SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14a INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
HALSEY DRUG CO., INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the
Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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HALSEY DRUG CO., INC.
616 N. NORTH COURT, SUITE 120
PALATINE, ILLINOIS 60067
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 2004 Annual Meeting of Shareholders (the
"Meeting") of Halsey Drug Co., Inc., a New York corporation, doing business as
Halsey Pharmaceuticals (the "Company"), will be held at the Wyndham Newark
Airport Hotel, 1000 Spring Street, Elizabeth, New Jersey 07201 on August 12,
2004 at 11:00 a.m., Eastern Time, for the purposes listed below:
1. To elect six directors to the Board of Directors who shall serve
until the 2005 Annual Meeting of Shareholders, or until their successors
have been elected and qualified;
2. To amend and restate the Company's Certificate of Incorporation
(the "Charter") to (i) increase the number of authorized shares of its $.01
par value common stock (the "Common Stock") from 80.0 million shares to
650.0 million shares, (ii) authorize 290.0 million shares of preferred
stock (collectively, the "Preferred Stock"), of which 45.0 million shares
shall be designated series A convertible preferred stock, $.01 par value
per share (the "Series A Preferred"), 25.0 million shares shall be
designated series B convertible preferred stock $.01 par value per share
(the "Series B Preferred"), 70.0 million shares shall be designated series
C-1 convertible preferred stock, $.01 par value per share (the "Series C-1
Preferred"), 50.0 million shares shall be designated series C-2 convertible
preferred stock, $.01 par value per share (the "Series C-2 Preferred") and
100.0 million shares shall be designated series C-3 convertible preferred
stock, $.01 par value per share (the "Series C-3 Preferred"), and (iii)
eliminate the voting rights of the holders of the Company's outstanding 5%
convertible senior secured debentures issued in 1998 and 1999 and having a
maturity date of March 31, 2006;
3. To authorize an amendment to the Charter to change the name of the
Company from Halsey Drug Co., Inc. to Acura Pharmaceuticals, Inc.;
4. To approve the sale of substantially all of the assets used in the
Company's manufacturing, labeling, packaging, storage, distribution and
sale of finished dosage generic pharmaceutical products at its Congers, New
York locations pursuant to an asset purchase agreement between the Company
and IVAX Pharmaceuticals New York LLC;
5. To adopt an amendment to the Company's 1998 Stock Option Plan to
(a) increase the number of shares available for grant under the Plan, (b)
permit the grant of non-qualified stock options having an exercise price
per share which is less than the fair market value of the Company's Common
Stock, and (c) set a limit of 8,750,000 option awards that may be granted
to one individual in any calendar year;
6. To ratify the appointment of Grant Thornton LLP as the Company's
independent certified public accountants for the fiscal year ending
December 31, 2004; and
7. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
Only shareholders of record at the close of business on July 6, 2004 are
entitled to notice of and to vote at the Meeting or any adjournment thereof.
For a period of 10 days prior to the Meeting, a shareholders list will be
kept at the Company's administrative office and shall be available for
inspection by shareholders during normal business hours. A shareholders list
shall also be present and available for inspection at the Meeting.
Your attention is directed to the accompanying Proxy Statement for the text
of the resolutions to be proposed at the Meeting and further information
regarding each proposal to be made.
SHAREHOLDERS UNABLE TO ATTEND THE MEETING ARE URGED TO COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. IF YOU ATTEND
THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU WISH.
By Order of the Board of Directors
JERRY KARABELAS
Chairman
July 6, 2004
Palatine, Illinois
HALSEY DRUG CO., INC.
616 N. NORTH COURT, SUITE 120
PALATINE, ILLINOIS 60067
PROXY STATEMENT
2004 ANNUAL MEETING OF SHAREHOLDERS
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Halsey Drug Co., Inc., doing business as Halsey
Pharmaceuticals (the "Company") of proxies in the accompanying form, to be voted
at the 2004 Annual Meeting of Shareholders of the Company (the "Meeting") to be
held on August 12, 2004, and at any adjournment(s) thereof, for the purposes set
forth in the accompanying Notice of Annual Meeting of Shareholders. This Proxy
Statement and the form of proxy were first mailed to shareholders on or about
July 6, 2004.
