dividend yield and expected
lives of five years were assumed for both years.
(f) Loss Per Share
The Company follows the provisions of SFAS No. 128, "Earnings Per
Share," which requires presentation of both basic and diluted
earnings per share (EPS) on the face of the Statements of
Operations. Basic EPS excludes dilution, and is computed using the
weighted average number
of common shares outstanding during the period. The diluted EPS
calculation assumes all dilutive stock options or contracts to
issue Common Stock were exercised or converted into Common Stock
at the beginning of the period.
For the years ended December 31, 2001 and 2002, the following
potential common shares were excluded from the computation of
diluted EPS because their effects would be antidilutive:
2001 2002
---- ----
Shares issuable upon exercise of
options 902,936 1,145,684
Shares issuable upon exercise of
warrants 1,626,938 1,516,985
Common Stock purchase rights issuable
only in the event that a
non-affiliated person or group
acquires 15% of the Company's then
outstanding Common Stock 6,408,690 6,781,566
Totals 8,938,564 9,444,235
========= =========
(g) Research and Development Costs
Research and development costs include the costs of materials,
personnel, outside services and applicable indirect costs incurred
in development of the Company's proprietary drug delivery system.
All such costs are charged to expenses when incurred.
(h) Statements of Cash Flows
For purposes of the statements of cash flows, the Company
considers highly liquid debt instruments with maturities of three
months or less at date of acquisition to be cash equivalents. At
December 31, 2002 cash equivalents excluded a certificate of
deposit in the amount of $370,000.
(i) Reclassifications
Reclassifications have been made to reflect cost and expense
accounts on a functional basis for 2001 and prior, which is
consistent with the Company's current presentation.
F-9
Operating costs and expenses were previously presented as follows:
Cumulative
Year ended from inception
December 31, (August 5, 1988)
2001 to
December 31, 2001
------------ ------------------
Legal, consulting and accounting fees $ 1,034,025 $ 6,025,255
Stock option compensation expense ... -- 2,520,170
Compensation and related expenses ... 557,087 3,304,703
Other operating expenses ............ 477,544 2,967,024
----------- -----------
Total costs and expenses ....... $ 2,068,656 $14,817,152
=========== ===========
(j) Stock Splits
All share and per share amounts give retroactive effect to stock
splits effected by the Company.
(2) Stockholders' Equity
(a) Stock Issuances
BGH Medical Products, Inc. (name later changed to Delcath Systems,
Inc.), a Delaware corporation (BGH - Delaware), was formed on
August 5, 1988. As of August 22, 1988, BGH Medical Products, Inc.,
a Connecticut corporation (BGH - Conn.), was merged into BGH
-Delaware, the surviving corporation. As of the merger date, the
authorized capital stock of BGH - Conn. consisted of 5,000 shares
of common stock, par value $.01 per share, of which 1,000 shares
were issued and outstanding. Upon the merger, each BGH - Conn.
Common Share outstanding was exchanged into 621.089 BGH - Delaware
Common Shares. As a result of the conversion, BGH - Delaware
issued 621,089 shares of common stock at $.01 par value. The
aggregate amount of the par value of all Common Shares issued as a
result of the exchange, $6,211, was credited as the Common Stock
capital of BGH - Delaware, and the difference in respect to the
capital account deficiency was charged to additional paid-in
capital.
On August 22, 1988, BGH - Delaware then sold in a private
placement 2,000,000 shares of Class A Preferred Stock, with a par
value of $.01, to two affiliated venture capital funds for an
aggregate amount of $500,000 in cash.
On March 8, 1990, 414,059 shares of Common Stock were returned to
the Company by certain stockholders as treasury stock due to
relevant technology milestones not being fully achieved within the
specified time period, in accordance with provisions of a
stockholders' agreement.
Effective May 7, 1990, the Company changed its name to Delcath
Systems, Inc.
On October 2, 1990, the Company sold 17,252 shares of Common
Treasury Stock, $.01 par value, for an aggregate amount of
$25,000.
F-10
On January 23, 1991, the Company offered in a private placement
shares of Common Stock and/or Class B Preferred Stock at $7.39 and
$2.55 per share respectively for an aggregate maximum amount of
$2,000,000. Under the terms of the private placement, 46,522
shares of Common Treasury Stock and 416,675 shares of Class B
Preferred Stock were sold, yielding net proceeds to the Company of
$1,406,322. The Common Stock and Class B Preferred Stock sold each
has a par value of $.01, resulting in an increase in additional
paid-in capital of $1,401,690. The two affiliated venture capital
funds that owned the Class A Preferred Shares purchased 117,650 of
the Class B Preferred Shares sold in the private placement.
On August 30, 1991, the Company sold an additional 1,353 shares of
Common Treasury Stock at $7.39 per share, yielding proceeds to the
Company of $10,001. The shares have a par value of $.01, resulting
in an additional paid-in capital amount of $9,987.
In a December 1992 private placement, the Company sold 103,515
shares of Common Stock held in our treasury at $10.14 per share
for a total placement of $1,050,000 ($1,015,004 after expenses).
The shares issued have a par value of $.01, resulting in an
additional paid-in capital amount of $1,048,965 ($1,013,969 after
expenses). The two affiliated venture capital funds that owned the
Class A Preferred Shares purchased 27,604 of the Common Treasury
Shares sold.
Effective January 1, 1994, the Company issued 1,725 shares of
Common Treasury Stock at $1.45 per share for a total price of
$2,500 upon the exercise of stock options by an employee of the
Company.
During the first quarter of 1994, the Company increased its
authorized number of Common Shares from 5,000,000 to 15,000,000.
On July 15, 1994, the Company sold through a private placement
offering, units at a price of $51,000 per unit. Each unit
consisted of 4,693 Common Shares and 469 warrants, each of which
entitled the holder to purchase one share of Common Stock for
$10.87. In connection therewith, the Company sold twenty-two (22)
units (103,239 Common Shares and 10,324 warrants expiring August
30, 1997) for total proceeds of $1,122,000. The two affiliated
venture capital funds that owned the Class A Preferred Shares
purchased six (6) of the units sold. During August 1997, the
holders of warrants exercised 8,916 warrants to purchase 8,916
Common Shares at $10.87 each for total proceeds of $96,900. The
remaining warrants expired unexercised.
Effective January 1, 1995, the Company issued 1,725 shares of
Common Treasury Stock at $1.45 per share for a total price of
$2,500 upon the exercise of stock options by an employee of the
Company.
Effective January 1, 1996, the Company issued 828 shares of common
stock, valued at $10.87 per share for a total of $9,000, as
compensation for consulting services.
On December 19, 1996, the Company sold through a private
transaction 39,512 shares of common stock for total proceeds of
$1,000,000. In connection with the offering, the purchaser
obtained sole distribution rights for the Company's products in
Japan, Korea, China, Taiwan, and Hong Kong through December 31,
2004. No value was attributed to the distribution rights. In
addition, under certain conditions, the purchaser will be required
to buy certain products from the Company.
F-11
On April 26, 1996, the Company entered into short-term borrowing
agreements with 26 investors under which it borrowed $1,704,964
bearing interest at 10.25% per annum. Under the terms of the
agreements, on December 22, 1996, the short-term borrowings were
converted into 156,879 shares of Common Stock, based on a
conversion price of $10.87 per share, and 78,438 warrants,
expiring April 25, 1999, entitling the holders to purchase 78,438
additional shares of Common Stock at $10.87 per share. The two
affiliated venture capital funds discussed above provided $250,000
of the short-term loan, converting that debt into approximately
23,003 shares of Common Stock and 11,502 warrants. From April 26,
1996 through December 22, 1996, interest of $114,948 accrued on
the borrowings. Such interest was paid in January 1997. During
September 1997, the holders of warrants exercised 1,150 warrants
to purchase 1,150 Common Shares at $10.87 each for total proceeds
of $12,499. During December 1997, the two affiliated venture
capital funds exercised their 11,502 warrants to purchase 11,502
Common Shares at $10.87 each for total proceeds of $124,999.
During April 1999, the holders of warrants exercised 2,300
warrants to purchase 2,300 Common Shares at $10.87 each for total
proceeds of $24,998. The remaining warrants expired unexercised.
In 1997, the Company issued 2,345 shares of Common Stock, valued
at $10.87 per share based on a 1996 agreement, for a total cost of
$25,485, as compensation for consulting services.
From September 1997 through December 31, 1997, the Company
received $775,000 and issued 53,483 shares of Common Stock. During
January 1998, the Company received an additional $500,000 and
issued another 34,505 shares of Common Stock. In April 1998, under
the terms of restricted stock sale agreements, the Company issued
to the purchasers of the 87,988 shares of Common Stock 11,732
three-year warrants entitling the holders to purchase 11,732
Common Shares at $10.87 per share. These warrants expired
unexercised in April 2001.
In December 1997, the holder of non-incentive stock options
exercised 13,802 options to purchase 13,802 restricted Common
Shares at $1.88 each for total proceeds of $26,000.
In April 1998, a venture capital firm exercised 8,626
non-incentive stock options to purchase 8,626 restricted Common
Shares at $7.83 each for total proceeds of $67,500.
In April 1998, in connection with the settlement of a dispute with
a former director, the Company cancelled 3,450 shares of Common
Stock previously held by the former director in return for $1.45
per share, the price originally paid by the former director.
In September 1998, the Company sold 3,450 shares of restricted
Common Stock to an individual for $16.52 per share, yielding
proceeds to the Company of $57,000.
In June 1999, the Company sold 46,987 shares of Common Stock to
individual investors for $16.52 per share and warrants entitling
the holders to purchase 5,218 Common Shares at $14.87 per share
(which warrants expired April 30, 2002), yielding proceeds to the
Company of $776,192.
In April 2000, the Company sold 230,873 Common Shares at $2.17 per
share to existing stockholders in a rights offering yielding
proceeds to the Company of $501,825.
The Company completed an initial public offering ("IPO") on
October 19, 2000 of 1,200,000 units for $6.00 per unit, each unit
consisting of one share of Common Stock and one redeemable warrant
to purchase one share of Common Stock at a price of $6.60 until
October 18, 2005. In connection with the initial public offering,
the Company received $7,200,000 before offering costs ($5,371,468
after expenses). The Company also issued to the underwriters
F-12
warrants to purchase 120,000 units for $6.60 per unit, each unit
consisting of one Common Share and one redeemable warrant to
purchase one share of Common Stock at a price of $10.50 until
October 18, 2005. The Company also issued 85,000 shares of Common
Stock valued at $510,000 for legal services provided in connection
with the offering.
Also, in connection with the initial public offering, the holders
of the 2,000,000 outstanding shares of the Company's Class A
Preferred Stock and the 416,675 outstanding shares of the
Company's Class B Preferred Stock agreed to convert their shares
into Common Stock prior to the closing of the offering. Upon the
conversion of the Company's Class A Preferred Stock and the
Company's Class B Preferred Stock into 833,873 shares of Common
Stock, the holders of the Class A and Class B shares received an
aggregate of $499,535 in cash and 690,910 shares of Common Stock
valued at $990,070 in payment of declared dividends.
In December 2000, the Company issued 1,720 Common Stock options at
an exercise price of $3.31, fair valued at $2.21 per option for a
total of $3,800, and 1,720 warrants to purchase Common Stock at an
exercise price of $6.00, fair valued at $0 per warrant, as
compensation for consulting services. Both the options and
warrants expire December 1, 2005.
The Company issued the following Common Stock warrants in 2001 for
consulting services:
(1) 150,000 fully vested warrants to purchase 150,000 units at
$7.00 per unit, through January 4, 2005, each unit consisting of
one fully-paid and non-assessable share of Common Stock, and one
Common Stock purchase warrant entitling the holder to purchase one
share of Common Stock for $6.60 per share. None of these warrants
have been exercised as of December 31, 2002. Such warrants, valued
at $175,000, were recognized as an expense in the first quarter of
2001; and
(2) 150,000 warrants to purchase up to 150,000 shares of
Common Stock, through April 30, 2005, for $6.60 per share. 25,000
of such warrants vested in 2001 and the remaining 125,000 warrants
would have vested by May 2002 if the share price of the Company's
Common Stock exceeded certain share price levels above the IPO
price by May 2002. As of May 2002, none of the thresholds had been
met, and the 125,000 remaining warrants did not vest and were
forfeited. None of the 25,000 vested warrants had been exercised
as of December 31, 2002. The 25,000 vested, non-contingent
warrants have been valued at $23,000, and were recognized as an
expense in the first quarter of 2001. The expenses, as noted in
(1) and (2) above, recognized with these two warrant issues are
non-cash expenses.
The values of the above warrants were $1.17 per warrant for
warrants described in (1) above, and $ .90 per warrant for the
25,000 warrants that vested immediately described in (2) above,
and were estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions, respectively: risk free interest rates of 4.95% and
5.9%, volatility of 26.7% and 22.9%, expected lives of four years
and four and one half years, with no dividend yield for either
issue.
In 2001, the Company cancelled a total of 36 shares of Common
Stock which represented the total of fractional shares resulting
from stock splits during September and October 2000 in connection
with the Company's initial public offering.
On October 30, 2001, the Company entered into a Rights Agreement
with American Stock Transfer & Trust Company (the "Rights
Agreement") in connection with the implementation of
F-13
the Company's stockholder rights plan (the "Rights Plan"). The
purposes of the Rights Plan are to deter, and protect the
Company's shareholders from, certain coercive and otherwise unfair
takeover tactics and to enable the Board of Directors to represent
effectively the interests of shareholders in the event of a
takeover attempt. The Rights Plan does not deter negotiated
mergers or business combinations that the Board of Directors
determines to be in the best interests of the Company and its
shareholders.
To implement the Rights Plan, the Board of Directors declared a
dividend of one Common Stock purchase right (a "Right") for each
share of Common Stock of the Company, par value $0.01 per share
(the "Common Stock") outstanding at the close of business on
November 14, 2001 (the "Record Date") or issued by the Company on
or after such date and prior to the earlier of the Distribution
Date, the Redemption Date or the Final Expiration Date (as such
terms are defined in the Rights Agreement). The rights expire
October 30, 2011. Each Right entitles the registered holder to
purchase from the Company one share of Common Stock, at a price of
$5.00 per share, subject to adjustment (the "Purchase Price"), in
the event that a person, or group announces that it has acquired,
or intends to acquire, 15% or more of the Company's outstanding
Common Stock.
On April 3, 2002, the Company received $267,500 by completing a
private placement of 243,181 shares of its Common Stock and
warrants to purchase up to 20,265 shares of Common Stock at an
exercise price of $1.32 per share that expire on April 3, 2005.
(b) Common Stock Repurchases
Pursuant to a stock repurchase plan approved in 2002 by the
Company's Board of Directors, the Company repurchased 28,100
shares of Common Stock for $51,103 during 2002. The Company has
been authorized by the Board of Directors to purchase up to seven
percent of its outstanding Common Stock.
(c) Stock Option Plans
The Company established an Incentive Stock Option Plan, a
Non-Incentive Stock Option Plan, the 2000 Stock Option Plan and
the 2001 Stock Option Plan (collectively, the "Plans") under which
stock options may be granted. Additionally, the Company has
entered into separate contracts apart from the Plans under which
options to purchase Common Stock have been granted. A stock option
grant allows the holder of the option to purchase a share of the
Company's Common Stock in the future at a stated price. The Plans
are administered by the Compensation Committee of the Board of
Directors which determines the individuals to whom the options
shall be granted as well as the terms and conditions of each
option grant, the option price and the duration of each option.
The Company's Incentive and Non-Incentive Stock Option Plans were
approved and became effective on November 1, 1992. During 2000 and
2001, respectively, the 2000 and 2001 Stock Option Plans became
effective. Options granted under the Plans vest as determined by
the Company and expire over varying terms, but not more than five
years from the date of grant. Stock option activity for the period
January 1, 2001 through December 31, 2002 is as follows:
F-14
The Plans Other Option Grants
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at
December 31, 2000 689,684 $ 3.82 17,252 $ 2.90
Granted during 2001 280,000 .83 -- --
Expired during 2001 (84,000) 3.31 -- --
---------- -------
Outstanding at
December 31, 2001 885,684 2.94 17,252 2.90
Granted during 2002 260,000 .71 -- --
Expired during 2002 -- (17,252) 2.90
---------- -------
Outstanding at
December 31, 2002 1,145,684 $ 2.43 -- $ --
========== =======
F-15
The following summarizes information about shares subject to
option at December 31, 2002:
Options outstanding Options exercisable
---------------------------------------------------------------------------- -------------------------------
Weighted
Weighted average Weighted
Number Range of average remaining Number average
outstanding exercise prices exercise price life in years exercisable exercise price
----------------- ------------------- ------------------ ---------------- ----------- ----------------
100,000 $ .60 $ .60 3.92 50,000 $ .60
260,000 .71 .71 4.25 .71
150,000 .85 .85 4.00 66,000 .85
30,000 1.53 1.53 3.67 7,500 1.53
172,525 2.90 2.90 2.00 172,525 2.90
164,020 3.31 3.31 2.95 164,020 3.31
269,139 4.93 4.93 1.00 269,139 4.93
------- -------
1,145,684 $ .60 - $4.93 $2.43 2.88 729,184 $3.38
========= ============= ===== ==== ======= =====
At December 31, 2001, options for 622,936 shares were exercisable at a
weighted average exercise price of $3.89 per share.
F-16
(3) Income Taxes
As of December 31, 2002, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$12,882,000 which may be available to offset future federal taxable
income, if any, through 2022. The use of net operating loss
carryforwards is subject to limitation in the event of a change in the
Company's ownership, as defined by federal income tax regulations. The
net operating loss carryforwards resulted in a deferred tax asset of
approximately $4,380,000 at December 31, 2002 ($3,777,000 at December
31, 2001). Management does not expect the Company to be taxable in the
near future and established a 100% valuation allowance against the
deferred tax asset created by the net operating loss carryforwards at
December 31, 2002 and 2001. The valuation allowance increased $603,000
during the year ended December 31, 2002 and $568,000 during the year
ended December 31, 2001.
(4) Due From Affiliate
The Company sublet office space from a corporation controlled by an
officer of the Company (the "affiliate"), whose lease with the
landlord expired August 1997. Thereafter, the Company's occupancy of
the premises continued pursuant to an informal arrangement, under
which the Company remitted monthly rental payments directly to the
landlord. Rent expense incurred pursuant to this arrangement amounted
to $87,376 for 2001. The informal arrangement was replaced as of
January 1, 2002 with a lease agreement between the Company and the
landlord (see Note6). In connection with its occupancy, the Company
paid the affiliate $24,000 which the affiliate then paid to the
landlord as a deposit on the lease.
(5) Deferred Costs in Connection with a Proposed Financing Transaction
On December 5, 2002, the Company filed with the Securities and
Exchange Commission a registration statement for the issuance of
units, each unit to consist of Common Shares and warrants to purchase
Common Shares. The Company has incurred $238,571 of costs associated
with the transaction. These costs will be netted against the proceeds
from the stock offering and charged to additional paid-in capital, or
charged to expense if the transaction is not consummated. As of
December 31, 2002, $21,705 of these costs were accrued.
F-17
(6) Rents
On April 1, 2002, the Company executed an Amendment of Lease (the
"Amendment") directly with the landlord. The Amendment is effective
January 1, 2002 and expires December 22, 2003, and can be renewed by
the Company for an additional three years. Rent expense under this
lease for the year ended December 31, 2002 was $89,082. Future minimum
rent under this lease is $91,055 for the year ending December 31,
2003.
(7) Subsequent Event
On January 31, 2003, the stockholders voted to approve an amendment to
the Company's Certificate of Incorporation to increase the authorized
number of shares of Common Stock, par value $0.01 per share, from 15
million to 35 million.
F-18
[LOGO - DELCATH SYSTEMS INC.]
TABLE OF CONTENTS
PROSPECTUS SUMMARY......................1
THE OFFERING............................2
SUMMARY FINANCIAL DATA..................3
RISK FACTORS............................4
SPECIAL NOTE REGARDING
FORWARD-LOOKING
STATEMENTS.........................9
USE OF PROCEEDS.........................9
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER
MATTERS............................11
DIVIDEND POLICY.........................12
CAPITALIZATION..........................12
SELECTED FINANCIAL DATA.................12
PLAN OF OPERATION.......................13
BUSINESS................................15
MANAGEMENT..............................28
PRINCIPAL STOCKHOLDERS..................35
RELATED PARTY
TRANSACTIONS.......................36
DESCRIPTION OF OUR CAPITAL
STOCK AND OTHER
SECURITIES..............................36
SHARES ELIGIBLE FOR FUTURE
SALE...............................42
UNDERWRITING............................43
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS AND
FINANCIAL DISCLOSURE...............45
LEGAL MATTERS...........................45
EXPERTS.................................45
WHERE YOU CAN FIND MORE
INFORMATION........................45
INDEX TO FINANCIAL
STATEMENTS.........................F-1
PART II
-------
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes a Delaware corporation to indemnify its officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director.
Section 102(b) of the Delaware General corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit a director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may affect
a director's liability with respect to any of the following:
o breaches of the director's duty of loyalty to the corporation or its
stockholders;
o acts or omissions not made in good faith or which involve intentional
misconduct of knowing violations of law;
o liability for dividends paid or stock repurchased or redeemed in violation
of the Delaware General Corporation law; or
o any transaction from which the director derived an improper personal
benefit.
o Section 102(b)(7) does not authorize any limitation on the ability of the
company or its stockholders to obtain injunctive relief, specific
performance or other equitable relief against directors.
Article Seventh of the Registrant's Certificate of Incorporation
provides that the personal liability of the directors of the Registrant be
eliminated to the fullest extent permitted under Section 102(b) of the Delaware
General Corporation Law.
Article Eighth of the Registrant's Certificate of Incorporation and the
Registrant's By-laws provide that all persons whom the Registrant is empowered
to indemnify pursuant to the provisions of Section 145 of the Delaware General
Corporation Law (or any similar provision or provisions of applicable law at the
time in effect), shall be indemnified by the Registrant to the full extent
permitted thereby. The foregoing right of indemnification shall not be deemed to
be exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
Reference is made to the Underwriting Agreement, to be filed as Exhibit
1, pursuant to which the underwriters agree to indemnify the directors and
certain officers of the Registrant and certain other persons against certain
civil liabilities.
The Registrant maintains a liability and indemnification insurance
policy in the amount of $2,500,000 for a period extending from October 19, 2002
to October 19, 2003 issued by Carolina Casualty Insurance Company covering all
our officers and directors, at an annual expense of $122,000.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses (other than the
underwriting discounts and commissions and the representative's non-accountable
expense allowance) expected to be incurred in connection with the issuance and
distribution of the securities being registered. All of such expenses are
estimates, other than the
II-1
filing fees payable to the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc.
Filing Fee - Securities and Exchange Commission .............. $ 318
Filing Fee - National Association of Securities Dealers, Inc. 500
Filing Fee - Boston Stock Exchange ........................... 12,500
Filing Fee - Nasdaq Small Cap Market ......................... 50,000
Fees and Expenses of Accountants ............................. 65,000
Fees and Expenses of Counsel ................................. 170,000
Printing and Engraving Expenses .............................. 10,000
Blue Sky Fees and Expenses ................................... 10,000
Transfer Agent Fees .......................................... 5,000
Miscellaneous Expenses ....................................... 6,682
--------
Total: .............................................. $330,000
--------
- -----------------------------
* To be filed by amendment.
ITEM 27. EXHIBITS
Exhibit No. Description
----------- -----------
1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of
Delcath Systems, Inc. (incorporated by reference to Exhibit
3.1 to Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 2002 (File No. 001-16133)).
3.2 Amended and Restated By-Laws of Delcath Systems, Inc.
(incorporated by reference to Exhibit 3.2 to Amendment No.
1 to Registrant's Registration Statement on Form SB-2
(Registration No. 333-39470)).
4.1 Form of Underwriter's Unit Warrant Agreement.
4.2 Specimen 2003 Warrant.
4.3 Warrant Agreement, dated January 5, 2001, by and between
Delcath Systems, Inc. and Euroland Marketing Solutions,
Ltd. (incorporated by reference to Exhibit 4.5 to the
Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 2000 (Commission File No. 001-16133)).
4.4 Warrant No. W-2 to purchase up to 150,000 units granted to
Euroland Marketing Services, Ltd. (incorporated by
reference to Exhibit 4.6 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 2000
(Commission File No. 001-16133)).
II-2
Exhibit No. Description
----------- -----------
4.5 Rights Agreement, dated October 30, 2001, by and between
Delcath Systems, Inc. and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to
Exhibit 4.7 to Registrant's Form 8-A dated November 12,
2001 (Commission File No. 001-16133)).
4.6 Form of Warrant Agreement by and between Delcath Systems,
Inc. and Whale Securities Co., L.P. (incorporated by
reference to Exhibit 4.2 to Amendment No. 5 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-39470)).
4.7 Form of Warrant Agreement by and between American Stock
Transfer & Trust Company, as warrant agent, Whale
Securities Co., L.P. and Delcath Systems, Inc.
(incorporated by reference to Exhibit 4.3 to Amendment No.
5 to Registrant's Registration Statement on Form SB-2
(Registration No. 333-39470)).
4.8 Form of Warrant Agent Agreement by and between Delcath
Systems, Inc. and American Stock Transfer & Trust Company,
as warrant agent with respect to the 2003 Warrants.
5 Opinion of Cummings & Lockwood LLC (to be filed by
amendment)
10.1 1992 Incentive Stock Option Plan (incorporated by reference
to Exhibit 10.1 to Registrant's Registration Statement on
Form SB-2 (Registration No. 333-39470)).
10.2 1992 Non-Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.2 to Registrant's Registration
Statement on Form SB-2 (Registration No. 333-39470)).
10.3 2000 Stock Option Plan (incorporated by reference to
Exhibit 10.3 to Registrant's Registration Statement on Form
SB-2 (Registration No. 333-39470)).
10.4 2001 Stock Option Plan (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 2001
(Commission File No. 001-16133)).
10.5 Employment Agreement, dated April 30, 1996, between Delcath
Systems, Inc. and M.S. Koly, as amended on April 30, 1999
(incorporated by reference to Exhibit 10.4 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-39470)).
10.6 Employment Agreement, dated April 30, 1996, between Delcath
Systems, Inc. and Samuel Herschkowitz, M.D., as amended on
April 30, 2000 (incorporated by reference to Exhibit 10.4
to Registrant's Registration Statement on Form SB-2
(Registration No. 333-39470)).
10.7 Distributorship Agreement, dated as of December 27, 1996,
by and between Delcath Systems, Inc. and Nissho Corporation
(incorporated by reference to Exhibit 10.6 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-39470)).
10.8 Consulting Services Agreement, between Delcath Systems,
Inc. and Euroland Marketing Solutions, Ltd. (incorporated
by reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 2000
(Commission File No. 001-16133)).
10.9 Amendment to Key Employment Agreement, dated October 30,
2001, by and between Delcath Systems, Inc. and M. S. Koly
(incorporated by reference to Exhibit 10.10 to Registrant's
Quarterly Report on Form 10-Q for the period ended
September 30, 2001 (Commission File No. 001-16133)).
10.10 Amendment to Key Employment Agreement, dated October 30,
2001, by and between
II-3
Exhibit No. Description
----------- -----------
Delcath Systems, Inc. and Samuel Herschkowitz (incorporated
by reference to Exhibit 10.11 to Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 2001
(Commission File No. 001-16133)).
23.1 Consent of Eisner LLP.
23.2 Consent of Cummings & Lockwood LLC (to be contained in
Exhibit 5 hereto).
24 Powers of Attorney (incorporated by reference to Exhibit 24
to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-101661)).
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to its
registration statement to be signed on its behalf by the undersigned, in City of
Stamford, State of Connecticut on March 17, 2003.
DELCATH SYSTEMS, INC.
By: /s/ M. S. Koly
----------------------------
M. S. Koly, President
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 date indicated.
Signature Title )
--------- ----- )
)
M.S. KOLY Chief Executive Officer )
(Principal Executive )
Officer) and Director )
)
THOMAS S. GROGAN Chief Financial Officer )
(Principal Financial )
and Accounting Officer) )
)
SAMUEL HERSCHOWITZ, M.D. Chairman and Director )
) By /s/ M. S. Koly
) --------------
MARK A. CORIGLIANO Director ) M. S. Koly
) Attorney-in-fact
DANIEL ISDANER Director )
) Date: March 17, 2003
VICTOR NEVINS Director )
II-5
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of
Delcath Systems, Inc. (incorporated by reference to Exhibit
3.1 to Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 2002 (File No. 001-16133)).
3.2 Amended and Restated By-Laws of Delcath Systems, Inc.
(incorporated by reference to Exhibit 3.2 to Amendment No.
1 to Registrant's Registration Statement on Form SB-2
(Registration No. 333-39470)).
4.1 Form of Underwriter's Unit Warrant Agreement.
4.2 Specimen 2003 Warrant.
4.3 Warrant Agreement, dated January 5, 2001, by and between
Delcath Systems, Inc. and Euroland Marketing Solutions,
Ltd. (incorporated by reference to Exhibit 4.5 to the
Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 2000 (Commission File No. 001-16133)).
4.4 Warrant No. W-2 to purchase up to 150,000 units granted to
Euroland Marketing Services, Ltd. (incorporated by
reference to Exhibit 4.6 to the Registrant's Annual Report
on Form 10-KSB for the year ended December 31, 2000
(Commission File No. 001-16133)).
4.5 Rights Agreement, dated October 30, 2001, by and between
Delcath Systems, Inc. and American Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to
Exhibit 4.7 to Registrant's Form 8-A dated November 12,
2001 (Commission File No. 001-16133)).
4.6 Form of Warrant Agreement by and between Delcath Systems,
Inc. and Whale Securities Co., L.P. (incorporated by
reference to Exhibit 4.2 to Amendment No. 5 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-39470)).
4.7 Form of Warrant Agreement by and between American Stock
Transfer & Trust Company, as warrant agent, Whale
Securities Co., L.P. and Delcath Systems, Inc.
(incorporated by reference to Exhibit 4.3 to Amendment No.
5 to Registrant's Registration Statement on Form SB-2
(Registration No. 333-39470)).
4.8 Form of Warrant Agent Agreement by and between Delcath
Systems, Inc. and American Stock Transfer & Trust Company,
as warrant agent with respect to the 2003 Warrants.
5 Opinion of Cummings & Lockwood LLC (to be filed by
amendment)
10.1 1992 Incentive Stock Option Plan (incorporated by reference
to Exhibit 10.1 to Registrant's Registration Statement on
Form SB-2 (Registration No. 333-39470)).
10.2 1992 Non-Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.2 to Registrant's Registration
Statement on Form SB-2 (Registration No. 333-39470)).
10.3 2000 Stock Option Plan (incorporated by reference to
Exhibit 10.3 to Registrant's Registration Statement on Form
SB-2 (Registration No. 333-39470)).
10.4 2001 Stock Option Plan (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 2001
(Commission File No. 001-16133)).
Exhibit No. Description
----------- -----------
10.5 Employment Agreement, dated April 30, 1996, between Delcath
Systems, Inc. and M.S. Koly, as amended on April 30, 1999
(incorporated by reference to Exhibit 10.4 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-39470)).
10.6 Employment Agreement, dated April 30, 1996, between Delcath
Systems, Inc. and Samuel Herschkowitz, M.D., as amended on
April 30, 2000 (incorporated by reference to Exhibit 10.4
to Registrant's Registration Statement on Form SB-2
(Registration No. 333-39470)).
10.7 Distributorship Agreement, dated as of December 27, 1996,
by and between Delcath Systems, Inc. and Nissho Corporation
(incorporated by reference to Exhibit 10.6 to Registrant's
Registration Statement on Form SB-2 (Registration No.
333-39470)).
10.8 Consulting Services Agreement, between Delcath Systems,
Inc. and Euroland Marketing Solutions, Ltd. (incorporated
by reference to Exhibit 10.9 to the Registrant's Annual
Report on Form 10-KSB for the year ended December 31, 2000
(Commission File No. 001-16133)).
10.9 Amendment to Key Employment Agreement, dated October 30,
2001, by and between Delcath Systems, Inc. and M. S. Koly
(incorporated by reference to Exhibit 10.10 to Registrant's
Quarterly Report on Form 10-Q for the period ended
September 30, 2001 (Commission File No. 001-16133)).
10.10 Amendment to Key Employment Agreement, dated October 30,
2001, by and between Delcath Systems, Inc. and Samuel
Herschkowitz (incorporated by reference to Exhibit 10.11 to
Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2001 (Commission File No. 001-16133)).
23.1 Consent of Eisner LLP.
23.2 Consent of Cummings & Lockwood LLC (to be contained in
Exhibit 5 hereto).
24 Powers of Attorney (incorporated by reference to Exhibit 24
to the Registrant's Registration Statement on Form SB-2
(Registration No. 333-101661)).
_________ Units, each Unit Consisting of
Five Shares of Common Stock and
Five Redeemable Common Stock Purchase Warrants
Each to Purchase One Share
of
Delcath Systems, Inc.
UNDERWRITING AGREEMENT
------------ ---------
New York, New York
_________, 2003
Roan/Meyers Associates, L.P.
as Representative of the several
Underwriters named in Schedule I
17 State Street
New York, New York 10004
Ladies and Gentlemen:
Delcath Systems, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell ___________ units (the "Units"), each Unit comprised of five
shares ("Shares") of the Company's common stock, par value $.01 per share (the
"Common Stock") and five Redeemable Common Stock Purchase Warrants each to
purchase one share of Common Stock (the "Warrants") in a public offering ( the
"Offering") under Section 5 of the Securities Act of 1933, as amended (the
"Securities Act"). The Units, Shares and Warrants (together, referred to as the
"Firm Securities") and together with all or any part of the up to __________
[15% of Firm Units] additional Units subject to the overallotment option
described in Section 2(b) hereof (the "Overallotment Securities") are
hereinafter collectively referred to as the "Securities." This agreement
confirms the agreement by the underwriters named in Schedule I ("Underwriters")
to purchase, jointly and not severally, the Firm Securities from the Company
upon the terms and conditions contained herein. Roan/Meyers Associates, L.P.,
shall act as managing underwriter and representative (the "Representative") of
the several underwriters.
The Company also proposes to issue and sell to the Representative, a
warrant (the "Underwriters' Unit Purchase Warrant") pursuant to the
Underwriters' Warrant Agreement (the "Underwriters' Warrant Agreement") for the
purchase of an aggregate of 10% of the number of Units being sold (not including
the Overallotment Securities) (the "Underwriters' Warrant Units"), as provided
in Section 2(d) hereof. The Securities, the Underwriters' Warrant Agreement and
Underwriters' Warrant Units are more fully described in the Registration
Statement (as defined in Subsection 1(a) hereof) and the Prospectus (as defined
in Subsection 1(a) hereof). Unless the context otherwise requires, all
references to the "Company" shall include all presently existing subsidiaries
and any entities acquired by the Company on or prior to the Closing Date
(defined in Subsection 2(c) hereof). All representations, warranties and
opinions of counsel required hereunder shall cover any such subsidiaries and
acquired entities.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the Underwriters as of the date
hereof, and as of the Closing Date and any Overallotment Closing Date (as
defined in Subsection 2(c) hereof), if any, as follows:
1
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form SB-2 (SEC File
No. 333-101661) including any related preliminary prospectus (each a
"Preliminary Prospectus"), for the registration of the offer and sale of the
Securities under the Securities Act, which registration statement and any
amendment or amendments have been prepared by the Company in conformity with the
requirements of the Securities Act and the Rules and Regulations (as hereinafter
defined) of the Commission. The registration statement with respect to the
Securities, including any Preliminary Prospectus, copies of which have
heretofore been delivered to the Representative, has been prepared by the
Company in conformity with the requirements of the Securities Act and the Rules
and Regulations. Following execution of this Agreement, the Company will
promptly file (i) if the registration statement has been declared effective by
the Commission, (A) a Term Sheet (as defined in the Rules and Regulations)
pursuant to Rule 434 under the Act or (B) a final Prospectus under Rules 430A
and/or 424(b) under the Securities Act, in either case in form satisfactory to
the Representative or (ii) in the event the registration statement has not been
declared effective, a further amendment to said registration statement in the
form heretofore delivered to the Representative and will not, before the
registration statement becomes effective, file any other amendment thereto
unless the Representative shall have consented thereto after having been
furnished with a copy thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus, financial
statements, schedules, exhibits and all other documents filed as a part thereof
and all information deemed to be a part thereof as of such time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations), is hereinafter called
the "Registration Statement" and the form of prospectus in the form first filed
with the Commission pursuant to Rule 424(b) of the Rules and Regulation, is
hereinafter called the "Prospectus." For purposes hereof, "Rules and
Regulations" mean the rules and regulations adopted by the Commission under
either the Securities Act or the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
the Registration Statement or the Prospectus or any part thereof and no
proceedings for a stop order have been instituted or are pending or, to the best
knowledge of the Company, threatened. Each of the Preliminary Prospectus, the
Registration Statement and the Prospectus at the time of filing thereof
conformed in all material respects with the requirements of the Securities Act
and the Rules and Regulations, and neither the Preliminary Prospectus, the
Registration Statement nor the Prospectus at the time of filing thereof
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein and necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriters by or on behalf of the
Underwriters expressly for use in such Preliminary Prospectus, Registration
Statement or Prospectus.
(c) When the Registration Statement became or becomes effective
and at all times subsequent thereto up to the Closing Date and each
Overallotment Closing Date (as hereinafter defined) and during such longer
period as the Prospectus may be required to be delivered in connection with
sales by the Underwriters or a dealer, the Registration Statement and the
Prospectus will contain all material statements which are required to be stated
therein in compliance with the Act and the Rules and Regulations, and conforms
in all material respects with the requirements of the Securities Act and the
Rules and Regulations; neither the Registration Statement, nor any amendment
thereto, at the time the Registration Statement or
2
such amendment was or is declared effective under the Securities Act, contained
or will contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, not misleading, and the Prospectus at the time the Registration
Statement became or becomes effective, at the Closing Date and at any
Overallotment Closing Date, did not or will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
does not apply to statements made or statements omitted in reliance upon and in
conformity with information supplied to the Company in writing by or on behalf
of the Underwriters expressly for use in the Registration Statement or
Prospectus or any amendment thereof or supplement thereto.
(d) The Company has been duly incorporated and is now, and at the
Closing Date and any Overallotment Closing Date will be, validly existing as a
corporation in good standing under the laws of the State of Delaware. The
Company has no subsidiaries and, other than as described in the Registration
Statement, the Company does not own, directly or indirectly, an interest in any
corporation, partnership, trust, joint venture or other business entity. The
Company is duly qualified to do business and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of its
properties or the character of its operations requires such qualification to do
business, except where the failure to so qualify could not reasonably be
expected to have a material adverse effect on the Company. The Company has all
requisite corporate power and authority, and has obtained any and all necessary
applications, approvals, orders, licenses, certificates, franchises and permits
of and from all governmental or regulatory officials and bodies (including,
without limitation, those having jurisdiction over environmental or similar
matters), to own or lease its properties and conduct its business as described
in the Prospectus; the Company is and has been doing business in compliance with
all such authorizations, approvals, orders, licenses, certificates, franchises,
and permits and all federal, state, local and foreign laws, rules and
regulations except where the failure to comply could not reasonably be expected
to have a material adverse effect on the Company; and the Company has not
received any notice of proceedings relating to the revocation or modification of
any such authorization, approval, order, license, certificate, franchise, or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision ruling or finding, could reasonably be expected to have a material
adverse effect on the condition, financial or otherwise, or the prospects,
value, operation, properties or business of the Company. The disclosures, if
any, in the Registration Statement concerning the effects of federal, state,
local, and foreign laws, rules and regulations on the Company's business as
currently conducted and as contemplated are correct in all material respects and
do not omit to state a material fact necessary to make the statements contained
therein not misleading in light of the circumstances in which they were made.
(e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under the caption "Capitalization"
and will have the adjusted capitalization set forth therein on the Closing Date
and the Overallotment Closing Date, if any, based upon the assumptions set forth
therein. The Company is not a party to or bound by any instrument, agreement or
other arrangement providing for the Company to issue any capital stock, rights,
warrants, options or other securities, except as contemplated by this Agreement,
the Underwriters' Unit Purchase Warrant and as otherwise described in the
Prospectus. The Securities, the Underwriters' Unit Purchase Warrant and the
Underwriters' Warrant Units and all other securities issued or issuable by the
Company conform or, when issued and paid for, will conform in all respects to
all statements with respect thereto contained in the Registration Statement and
the Prospectus. All issued and outstanding securities of the Company have been
3
duly authorized and validly issued and all outstanding shares of Common Stock
are fully paid and non-assessable; the holders of all outstanding securities
have no rights of rescission with respect thereto, and are not subject to
personal liability by reason of being such holders; and none of such securities
were issued in violation of the preemptive rights of any holders of any security
of the Company, or similar contractual rights granted by the Company to
subscribe for or purchase securities. The Securities, the Underwriters' Unit
Purchase Warrant and the Underwriters' Warrant Units to be issued and sold by
the Company hereunder, and upon payment therefor, are not and will not be
subject to any preemptive or other similar rights of any stockholder to
subscribe for or purchase securities, have been duly authorized and, when
issued, paid for and delivered in accordance with the terms hereof and thereof,
will be validly issued, and, with respect to the shares of Common Stock included
in the Securities, fully paid and non-assessable and will conform to the
descriptions thereof contained in the Prospectus, and the holders thereof will
not be subject to any liability solely as such holders. All corporate action
required to be taken for the authorization, issuance and sale of the Securities,
the Underwriters' Unit Purchase Warrant and the Underwriters' Warrant Units has
been duly and validly taken; and the certificates, if any, representing the
Securities will be in legally proper form. Upon the issuance and delivery
pursuant to the terms hereof of the Securities to be sold to the Underwriters by
the Company hereunder, the Underwriters will acquire title to such Securities
free and clear of any lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever as a
result of any action taken or not taken by the Company.