The close of business on July 6, 2004 has been fixed as the record date
(the "Record Date") for the determination of shareholders entitled to notice of
and to vote at the Meeting. On the Record Date, the Company's outstanding voting
securities consisted of 66,453,864 shares of common stock, $.01 par value per
share (the "Common Stock"), which is comprised of 21,927,944 shares of Common
Stock issued and outstanding and 44,525,920 shares of Common Stock underlying
the Company's issued and outstanding 5% convertible senior secured debentures
issued by the Company in 1998 and 1999 (including debentures issued in
satisfaction of interest payments under such debentures) (collectively, the
"1998 and 1999 Debentures") for which the holders of the 1998 and 1999
Debentures are entitled to vote on shareholder matters on an as-converted basis.
Under the New York Business Corporation Law and the Company's Certificate of
Incorporation and Bylaws, each stockholder will be entitled to one vote for each
share of Common Stock held at the Record Date, and each holder and the holders
of the 1998 and 1999 Debentures will be entitled to one vote for each share of
Common Stock into which such debenture holder's 1998 and 1999 Debentures are
convertible at the Record Date, for all matters, including the election of
directors. The required quorum for the transaction of business at the Meeting is
a majority of the votes eligible to be cast by holders of shares of Common Stock
and holders of 1998 and 1999 Debentures issued and outstanding on the Record
Date. Shares that are voted "FOR," "AGAINST," "WITHHELD" or "ABSTAIN" are
treated as being present at the Meeting for the purposes of establishing a
quorum and are also treated as shares entitled to vote at the Meeting (the
"Votes Cast") with respect to such matter. Abstentions will have the same effect
as voting against a proposal. Broker non-votes will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business,
but such non-votes will not be counted for purposes of determining the number of
Votes Cast with respect to the particular proposal on which a broker has
expressly not voted. Thus a broker non-vote will not effect the outcome of the
voting on a proposal. Holders of Common Stock and the holders of the 1998 and
1999 Debentures have no cumulative voting rights in the election of directors.
TABLE OF CONTENTS
ITEM PAGE
---- ----
Summary of the Transaction for the Sale of Assets located at our Congers, New 4
York Facilities..............................................................
Voting of Proxies............................................................ 8
The Board of Directors....................................................... 8
Proposal 1 -- Election of Directors....................................... 11
-- Executive Officers and Key Employees........................ 12
-- Agreements Governing Appointment of Directors............... 13
Compensation of Executive Officers and Directors............................. 14
Summary Compensation Table................................................... 14
-- Other Compensatory Arrangements............................. 14
-- Employment Agreements....................................... 15
-- Compensation of Directors................................... 17
-- Stock Option Plans.......................................... 17
-- Securities Authorized for Issuance Under Equity Compensation
Plans....................................................... 18
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option 19
Values.....................................................................
Compensation Committee Interlocks and Insider Participation.................. 19
Section 16(a) Beneficial Ownership Reporting Compliance...................... 19
Report of the Compensation Committee on Executive Compensation............... 20
Performance Graph............................................................ 23
Certain Relationships and Related Transactions............................... 23
Vote Required................................................................ 27
Proposal 2 -- Amendment to Certificate of Incorporation to Increase
Authorized Capital Stock.................................... 27
-- General..................................................... 28
-- Background.................................................. 28
-- Negotiations Between the Company and the Lead 2004
Investors................................................... 29
-- 2004 Debenture Offering..................................... 36
-- Dilution to Common Shareholders and Holders of the 1998-2002
Debentures.................................................. 38
-- Proceeds of 2004 Debenture Offering......................... 38
-- Description of Charter Amendment............................ 39
-- Board Recommendation........................................ 41
-- Description of Debentures................................... 41
-- Terms of Preferred Stock.................................... 48
-- Board Approval of the Charter Amendment..................... 53
-- Effect of the Charter Amendment............................. 59
-- Interests of Investors in the 2004 Debenture Offering....... 63
-- Vote Required............................................... 64
-- Dissenting Shareholders' Right of Appraisal................. 64
Proposal 3 -- Amendment to Certificate of Incorporation to Change the Name
of the Company.............................................. 67
Proposal 4 -- Sale of the Assets used in our Generic Finished Dosage
Product Operations Located in Congers, New York............. 68
-- The Companies............................................... 68
-- Background of the Sale of Assets used in the Operation of
the Congers Facilities...................................... 71
-- Reasons for the Sale of the Congers Facilities Assets....... 76
-- Recommendation of the Board of Directors.................... 79
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ITEM PAGE
---- ----
-- Proceeds of the Sale of the Congers Facilities Assets....... 79
-- Shareholder Approval of the Sale of the Congers Facilities
Assets; Vote Required....................................... 80
-- Dissenter's Rights.......................................... 80
-- Regulatory Matters.......................................... 82
-- Accounting Treatment........................................ 82
-- Material United States Federal Income Tax Consequences...... 82
-- Voting Agreement............................................ 83
-- Special Considerations Shareholders Should Take into Account
in Deciding How to Vote on the Proposal to Sell the Assets
Used in the Operation of the Congers Facilities............. 83
-- Special Considerations Regarding the Proposal to Sell the
Congers Facilities Assets................................... 84
-- Special Considerations Relating to the Company if the Assets
Used in the Operation of the Congers Facilities are Sold.... 85
-- The Asset Purchase Agreement................................ 89
-- Cautionary Statements Concerning Forward Looking
Information................................................. 96
-- Selected Historical Consolidated Financial Data............. 97
Proposal 5 -- Amendment to the Company's 1998 Stock Option Plan........... 97
-- Administration.............................................. 99
-- Shares Subject to the 1998 Plan............................. 100
-- Eligibility................................................. 100
-- Exercise Price of Options................................... 100
-- Terms....................................................... 101
-- Exercise of Options......................................... 101
-- Federal Income Tax Consequences Relating to Incentive Stock
Options..................................................... 101
-- Federal Income Tax Consequences Relating to Non-Qualified
Stock Options............................................... 102
-- Previously Granted Options.................................. 103
-- 2003 and 2004 Stock Option Commitments...................... 103
-- Amendments and Discontinuance of the 1998 Plan.............. 104
-- Vote Required............................................... 104
-- Recommendation of the Board of Directors.................... 105
Proposal 6 -- Ratification of Appointment of Independent Certified Public
Accountants................................................. 105
-- Audit Fees.................................................. 105
-- Audit-Related Fees.......................................... 105
-- Tax Fees.................................................... 105
-- All Other Fees.............................................. 105
-- Audit Committee's Pre-Approval Policies and Procedures...... 105
-- Audit Committee Report...................................... 106
-- Recommendation of the Board of Directors.................... 106
Security Ownership of Certain Beneficial Owners and Management............... 107
General...................................................................... 110
Shareholder Proposals for 2005 Annual Meeting................................ 111
Appendix A -- Charter of Audit Committee..................................... A-1
Appendix B -- Section 623 of the New York Business Corporation Law relating
to Dissenters' Appraisal Rights............................................ B-1
Appendix C -- Restated Certificate of Incorporation.......................... C-1
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ITEM PAGE
---- ----
Appendix D -- Fairness Opinion............................................... D-1
Appendix E -- Resolutions of Independent Committee of Board of Directors..... E-1
Appendix F -- Amended 1998 Stock Option Plan................................. F-1
Appendix G -- Debenture and Share Purchase Agreement......................... G-1
Appendix H -- Form of 2004 Debenture......................................... H-1
Appendix I -- Asset Purchase Agreement....................................... I-1
Appendix J -- Voting Agreement Relating to Charter Amendment................. J-1
Appendix K -- Voting Agreement Relating to Sale of Congers Assets............ K-1
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SUMMARY OF THE TRANSACTION FOR THE SALE OF ASSETS
LOCATED AT OUR CONGERS, NEW YORK FACILITIES
The following summary describes the material terms of the proposed sale of
substantially all of the assets located at our Congers, New York locations to
IVAX Pharmaceuticals New York LLC ("IVAX"), a wholly-owned subsidiary of IVAX
Corporation. This summary does not contain all of the information that may be
important for you to consider when evaluating the proposed transaction. We
encourage you to read the entire Proxy Statement (including the Asset Purchase
Agreement attached as Appendix I) before voting.