(f) The financial statements of the Company, together with the
related notes thereto, included in the Registration Statement, the Preliminary
Prospectus and the Prospectus fairly present the financial position and the
results of operations of the Company at the respective dates and for the
respective periods to which they apply; and such financial statements have been
prepared in conformity with generally accepted accounting principles and the
Rules and Regulations, consistently applied throughout the periods involved
except as otherwise disclosed therein. Other than as described in the
Prospectus, there has been no material adverse change or development involving a
prospective change in the condition, financial or otherwise, or in the
prospects, value, operation, properties or business of the Company, whether or
not arising in the ordinary course of business, since the dates of the financial
statements included in the Registration Statement and the Prospectus. The
outstanding debt, the property, both tangible and intangible, the capitalization
and the business of the Company conform in all material respects to the
descriptions thereof contained in the Registration Statement and in the
Prospectus.
(g) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(h) Eisner LLP whose report is filed with the Commission as a part
of the Registration Statement, is an independent auditor as required by the Act
and the Rules and Regulations.
(i) Except for any taxes being duly contested by the Company, the
Company: (i) has paid all federal, state, local and foreign taxes for which it
is liable, including, but not limited to, payroll withholding taxes and taxes
payable under Chapters 21 through 24 of the
4
Internal Revenue Code of 1986 (the "Code"); (ii) has furnished all tax and
information returns it is required to furnish pursuant to the Code, and has
established adequate reserves for such taxes which are not due and payable; and
(iii) does not have knowledge of any tax deficiency or claims outstanding,
proposed or assessed against it.
(j) The Company maintains insurance, which is in full force and
effect, of the types and in the amounts which it reasonably believes to be
adequate for its business (but in no event less than $1,000,000 per occurrence
and $3,000,000 in the aggregate), including, but not limited to, personal injury
and product liability insurance covering all personal and real property owned or
leased by the Company against fire, theft, damage and all risks customarily
insured against by corporations in circumstances similar to those of the
Company.
(k) Except as disclosed in the Prospectus, there is no action,
suit, proceeding, inquiry, investigation, litigation or governmental proceeding
(including, without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, pending or, to the knowledge of the
Company, threatened against, or involving the properties or business of the
Company which: (i) questions the validity of the capital stock of the Company or
this Agreement or of any action taken or to be taken by the Company pursuant to
or in connection with this Agreement; (ii) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings as are
summarized in the Registration Statement are accurately summarized in all
respects); or (iii) could reasonably be expected to have a material adverse
effect on the condition, financial or otherwise, prospects, operation,
properties or business of the Company.
(l) The Company has full legal right, power and authority to enter
into this Agreement and the Underwriters' Warrant Agreement and to consummate
the transactions provided for in this Agreement, the Underwriters' Warrant
Agreement and the Warrant Agreement between the Company and its Transfer and
Warrant Agent (the "Transfer Agent Agreement") have each been duly authorized,
executed and delivered by the Company. Each of this Agreement and the
Underwriters' Warrant Agreement constitutes a legally valid and binding
agreement of the Company, subject to due authorization, execution and delivery
by the Representative on behalf of the Underwriters, enforceable against the
Company in accordance with its terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law). Neither the Company's execution or delivery of this
Agreement, the Underwriter's Warrant Agreement or the Transfer Agent Agreement,
its performance hereunder and thereunder, its consummation of the transactions
contemplated herein and therein, nor the conduct of its business as described in
the Registration Statement, the Prospectus, and any amendments or supplements
thereto, except as may not reasonably be expected to have a material adverse
effect on the Company, conflicts with or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, or result in the creation or
imposition of any material lien, charge, claim, encumbrance, pledge, security
interest, defect or other restriction or equity of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company pursuant to the terms
of: (i) the Certificate of Incorporation or By-Laws of the Company; (ii) any
license, contract, indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement or any other agreement or
instrument to which the Company is a party or by which the Company is bound or
to which any of its properties or assets (tangible or intangible) is or may be
subject; or (iii) any statute, judgment, decree, order, rule or regulation
5
applicable to the Company of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, having jurisdiction over the Company or any of its
activities or properties.
(m) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities, the performance of this
Agreement and the transactions contemplated hereby, except such as have been or
may be obtained under the Securities Act or may be required under state
securities or Blue Sky laws in connection with (i) the Underwriters' purchase
and distribution of the Firm Securities and Overallotment Securities to be sold
by the Company hereunder or (ii) the issuance and delivery of the Underwriters'
Unit Purchase Warrant or the Underwriters' Warrant Units.
(n) All agreements filed as exhibits to the Registration Statement
(or incorporated by reference to other filings by the Company pursuant to the
Securities Act or the Exchange Act) have been duly and validly authorized,
executed and delivered by the Company, and, assuming the due and valid
authorization, execution and delivery thereof by the parties thereto other than
the Company, constitute legally valid and binding agreements of the Company,
enforceable against it in accordance with their respective terms (except as such
enforcebility may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
and contribution may be limited by applicable law). The descriptions contained
in the Registration Statement of material contracts and other documents are
accurate in all material respects and fairly present the information required to
be shown with respect thereto by the Rules and Regulations and there are no
material contracts, government grants, collaborative relationships, or other
documents which are required by the Securities Act or the Rules and Regulations
to be described in the Registration Statement or filed as exhibits to the
Registration Statement which are not described or filed as required or have not
previously been filed, and the exhibits which have been filed are complete and
correct copies of the documents of which they purport to be copies.
(o) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and the Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not:
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money in any material amount; (ii) entered into any
transaction other than in the ordinary course of business; (iii) declared or
paid any dividend or made any other distribution on or in respect of its capital
stock; or (iv) made any changes in capital stock, material changes in debt (long
or short term) or liabilities other than in the ordinary course of business; or
(v) made any material changes in or affecting the general affairs, management,
financial operations, stockholders equity or results of operations of the
Company.
(p) No default exists in the due performance and observance of any
material term, covenant or condition of any license, contract, indenture,
mortgage, installment sales agreement, lease, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement, or any other
agreement or instrument evidencing an obligation for borrowed money, or any
other agreement or instrument to which the Company is a party or by which the
Company may be bound or to which any of its property or assets (tangible or
intangible) is
6
subject or affected except where such default cannot reasonably be expected to
have a material adverse effect upon the Company.
(q) The Company is in compliance in all material respects with all
federal, state, local, and foreign laws and regulations respecting employment
and employment practices, terms and conditions of employment and wages and
hours.
(r) The Company has not incurred any fines or penalties arising
under or as a result of the application of the provisions of the Securities Act
or the Exchange Act.
(s) Except as disclosed in the Prospectus, the Company does not
presently maintain, sponsor or contribute to, and never has maintained,
sponsored or contributed to, any program or arrangement that is an "employee
pension benefit plan," an "employee welfare benefit plan" or a "multiemployer
plan" as such terms are defined in Sections 3(2), 3(1) and 3(37) respectively of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
("ERISA Plans"). Except as disclosed in the Prospectus, the Company does not
maintain or contribute, now or at any time previously, to a defined benefit
plan, as defined in Section 3(35) of ERISA.
(t) The Company is not aware of any violation in any material
respect by it of any domestic or foreign laws, ordinances or governmental rules
or regulations to which it is subject.
(u) Except for registration rights for securities which are
disclosed in all material respects in the Prospectus under the section entitled
"Description of Capital Stock", no holders of any securities of the Company or
of any options, warrants or other convertible or exchangeable securities of the
Company exercisable for or convertible or exchangeable for securities of the
Company have the right to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the Company
or to require the Company to file a registration statement under the Act.
(v) Except s may be disclosed in the Prospectus, neither the
Company, nor, to the Company's best knowledge, any of its employees, directors
or affiliates (within the meaning of the Rules and Regulations) has taken,
directly or indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result in, under the Exchange Act or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities or otherwise.
(w) To its knowledge after reasonable investigation, none of the
patents, patent applications, trademarks, service marks, trade names and
copyrights, or licenses and rights to the foregoing presently owned or held by
the Company are in dispute or are in any conflict with the right of any other
person or entity within the Company's current area of operations nor has the
Company received notice of any of the foregoing. Except as described in the
Prospectus, or as could not reasonably be expected to have a material adverse
effect upon the Company, its financial condition or operations, the Company: (i)
owns or has the right to use, free and clear of all liens, charges,
encumbrances, pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, all patents, trademarks, service marks, trade
names and copyrights, technology and licenses and rights with respect to the
foregoing, used in the conduct of its business as now conducted or proposed to
be conducted without infringing upon or otherwise acting adversely to the right
or claimed right of any person, corporation or other entity under or with
respect to any of the foregoing; and (ii) is not obligated or under any
liability
7
whatsoever to make any payments by way of royalties, fees or otherwise to any
owner or licensee of, or other claimant to, any patent, trademark, service mark
trade name, copyright, know-how, technology or other intangible asset, with
respect to the use thereof or in connection with the conduct of its business.
(x) To its knowledge, the Company owns or has the unrestricted
right to use all material trade secrets, know-how (including all other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), patents, patent applications, inventions, designs, processes,
works of authorship, computer programs and technical data and information
(collectively herein "Intellectual Property") required for or incident to the
development, manufacture, operation and sale of all products and services
proposed to be sold by the Company, free and clear of and without violating any
right, lien, or claim of others, including without limitation, former employers
of its employees; provided, however, that the possibility exists that other
persons or entities, completely independently of the Company, or employees or
agents, could have developed trade secrets or items of technical information
similar or identical to those of the Company.
(y) The Company has taken security measures which management
believes to have been reasonable to protect the secrecy, confidentiality and
value of all the Intellectual Property material to its operations.
(z) Except as disclosed in the Prospectus, the Company has good
title to, or valid and enforceable leasehold estates in, all items of real and
personal property owned or leased by it free and clear of all liens, charges,
claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than liens for taxes or
assessments not yet due and payable.
(aa) The Company has not incurred any liability and there are no
arrangements or understandings for services in the nature of a finder's or
origination fee with respect to the sale of the Securities or any other
arrangements, agreements, understandings, payments or issuances with respect to
the Company or any of its officers, directors, employees or affiliates that may
adversely affect the Underwriters' compensation, as determined by the National
Association of Securities Dealers, Inc. ("NASD") except for this Agreement and
any other agreement between the Company and the Represntative.
(bb) The Firm Securities and the Overallotment Securities have
been approved for quotation on the Nasdaq SmallCap Stock Market, Inc. and the
Boston Stock Exchange, subject to official notice of issuance, and the Company
has received, prior to the Effective Date, written notification from the Nasdaq
Stock Market that it has withdrawn any outstanding notices regarding delisting
of the Company's Common Stock and that following the Closing of the Offering the
Company's Common Stock shall not be subject to delisting proceedings.
(cc) Neither the Company nor any of its respective officers,
employees, agents or any other person authorized to act on behalf of the
Company, has, directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the ordinary
course of business) to any customer, supplier, employee or agent of a customer
or supplier, or official or employee of any governmental agency (domestic or
foreign) or instrumentality of any government (domestic or foreign) or any
political party or candidate for office (domestic or foreign) or other person
who was, is, or may be in a position to help or hinder the business of the
Company (or assist the Company in connection with any actual or proposed
transaction) which: (a) could reasonably be expected to subject the Company, or
any other such person to any material damage or penalty in any civil, criminal
or governmental litigation or
8
proceeding (domestic or foreign) or (b) could reasonably be expected to have a
materially adverse effect on the assets, business or operations of the Company.
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.
(dd) Except as set forth in the Prospectus or as not required to
be disclosed pursuant to the Rules and Regulations, no officer or director or to
the Company's knowledge, stockholder of the Company, or any "affiliate" or
"associate" (as these terms are defined in Rule 405 promulgated under the Rules
and Regulations) of any such person or entity or the Company, has or has had,
either directly or indirectly, (i) an interest in any person or entity which (A)
furnishes or sells services or products which are furnished or sold or are
proposed to be furnished or sold to the Company, or (B) purchases from or sells
or furnishes to the Company any goods or services, except with respect to the
beneficial ownership of not more than 1% of the outstanding shares of capital
stock of any publicly-held entity; or (ii) a beneficial interest in any contract
or agreement to which the Company is a party or by which it may be bound or
affected. Except as set forth in the Prospectus under "Related Party
Transactions" or as not required to be disclosed pursuant to the Rules and
Regulations, there are no existing agreements, arrangements, understandings or
transactions, or proposed agreements, arrangements, understandings or
transactions, between or among the Company, and any officer, director, or
stockholder owning 5% or more of the Company's Common Stock, or any affiliate or
associate of any such person or entity.
(ee) Any certificate signed by any officer of the Company and
delivered to the Representative or to the Underwriters' Counsel (as hereinafter
defined) shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(ff) The Company has entered into an employment agreement with
each of M.S. Koly and Samuel Herschkowitz as described in the Prospectus. The
Company has obtained or shall obtain prior to the Closing Date key person life
insurance with an insurer rated at least AA or better in the most recent
addition of "Best's Life Reports" in the amount of $_______ on the life of each
of Messrs. Koly and Herschkowitz. Such insurance shall be maintained in full
force and effect for a period of three years from the Closing Date. The Company
shall be the sole beneficiary of such policy.
(gg) No securities of the Company have been sold by the Company
since January 1, 2000 except as disclosed in the Registration Statement.
(hh) The minute books of the Company have been made available to
Underwriters' Counsel and contain a complete summary of all meetings and actions
of the Board of Directors and Stockholders of the Company since its date of
formation, except for minutes which have not yet been approved which have been
made available in draft form. The stock ledgers of the Company are correct and
accurate and reflect the record ownership of all owners of the Company's capital
stock. All persons who, to the Company's knowledge, are owners of more than 5%
of the Common Stock of the Company as set forth in the section of the Prospectus
entitled "Principal Stockholders" and all transactions between such shareholders
and the Company have been properly described in accordance with the Rules and
Regulations.
(ii) Except as disclosed in writing to the Representative, no
officer, or director of the Company nor any person who, to the Company's
knowledge, is the owner of more than
9
5% of the Common Stock of the Company has any affiliation or association with
any member of the NASD.
(jj) The Company shall use its best efforts to obtain (or continue
in effect if previously obtained) Directors and Officers' liability insurance
prior to the effective date of the Registration Statement in the face amount of
at least $2,000,000 per occurrence.
2. REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITERS.
Each of the Underwriters, severally and not jointly, hereby represent
and warrants to the Company as follows:
(a) The Underwriter is duly formed and validly existing and in
good standing under the laws of its state of formation.
(b) The Underwriter is, and at the time of each Closing will be, a
member in good standing of the NASD.
(c) Sales of Securities will only be made in such jurisdictions in
which the Underwriter is a registered broker-dealer or where an applicable
exemption from such registration exists.
(d) The Underwriter has full legal right, power and authority to
enter into this Agreement and to consummate the transactions contemplated herein
and this Agreement has been duly authorized, executed and delivered by the
Underwriter (or by the Representative on behalf of the Underwriter). This
Agreement constitutes a legally valid and binding agreement of the Underwriter
enforceable against the Underwriter in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law).
3. PURCHASE, SALE AND DELIVERY OF THE SECURITIES AND AGREEMENT TO
ISSUE UNDERWRITERS' PURCHASE WARRANT
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and each Underwriter
agrees, severally and not jointly, to purchase from the Company the respective
number of Firm Securities set forth in Schedule I hereto opposite its name,
subject to Section (b) hereof, at the price per Unit set forth below in Section
3(c).
(b) In addition, on the basis of the representations, warranties,
covenants and agreements, herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters to purchase severally, and not jointly, up to an additional
_________ Units [15% of Firm Units] (the "Overallotment Option"). The option
granted hereby will expire 45 days after the date of the Prospectus, and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Firm Securities upon notice by the Underwriters through the
Representative to the Company, setting forth the number of Overallotment
Securities as to which the Underwriters are then exercising the option and the
time and date of payment and delivery for such Overallotment Securities. Any
such time
10
and date of delivery shall be determined by the Representative, but shall not be
later than seven full business days nor earlier than three full business days
after the exercise of said option, nor in any event prior to the Closing Date,
as defined in paragraph (c) below, unless otherwise agreed to between the
Representative and the Company. In the event such option is exercised, the
Underwriters shall purchase such number of Overallotment Securities then being
purchased which shall have been allocated to the Underwriters, and which such
shall have agreed to purchase, subject in each case to such adjustments as the
Underwriters in their discretion shall make to eliminate any sales or purchases
of fractional Securities. Nothing herein contained shall obligate the
Underwriters to make any over-allotments. No Overallotment Securities shall be
delivered unless the Firm Securities shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Securities and Overallotment Securities shall be made
at the offices of the Representative, 17 State Street, New York, New York 10004,
or at such other place as shall be designated by the Representative for the
respective accounts of the several Underwriters. Such delivery and payment shall
be made at 10:00 a.m. New York City time on ______, 2003 or at such other time
and date as shall be designated by the Representative, but not more than three
(3) business days after the first day of trading of the Securities following the
effective date of the Registration Statement (such time and date of payment and
delivery being hereafter called "Closing Date"). In addition, in the event that
any or all of the Overallotment Securities are purchased by the Underwriters,
payment of the purchase price for, and delivery of certificates for such
Overallotment Securities shall be made at the above-mentioned office or at such
other place and at such time (such time and date of payment and delivery being
hereinafter called "Overallotment Closing Date") as shall be agreed upon by the
Underwriters and the Company on any Overallotment Closing Date as specified in
the notice from the Underwriters to the Company. Delivery of the certificates
for the Firm Securities and the Overallotment Securities, if any, shall be made
to the Underwriters against payment by the Underwriters of the purchase price
for the Firm Securities and the Overallotment Securities, if any, to the order
of the Company as the case may be by certified check in immediately available
funds, certificates for the Firm Securities and the Overallotment Securities, if
any, shall be in definitive, fully registered form, shall bear no restrictive
legends and shall be in such denominations and registered in such names as the
Underwriters may request in writing at least two (2) business days prior to
Closing Date or the Overallotment Closing Date, as the case may be. The
certificates for the Firm Securities and the Overallotment Securities, if any,
shall be made available to the Underwriters at the above-mentioned office or
such other place as the Underwriter may designate for inspection, checking and
packaging no later than 9:30 a.m. on the last business day prior to Closing Date
or the Overallotment Closing Date, as the case may be.
The purchase price of the Securities to be paid by the
Underwriters to the Company for the Securities purchased under clauses (a) and
(b) above will be $______ per Unit (which price is net of the Underwriters'
discount of 10% per Unit). The Company shall not be obligated to sell any
Securities hereunder unless all Firm Securities to be sold by the Company are
purchased hereunder. The Company agrees to issue and sell the Securities to the
Underwriters in accordance herewith.
(d) On the Closing Date, the Company shall issue and sell to the
Representative, the Underwriters' Unit Purchase Warrant at a purchase price of
$_____ [165% of the Unit offering price] which Underwriters' Unit Purchase
Warrant shall entitle the holders thereof to purchase an aggregate of _______
Units, representing 10% of Firm Units. The Underwriters' Unit Purchase Warrant
shall not be exercisable for one year after the effective date
11
and will expire five years after the effective date of the Registration
Statement and will have an initial exercise price equal to one hundred - five
percent (165%) of the initial public offering price of the Units. The
Underwriters' Unit Purchase Warrant shall not be redeemable, provided, however,
the Warrants issuable upon exercise of the Underwriters' Unit Purchase Warrant
shall be redeemable upon the same terms as the Warrants sold to the public. The
Underwriters' Warrant Agreement and form of the Unit Purchase Warrant
Certificate shall be substantially in the form filed as an exhibit to the
Registration Statement. The Securities to be received by the Underwriters upon
exercise of the Underwriters' Unit Purchase Warrant shall be the same as
delivered to the public in the Offering. Payment for the Underwriters' Unit
Purchase Warrant shall be made on the Closing Date. The Company has reserved and
shall continue to reserve a sufficient number of Units, Shares and Warrants for
issuance upon exercise of the Underwriters' Unit Purchase Warrant. The
Underwriters' Unit Purchase Warrant will be restricted from sale, transfer,
assignment or hypothecation for a period of one year from the effective date of
the offering except to officers or partners (not directors) of the underwriter
and members of the selling group and/or their officers or partners in compliance
with NASD Rule 2710(c)(7)(A).
4. PUBLIC OFFERING OF THE SECURITIES. As soon after the Registration
Statement becomes effective and as the Representative deems advisable, but in no
event more than three (3) business days after such effective date of the
Registration Statement (the "Effective Date"), the Underwriters shall make a
public offering of the Securities (other than to residents of or in any
jurisdiction in which qualification of the Securities is required and has not
become effective) at the price and upon the other terms set forth in the
Prospectus and otherwise in compliance with the Rules and Regulations and the
rules of any governmental body or self-regulatory organization applicable to the
Offering. The Underwriter may allow such concessions and discounts upon sales to
other dealers as set forth in the Prospectus. The Underwriters may from time to
time increase or decrease the public offering price after distribution of the
Securities has been completed to such extent as the Representative, in its sole
discretion, deem advisable.