We have entered into an Asset Purchase Agreement with IVAX, dated March 19,
2004, pursuant to which we will sell and transfer to IVAX substantially all of
the assets used in the Company's manufacturing, labeling, packaging, storage,
distribution and sale of finished dosage generic pharmaceutical products located
at our Congers, New York locations (collectively, the "Congers Assets").
THE PARTIES TO THE ASSET PURCHASE AGREEMENT (SEE PAGE 68)
Halsey Drug Co., Inc.
616 N. North Court, Suite 120
Palatine, Illinois 60067
Telephone: (847) 705-7709
Website: www.halseydrug.com
The Company is engaged in the development of proprietary opioid synthesis
technologies for manufacturing of active pharmaceutical ingredients ("APIs") and
abuse deterrent formulation technologies for use in orally administered opioid
containing pharmaceutical products. The Company conducts research and
development activities at its Culver, Indiana facility. The Culver facility is
approved by the U.S. Drug Enforcement Administration ("DEA") for research,
development and manufacturing Schedule II to V controlled substances in bulk and
finished dosage forms. The Company, through its wholly-owned subsidiary, Houba,
Inc., has made an application to the DEA for registration to import narcotic raw
materials directly from foreign sources for use in the Company's API
manufacturing process development and manufacturing activities at the Culver,
Indiana facility. In the event the Company is successful in developing and
scaling up for commercial production its API and finished dosage formulation
technologies, the Company will enter into license and supply agreements with
strategic partners providing that such partners will further develop orally
administered products incorporating the Company's abuse deterrent formulation
technologies, file for applicable regulatory approval and market and sell such
products. It is the Company's intention to manufacture clinical trial supplies
for use in obtaining regulatory approvals and commercial supplies of such
products for marketing, sale and distribution by the Company's licensees.
IVAX Pharmaceuticals New York LLC
77 Brenner Drive
Congers, New York 10920
Telephone: (305) 575-6000
IVAX , a wholly-owned subsidiary of IVAX Corporation, was formed for the
purpose of completing the purchase of the assets used in the operation of the
Congers Facilities. IVAX Corporation is a multi-national company engaged in the
research, development, manufacturing and marketing of branded and generic
pharmaceuticals and veterinary products in the United States and
internationally. IVAX Corporation has direct operations in 30 countries and
markets its products in more than 80 countries around the world.
REASONS FOR THE SALE OF THE CONGERS FACILITIES ASSETS (SEE PAGE 76)
We are proposing to sell the Congers Assets to IVAX because we believe that
the sale and the terms of the related Asset Purchase Agreement are in the best
interests of our Company and our shareholders. The
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Board of Directors has identified various benefits that are likely to result
from the sale of the Congers Assets. The Board of Directors believes that the
sale of the Congers Assets will:
- Allow us to direct our resources to what the Board of Directors believes
are the potentially better overall returns that may be derived from the
development and commercialization of our proprietary opioid API synthesis
and finished dosage formulation technologies while increasing our cash
balance, reducing our cash burn and eliminating expenses primarily
associated with the operation of the Congers Assets in the manufacture
and sale of a variety of prescription and over-the-counter generic drugs;
- Provide an improved organizational focus and free up senior management
from directing the operation of multiple development, manufacturing and
administrative locations;
- Allow us to focus on a streamlined business strategy that the Board of
Directors believes will provide competitive advantages potentially
leading to greater returns for our shareholders; and
- Allow us to increase our cash reserves by approximately $2.35 million
(net of expenses) and thereby providing greater flexibility to develop
and, if successful in development, commercialize opioid APIs and finished
dosage pharmaceutical products incorporating our proprietary opioid
synthesis and finished dosage formulation technologies.