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Underwriters as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Exchange Act: (i) before termination of the Offering of the Securities
by the Underwriters which the Underwriters shall not previously have been
advised and furnished with a copy; or (ii) to which the Underwriters shall have
objected; or (iii) which is not in compliance with the Securities Act, the
Exchange Act or the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative and confirm by notice in
writing: (i) when the Registration Statement, becomes effective and, if the
provisions of Rule 430A promulgated under the Securities Act will be relied
upon, when the Prospectus has been filed in accordance with said Rule 430A and
when any post-effective amendment to the Registration Statement becomes
effective; (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening of, any proceeding, suspending the effectiveness
of the Registration Statement or any order preventing or suspending the use of
the Preliminary Prospectus or the Prospectus, or any amendment or supplement
thereto, or the institution or proceeding for that purpose; (iii) of the
initiation by any state securities commission of any proceedings for the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction or of the initiation, or the
12
threatening, of any proceeding for that purpose; (iv) of the receipt of any
comments from the Commission relating to the Registration Statement; and (v) of
any request by the Commission for any amendment to the Registration Statement or
any amendment or supplement to the Prospectus or for additional information. If
the Commission or any state securities commission or regulatory authority shall
enter a stop order or suspend such qualification at any time, the Company will
make every reasonable effort to obtain promptly the lifting of such order.
(c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifth business day after the Effective Date.
(d) The Company will give the Representative notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
by the Underwriters in connection with the Offering of the Securities which
differs from the prospectus on file at the Commission at the time the
Registration Statement became or becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the Rules and
Regulations), will furnish the Underwriters with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such prospectus to which the Underwriters
or Goldstein & DiGioia, LLP ("Underwriters' Counsel") shall reasonably object.
(e) The Company shall cooperate in good faith with the
Underwriters, and Underwriters' Counsel, at or prior to the time the
Registration Statement becomes effective, in endeavoring to qualify the
Securities for offering and sale under the securities laws of such jurisdictions
as the Underwriters may reasonably designate, and shall cooperate with the
Underwriters and Underwriters' Counsel in the making of such applications, and
filing such documents and shall furnish such information as may be required for
such purpose; provided, however, the Company shall not be required to qualify as
a foreign corporation or file a general consent to service of process in any
such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriters agree that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may reasonably be
required by the laws of such jurisdiction to continue such qualification.
(f) During the time when the Prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to comply
with all requirements imposed upon it by the Securities Act and the Exchange
Act, as now and hereafter amended, and by the Rules and Regulations, as from
time to time in force, so far as necessary to permit the continuance of sales of
or dealings in the Securities in accordance with the provisions hereof and the
Prospectus, or any amendments or supplements thereto. If at any time when the
Prospectus relating to the Securities is required to be delivered under the
Securities Act, any event shall have occurred as a result of which, in the
opinion of counsel for the Company or Underwriters' Counsel, the Prospectus, as
then amended or supplemented, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to amend the
Prospectus to comply with the Securities Act, the Company will notify the
Underwriters promptly and prepare and file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the Securities Act,
each such
13
amendment or supplement to be reasonably satisfactory to Underwriters' Counsel,
and the Company will furnish to the Underwriters a reasonable number of copies
of such amendment or supplement.
(g) As soon as practicable, but in any event not later than 45
days after the end of the 12-month period commencing on the day after the end of
the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company shall make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and Regulations, and to the Representative, an earnings
statement which will be in such form and detail required by, and will otherwise
comply with, the provisions of Section 11(a) of the Securities Act and Rule
158(a) of the Rules and Regulations, which statement need not be audited unless
required by the Act, covering a period of at least 12 consecutive months after
the Effective Date.
(h) During a period of five (5) years after the date hereof and
provided that the Company is required to file reports with the Commission under
Section 12 of the Exchange Act, the Company will furnish to its stockholders, as
soon as practicable, annual reports (including financial statements audited by
independent public accountants), and will deliver to the Representative:
(i) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders;
(ii) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the Nasdaq Stock
Market or any securities exchange;
(iii) every press release of the Company and any future
subsidiaries which is released by the Company;
(iv) any additional information of a public nature concerning
the Company and any future subsidiaries or their respective businesses which the
Representative may reasonably request; or
(v) a copy of any Schedule 13D, 13G, 14D-1, 13E-3 or 13E-4
received or filed by the Company from time to time.
During such five-year period, if the Company has active subsidiaries,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
In lieu of providing copies of the materials described in this Section
4(h) to the Representative, the Company may advise the Representative that such
material has been filed electronically with the Commission.
(i) For at least two years following the completion of the
Offering, the Company will maintain a Transfer Agent and Warrant Agent, which
may be the same entity, and, if necessary under the same jurisdiction of
incorporation as the Company, as well as a Registrar (which may be the same
entity as the Transfer and Warrant Agent) for its Common Stock. Such
14
Transfer Agent and Warrant Agent, during such two-year period, shall be American
Stock Transfer & Trust Company or such other entity reasonably acceptable to the
Representative.
(j) The Company will furnish to the Underwriters or pursuant to
the Underwriters' direction, without charge, at such place as the Underwriters
may designate, copies of each Preliminary Prospectus, the Registration Statement
and any pre-effective or post-effective amendments thereto (one of which copies
will be manually executed and will include all financial statements and
exhibits), the Prospectus, and all amendments and supplements thereto, including
any prospectus prepared after the effective date of the Registration Statement,
in each case as soon as available and in such quantities as the Underwriters may
reasonably request.
(k) During the period commencing on the date hereof and ending 45
days hereafter, neither the Company, nor its officers or directors, nor
affiliates of any of them (within the meaning of the Rules and Regulations) will
take, directly or indirectly, any action designed to, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(l) The Company shall apply the net proceeds from the sale of the
Securities in substantially the manner, and subject to the provisions, set forth
under the caption "Use of Proceeds" in the Prospectus. No portion of the net
proceeds will be used directly or indirectly to acquire any securities
previously issued by the Company.
(m) The Company shall timely file all such reports, forms or other
documents as may be required from time to time, under the Securities Act, the
Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Securities Act, the Exchange Act, and the Rules and
Regulations.
(n) The Company shall furnish to the Underwriters as early as
practicable prior to the Closing Date and the Overallotment Closing Date, if
any, but no later than two (2) full business days prior thereto, a copy of the
latest available unaudited consolidated interim financial statements of the
Company (which in no event shall be as of a date more than forty-five (45) days
prior to the date of the Registration Statement) which have been read by the
Company's independent public accountants, as stated in their letters to be
furnished pursuant to Section 6(j) hereof.
(o) For a period of two (2) years from the Closing Date, the
Company shall furnish to the Representative at the Company's sole expense, (i)
daily consolidated transfer sheets relating to the Securities upon the
Representative's request; (ii) a list of holders of Securities upon the
Representatives' request; (iii) a list of, if any, the securities positions of
participants in the Depository Trust Company upon the Representative's request.
(p) For a period equal to the lesser of (i) five (5) years from
the date hereof, or (ii) the sale to the public of the Underwriters' Warrant
Units, the Company will not take any action or actions that may prevent or
disqualify the Company's use of Form SB-2 or, if applicable, Form S-3 (or other
appropriate form) for the registration under the Securities Act of the offer and
sale of the warrants and shares of Common Stock underlying the Underwriter's
warrant Units.
15
(q) For a period of five (5) years from the date hereof, use its
best efforts at its cost and expense to maintain the listing of the Securities
on the Nasdaq SmallCap Stock Market and Boston Stock Exchange.
(r) Following the Effective Date and for a period of two (2) years
thereafter, the Company shall, at its sole cost and expense, prepare and file
such blue sky trading applications with such jurisdictions as the Representative
may reasonably request after consultation with the Company in order to provide
for the resale of the Securities and the Warrants and Common Stock underlying
the Underwriter's Unit Warrant.
(s) During the period commencing on the date hereof until six
months from the date hereof, the Company shall not amend or alter any term of
any written employment agreement between the Company and any executive officer,
or alter or amend the amount of compensation payable to such employee during the
term of such written employment agreement, in a manner more favorable to such
employee, without the express written consent of the Representative.
(t) Until the completion of the distribution of the Securities and
the termination of the Overallotment Option period, the Company shall not
without the prior written consent of the Representative, which consent shall not
be unreasonably withheld, issue, directly or indirectly, any press release or
other communication or hold any press conference with respect to the Company or
its activities or the offering contemplated hereby, other than releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations or as required by the Rules and
Regulations.
(u) The Company will use its best efforts to maintain its
registration under the Exchange Act in effect for a period of five (5) years
from the Closing Date.
(v) Subsequent to the dates as of which information is given in
the Registration Statement and Prospectus and prior to the Closing Date or the
Overallotment Closing Date, except as disclosed in or contemplated by the
Registration Statement and Prospectus, (i) the Company will not have incurred
any material liabilities or obligations, direct or contingent, or entered into
any material transactions other than in the ordinary course of business; (ii)
there shall not have been any change in the capital stock, funded debt (other
than regular repayments of principal and interest on existing indebtedness) or
other securities of the Company, any material adverse change in the condition
(financial or other), business, operations, income, net worth or properties,
including any material loss or damage to the properties of the Company (whether
or not such loss is insured against), which could reasonably be expected to have
a material adverse affect the condition (financial or other), business,
operations, income, net worth or properties of the Company; and (iii) the
Company shall not pay or declare any dividend or other distribution on its
Common Stock or its other securities or redeem or repurchase any of its Common
Stock or other securities.
(w) Except as disclosed in or contemplated by the Registration
Statement and Prospectus, the Company, for a period of 12 months following the
Closing Date, shall not redeem any of its securities, and shall not pay any
dividends or make any other cash distribution in respect of its securities in
excess of the amount of the Company's current or retained earnings derived after
the Closing Date without obtaining the Representative's prior written consent,
which consent shall not be unreasonably withheld. The Representative shall
either approve or disapprove such contemplated redemption of securities or
dividend payment or distribution within ten (10) business days from the date the
Representative receives written notice of the
16
Company's proposal with respect thereto; a failure of the Representative to
respond within the ten (10) business day period shall be deemed approval of the
transaction.
(x) The Company maintains and will continue to maintain a system
of internal accounting controls sufficient to provide reasonable assurance that:
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary in order to
permit preparation of financial statements in accordance with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) In connection with the redemption of the Warrants, the
Representative shall be entitled to a fee of a fee of 5% of the exercise price
for each Warrant exercised; provided, however, that the Representative will not
be entitled to receive such compensation in warrant exercise transactions in
which (i) the market price of Common Stock at the time of exercise is lower than
the exercise price of the warrants; (ii) the warrants are held in any
discretionary account; (iii) disclosure of compensation arrangements is not
made, in addition to the disclosure provided in the Prospectus, in documents
provided to holders of warrants at the time of exercise; (iv) the holder of the
Warrants has not confirmed in writing that the Representative solicited such
exercise; or (v) the solicitation of exercise of the Warrants was in violation
of Regulation M promulgated under the Securities Act. Payment of any fee to the
Representative hereunder shall be made by the Company within 10 days of the date
that any Warrant is properly exercised in accordance with its terms. The Company
hereby covenants and agrees that it not employee, retain or hire any other
person or broker dealer in connection with the redemption of the Warrants,
without the prior written consent of the Representative. The covenants and
agreements contained in this clause 5 (y) shall survive termination of this
Agreement.
6. PAYMENT OF EXPENSES.
(a) The Company hereby agrees to pay on the Closing Date and the
Overallotment Closing Date (to the extent not paid at the Closing Date) all its
expenses and fees (other than fees of Underwriters' Counsel, except as provided
in (iv) below) incident to the performance of the obligations of the Company
under this Agreement, including, without limitation: (i) the fees and expenses
of accountants and counsel for the Company; (ii) all costs and expenses incurred
in connection with the preparation, duplication, delivery to the Underwriter,
printing and filing of the Registration Statement and the Prospectus and any
amendments and supplements thereto and the printing, mailing and delivery of
this Agreement, the Selected Dealer Agreements, Agreement Between Underwriters,
and related documents, including the cost of all copies thereof and of the
Preliminary Prospectuses and of the Prospectus and any amendments thereof or
supplements thereto supplied to the Underwriters in quantities as hereinabove
stated; (iii) the printing, engraving, issuance and delivery of the Securities
and Underwriters' Warrant Units including any transfer, issue or other taxes
payable thereon; (iv) disbursements and fees of Underwriters' Counsel in
connection with the qualification of the Securities under state or foreign
securities or "Blue Sky" laws and determination of the status of such securities
under legal investment laws, including the costs of printing and mailing the
"Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and
"Legal Investments Survey," if any, which Underwriters' Counsel fees (exclusive
of filing fees and disbursements) shall not exceed $20,000, payable as follows:
(A) $10,000 were paid when the first "Blue Sky" filings were made and the
remainder will be paid on the Closing Date, and (B)
17
the amount of "Blue Sky" filing fees that were paid by the Company to
Underwriter's Counsel at the time application of the Offering under "Blue Sky"
laws was made; (v) the costs and expenses in connection with one information
meeting held in New York, New York, one tombstone advertisement in the Wall
Street Journal; (vi) fees and expenses of the Transfer and Warrant Agent; (vii)
the fees payable to the NASD and expenses of filing with the NASD; and (viii)
the fees and expenses incurred in connection with the listing of the Securities
on the Nasdaq Stock Market and Boston Stock Exchange. All fees and expenses
payable to the Underwriters hereunder shall be payable at the Closing Date or
Overallotment Closing Date, as applicable; provided, however, the Company shall
pay such fees and costs in advance of the Closing Date if requested by the
Underwriter. The Underwriters shall be responsible for all of its own costs of
counsel. Any expenses incurred by the Underwriter (excluding any fees payable to
the NASD) shall not exceed in the aggregate $5,000 without the prior written
consent of the Company.
(b) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 7, clauses (v),(vi) or (vii) of
Section 12(a) or Section 13, the Company shall reimburse and indemnify the
Underwriters for up to $100,000 out-of-pocket actual, documented expenses paid
to unaffiliated third parties and reasonably incurred in connection with the
transactions contemplated hereby including the fees and disbursements of counsel
for the Underwriters; provided, however, in the event that the Underwriter
cannot proceed with the Offering as a result of its inability to comply with
NASD net capital or other regulatory reasons, then the Company shall not be
required to reimburse the Underwriter for out-of-pocket expenses paid to
unaffiliated third parties. Any amounts payable pursuant to this Section 6 (b)
shall be reduced by any amount paid by the Company pursuant to Section 6(c)
below.
(c) The Company further agree that, in addition to the expenses
payable pursuant to subsection (a) of this Section 6, it will pay to the
Underwriters a non-accountable expense allowance equal to three percent (3%) of
the gross proceeds received by the Company from the sale of the Firm Securities.
The Company has advanced $45,000 to the Underwriters (the "Advance"), to be
applied against the non-accountable expense allowance payable to the
Underwriters on the Closing Date. Such Advance has been paid as follows: (i)
$35,000 was previously paid by the Company and (ii) $10,000 was paid to the
Representative on the printing of the initial "red herring" prospectus. The
Company will pay the non-accountable expense allowance, less the Advance, on the
Closing Date by certified or bank cashier's check or, at the election of the
Underwriter, by deduction from the proceeds of the offering contemplated herein.
In the event the Underwriters elect to exercise the over-allotment option
described in Section 2(b) hereof, the Company further agrees to pay to the
Underwriters on the Overallotment Closing Date (by certified or bank cashier's
check or, at the Underwriters' election, by deduction from the proceeds of the
offering) a non-accountable expense allowance equal to three percent (3%) of the
gross proceeds received by the Company from the sale of the Overallotment
Securities. As required under NASD Rule 2710, other than payments made to
unaffiliated third parties, the Advance shall be refunded to the Company in the
event that the Offering is not consummated.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder shall be subject to the continuing accuracy in all
material respects of the representations and warranties of the Company herein as
of the Closing Date and the Overallotment Closing Date, if any, as if they had
been made on and as of the Closing Date or the Overallotment Closing Date, as
the case may be; the accuracy on and as of the Closing Date or Overallotment
Closing Date, if any, of the statements of officers of the Company made pursuant
to the provisions hereof; and the performance by the Company on and as of the
Closing Date and the Overallotment Closing Date, if any, of each of its material
covenants and obligations hereunder and to the following further conditions:
18
(a) The Registration Statement shall have be declared effective by
the Commission not later than 5:30 P.M., New York time, on the date of this
Agreement or such later date and time as shall be consented to in writing by the
Underwriters, and, at the Closing Date and the Overallotment Closing Date, if
any, no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or contemplated to the knowledge of the Company
by the Commission and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of the
Rules and Regulations, the price of the Securities and any price-related
information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) of the Rules and Regulations within the
prescribed time period, and prior to the Closing Date the Company shall have
provided evidence satisfactory to the Underwriters of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A of
the Rules and Regulations.
(b) The Underwriters shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, and the reasonable opinion of
its counsel is material or omits to state a fact which, in the Representative's
reasonable opinion, is material and is required to be stated therein or is
necessary to make the statements therein not misleading, or that the Prospectus,
or any supplement thereto, contains an untrue statement of fact which, in the
Representative's reasonable opinion, or the opinion of its counsel is material,
or omits to state a fact which, in the Representative's reasonable opinion, is
material and is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(c) The Company's registration statement pursuant to the Exchange
Act on Form 8-A with respect to the Warrants contained in the Units (the "Form
8-A") has been declared effective by the Commission.
(d) At the Closing Date and the Overallotment Closing Date, the
Representative shall have received the favorable opinion of Cummings & Lockwood
LLC, securities counsel to the Company or other counsel reasonably acceptable to
the Representative, dated the Closing Date, or the Overallotment Closing Date,
as the case may be, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) The Company: (A) has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Delaware with full corporate power and authority to own and operate its
properties and to carry on its business as set forth in the Registration
Statement and Prospectus; (B) the Company is duly licensed or qualified as a
foreign corporation in all jurisdictions in which by reason of maintaining an
office in such jurisdiction or by owning or leasing real property in such
jurisdiction it is required to be so licensed or qualified except where failure
to be so qualified or licensed could not reasonably be expected to have a
material adverse effect upon the Company; and (C) to counsel's knowledge, the
Company has not received any notice of proceedings relating to the revocation or
modification of any such license or qualification which revocation or
modification could reasonably be expected to have a material adverse effect upon
the Company.
19
(ii) The Registration Statement and the Prospectus and any
post-effective amendments or supplements thereto (other than the exhibits,
financial statements, schedules and other financial and statistical data
included therein, as to which no opinion need be rendered) comply as to form in
all material respects with the requirements of the Securities Act and the Rules
and Regulations and the conditions for use of a registration statement on Form
SB-2 have been satisfied by the Company.
(iii) To counsel's knowledge, except as described in the
Prospectus, the Company does not own an interest of a character required to be
disclosed in the Registration Statement in any corporation, partnership, joint
venture, trust or other business entity;
(iv) The Company has a duly authorized capitalization as set
forth in the Prospectus as of the date indicated therein, under the caption
"Capitalization." The Securities, the Underwriters' Unit Warrant and the
Underwriters' Warrant Units conform or upon issuance will conform in all
material respects to all statements with respect thereto contained in the
Registration Statement and the Prospectus. The Securities to be sold by the
Company hereunder, the Underwriters' Unit Warrant to be sold by the Company
under the Underwriters' Unit Warrant Agreement and Underwriters' Warrant Units
have been duly authorized and, when issued paid for and delivered in accordance
with the terms hereof or thereof, will be validly issued, and conform or upon
issuance will conform to the description thereof contained in the Prospectus and
the Common Stock included in the Units, when issued paid for and delivered in
accordance with the terms hereof, will be fully paid and non-assessable; are not
subject to any preemptive or other similar rights of any stockholder of the
Company; that, to such counsel's knowledge, the holders of the Securities and
Underwriters' Warrant Units shall not be personally liable for the payment of
the Company's debts solely by reason of being such holders except as they may be
liable by reason of their own conduct or acts; and that the certificates
representing the Units, Underwriters' Unit Warrant and Underwriters' Warrant
Units are in legal form. Upon delivery of the Units to the Underwriters against
payment therefor as provided for in this Agreement, the Underwriters (assuming
they are bona fide purchasers within the meaning of the Uniform Commercial Code)
will acquire title to the Units, free and clear of all liens, encumbrances,
equities, security interests and claims.
(v) The Registration Statement and the Form 8-A have been
declared effective under the Act, and, if applicable, the filing of all pricing
information has been timely made in the appropriate form under Rule 430A, and,
to counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and to counsel's knowledge, no
proceedings for that purpose have been instituted or are pending or threatened
or contemplated under the Securities Act;
(vi) To counsel's knowledge, (A) there are no material
contracts or other documents required to be described in the Registration
Statement and the Prospectus and filed as exhibits to the Registration Statement
other than those described in the Registration Statement and the Prospectus and
filed as exhibits thereto, and (B) the descriptions in the Registration
Statement and the Prospectus and any supplement or amendment thereto regarding
such material contracts or other documents to which the Company is a party or by
which it is bound, are accurate in all material respects and fairly represent
the information required to be shown by Form SB-2 and the Rules and Regulations;
(vii) This Agreement, the Underwriters' Warrant Agreement and
the Transfer Agent Agreement have each been duly and validly authorized,
executed and delivered by the Company, and assuming that each is a valid and
binding agreement of the parties other
20
than the Company, constitutes a legally valid and binding agreement of the
Company, enforceable as against the Company in accordance with their respective
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting enforcement of creditors' rights and the application of
equitable principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law or pursuant to public
policy).
(viii) Neither the execution or delivery by the Company of
this Agreement, the Underwriters' Warrant Agreement or the Transfer Agent
Agreement, nor its performance hereunder or thereunder, nor its consummation of
the transactions contemplated herein or therein, nor the issuance of the
Securities pursuant to this Agreement, conflicts with or will conflict with or
results or will result in any material breach or violation of any of the terms
or provisions of, or constitutes or will constitute a material default under, or
result in the creation imposition of any material lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction of any kind
whatsoever upon, any property or assets (tangible or intangible) of the Company
except to the extent such event could not reasonably be expected to have a
material adverse effect upon the Company pursuant to the terms of, (A) the
Certificate of Incorporation or By-Laws of the Company, (B) to the knowledge of
such counsel, any indenture, mortgage, deed of trust, voting trust agreement,
stockholders agreement, note, loan or credit agreement that is material to the
Company to which the Company is a party or by which it is bound or to which its
properties or assets (tangible or intangible) are subject, or (C) to the
knowledge of such counsel, and except to the extent it would not have a material
adverse effect on the Company, any statute, judgment, decree, order, rule or
regulation applicable to the Company or any arbitrator, court, regulatory body
or administrative agency or other governmental agency or body, having
jurisdiction over the Company or any of its respective activities or properties.
(ix) No consent, approval, authorization or order and no
filing with, any court, regulatory body, government agency or other body (other
than such as may be required under state securities laws, as to which no opinion
need be rendered) is required in connection with the issuance by the Company of
the Securities, the performance of this Agreement and the Underwriters' Warrant
Agreement by the Company, and the taking of any action by the Company
contemplated hereby or thereby, which has not been obtained;
(x) Except as described in the Prospectus, to the knowledge
of such counsel, the Company is not in breach of, or in default under, any
material term or provision of any indenture, mortgage, installment sale
agreement, deed of trust, lease, voting trust agreement, stockholders'
agreement, note, loan or credit agreement and, to the knowledge of counsel, the
Company is not in violation of any material term or provision of its Certificate
of Incorporation or By-Laws or in violation of any material franchise, license,
permit, judgment, decree, order, statute, rule or regulation material to the
Company's business;
(xi) The statements in the Prospectus under the captions
"DESCRIPTION OF BUSINESS," "MANAGEMENT," "PRINCIPAL STOCKHOLDERS," "CERTAIN
TRANSACTIONS," "DESCRIPTION OF CAPITAL STOCK," "SHARES ELIGIBLE FOR FUTURE SALE"
and "RISK FACTORS" have been reviewed by such counsel, and only insofar as they
refer to statements of law, descriptions of statutes, rules or regulations or
legal conclusions, are correct in all material respects;
(xii) To such counsel's knowledge, except as described in the
Prospectus or as could not reasonably be expected to have a material adverse
effect on the Company, no person, corporation, trust, partnership, association
or other entity holding securities
21
of the Company has the contractual right to include and/or register any
securities of the Company in the Registration Statement, require the Company to
file any registration statement or, if filed, to include any security in such
registration statement; and
(xiii) Upon consummation of the transactions contemplated
hereby, the Securities will be eligible for listing on the Nasdaq SmallCap Stock
Market and Boston Stock Exchange.
In addition, such counsel shall state that such counsel has
participated in meetings and teleconferences with officers of the Company,
representatives of the independent public accountants for the Company and
representatives of the Underwriters at which the contents of the Registration
Statement, the Prospectus and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus and made no independent check or
verification thereof, on the basis of the foregoing, no facts have come to the
attention of such counsel which lead them to believe that either the
Registration Statement or any amendment thereto at the time such Registration
Statement or amendment became effective or the Prospectus as of the date of such
opinion contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need make no statement with
respect to the financial statements and schedules and other financial and
statistical data included in the Registration Statement or Prospectus or with
respect to statements or omissions made therein in reliance upon information
furnished in writing to the Company on behalf of any Underwriter expressly for
use in the Registration Statement or the Prospectus).
In rendering such opinion, such counsel may rely, (A) as to
matters involving the application of laws other than the laws of the United
States, the corporate laws of Delaware and New York to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws of such other jurisdictions, (B) as
to matters of fact, to the extent they deem proper, on certificates and written
statements of responsible officers of the Company and certificates or other
written statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of the
Company; provided, that copies of any such statements or certificates shall be
delivered to Underwriters' Counsel if requested, and (C) upon the opinions of
(i) ___________________, as patent counsel to the Company with respect to patent
matters and (ii) __________________, as Food and Drug Act ("FDA") counsel with
respect to FDA matters. The form of the opinions of the aforementioned counsels
are attached hereto as Exhibits A and B, respectively. The opinions of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and, in their opinion, the Underwriters
and they are justified in relying thereon, or in the alternative, such opinions
may be addressed directly to the Underwriters.
(e) At the Overallotment Closing Date, if any, the Underwriters
shall have received the favorable opinion of counsel to the Company, each dated
the Overallotment Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel confirming as of the
Overallotment Closing Date the statements made by such firm, in their opinion
delivered on the Closing Date.
22
(f) On or prior to each of the Closing Date and the Overallotment
Closing Date, if any, Underwriters' Counsel shall have been furnished such
documents, certificates and other legal opinions (including, without limitation,
legal opinions related to patent, trademark or Food and Drug matters) as they
may reasonably require and request for the purpose of enabling them to review or
pass upon the matters referred to in subsection (d) of this Section 6, or in
order to evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
(g) Prior to the Closing Date and the Overallotment Closing Date,
if any: (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
prospects or the business activities of the Company, whether or not in the
ordinary course of business, from the latest dates as of which such condition is
set forth in the Registration Statement and Prospectus; (ii) except as may be
disclosed in the Registration Statement or the Prospectus, there shall have been
no transaction, not in the ordinary course of business, entered into by the
Company, from the latest date as of which the financial condition of the Company
is set forth in the Registration Statement and Prospectus which could reasonably
be expected to have a material adverse effect on the Company; (iii) the Company
shall not be in material default under any provision of any instrument relating
to any outstanding indebtedness for money borrowed, except as described in the
Prospectus; (iv) no material amount of the assets of the Company shall have been
pledged or mortgaged, except as set forth in the Registration Statement and
Prospectus; (v) no action, suit or proceeding, at law or in equity, shall have
been pending or to its knowledge threatened against the Company, or affecting
any of its properties or businesses before or by any court or federal, state or
foreign commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding could reasonably be expected to have a material
adverse effect on the business, operations, prospects or financial condition of
the Company, except as set forth in the Registration Statement and Prospectus;
and (vi) no stop order shall have been issued under the Securities Act and no
proceedings therefor shall have been initiated, threatened or contemplated by
the Commission.
(h) At the Closing Date and the Overallotment Closing Date, if
any, the Underwriters shall have received a certificate of the Company signed by
the principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Overallotment Closing Date, as
the case may be, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are, in all material respects, true and correct, as if made on and as
of the Closing Date or the Overallotment Closing Date, as the case may be, and
the Company has complied with all agreements and covenants and satisfied all
conditions contained in this Agreement on its part to be performed or satisfied
at or prior to such Closing Date or Overallotment Closing Date, as the case may
be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending or, to the best of each of such person's
knowledge, are contemplated or threatened under the Act;
(i) By the Effective Date, the Representative shall have received
clearance from NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.
23
(j) At the time this Agreement is executed, the Underwriters shall
have received a letter, dated such date, addressed to the Underwriters in form
and substance satisfactory in all respects (including the non-material nature of
the changes or decreases, if any, referred to in clause (iii) below) to the
Underwriters, from Eisner LLP:
(i) confirming that they are independent public accountants
with respect to the Company within the meaning of the Securities Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion the financial
statements included in the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act and the Rules and Regulations;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim financial statements), a reading of the latest
available minutes of the stockholders and board of directors and the various
committees of the boards of directors of the Company, consultations with
officers and other employees of the
Company responsible for financial and accounting matters and other specified
procedures and inquiries, nothing has come to their attention that would lead
them to believe that (A) the unaudited financial statements of the Company
included in the Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the Securities Act and
the Rules and Regulations or are not fairly presented in conformity with
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of the Company included
in the Registration Statement, or (B) at a specified date not more than five (5)
business days prior to the Effective Date of the Registration Statement, there
has been any change in the capital stock or long-term debt of the Company, or
any decrease in the stockholders' equity or net current assets or net assets of
the Company as compared with amounts shown in the financial statements included
in the Registration Statement, other than as set forth in or contemplated by the
Registration Statement and changes in the ordinary course of business, or, if
there was any change or decrease, setting forth the amount of such change or
decrease, and (C) during the period from December 31, 2002, to a specified date
not more than five (5) business days prior to the Effective Date, there was any
decrease in net revenues, net earnings or increase in net loss per common share
of the Company, in each case as compared with the corresponding period beginning
January 1, 2001 other than as set forth in or contemplated by the Registration
Statement and changes or increases in the ordinary course of business, or, if
there was any such increase, setting forth the amount of such increase;
(iv) stating that they have compared specific dollar amounts,
numbers of Securities, percentages of revenues and earnings, statements and
other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers, percentages,
statements and information may be derived from the general accounting records,
including work sheets, of the Company and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter and found them to be in
agreement; and
(v) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriters may reasonably request.
24
(k) At the Closing Date and the Overallotment Closing Date, if
any, the Underwriters shall have received from Eisner LLP, a letter, dated as of
the Closing Date, or Overallotment Closing Date, as the case may be, to the
effect that they reaffirm that statements made in the letter furnished pursuant
to Subsection (j) of this Section, except that the specified date referred to
shall be a date not more than five (5) business days prior to Closing Date or
the Overallotment Closing Date, as applicable, and if the Company has elected to
rely on Rule 430A of the Rules and Regulations, to the further effect that they
have carried out procedures as specified in clause (iii) of Subsection (j) of
this Section with respect to certain amounts, percentages and financial
information as specified by the Underwriters and deemed to be a part of the
Registration Statement pursuant to Rule 430A(b) and have found such amounts,
percentages and financial information to be in agreement with the records
specified in such clause (iii).
(l) On the Closing Date and the Overallotment Closing Date, if
any, there shall have been duly tendered to the Underwriters for their accounts
the appropriate number of Securities against payment therefor.
(m) No order suspending the sale of the Securities in any
jurisdiction designated by the Representative pursuant to subsection (e) of
Section 4 hereof shall have been issued on either the Closing Date or the
Overallotment Closing Date, if any, and no proceedings for that purpose shall
have been instituted or, to the Representative's knowledge or that of the
Company, shall be contemplated.
(n) On or prior to the Effective Date, the Company shall cause its
securities counsel to deliver to the Representative an opinion of counsel
advising the Representative of the ability of the Underwriters to participate in
secondary trading of the shares of Common Stock and Warrants.
(o) On or prior to the Effective Date, the Company shall have
received notification, in form and substance satisfactory to the Representative,
from the Nasdaq Stock Market that it has withdrawn any outstanding notices
regarding delisting of the Company's Common Stock and that following the Closing
of the Offering the Company's Common Stock shall not be subject to delisting
proceedings.
If any condition to the Underwriters' obligations hereunder to be
fulfilled prior to or at the Closing Date or the Overallotment Closing Date, as
the case may be, is not so fulfilled, the Underwriters may terminate this
Agreement or, if the Underwriters so elects, it may waive any such conditions
which have not been fulfilled or extend the time for their fulfillment.
8. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters, including specifically each person who controls the Underwriters
("controlling person") within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act, against any and all losses, claims, damages,
reasonable expenses or liabilities, joint or several (and actions in respect
thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), as such are
incurred, to which the Underwriters or such controlling person may become
subject under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries arising
25
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained (i) in any Preliminary Prospectus (except that the
indemnification contained in this paragraph with respect to any Preliminary
Prospectus shall not inure to the benefit of the Underwriters or to the benefit
of any controlling person the Underwriters on account of any loss, claim,
damage, liability or expense arising from the sale of the Firm Securities by the
Underwriters to any person if a copy of the Prospectus, as amended or
supplemented, shall not have been delivered or sent to such person within the
time required by the Securities Act, and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus, as amended and
supplemented, and such correction would have eliminated the loss, claim, damage,
liability or expense), the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
Securities of the Company issued or issuable upon exercise of the Underwriters'
Unit Purchase Warrant; or (iii) in any application or other document or written
communication (in this Section 8 collectively called "application") executed by
the Company or based upon written information furnished by the Company in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
Nasdaq Stock Market, Inc. or any other securities exchange; or the omission or
alleged omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading (in the case of the
Prospectus, in the light of the circumstances under which they were made),
unless in any case above such statement or omission was made in reliance upon
and in conformity with written information furnished to the Company with respect
to any Underwriters by or on behalf of such Underwriters, through Underwriters'
Counsel, directly or through the Representative, expressly for use in any
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment thereof or supplement thereto, in any post-effective amendment, new
registration statement or prospectus or in any application, as the case may be.
The indemnity agreement in this subsection (a) shall be in addition to
any liability which the Company may have at common law or otherwise.
(b) The Underwriters, severally but not jointly, hereby indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the Registration Statement, its agents and each other person, if any,
who controls the Company within the meaning of the Securities Act, to the same
extent as the foregoing indemnity from the Company to the Underwriters but only
with respect to statements or omissions, if any, made in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto, any post-effective amendment, new registration statement or
prospectus, or in any application made in reliance upon, and in conformity with,
written information furnished to the Company with respect to the Underwriters by
or on behalf of such Underwriters, through Underwriters' counsel or the
Representative expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any post-effective amendment, new registration statement or
prospectus, or in any application, directly related to the transactions effected
by the Underwriters in connection with this Offering; provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto, in any post-effective amendment, new registration statement
or prospectus or in any such application. The Company acknowledges that the
statements with respect to the public offering of the Firm Securities set forth
under the heading "Underwriting" and the stabilization legend and the last
paragraph of the cover page in the Prospectus have been furnished by the
Underwriters expressly for use therein and any information furnished by or on
26
behalf of the Underwriters filed in any jurisdiction in order to qualify the
Securities under state securities laws or filed with the Commission, the NASD or
any securities exchange constitute the only information furnished in writing by
or on behalf of the Underwriters for inclusion in the Preliminary Prospectus,
Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any post-effective amendment and the Underwriters hereby confirm
that such statements and information are true and correct in all material
respects on the date hereof and do not omit a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
shall be so on each Closing Date and Overallotment Closing Date.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, suit or proceeding, such
indemnified party shall, if a claim in respect thereof is to be made against one
or more indemnifying parties under this Section 8, notify each party against
whom indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party or parties
of the commencement thereof, the indemnifying party or parties will be entitled
to participate therein, and to the extent it or they may elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, the indemnifying party may assume the defense
thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing the indemnified party or parties shall have the
right to employ its or their own counsel in any such case but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by the indemnifying parties in connection with the defense of such
action at the expense of the indemnifying party, (ii) the indemnifying parties
shall not have employed counsel reasonably satisfactory to such indemnified
party to have charge of the defense of such action within a reasonable time
after notice that the indemnifying party or parties have elected to assume the
defense thereof, or (iii) such indemnifying party or parties shall have
reasonably concluded, based on an opinion of counsel reasonably satisfactory to
the indemnifying party or parties, a copy of which has been delivered to the
indemnifying party or parties, that there may be defenses available to it or
them that are different from or additional to those available to one or all of
the indemnifying parties (in which case the indemnifying parties shall not have
the right to direct the defense of such action on behalf of the indemnified
party or parties), in any of which events such fees and expenses of one
additional counsel shall be borne by the indemnifying parties. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. Anything in this Section 8 to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided however, that
such consent was not unreasonably withheld.
(d) In order to provide for just and equitable contribution in any
case in which (i) an indemnified party makes claim for indemnification pursuant
to this Section 8, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 8 provide for indemnification in such
case, or (ii) contribution under the Securities Act may be required on the part
of any indemnified party, then each indemnifying
27
party shall contribute to the amount paid as a result of such losses, claims,
damages, expenses or liabilities (or actions in respect thereof) (A) in such
proportion as is appropriate to reflect the relative benefits received by each
of the contributing parties, on the one hand, and the party to be indemnified on
the other hand, from the offering of the Securities or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (A) above but also the relative fault of each of the contributing
parties, on the one hand, and the party to be indemnified on the other hand in
connection with the untrue or alleged untrue statement or omission or alleged
omission that resulted in such losses, claims, damages, expenses or liabilities,
as well as any other relevant equitable considerations. In any case where the
Company is the contributing party and the Underwriters are the indemnified party
the relative benefits received by the Company on the one hand, and the
Underwriters, on the other, shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Securities (before deducting
expenses) bear to the total underwriting discounts and commissions received by
the Underwriters hereunder, in each case as set forth in the table on the Cover
Page of the Prospectus. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue or alleged untrue statement or omission or alleged omission.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this subdivision (d) shall be deemed to include 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 subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such 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. For purposes of this Section 8, each person, if
any, who controls the Company within the meaning of the Securities Act, each
officer of the Company who has signed the Registration Statement, and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to this subparagraph (d). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this
subparagraph (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this subparagraph (d), or to
the extent that such party or parties were not adversely affected by such
failure to give notice. The contribution agreement set forth above shall be in
addition to any liabilities which any indemnifying party may have at common law
or otherwise.
9. FINDERS. The Company and the Representative each represents that no
person has acted as a finder in connection with the transactions contemplated
herein and the Representative and the Company agree to indemnify, on the terms
set forth in Section 8 hereof, each other with respect to any claim for a
finder's fee in connection with the Offering.
10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of
28
the Company submitted pursuant hereto, shall be deemed to be representations,
warranties and agreements at the Closing Date and the Overallotment Closing
Date, if any, and such representations, warranties and agreements of the Company
and the indemnity agreements contained in Section 7 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Underwriters, the Company, or any controlling person, and
shall survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters.
11. EFFECTIVE DATE.
This Agreement shall become effective no later than 10:00 a.m. New York
City Time, on the next full business day following the date on which the
Registration Statement becomes effective, or at such earlier time as the
Representative, in its discretion, shall release the Securities for the sale to
the public. For purposes of this Section 11, the Securities to be purchased
hereunder shall be deemed to have been so released for sale upon the earlier of
dispatch by the Representative of telegrams to securities dealers releasing such
Securities for offering or the release by the Representative for publication of
the first newspaper advertisement which is subsequently published relating to
the Securities.
12. TERMINATION; SUBSTITUTION OF UNDERWRITERS
(a) The Representative shall have the right to terminate this
Agreement if: (i) trading in securities generally on the New York Stock Exchange
or the Nasdaq National Market or in the over-the-counter market, or trading in
any securities of the Company on any 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 of the
United States; (iii) the United States shall have become engaged in hostilities,
there shall have been a significant escalation in hostilities involving the
United States or there shall have been a declaration of a national emergency or
war by the United States; (iv) there shall have occurred such a material adverse
change in general economic, political or financial conditions of (or the effect
of international conditions on the financial markets in the United States shall
be such) as to make it, in the responsible judgment of the Representative,
impracticable or inadvisable to proceed with the public offering or delivery of
the Securities on the terms and in the manner contemplated in the Prospectus;
(v) any materially adverse change shall have occurred in the reasonable
judgement of the Representative, in the financial condition, business,
prospects, or obligations of the Company; (vi) the Company cannot expeditiously
proceed with the Offering, including without limitation, as a result of actions
taken or not taken by the Company; or (vii) any representations, warranties or
covenants of the Company are not materially correct or with which the Company
cannot comply.
(b) Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement
(including, without limitation, pursuant to Sections 12 and 13 hereof), and
whether or not this Agreement is otherwise carried out, the provisions of
Section 6(b) shall not be in any way affected by such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
(c) If any Underwriter or Underwriters shall default in its or
their obligations to purchase Units hereunder and the aggregate numbers of Units
which such defaulting Underwriter or Underwriters agreed but failed to purchase
does not exceed twenty percent (20%) of the total number of Units underwritten,
the other Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Units which such defaulting
Underwriter or Underwriters agreed but failed to purchase. If any Underwriter or
Underwriters shall so default and the aggregate number of Units with respect to
which such default or defaults occur is more than twenty percent (20%)
29
of the total number of Units underwritten and arrangements satisfactory to the
Underwriters and the Company for the purchase of such Units by other persons are
not made within forty-eight (48) hours after such default, this Agreement shall
terminate.
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the Units of a defaulting Underwriter
or Underwriters as provided in this Section 12, (i) the Company shall have the
right to postpone the Closing Date for a period of not more than five (5) full
business days in order that the Company may effect whatever changes may thereby
be made necessary in the Registration Statement or the Prospectus, or in any
other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective number of Units to be
purchased by the remaining Underwriters or substituted Underwriters shall be
taken as the basis of their underwriting obligation for all purposes of this
Agreement. Nothing herein contained shall relieve any defaulting Underwriter of
its liability to the Company or the other Underwriters for damages occasioned by
its default hereunder. Any termination of this Agreement pursuant to this
Section 12 shall be without liability on the part of any non-defaulting
Underwriters or the Company, except for expenses to be paid or reimbursed
pursuant to Section 6 and except for the provisions of Section 8.