In reaching the conclusion that the sale of the Congers Assets to IVAX
pursuant to the related Asset Purchase Agreement was in the best interests of
our Company and our shareholders, the Board did, however, consider the potential
adverse effects of other factors relating to the proposed asset sale, including:
- The risk that, after the asset sale, the Company will have no ability to
manufacture finished dosage generic products and that all of the
Company's previous revenue generating products will have been sold;
- The fact that the finished dosage manufacturing, packaging, labeling and
distribution operations conducted at the Congers Facilities represented
essentially all of the Company's product revenues for fiscal 2003 and
2002;
- The risk that the Company will be able to develop and commercialize the
Company's proprietary technologies;
- The fact that in the absence of the Company's ability to successfully
develop and commercialize the Company's proprietary technologies, the
Company will have no ability to generate revenues from sales of generic
products to partially offset operating expenses; and
- The risk that the Company's cash resources to fund the development and
commercialization of the Company's proprietary technologies and
continuing operating losses may be insufficient to sustain the Company's
cash needs until such time as revenues may be generated from such
technologies.
These and other reasons for approving and recommending the sale of our
Congers Assets are discussed further under Proposal 4 of this Proxy Statement.
PROCEEDS FROM THE SALE OF OUR CONGERS ASSETS (SEE PAGE 79)
Our Company will retain the proceeds of the sale of our Congers Assets. We
do not intend to distribute any of the proceeds to our shareholders, but will
use the proceeds along with our cash and cash equivalents, in implementing our
future business plans, including the development and commercialization of our
proprietary opioid synthesis and finished dosage formulation technologies.
TERMS OF ASSET PURCHASE AGREEMENT (SEE PAGE 89)
WHAT WE WILL RECEIVE (SEE PAGE 90)
IVAX will acquire all of the Congers Assets for the sum of $2.5 million and
the assumption of certain contractual liabilities related to operation of such
assets. We received $2.0 million of the purchase price at the
5
time of the signing of the Asset Purchase Agreement. The remaining $0.5 million
will be paid at the closing of the asset sale following receipt of shareholder
approval to sell the Congers Assets.
We believe the source of the funds from which IVAX will pay the cash
consideration for the Congers Assets will be from IVAX' working capital.
WHAT IS BEING SOLD (SEE PAGE 89)
We are selling to IVAX substantially all of the assets used in
manufacturing, labeling, packaging, distributing and selling finished dosage
generic pharmaceutical products located at our Congers, New York locations.
These assets include the leases to both of our facilities in Congers, New York,
consisting of our facility located on Brenner Drive (the "Brenner Drive
Facility"), including our option to purchase the Brenner Drive Facility, and our
lease agreement for our facility located on Wells Avenue (the "Wells Avenue
Facility"), as well as all of our equipment, manufacturing information relating
to such equipment, intellectual property, regulatory approvals, licenses,
registrations and supporting documentation and records relating to certain
generic products manufactured at the Brenner Drive Facility.
WHEN WILL THE ASSET SALE BE COMPLETED (PAGE 90)
The closing of the asset sale transaction will take place three business
days following our receipt of shareholder approval of the proposal to sell the
Congers Assets. In accordance with the terms of a use and license agreement
between us and IVAX, IVAX is permitted to use the Congers Assets from the date
of signing of the Asset Purchase Agreement until the closing of the asset sale
following receipt of shareholder approval.
ASSUMED LIABILITIES (PAGE 90)
As partial consideration for the purchase of our Congers Assets, at the
signing of the Asset Purchase Agreement, IVAX assumed our obligations under the
lease agreement of the Wells Avenue Facility. The lease for the Wells Avenue
Facility has an initial term expiring June 30, 2004 and provides for a monthly
rental payment of $11,255. On March 19, 2004, we exercised the purchase option
under the lease for the Brenner Drive Facility and assigned our rights under the
contract of sale to IVAX. On the same day, simultaneous with the closing of the
sale of the Brenner Drive Facility from Par Pharmaceutical, Inc. to IVAX, we
terminated the lease for the Brenner Drive Facility.
REPRESENTATIONS AN WARRANTIES (PAGE 91)
The Asset Purchase Agreement contains customary representations and
warranties included in similar transactions. The representations and warranties
will survive the completion of the sale of the Congers Assets for a period of
three years, excluding our representations and warranties relating to title to
the Congers Assets, environmental conditions and taxes, which survive without
limitation.