13. DEFAULT BY THE COMPANY. If the Company shall fail at the Closing
Date or the Overallotment Closing Date, as applicable, to sell and deliver the
number of Securities which it is obligated to sell hereunder on such date, then
this Agreement shall terminate (or, if such default shall occur with respect to
any Overallotment Securities to be purchased on the Overallotment Closing Date,
the Underwriters may at the Underwriters' option, by notice from the
Underwriters to the Company, terminate the Underwriters' obligations to purchase
Securities from the Company on such date) without any liability on the part of
any non-defaulting party other than pursuant to Section 6 and Section 8 hereof.
No action taken pursuant to this Section shall relieve the Company from
liability, if any, in respect of such default.
14. NOTICES. All notices and communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to the
Representative at Roan/Meyers Associates, L.P., 17 State Street, New York, NY
10004, Attention: Bruce Meyers, with a copy to Goldstein & DiGioia, LLP, 45
Broadway, 11th Floor, New York, NY 10006, Attention: Brian C. Daughney, Esq.
Notices to the Company shall be directed to the Company at 1100 Summer Street,
Stamford, CT 06905, Attention: Mr. M.S. Koly, with a copy to Cummings & Lockwood
LLC, Four Stamford Plaza, 107 Elm Street, Stamford, CT 06902, Attention: Paul G.
Hughes, Esq.
15. PARTIES. This Agreement shall inure solely to the benefit of and
shall be binding upon, the several Underwriters, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Securities from any Underwriter shall be deemed to be
a successor by reason merely of such purchase.
30
16. GOVERNING LAW/CONSTRUCTION/JURISDICTION.
(a) This Agreement shall be construed in accordance with the laws
of the State of Delaware, without giving effect to conflict of laws.
(b) The Company and the Underwriters (a) agree that any legal
suit, action or proceeding arising out of or relating to this Agreement shall be
instituted exclusively in New York State Supreme Court, County of New York, or
in the United States District Court for the Southern District of New York, (b)
waive any objection which they may have now or hereafter to the venue of any
such suit, action or proceeding, and (c) irrevocably consent to the jurisdiction
of the New York State Supreme Court, County of New York and the United States
District Court for the Southern District of New York in any such suit, action or
proceeding. Each of the Company and the Underwriters further agree to accept and
acknowledge service of any and all process which may be served in any suit,
action or proceeding in the New York State Supreme Court or the United States
District Court for the Southern District of New York, and agree that service of
process upon them mailed by certified mail to their respective addresses shall
be deemed in every respect effective service of process upon them in any such
suit, action or proceeding. In the event of litigation between the parties
arising hereunder, the prevailing party shall be entitled to costs and
reasonable attorney's fees.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.
18. WAIVER. The waiver by either party of the breach of any provision
of this Agreement by the other party shall not operate or be construed as a
waiver of any subsequent breach.
19. ASSIGNMENT. Neither party hereto may transfer or assign this
Agreement without prior written consent of the other party.
20. TITLES AND CAPTIONS. All article, section and paragraph titles or
captions contained in this Agreement are for convenience only and shall not be
deemed part of the context nor affect the interpretation of this Agreement.
21. PRONOUNS AND PLURALS. All pronouns and any variations thereof shall
be deemed to refer to the masculine, feminine, neuter, singular or plural as the
identity of the Person or Persons may require.
22. ENTIRE AGREEMENT. This Agreement contains the entire understanding
between and among the parties and supersedes any prior understandings and
agreements among them respecting the subject matter of this Agreement.
[remainder of page left blank- signature page appears next]
31
If the foregoing correctly sets forth our understanding, please so
indicate in the space provided below for that purpose, whereupon this letter and
your acceptance shall constitute a binding agreement among us.
Very truly yours,
DELCATH SYSTEMS, INC.
By:________________________________
Name: M.S. Koly
Title: Chief Executive Officer
Confirmed and accepted as of the date first above written
ROAN/MEYERS ASSOCIATES, L.P.,
as Representative of the Underwriters
BY: MEYERS/JANSSEN SECURITIES CORP.,
General Partner
By:_____________________________
Name: Bruce Meyers
Title: President
32
SCHEDULE I
Underwriters
------------
Roan/Meyers Associates, L.P.
SCHEDULE II
Warrant Agent
-------------
American Stock Transfer & Trust Company
DELCATH SYSTEMS, INC.
AND
ROAN/MEYERS ASSOCIATES, LP
UNDERWRITER'S UNIT OPTION AGREEMENT
Dated as of __________, 2003
1
UNDERWRITER'S UNIT WARRANT AGREEMENT dated as of ________, 2003 between
DELCATH SYSTEMS, INC., a Delaware corporation (the "Company") and ROAN/MEYERS
ASSOCIATES, LP, a New York limited partnership (hereinafter referred to as the
"Representative").
W I T N E S S E T H :
-------------------
WHEREAS, pursuant to the terms of an Underwriting Agreement dated as of
_______, 2003 (the "Underwriting Agreement") between the Representative as
representative of the underwriters names on Schedule I therein (the
"Underwriters"), the Underwriters have severally agreed to purchase, in a public
offering under the Securities Act of 1933, as amended (the "Act") on a "firm
commitment" basis (the "Public Offering"), _________ units (the "Public Units")
at a public offering price of $___ per Public Unit, each Public Unit consisting
of five (5) shares of the Company's common stock, par value $.01 per share (the
"Common Stock") ( each share of Common Stock constituting part of a Public Unit,
referred to as the "Public Shares"), and five (5) Redeemable Common Stock
Purchase Warrants each to purchase one (1) share of Common Stock ("Public
Warrant"); and
WHEREAS, as additional consideration to the Representative for its
services pursuant to the Underwriting Agreement, the Company has agreed to issue
to the Representative a warrant ("Representative's Unit Warrant) to purchase up
to an aggregate of ________ Units (the "Representative's Units") with an
exercise price equal to $_______ [165% of the Public Unit offering price], each
consisting of five shares of Common Stock ("Representative's Shares") and five
warrants, each to purchase one share of Common Stock ("Representative's
Warrants"), having the same terms as the Public Warrants except that the
exercise price of the Representative's Warrants shall be exercisable at
$________ [165% of the public offering price of the Public Warrants]; and
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate of ______ Dollars ($____)[$.001
per Representative Unit], the agreements herein set forth and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
l. GRANT. The Holder is hereby granted the right to purchase, at any
time from ______, 2004 [one year from the Effective Date] until 5:00 P.M., New
York time, on ____, 2008 [ five
1
years from the Effective Date], up to an aggregate of _________ Representative's
Units at an initial exercise price (subject to adjustment as provided in Section
8 hereof) of 165% of the public offering price of the Public Units).
2. REPRESENTATIVE'S UNIT WARRANT CERTIFICATES. The Representative's
warrant certificates (the "Representative's Warrant Certificates") delivered and
to be delivered pursuant to this Agreement shall be in the form set forth in
Exhibit A, attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions, and other variations as required or
permitted by this Agreement.
3. EXERCISE OF REPRESENTATIVE'S REPRESENTATIVE'S WARRANTS. The
Representative's Unit Warrants initially are exercisable at an aggregate initial
exercise price (subject to adjustment as provided in Section 8 hereof) per
Representative's Unit, as set forth in Section 6 hereof payable by certified or
official bank check in New York Clearing House funds, subject to adjustment as
provided in Section 8 hereof. Upon surrender at the Company's principal offices
(presently located at 1100 Summer Street, Stamford, CT 06905), of an
Representative's Unit Warrant with the annexed Form of Election to Purchase duly
executed, together with payment of the Purchase Price (as hereinafter defined)
for the number of Representative's Units purchased, the registered holder of an
Representative's Unit Warrant ("Holder" or "Holders") shall be entitled to
receive a certificate or certificates for the Represetnative's Units so
purchased. The shares of Common Stock and the Representative's Warrants
comprising the Representative's Units shall consist of the same shares of Common
Stock and Public Warrants as being sold to the public in the Public Offering,
shall contain the same terms and conditions and rights; provided, however, the
Representantive's Warrant obtained upon exercise of the Representative's Unit
Warrant shall have an exercise price of 165% of the Public Warrants. The
purchase rights represented by each Representative's Unit Warrant are
exercisable at the option of the Holder thereof, in whole or in part. In the
case of the purchase of less than all the Representative's Units purchasable
under any Representative's Unit Warrant, the Company shall cancel the
Representative's Unit Warrant upon the surrender thereof and shall execute and
deliver a new Representative's Unit Warrant of like tenor for the balance of the
Representative's Units purchasable thereunder.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Representative's
Unit Warrant, the issuance of certificates for the Representative's Warrants and
Representative's Shares or other securities, properties or rights underlying
such Representative's Unit Warrant, shall be made (and in any event within five
(5) business days thereafter) without charge to the Holder thereof
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including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Representative and the Company shall not be required to issue
or deliver such certificates unless or until the person or persons requesting
the issuance thereof shall have paid to the Company the amount of such tax or
shall have established to the satisfaction of the Company that such tax has been
paid.
The Representative's Unit Warrants and the certificates representing
the Representative's Warrants and Representative's Shares issuable upon exercise
of the Representative's Unit Purchase Warrant shall be executed on behalf of the
Company in the same manner as the certificates for the Public Shares and Public
Warrants. The Representative's Unit Warrants shall be dated the date of the
execution by the Company upon initial issuance, division, exchange, substitution
or transfer. The certificates representing the Representative's Shares and
Representative's Warrants issuable upon exercise of the Representative's Unit
Warrants shall be identical in form and substance to the Public Shares and
Public Warrants, including the terms of redemption for the Warrants sold to the
public; provided, however, the exercise price of the Representative's Warrants
shall be $______ [165% of the exercise price of the Public Warrants].
5. RESTRICTION ON TRANSFER OF REPRESENTATIVE'S UNIT WARRANT. The Holder
of a Representative's Unit Warrant, by its acceptance thereof, covenants and
agrees that the Representative's Unit Warrant is being acquired as an investment
and not with a view to the distribution thereof; and that the Representative's
Unit Warrant may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one year from the effective
date of the Public Offering except to officers or partners (not directors) of
the Representative and members of the selling group in the Public Offering
and/or their officers or partners as required in compliance with NASD Rule
2710(c)(7)(A).
6. EXERCISE PRICE.
6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise provided
in Section 8 hereof, the initial exercise price of each Representative's Unit
Warrant shall be $___ [165% of the Public Unit offering price] per
Representative's Unit. The exercise price of the Representative's Warrant and
the number of Representative's Shares to be received upon exercise
3
of the Representative's Unit Warrant shall be subject to adjustment as provided
in Section 8 hereof.
7. REGISTRATION RIGHTS.
7.1 DEMAND REGISTRATION UNDER THE SECURITIES ACT OF 1933.
At any time commencing after _________, 2004 [one (1) year from the
Effective Date] through and including ___________, 2008 [five (5) years from the
Effective Date], the Holders of the Representative's Unit Purchase Warrant,
Representative's Shares and Representative's Shares, representing a "Majority"
of the shares of Common Stock issuable upon the exercise of the Units (assuming
the exercise of all of the Representative's Unit Warrant) shall have the right
(which right is in addition to the registration rights under Section 7.2
hereof), exercisable by written notice to the Company, to have the Company
prepare and file with the Commission, on one occasion, a registration statement
and such other documents, including a prospectus, as may be necessary in the
opinion of both counsel for the Company and counsel for the Representative and
Holders, in order to comply with the provisions of the Act, so as to permit a
public offering and sale of their respective Representative's Shares and
Representative's Warrants during a period equal to the longer of: (i) nine (9)
months or (ii) the unexpired term of the Representative's Warrants by such
Holders and any other Holders of the Representative's Unit Warrant who shall
notify the Company within ten (10) days after receiving notice from the Company
of such request.
7.2 PIGGYBACK REGISTRATION. If, at any time commencing after ______,
2004 [one year from the Effective Date], through and including ________, 2008
[five (5) years from the Effective Date], the Company proposes to register any
of its securities under the Act (other than in connection with a merger or
similar transaction with a filing on a Form S-4 or pursuant to Form S-8 or
similar form) it will give written notice by registered or certified mail, at
least thirty (30) days prior to the filing of each such registration statement,
to the Representative and to all other Holders of the Representative's Unit
Warrant, Representative's Units, Representative's Warrants or Representative's
Shares underlying the Representative's Units, of its intention to do so. If any
of the Representatives or other Holders of the Representative's Unit Warrant,
Representative's Units, Representative's Warrants or Representative's Shares
underlying the Representative's Unit Warrant, notify the Company within twenty
(20) days after receipt of any such notice of its or their desire to include any
such securities in such proposed registration statement, the Company shall
afford each of the Representative and such Holders of the
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Representative's Unit Warrant, Representative's Units, Representative's Warrant
or Representative's Shares, the opportunity to have any of such securities
registered under such registration statement.
Notwithstanding the provisions of this Section 7.2, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the Effective Date thereof.
7.3. NOTICE TO BE DELIVERED. The Company covenants and agrees to give
written notice of any registration request under Section 7.1 by any Holder or
Holders to all other registered Holders of the Representative's Unit Warrant,
Representative's Units, Representative's Warrants and Representative's Shares
within ten (10) days from the date of the receipt of any such registration
request.
7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registration under Section 7.1 or 7.2 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within forty-five (45) days of receipt of any demand therefor in
accordance with Section 7.1, shall use its best efforts to have any registration
statement declared effective at the earliest practicable time, and shall furnish
each Holder desiring to sell the Representative's Shares and Representative's
Warrants and the shares underlying the Representative's Warrants such number of
prospectuses as shall reasonably be requested. Notwithstanding the foregoing
sentence, the Company shall be entitled to postpone the filing of any
registration statement otherwise required to be prepared and filed by it
pursuant to this Section 7.4(a) if (i) the Company is under contract or other
binding legal obligation for a material acquisition, reorganization or
divestiture, or (ii) the Company is publically committed to a self-tender or
exchange offer and the filing of a registration statement would cause a
violation of Rule 10b-6 under the Securities Exchange Act of 1934. In the event
of such postponement, the Company shall be required to file the registration
statement pursuant to this Section 7.4(a) upon the earlier of (i) the
consummation or termination, as applicable, of the event requiring such
postponement or (ii) 90 days after the receipt of the initial demand for such
registration.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s) counsel and any underwriting or selling commissions), fees and
expenses in connection with all
5
registration statements filed pursuant to Sections 7.1 and 7.2 hereof including,
without limitation, the Company's legal and accounting fees, printing expenses,
and blue sky fees and expenses. The Holder(s) whose securities are included in
any regsitraion statement filed by the Company will pay all costs, fees and
expenses in connection with any registration statement filed pursuant to Section
7.1 or 7.2. If the Company shall fail to comply with the provisions of Section
7.4, the Company shall, in addition to any other equitable or other relief
available to the Holder(s), be liable for any or all actual damages (which may
include damages due to a loss of profit).
(c) The Company will take all necessary action which may be required in
qualifying or registering the Representative's Warrants, Representative's Shares
and underlying shares of Common Stock included in a registration statement for
offering and sale under the securities or blue sky laws of such states as
reasonably are requested by the Holder(s), provided that the Company shall not
be obligated to execute or file any general consent to service of process or to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Representative's
Unit Warrant, Representative's Warrants and Representative's Shares to be sold
pursuant to any registration statement and each person, if any, who controls
such Holders within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss,
claim, damage, expense or liability (including all expenses reasonably incurred
in investigating, preparing or defending against any claim whatsoever) to which
any of them may become subject under the Act, the Exchange Act or otherwise,
arising from such registration statement but only to the same extent and with
the same effect as the provisions pursuant to which the Company has agreed to
indemnify the Underwriters contained in Section 7 of the Underwriting Agreement.
(e) The Holder(s) of the Representative's Unit Warrant,
Representative's Units, Representative's Shares and Representative's Warrants
and shares of Common Stock underlying the Representative's Warrant to be sold
pursuant to a registration statement, and their successors and assigns, shall
severally, and not jointly, indemnify the Company, its officers and directors
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim,
damage or expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such Holders, or their
6
successors or assigns, for specific inclusion in such registration statement to
the same extent and with the same effect as the provisions contained in Section
7 of the Underwriting Agreement pursuant to which the Underwriters have agreed
to indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Representative's Unit Warrant or the
Representative's Warrants prior to the initial filing of any registration
statement or the effectiveness thereof.
(g) The Company shall as soon as practicable after the Effective Date
of the registration statement filed pursuant to this Section 7, and in any event
within 15 months thereafter, have made "generally available to its security
holders" (within the meaning of Rule 158 under the Act) an earnings statement
(which need not be audited) complying with Section 11(a) of the Act and covering
a period of at least 12 consecutive months beginning after the Effective Date of
such registration statement.
(h) In connection with a demand registration pursuant to Section 7.1,
the Company shall enter into an underwriting agreement with the managing
Representative(s) selected for such underwriting, if any, by Holders holding a
Majority of the Representative's Unit Warrants, Representative's Units,
Representative's Shares and Representative's Warrants requested to be included
in such underwriting. Such underwriting agreement shall be satisfactory in form
and substance to the Company, each Holder and such managing Representatives, and
shall contain such representations, warranties and covenants by the Company and
such other terms as are customarily contained in agreements of that type used by
the managing Representative(s).
The Holders shall be parties to any underwriting agreement relating to
an underwritten sale of their Representative's Shares and Representative's
Warrants and shares of Common Stock Shares underlying the Representative's
Warrants and may, at their option, require that any or all the representations,
warranties and covenants of the Company to or for the benefit of such
Representative(s) shall also be made to and for the benefit of such Holders.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the Representative(s) except as they may
relate to such Holders, their intended methods of distribution, and except for
matters related to disclosures with respect to such Holders, contained or
required to be contained, in such registration statement under the Act and the
rules and regulations thereunder.
(i) For purposes of this Agreement, the term "Majority" in reference to
the Holders of Representative's Warrants and Representative's Shares and shares
underlying the
7
Representative's Warrants, shall mean in excess of fifty percent (50%) of the
then outstanding Warrants and Representative's Shares that (i) are not held by
the Company, an affiliate, officer, creditor, employee or agent thereof or any
of their respective affiliates, members of their families, persons acting as
nominees or in conjunction therewith or (ii) have not been resold to the public
pursuant to Rule 144 under the Act or a registration statement filed with the
Commission under the Act.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
8.1 ADJUSTMENTS TO REPRESENTATIVE'S WARRANTS. The Exercise Price of the
Representative's Warrants and number of securities issuable with respect to the
Representative's Warrants shall be adjusted on the same terms and conditions,
and at the same time, as any adjustments in the Exercise Price and number of
shares issuable with respect to the Public Warrants required by the terms of the
Public Warrants.
8.2 ADJUSTMENT TO NUMBER OF REPRESENTATIVE'S SHARES. The number of
Representative's Shares to be received upon exercise of the Representative's
Unit Warrants shall be subject to adjustment as follows:
(a) In the event that the number of outstanding shares of Common Stock
is increased by a stock dividend payable in Common Stock or by a subdivision of
the outstanding Common Stock, then, from and after the effective time of such
increase by reason of such dividend or subdivision, the number of shares of
Common Stock issuable upon the exercise of each Representative's Unit Warrant
shall be increased in proportion to such increase in outstanding shares. In the
event that the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding Common Stock, then, from and after the effective
time of such decrease by reason of such combination, the number of shares of
Common Stock issuable upon the exercise of each Representative's Unit Warrant
shall be decreased in proportion to such decrease in the outstanding shares of
Common Stock.
(b) In case of any reorganization or reclassification of the
outstanding Common Stock (other than a change in par value, or from par value to
no par value, or as a result of a subdivision or combination), or in case of any
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification of the
outstanding Common Stock), or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, the Holder of each
8
Representative's Unit Warrant then outstanding shall thereafter have the right
to purchase the kind and amount of shares of Common Stock and other securities
and property receivable upon such reorganization, reclassification,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock which the Holder of such Representative's Unit Warrant shall then
be entitled to purchase; such adjustments shall apply with respect to all such
changes occurring between the date of this Agreement and the date of exercise of
such Representative's Unit Warrant.
(c) Subject to the provisions of this Section 8, in case the Company
shall, at any time prior to the exercise of the Warrants, make any distribution
of its assets to holders its Common Stock as a liquidating or a partial
liquidating dividend, then the holder of Warrants who exercises its Warrants
after the record date for the determination of those holders of Common Stock
entitled to such distribution of assets as a liquidating or partial liquidating
dividend shall be entitled to receive for the Warrant Exercise Price per
Warrant, in addition to each share of Common Stock, the amount of such
distribution or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith) which would have been payable to such
holder had such holder been the holder of record of the Common Stock receivable
upon exercise of its Warrant on the record date for the determination of those
entitled to such distribution.
(d) In case of the dissolution, liquidation or winding up of the
Company, all rights under this Representative's Unit Warrants shall terminate on
a date fixed by the Company, such date to be no earlier than ten (10) days prior
to the effectiveness of such dissolution, liquidation or winding up and not
later than five (5) days prior to such effectiveness. Notice of such termination
of purchase rights shall be given to the last registered holder of the
Representative's Unit Warrants, as the same shall appear on the books of the
Company maintained by the Warrant Agent, by registered mail at least thirty (30)
days prior to such termination date.
(e) In case the Company shall, at any time prior to the expiration of
the Representative's Unit Warrants and prior to the exercise thereof, offer to
the holders of its Common Stock any rights to subscribe for additional shares of
any class of the Company, then the Company shall give written notice thereof to
the registered holders of the Representative's Unit Warrants not less than
thirty (30) days prior to the date on which the books of the Company are closed
or a record date is fixed for the determination of the stockholders entitled to
such subscription rights. Such notice shall specify the date as to which the
books shall be closed or the
9
record date fixed with respect to such offer of subscription and the right of
the holders of the Representative's Unit Warrants to participate in such offer
of subscription shall terminate if the Representative's Unit Warrant shall not
be exercised on or before the date of such closing of the books or such record
date.
(f) Any adjustment pursuant to the aforesaid provisions of this Section
8 shall be made on the basis of the number of shares of Common Stock which the
holder thereof would have been entitled to acquire upon the exercise of the
Representative's Unit Warrant immediately prior to the event giving rise to such
adjustment.
9. EXCHANGE AND REPLACEMENT OF REPRESENTATIVE'S UNIT WARRANTS. Each
Representative's Unit Warrant is exchangeable without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company, for a new Representative's Unit Warrant of like tenor and date
representing in the aggregate the right to purchase the same number of
Representative's shares and Representative's Warrants as provided in the
original Representative's Unit Warrant in such denominations as shall be
designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Representative's Unit
Warrant, and, in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Representative's Unit Warrant, if mutilated, the Company will make and
deliver a new Representative's Unit Warrant of like tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of Representative's Shares
upon the exercise of the Representative's Unit Warrant, nor shall it be required
to issue scrip or pay cash in lieu of fractional interests, it being the intent
of the parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Representative's
Unit Warrant and Representative's Warrants, such number of shares of Common
Stock or other securities, properties or rights as shall be issuable upon the
exercise thereof. The Company covenants and agrees that, upon exercise of the
10
Representative's Unit Warrant and/or the Representative's Warants and payment of
the Exercise Price therefor, all Representative's Shares and other securities
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any stockholder. As
long as the Representative's Unit Warrant and/or Representative's Warrants shall
be outstanding, the Company shall use its best efforts to cause all
Representative's Shares and Representative's Shares issuable upon the exercise
of the Representative's Warrants to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock may then be
listed and/or quoted on the Nasdaq Stock Market.
12. NOTICES TO REPRESENTATIVE'S UNIT WARRANT HOLDERS. Nothing contained
in this Agreement shall be construed as conferring upon the Holders the right to
vote or to consent or to receive notice as a stockholder in respect of any
meetings of stockholders for the election of directors or any other matter, or
any rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Representative's Unit Warrant or Representative's
Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock
of the Company, or any option, right or warrant to subscribe therefor;
or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of such events the Company shall give written notice of
such event at least fifteen (15) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect
11
therein shall not affect the validity of any action taken in connection with the
declaration or payment of any such dividend, distribution or the issuance of any
convertible or exchangeable securities, or subscription rights, options or
warrants, or any proposed dissolution, liquidation, winding up or sale.
13. NOTICES
All notices requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly made when delivered, or
mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Representative's Unit
Warrant, to the address of such Holder as shown on the books of the
Company; or
(b) If to the Company, to the address set forth in Section 3
hereof or to such other address as the Company may designate by notice
to the Holders.
14. SUPPLEMENTS AND AMENDMENTS. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of any
holders of Representative's Unit Warrants (other than the Representative) in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Representative may deem necessary or desirable and
which the Company and the Representative deem shall not adversely affect the
interests of the Holders of Representative's Unit Warrants.
15. SUCCESSORS. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. TERMINATION. This Agreement shall terminate at the close of
business on _________, 2008. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on ____, 2011.
17. GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) This Agreement and each Representative's Unit Warrant issued
hereunder shall be deemed to be a contract made under the laws of the State of
Delaware and for all purposes shall be construed in accordance with the laws of
such State without giving effect to the rules of said State governing the
conflicts of laws.
12
(b) The Company, the Representative and the Holders hereby agree that
any action, proceeding or claim against it arising out of, or relating in any
way to, this Agreement shall be brought and enforced in the courts of the State
of New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Representative and the Holders hereby irrevocably
waive any objection to such exclusive jurisdiction or inconvenient forum. Any
such process or summons to be served upon any of the Company, the Representative
and the Holders (at the option of the party bringing such action, proceeding or
claim) may be served by transmitting a copy thereof, by registered or certified
mail, return receipt requested, postage prepaid, addressed to it at the address
determined in accordance withSection 13 hereof. Such mailing shall be deemed
personal service and shall be legal and binding upon the party so served in any
action, proceeding or claim. The Company, the Representative and the Holders
agree that the prevailing party(ies) in any such action or proceeding shall be
entitled to recover from the other party(ies) all of its/their reasonable legal
costs and expenses relating to such action or proceeding and/or incurred in
connection with the preparation therefor.
18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and, except as provided in Section 14 hereof, may not be
modified or amended except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought. Any terms not otherwise
defined herein shall have the meaning ascribed to such term in the Underwriting
Agreement.
19. SEVERABILITY. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
20. CAPTIONS. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Representative's Unit
Warrants or Representative's Shares or the Representative's Warrants any legal
or equitable right, remedy or claim under this Agreement;
13
and this Agreement shall be for the sole and exclusive benefit of the Company
and the Representative and any other Holder(s) of the Representative's Unit
Warrants or Representative's Shares or Representative's Warrants.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
Remainder of page intentionally left blank. Signature page follows.
14
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
[SEAL] DELCATH SYSTEMS, INC.
By:__________________________________
Name:
Title:
Attest:
Secretary
Agreed and accepted as of the date
first above written
ROAN/MEYERS ASSOCIATES, L.P.,
as Representative of the Underwriters
By: MEYERS/JANSSEN SECURITIES CORP.,
General Partner
By:__________________________________
Name: Bruce Meyers
Title: President
15
EXHIBIT A
[FORM OF REPRESENTATIVE'S UNIT WARRANT CERTIFICATE]
THE REPRESENTATIVE'S UNIT WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER
SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S UNIT PURCHASE WARRANT
REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE
REPRESENTATIVE'S WARRANT AGREEMENT FOR UNITS REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, ____, 2008
No. DS-UW-1 _______ Representative's Unit Warrant
Representative's Unit Warrant
This Representative's Unit Warrant certifies that ROAN/MEYERS
ASSOCIATES, L.P., or registered assigns, is the registered holder of ________
Representative's Unit Purchase Warrants to purchase initially, at any time from
______, 2003 until 5:00 p.m. New York time on _______, 2008 ("Expiration Date"),
up to ______ Representative's Units (the "Units") of Delcath Systems, Inc., a
Delaware corporation (the "Company"), at an initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $____ [165% of the
public offering price of the Units] upon surrender of this Representative's Unit
Warrant and payment of the Exercise Price at an office or agency of the Company,
but subject to the conditions set forth herein and in the Representative's Unit
Warrant Agreementdated as of ______, 2002 between the Company and Roan/Meyers
Associates, L.P. (the "Representative's Warrant Agreement"). Payment of the
Exercise Price shall be made by certified or official bank check in New York
Clearing House funds payable to the order of the Company.
No Representative's Unit Warrant may be exercised after 5:00 p.m., New
York time, on the Expiration Date, at which time all Representative's Unit
Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be
void.
1
The Representative's Unit Warrant evidenced by this Representative's
Unit Purchase Warrant Certificate are part of a duly authorized issue of Units
pursuant to the Representative's Warrant Agreement, which Representative's
Warrant Agreement is hereby incorporated by reference herein and made a part of
this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Representative's Unit Warrant.
The Representative's Warrant Agreement provides that upon the
occurrence of certain events the exercise prices and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Representative's Unit Warrant Certificate evidencing the adjustment in the
exercise price and the number and/or type of securities issuable upon the
exercise of the Representative's Unit Warrant; provided, however, that the
failure of the Company to issue such new Representative's Unit Warrants shall
not in any way change, alter or otherwise impair, the rights of the holder as
set forth in the Representative's Warrant Agreement.
Upon due presentment for registration of transfer of this
Representative's Unit Warrant at an office or agency of the Company, a new
Representative's Unit Warrant or Representative's Unit Warrants of like tenor
and evidencing in the aggregate a like number of Representative's Unit Warrants
shall be issued to the transferee(s) in exchange for this Representative's Unit
Warrant, subject to the limitations provided herein and in the Representative's
Warrant Agreement, without any charge except for any tax or other governmental
charge imposed in connection with such transfer.
Upon the exercise of less than all of the Representative's Unit
Warrants evidenced by this Certificate, the Company shall forthwith issue to the
holder hereof a new Representative's Unit Warrant Certificate representing such
number of unexercised Representative's Unit Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Representative's Unit Warrant (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Representative's Unit Purchase Warrant which are
defined in the Representative's Warrant Agreement shall have the meanings
assigned to them in the Representative's Warrant Agreement.
2
IN WITNESS WHEREOF, the Company has caused this Representative's Unit
Warrant to be duly executed under its corporate seal.
Dated as of _____, 2003
DELCATH SYSTEMS, INC.
[SEAL] By:__________________________________
Name:
Title:
Attest:
Secretary
3
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Representative's Unit Warrant, to purchase ______ Units and
herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of Delcath Systems,
Inc. in the amount of $_____, all in accordance with the terms hereof. The
undersigned requests that a certificate for such securities be registered in the
name of _________________ whose address is _________________________ and that
such Certificate be delivered to _________________ whose address is
_________________________.
Dated:
Signature __________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Representative's Unit Purchase Warrant.)
Insert Social Security or Other
Identifying Number of Holder)
4
DELCATH SYSTEMS, INC.
NUMBER WARRANTS
DSW
CUSIP ________________
THIS IS TO CERTIFY THAT
or registered assigns, is the owner of the number of warrants set forth above.
Each warrant (subject to adjustments as hereinafter referred to) entitles the
holder hereof to purchase at any time until 5:00 p.m. Eastern Time on _________,
___, 2008 one fully paid and non-assessable share of common stock (the "Common
Stock") of Delcath Systems, Inc. a Delaware corporation (the "Company") (such
shares of Common Stock being hereinafter referred to as the "Shares" or a
"Share"), upon payment of the warrant price (as hereinafter described),
provided, however, that under certain conditions set forth in the Warrant
Agreement hereinafter mentioned the number of Shares purchased upon the exercise
of this Warrant may be increased or reduced and the warrant price may be
adjusted. Subject to adjustment as aforesaid, the warrant price per Share
(hereinafter called the "Warrant Price") shall be $______________ per Share. As
provided in said Warrant Agreement the Warrant Price is payable upon the
exercise of the Warrant, either in cash or by certified check or bank draft to
the order of the Company.
Under certain conditions set forth in the Warrant Agreement, this
Warrant may be called for redemption on or after ______________________, at a
redemption price of $0.01 per Warrant upon written notice of not less than 30
days.
Upon the exercise of this Warrant, the form of election to purchase on
the reverse hereof must be properly completed and executed. In the event that
this Warrant is exercised in respect to less than all of such Shares, a new
Warrant for the remaining number of Shares will be issued on such surrender.
This Warrant is issued under and the rights represented hereby are
subject to the terms and provisions contained in a Warrant Agreement dated as of
___________________ by and between the Company and American Stock Transfer &
Trust Company, as Warrant Agent (the "Warrant Agent"), all terms and provisions
of which the registered holder of this Warrant, by acceptance hereof, assents.
Reference is hereby made to said Warrant Agreement for a more complete statement
of the rights and limitations of rights of the registered holders hereof, the
rights and duties of the Warrant Agent and the rights and obligations of the
Company hereunder. Copies of said Warrant Agreement are on file at the office of
the Warrant Agent.
The Company shall not be required upon the exercise of this Warrant to
issue fractions of Shares, but shall make adjustments therefor in cash on the
basis of the then current market value of any fractional interest as provided in
the Warrant Agreement.
This Warrant is transferable at the office of the Warrant Agent (or of
its successor as Warrant Agent) by the registered holder hereof in person or by
attorney duly authorized in writing, but only in this manner and subject to the
limitations provided in the Warrant Agreement and upon surrender of this Warrant
and the payment of any transfer taxes. Upon any such transfer, a new Warrant, or
Warrants of different denominations, of this tenor and representing in the
aggregate the right to purchase a like number of Shares will be issued to the
transferee in exchange for this Warrant.
This Warrant may be transferred, when surrendered at the office of the
Warrant Agent or its successor as warrant agent by the registered holder hereof
in person or by attorney duly authorized in writing, but only in the manner and
subject to the limitations provided in the Warrant Agreement and upon surrender
of this Warrant Certificate and the payment of any transfer taxes. Upon any such
transfer, a new Warrant or, Warrants of different denominations, of this tenor
and representing in the aggregate the right to purchase a like number of Shares
equal to this number of such Warrants.
If this Warrant Certificate shall be surrendered for exercise within
any period during which the transfer books for the Company's Common Stock or
other securities purchasable upon exercise of the Warrants are closed for any
purpose, the Company shall not be required to make delivery of certificates for
the securities purchase upon such exercise until the date of the reopening of
said transfer books.
The holder of this Warrant shall not be entitled to any of the rights
of a shareholder of the Company prior to the exercise hereof.
This Warrant shall not be valid unless countersigned by the Warrant
Agent.
Witness the facsimile seal of the Company and the facsimile signatures
of its duly authorized officers.
DATED:
[SIGNATURE] [CORPORATE SEAL] [SIGNATURE]
DELCATH SYSTEMS, INC
ELECTION TO PURCHASE
To Be Executed by the Registered Holder In Order to Exercise Warrants
To: DELCATH SYSTEMS, INC.
c/o: American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant(s) for and to purchase thereunder,
________________ shares of Common Stock provided for therein and tenders
herewith payment of the purchase price in full to the order of the Company and
requests that certificates for such shares shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
- --------------------------------------------------------------------------------
(Please Print or Typewrite)
and be delivered to
------------------------------------------------------------
(Name)
at
-----------------------------------------------------------------------------
(Street Address) (City) (State) (Zip Code)
and, if said number of shares shall not be all the shares purchasable
thereunder, that a new Warrant for the balance remaining of the shares
purchasable under the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated: Signature:
------------------------------- -------------------------------
Note: The above signature must
Name: correspond with the name as
------------------------------- written upon the face of this
(Please Print or Typewrite) Warrant or with the name of the
assignee appearing in the
assignment from below in every
particular without alteration or
enlargement or any change
whatever.
*Signature Guaranteed:
--------------------
Address:
-----------------------------
(Street)
- ------------------------------------- --------------------------------------
(City) (State) (Zip Code) PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER
ASSIGNMENT
For value received: hereby sell, assign and
----------------------------------
transfer unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
- --------------------------------------------------------------------------------
Please Print or typewrite name and address including postal zip code of assignee
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
( ) Warrants represented by the within Warrant Certificate,
--------------------
together with all right, title and interest therein, and do hereby irrevocably
constitute and appoint
---------------------------------------------------------
attorney to transfer said Warrant on the books of the within named Company, with
full power of substitution in the premises,
Dated:
----------------------------
Signature:
--------------------------------
Note: The above signature must
correspond with the name as
written upon the face of the
Warrant in every particular
without alteration or
enlargement of any change
whatever.
*Signature Guaranteed:
--------------------
*In case of assignment or if the Common Stock issued upon exercise is to be
registered in the name of a person other than the holder, the holder's signature
must be guaranteed by a commercial bank, trust company or an NASD member firm.
WARRANT AGENT AGREEMENT
dated as of ___________, 2003
between
DELCATH SYSTEMS, INC.
and
AMERICAN STOCK TRANSFER & TRUST COMPANY
WARRANT AGENT AGREEMENT dated as of ____________, 2003, by and between
DELCATH SYSTEMS, INC., a Delaware corporation (the "Company"), and AMERICAN
STOCK TRANSFER & TRUST COMPANY, as warrant agent (hereinafter called the
"Warrant Agent").
WHEREAS, the Company proposes to issue and sell to the public up to
_____________ units (including up to __________ units that may be issued
pursuant to a Warrant Agreement dated _______________, 2003 between the Company
and Roan/Meyers Associates, L.P. (the Representative")) (the "Units") each Unit
consisting of five shares of the common stock of the Company, par value $.01 per
share (hereinafter, together with the stock of any other class to which such
shares may hereafter have been changed, the "Common Stock"), and five Common
Stock Purchase Warrants (the "Warrants");
WHEREAS, each Warrant will entitle the holder to purchase one share of
Common Stock;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and exercise of the Warrants;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
Section 1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints
the Warrant Agent to act as warrant agent for the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
Section 2. FORM OF WARRANT. The text of the Warrants and of the form of
election to purchase Common Stock to be printed on the reverse thereof shall be
2
substantially as set forth in Exhibit A attached hereto. Each Warrant shall
entitle the registered holder thereof to purchase one share of Common Stock at a
purchase price of ____________________ ($______) (or, in the case of Warrants
issued to the Representative, __________ ($______)), at any time commencing on
the date of issuance thereof and ending at 5:00 p.m. Eastern time, on ______,
___, 2008 (the "Warrant Exercise Period"). The Warrant Exercise Price and the
number of shares of Common Stock issuable upon exercise of the Warrants are
subject to adjustment upon the occurrence of certain events, all as hereinafter
provided. The Warrants shall be executed on behalf of the Company by the manual
or facsimile signature of the present or any future Chief Executive Officer,
President or Vice President of the Company, attested to by the manual or
facsimile signature of the present or any future Secretary or Assistant
Secretary of the Company.
Warrants shall be dated as of the issuance by the Warrant Agent either
upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration dates of the Warrants fall on a
Saturday or Sunday, or on a legal holiday on which the New York Stock Exchange
is closed, then the Warrants shall expire at 5:00 p.m. Eastern time on the next
succeeding business day.
Section 3. COUNTERSIGNATURE AND REGISTRATION. The Warrant Agent shall
maintain books for the transfer and registration of the Warrants. Upon the
initial issuance of the Warrants, the Warrant Agent shall issue and register the
Warrants in the names of the respective holders thereof. The Warrants shall be
countersigned manually or by facsimile by the Warrant Agent (or by any successor
to the Warrant Agent then acting as warrant agent under this Agreement) and
shall not be valid for any purpose unless so countersigned. Warrants may,
however, be so countersigned by the Warrant Agent (or by its successor as
warrant agent) and be delivered by the Warrant Agent, notwithstanding that the
persons whose manual or facsimile signatures appear thereon as proper officers
of the Company shall have ceased to be such officers at the time of such
countersignature or delivery.
Section 4. TRANSFERS AND EXCHANGES. The Warrant Agent shall transfer,
from time to time, any outstanding Warrants upon the books to be maintained by
the Warrant Agent for that purpose, upon surrender thereof for transfer properly
endorsed or accompanied by appropriate instructions for transfer. Upon any such
transfer, a new Warrant shall be issued to the transferee and the surrendered
Warrant shall be cancelled by the Warrant Agent. Warrants so cancelled shall be
delivered by the Warrant Agent to the Company from time to time upon request.
Warrants may be exchanged at the option of the holder thereof, when surrendered
at the office of the Warrant Agent, for another Warrant, or other Warrants of
different denominations of like tenor and representing in the aggregate the
right to purchase a like number of shares of Common Stock.
3
Section 5. EXERCISE OF WARRANTS. Subject to the provisions of this
Agreement, each registered holder of Warrants shall have the right, which may be
exercised commencing at the opening of business on the first day of the Warrant
Exercise Period, to purchase from the Company (and the Company shall issue and
sell to such registered holder of Warrants) the number of fully paid and
non-assessable shares of Common Stock specified in such Warrants upon surrender
of such Warrants to the Company at the office of the Warrant Agent, with the
form of election to purchase on the reverse thereof duly filled in and signed,
and upon payment to the Company of the Warrant Exercise Price, determined in
accordance with the provisions of Sections 9 and 10 of this Agreement, for the
number of shares of Common Stock in respect of which such Warrants are then
exercised. Payment of the Warrant Exercise Price shall be made in cash or by
certified check or bank draft to the order of the Company. Subject to Section 6,
upon such surrender of Warrants and payment of the Warrant Exercise Price, the
Company shall issue and cause to be delivered with all reasonable dispatch to or
upon the written order of the registered holder of such Warrants and in such
name or names as such registered holder may designate, a certificate or
certificates for the number of full shares of Common Stock so purchased upon the
exercise of such Warrants. Such certificate or certificates shall be deemed to
have been issued, and any person so designated to be named therein shall be
deemed to have become a holder of record of such shares of Common Stock, as of
the date of the surrender of such Warrants and payment of the Warrant Exercise
Price as aforesaid. The rights of purchase represented by the Warrants shall be
exercisable, at the election of the registered holders thereof, either as an
entirety or from time to time for a portion of the shares specified therein and,
in the event that any Warrant is exercised in respect of fewer than all of the
shares of Common Stock specified therein at any time prior to the end of the
Warrant Exercise Period, a new Warrant or Warrants will be issued to the
registered holder for the number of shares of Common Stock specified in the
Warrant so surrendered as to which the Warrant is not exercised, and the Warrant
Agent is hereby irrevocably authorized to countersign and to deliver the
required new Warrants pursuant to the provisions of this Section and of Section
3 of this Agreement and the Company, whenever requested by the Warrant Agent,
will supply the Warrant Agent with Warrants duly executed on behalf of the
Company for such purpose. Anything in the foregoing to the contrary
notwithstanding, no Warrant will be exercisable unless at the time of exercise
the Company has filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933, as amended (the "Act"), covering the
shares of Common Stock issuable upon exercise of such Warrant which registration
statement is effective as of the time of exercise and such shares have been so
registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder of such Warrant. The Company shall use its best
efforts to have all shares so registered or qualified on or before the date on
which the Warrants become exercisable.