TERMINATION (PAGE 93)
The Asset Purchase Agreement may be terminated under certain circumstances,
including the following:
- Upon the mutual written consent of Halsey and IVAX;
- By either Halsey or IVAX if a governmental authority takes action to
enjoin or otherwise prohibit the transactions contemplated in the Asset
Purchase Agreement;
- By IVAX in the event the sale of the Congers Assets does not occur within
10 days following our receipt of shareholder approval of our sale of the
Congers Asset; and
- By either party upon notice on or after January 1, 2005 in the event that
by January 1, 2005 we have not obtained shareholder approval to sell the
Congers Assets and a meeting of our shareholders has been held during
which our sale of the Congers Assets was considered by our shareholders
for approval.
6
If the Asset Purchase Agreement is terminated for the reasons specified
above, we must refund to IVAX the $2.0 million payment received by us at the
signing of the Asset Purchase Agreement. The termination of the Asset Purchase
Agreement shall not affect the assignment of the lease for the Wells Avenue
Facility.
CONDITIONS TO COMPLETION OF THE ASSET PURCHASE (PAGE 93)
Each parties' obligation to complete the sale of the Congers Assets is
subject to the prior satisfaction or waiver of certain conditions. In addition
to customary closing conditions, we have to comply with the following material
conditions that must be satisfied or waived before completion of the sale of the
Congers Assets:
- We will have obtained approval of our shareholders in accordance with the
New York Business Corporation Law.
- We will have filed with the U.S. Food and Drug Administration the
information required to transfer to IVAX the regulatory approvals
relating to the prescription generic pharmaceutical products manufactured
at the Congers, New York locations and conveyed to IVAX pursuant to the
Asset Purchase Agreement.
- We will have delivered to IVAX evidence that all liens, security
interests, mortgages or encumbrances on the Congers Assets have been
terminated or removed.
ADDITIONAL AGREEMENTS RELATED TO THE ASSET PURCHASE AGREEMENT (SEE PAGE 95)
USE AND LICENSE AGREEMENT (PAGE 95)
Concurrently with the execution of the Asset Purchase Agreement, Halsey and
IVAX executed a use and license agreement providing for IVAX' use of the Congers
Assets during the term of the Asset Purchase Agreement until the Congers Assets
are conveyed to IVAX.
VOTING AGREEMENT (PAGE 95)
Concurrently with the execution of the Asset Purchase Agreement, certain of
our major securityholders entered into a voting agreement with IVAX pursuant to
which these securityholders have granted IVAX an irrevocable proxy to vote their
voting securities at a meeting of the Company's shareholders or any adjournment
therefore in favor of the proposed sale of the Congers Assets to IVAX.
7
VOTING OF PROXIES
Proxies may be revoked by shareholders at any time prior to the voting
thereof by giving notice of revocation in writing to the Secretary of the
Company or by voting in person at the Meeting.
If the enclosed proxy is properly signed, dated and returned, the Common
Stock represented thereby will be voted at the Meeting and will be voted in
accordance with the specifications made thereon. IF NO INSTRUCTIONS ARE
INDICATED, THE COMMON STOCK REPRESENTED THEREBY WILL BE VOTED (i) FOR the
election of Directors, (ii) FOR the restatement of the Company's Certificate of
Incorporation (the "Charter") to increase the number of authorized shares of the
Company's Common Stock from 80,000,000 shares to 650,000,000 shares and to
authorize 290,000,000 shares of Preferred Stock, (iii) FOR the amendment to the
Company's Charter to change the name of the Company to Acura Pharmaceuticals,
Inc., (iv) FOR the approval of the sale of substantially all of the assets used
in the operation of the Company's Congers, New York locations, (v) FOR the
adoption of the amendment to the Company's 1998 Stock Option Plan, and (vi) FOR
the ratification of the appointment of Grant Thornton LLP as the Company's
independent certified public accountants for the fiscal year ending December 31,
2004.
THE BOARD OF DIRECTORS
During the year ended December 31, 2003, the Board of Directors held nine
meetings. None of the Company's Board members attended less than 75% of the
Board meetings held during 2003.
It is the policy of the Board that Directors are strongly encouraged to
attend all board meetings and shareholder meetings.
BOARD COMMITTEES
During 2003, the Company had an Audit Committee, a Compensation Committee,
a Stock Option Committee, an Executive Committee and a Technology Committee of
the Board of Directors.
AUDIT