Section 6. PAYMENT OF TAXES. The Company will pay any documentary stamp
taxes attributable to the initial issuance of Common Stock issuable upon the
exercise of Warrants; provided, however, that the Company shall not be required
to pay any tax
4
which may be payable in respect of any transfer involved in the issue or
delivery of any certificates for shares of Common Stock in a name other than
that of the registered holder of Warrants in respect of which such shares are
issued, and in such case neither the Company nor the Warrant Agent shall be
required to issue or deliver any certificate for shares of Common Stock or any
Warrant until the person requesting the same has paid to the Company the amount
of such tax or has established to the Company's satisfaction that such tax has
been paid.
Section 7. MUTILATED OR MISSING WARRANTS. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Company may, in its
discretion, issue and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but only
upon receipt of evidence satisfactory to the Company and the Warrant Agent of
such loss, theft or destruction and, in case of a lost, stolen or destroyed
Warrant, indemnity, if requested, also satisfactory to them. Applicants for such
substitute Warrants shall also comply with such other reasonable regulations and
pay such reasonable charges as the Company or the Warrant Agent may prescribe.
Section 8. RESERVATION OF COMMON STOCK. There have been reserved, and
the Company shall at all times keep reserved, out of the authorized and unissued
shares of Common Stock, a number of shares of Common Stock sufficient to provide
for the exercise of the rights of purchase represented by the Warrants, and the
transfer agent for the shares of Common Stock and every subsequent transfer
agent for any shares of the Common Stock issuable upon the exercise of any of
the rights of purchase aforesaid are irrevocably authorized and directed at all
times to reserve such number of authorized and unissued shares of Common Stock
as shall be required for such purpose. The Company agrees that all shares of
Common Stock issued upon exercise of the Warrants shall be, at the time of
delivery of the certificates for such shares, validly issued and outstanding,
fully paid and nonassessable and listed on any national securities exchange upon
which the other shares of Common Stock are then listed. So long as any unexpired
Warrants remain outstanding, the Company will file such post-effective
amendments to the registration statement (Form SB-2, Registration No.
333-101661) (the "Registration Statement") filed pursuant to the Act with
respect to the Warrants (or other appropriate registration statements or
post-effective amendments or supplements) as may be necessary to permit it to
deliver to each person exercising a Warrant, a prospectus meeting the
requirements of Section 10(a)(3) of the Act and otherwise complying therewith,
and will deliver such a prospectus to each such person. To the extent that
during any period it is not reasonably likely that the Warrants will be
exercised, due to market price or otherwise, the Company need not file such a
post-effective amendment during such period. The Company will keep a copy of
this Agreement on file with the transfer agent for the shares of Common Stock
and with every subsequent transfer agent for any shares of the Company's Common
Stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Warrant Agent is irrevocably authorized to requisition from time
to time from such transfer
5
agent stock certificates required to honor outstanding Warrants. The Company
will supply such transfer agent with duly executed stock certificates for that
purpose. All Warrants surrendered in the exercise of the rights thereby
evidenced shall be cancelled by the Warrant Agent and shall thereafter be
delivered to the Company, and such cancelled Warrants shall constitute
sufficient evidence of the number of shares of Common Stock which have been
issued upon the exercise of such Warrants. Promptly after the date of expiration
of the Warrants, the Warrant Agent shall certify to the Company the total
aggregate number of Warrants then outstanding, and thereafter no shares of
Common Stock shall be subject to reservation in respect of such Warrants which
shall have expired.
Section 9. WARRANT EXERCISE PRICE; ADJUSTMENTS.
(a) The Warrant Exercise Price shall be $_________ per share or after
adjustment, as provided in this Section, shall be such price as so adjusted.
(b) The Warrant Exercise Price shall be subject to adjustment from time to
time as follows:
(i) In case the Company shall at any time after the date hereof pay a
dividend in shares of Common Stock or make a distribution in shares of Common
Stock, then upon such dividend or distribution the Warrant Exercise Price in
effect immediately prior to such dividend or distribution shall forthwith be
reduced to a price determined by dividing:
(A) an amount equal to the total number of shares of Common Stock
outstanding immediately prior to such dividend or distribution multiplied by the
Warrant Exercise Price in effect immediately prior to such dividend or
distribution, by
(B) the total number of shares of Common Stock outstanding
immediately after such dividend or distribution.
For the purposes of any computation to be made in accordance with the
provisions of this Section 9(b)(i), the following provisions shall be
applicable: Common Stock issuable by way of dividend or other distribution on
any stock of the Company shall be deemed to have been issued immediately after
the opening of business on the date following the date fixed for the
determination of stockholders entitled to receive such dividend or other
distribution.
(ii) In case the Company shall at any time subdivide or combine the
outstanding Common Stock, the Warrant Exercise Price shall forthwith be
proportionately decreased in the case of subdivision or increased in the case of
combination to the nearest one cent. Any such adjustment shall become effective
at the time such subdivision or combination shall become effective.
6
(iii) Within a reasonable time after the close of each quarterly fiscal
period of the Company during which the Warrant Exercise Price has been adjusted
as herein provided, the Company shall:
(A) file with the Warrant Agent a certificate signed by the Chief
Executive Officer, President or Vice President of the Company and by the Chief
Financial Officer, Principal Accounting Officer, Treasurer or Assistant
Treasurer of the Company, showing in detail the facts requiring all such
adjustments occurring during such period and the Warrant Exercise Price after
each such adjustment; and
(B) the Warrant Agent shall have no duty with respect to any such
certificate filed with it except to keep the same on file and available for
inspection by holders of Warrants during reasonable business hours, and the
Warrant Agent may conclusively rely upon the latest certificate furnished to it
hereunder. The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of a Warrant to determine whether any facts exist
which may require any adjustment of the Warrant Exercise Price, or with respect
to the nature or extent of any adjustment of the Warrant Exercise Price when
made, or with respect to the method employed in making any such adjustment, or
with respect to the nature or extent of the property or securities deliverable
hereunder. In the absence of a certificate's having been furnished, the Warrant
Agent may conclusively rely upon the provisions of the Warrants with respect to
the Common Stock deliverable upon the exercise of the Warrants and the
applicable Warrant Exercise Price.
(iv) Notwithstanding anything contained herein to the contrary, no
adjustment of the Warrant Exercise Price shall be made if the amount of such
adjustment shall be less than $0.02, but in such case any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time and together with the next subsequent adjustment which, together
with any adjustment so carried forward, shall amount to not less than $0.02.
(v) In the event that the number of outstanding shares of Common Stock
is increased by a stock dividend payable in Common Stock or by a subdivision of
the outstanding Common Stock, then, from and after the time at which the
adjusted Warrant Exercise Price becomes effective pursuant to this Section 9(b)
by reason of such dividend or subdivision, the number of shares of Common Stock
issuable upon the exercise of each Warrant shall be increased in proportion to
such increase in outstanding shares. In the event that the number of shares of
Common Stock outstanding is decreased by a combination of the outstanding Common
Stock, then, from and after the time at which the adjusted Warrant Exercise
Price becomes effective pursuant to this Section 9(b) by reason of such
combination, the number of shares of Common Stock issuable upon the exercise of
each Warrant shall be decreased in proportion to such decrease in the
outstanding shares of Common Stock.
7
(vi) In case of any reorganization or reclassification of the
outstanding Common Stock (other than a change in par value, or from par value to
no par value, or as a result of a subdivision or combination), or in case of any
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification of the
outstanding Common Stock), or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, the holder of each Warrant then outstanding shall thereafter have the
right to purchase the kind and amount of shares of Common Stock and other
securities and property receivable upon such reorganization, reclassification,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock which the holder of such Warrant shall then be entitled to
purchase; such adjustments shall apply with respect to all such changes
occurring between the date of this Warrant Agreement and the date of exercise of
such Warrant.
(vii) Subject to the provisions of this Section 9, in case the Company
shall, at any time prior to the exercise of the Warrants, make any distribution
of its assets to holders of its Common Stock as a liquidating or a partial
liquidating dividend, then the holder of Warrants who exercises its Warrants
after the record date for the determination of those holders of Common Stock
entitled to such distribution of assets as a liquidating or partial liquidating
dividend shall be entitled to receive for the Warrant Exercise Price per
Warrant, in addition to each share of Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith) which would have been payable to such
holder had such holder been the holder of record of the Common Stock receivable
upon exercise of its Warrant on the record date for the determination of those
entitled to such distribution.
(viii) In case of the dissolution, liquidation or winding up of the
Company, all rights under the Warrants shall terminate on a date fixed by the
Company, such date to be no earlier than ten (10) days prior to the
effectiveness of such dissolution, liquidation or winding up and not later than
five (5) days prior to such effectiveness. Notice of such termination of
purchase rights shall be given to the last registered holder of the Warrants, as
the same shall appear on the books of the Company maintained by the Warrant
Agent, by registered mail at least thirty (30) days prior to such termination
date.
(ix) In case the Company shall, at any time prior to the expiration of
the Warrants and prior to the exercise thereof, offer to the holders of its
Common Stock any rights to subscribe for additional shares of any class of the
Company, then the Company shall give written notice thereof to the registered
holders of the Warrants not less than thirty (30) days prior to the date on
which the books of the Company are closed or a record date is fixed for the
determination of the stockholders entitled to such subscription rights. Such
notice shall specify the date as to which the books shall be closed or the
record date fixed with respect to such offer of subscription and the right of
the holders of the Warrants
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to participate in such offer of subscription shall terminate if the Warrant
shall not be exercised on or before the date of such closing of the books or
such record date.
(x) Any adjustment pursuant to the aforesaid provisions of this Section
9 shall be made on the basis of the number of shares of Common Stock which the
holder thereof would have been entitled to acquire upon the exercise of the
Warrant immediately prior to the event giving rise to such adjustment.
(xi) Irrespective of any adjustments in the Warrant Exercise Price or
the number or kind of shares purchasable upon exercise of the Warrants, Warrants
previously or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Warrant Agreement.
(xii) The Company may retain a firm of independent public accountants
(who may be any such firm regularly employed by the Company) to make any
computation required under this Section 9, and any certificate setting forth
such computation signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section 9.
(xiii) If at any time, as a result of an adjustment made pursuant to
Section 9(b)(vi) above, the holder of a Warrant or Warrants shall become
entitled to purchase any securities other than shares of Common Stock,
thereafter the number of such securities so purchasable upon exercise of each
Warrant and the Warrant Exercise Price for such securities shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
Sections 9(b)(ii) through (v).
Section 10. FRACTIONAL INTEREST. The Warrants may only be exercised to
purchase full shares of Common Stock and the Company shall not be required to
issue fractions of shares of Common Stock on the exercise of Warrants. However,
if a Warrant holder exercises all Warrants then owned of record by it and such
exercise would result in the issuance of a fractional share, the Company will
pay to such Warrant holder, in lieu of the issuance of any fractional share
otherwise issuable, an amount of cash based on the market value of the Common
Stock of the Company on the last trading day prior to the exercise date.
Section 11. NOTICES TO WARRANTHOLDERS.
(a) Upon any adjustment of the Warrant Exercise Price and the number of
shares of Common Stock issuable upon exercise of a Warrant, then and in each
such case the Company shall give written notice thereof to the Warrant Agent,
which notice shall state the Warrant Exercise Price resulting from such
adjustment and the increase or decrease, if any, in the number of shares
purchasable at such price upon the exercise of a Warrant, setting forth in
reasonable detail the method of calculation and the facts upon
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which such calculation is based. The Company shall also mail such notice to the
holders of the Warrants at their addresses appearing in the Warrant register.
Failure to give or mail such notice, or any defect therein, shall not affect the
validity of the adjustments.
(b) In case at any time:
(i) the Company shall pay dividends payable in stock upon its Common
Stock or make any distribution (other than regular cash dividends) to the
holders of its Common Stock; or
(ii) the Company shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or other rights;
or
(iii) there shall be any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with, or sale of substantially all of its assets to, another corporation; or
(iv) there shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Company;
then in any one or more of such cases, the Company shall give written notice in
the manner set forth in Section 11(a) of the date on which (A) a record shall be
taken for such dividend, distribution or subscription rights, or (B) such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up shall take place, as the case may be. Such notice
shall also specify the date as of which the holders of Common Stock of record
shall participate in such dividend, distribution or subscription rights, or
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be. Such
notice shall be given at least thirty (30) days prior to the action in question
and not less than thirty (30) days prior to any record date in respect thereof.
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of any of the matters set forth in this Section 11(b).
(c) The Company shall cause copies of all financial statements and reports,
proxy statements and other documents that are sent to its stockholders to be
sent by first-class mail, postage prepaid to each registered holder of Warrants
at his address appearing in the warrant register as of the record date for the
determination of the stockholders entitled to such documents.
Section 12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS.
(i) The Warrant Agent shall promptly forward to the Company all monies
received by the Warrant Agent for the purchase of shares of Common Stock through
the exercise of Warrants.
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(ii) The Warrant Agent shall keep copies of this Agreement available
for inspection by holders of Warrants during normal business hours.
Section 13. REDEMPTION OF WARRANTS. The Warrants are redeemable by the
Company, in whole or in part, on not less than thirty (30) days' prior written
notice at a redemption price of $0.01 per Warrant at any time commencing on
_____, ___, 2004; provided that (i) the average closing bid quotation for the
Common Stock for the twenty (20) trading days prior to the day on which the
Company gives notice (the "Call Date") of redemption has been at least
$_____________ [200% of public unit offering price] and (ii) there is an
effective registration statement under the Act covering the offer and sale of
shares of Common Stock upon exercise of the Warrants. The redemption notice
shall be mailed to the holders of the Warrants at their addresses appearing in
the Warrant register. Holders of the Warrants will have exercise rights until
the close of business on the date fixed for redemption.
Section 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT.
Any corporation or company which may succeed to the corporate trust business of
the Warrant Agent by any merger or consolidation or otherwise shall be the
successor as the warrant agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided that
such corporation would be eligible to serve as a successor Warrant Agent under
the provisions of Section 16 of this Agreement. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement, any of the Warrants shall have been countersigned but not delivered,
any such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent and deliver such Warrants so countersigned.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrants so countersigned. In all such cases such Warrants shall
have the full force provided in the Warrants and in this Agreement.
Section 15. DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrants, by their
acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained herein and in the
Warrants shall be taken as statements of the Company, and the Warrant Agent
assumes no responsibility for the correctness of any of the same except such as
describe the Warrant Agent or action taken or to be taken by it. The Warrant
Agent assumes no responsibility with respect to the distribution of the Warrants
except as herein expressly provided.
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(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants in this Agreement or in the Warrants
to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel satisfactory to
it (who may be counsel for the Company) and the Warrant Agent shall incur no
liability or responsibility to the Company or to any holder of any Warrant in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in accordance with the opinion or the advice of such counsel.
(d) The Warrant Agent shall incur no liability or responsibility to the
Company or to any holder of any Warrant for any action taken in reliance on any
notice, resolution, waiver, consent, order, certificate or other instrument
believed by it to be genuine and to have been signed, sent or presented by the
proper party or parties.
(e) The Company agrees to pay to the Warrant Agent reasonable compensation
for all services rendered by the Warrant Agent in the execution of this
Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and other charges incurred by the Warrant Agent in the
execution of this Agreement and to indemnify the Warrant Agent and save it
harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation to institute any action,
suit or legal proceeding or to take any other action likely to involve expenses
unless the Company or one or more registered holders of Warrants shall furnish
the Warrant Agent with reasonable security and indemnity for any costs and
expenses which may be incurred, but this provision shall not affect the power of
the Warrant Agent to take such action as the Warrant Agent may consider proper,
whether with or without any such security or indemnity. All rights of action
under this Agreement or under any of the Warrants may be enforced by the Warrant
Agent without the possession of any of the Warrants or the production thereof at
any trial or other proceeding, and any such action, suit or proceeding
instituted by the Warrant Agent shall be brought in its name as Warrant Agent,
and any recovery of judgment shall be for the ratable benefit of the registered
holders of the Warrants, as their respective rights and interests may appear.
(g) The Warrant Agent and any stockholder, director, officer, partner or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it were not the Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.
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(h) The Warrant Agent shall act hereunder solely as agent and its duties
shall be determined solely by the provisions hereof.
(i) The Warrant Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys, agents or employees, and the Warrant Agent shall not be
answerable or accountable for any such attorneys, agents or employees or for any
loss to the Company resulting from such neglect or misconduct, provided
reasonable care had been exercised in the selection and continued employment
thereof.
(j) Any request, direction, election, order or demand of the Company shall
be sufficiently evidenced by an instrument signed in the name of the Company by
its Chief Executive Officer, President or a Vice President or its Secretary or
an Assistant Secretary or its Treasurer or an Assistant Treasurer (unless other
evidence in respect thereof be herein specifically prescribed); and any
resolution of the Board of Directors may be evidenced to the Warrant Agent by a
copy thereof certified by the Secretary or an Assistant Secretary of the
Company.
Section 16. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and
be discharged from its duties under this Agreement by giving to the Company
notice in writing, and to the holders of the Warrants notice by mailing such
notice to the holders at their addresses appearing on the Warrant register, of
such resignation, specifying a date when such resignation shall take effect. The
Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and the like mailing of notice to the holders of the Warrants. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after such removal or after it has been notified in writing of such resignation
or incapacity by the resigning or incapacitated Warrant Agent or after the
Company has received such notice from a registered holder of a Warrant (who
shall, with such notice, submit his Warrant for inspection by the Company), then
the registered holder of any Warrant may apply to any court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Any
successor Warrant Agent, whether appointed by the Company or by such a court,
shall be a bank or trust company, in good standing, incorporated under New York
or federal law. After appointment, the successor Warrant Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant Agent without further act or deed and the former
Warrant Agent shall deliver and transfer to the successor Warrant Agent all
cancelled Warrants, records and property at the time held by it hereunder, and
execute and deliver any further assurance or conveyance necessary for the
purpose. Failure to file or mail any notice provided for in this Section,
however, or any defect therein, shall not affect the validity of the resignation
or removal of the Warrant Agent or the appointment of the successor Warrant
Agent, as the case may be.
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Section 17. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment
of any transfer agent for the shares of Common Stock or of any subsequent
transfer agent for the shares of Common Stock or other shares of Common Stock
issuable upon the exercise of the rights of purchase represented by the
Warrants, the Company will file with the Warrant Agent a statement setting forth
the name and address of such transfer agent.
Section 18. NOTICES. Any notice pursuant to this Agreement to be given
by the Warrant Agent or by the registered holder of any Warrant to the Company
shall be sufficiently given if sent by first-class mail, postage prepaid,
addressed (until another is filed in writing by the Company with the Warrant
Agent) as follows:
Delcath Systems, Inc.
1100 Summer Street
Stamford, Connecticut 06905
Attention: M. S. Koly
Chief Executive Officer
and a copy thereof to:
Cummings & Lockwood LLC
Four Stamford Plaza
107 Elm Street
Stamford, Connecticut 06902
Attention: Paul G. Hughes, Esq.
Any notice pursuant to this Agreement to be given by the Company or by
the registered holder of any Warrant to the Warrant Agent shall be sufficiently
given if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing by the Warrant Agent with the Company) as follows:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attention: [Michael Karfunkel]
Section 19. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement in order to cure
any ambiguity or to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provision herein, or to make any
other provisions with respect to matters or questions arising hereunder which
the Company and the Warrant Agent may deem necessary or desirable and which
shall not be inconsistent with the provisions of the Warrants and which shall
not adversely affect the interest of the holders of Warrants.
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Section 20. NEW YORK CONTRACT. This Agreement and each Warrant issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and shall be construed in accordance with the laws of New York
applicable to agreements to be performed wholly within New York.
Section 21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent and the registered
holders of the Warrants.
Section 22. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company, the Warrant Agent or the
Underwriter shall bind and inure to the benefit of their respective successors
and assigns hereunder.
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date first above written.
DELCATH SYSTEMS, INC.
By: ______________________________
Name:
Title:
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By: ______________________________
Name:
Title: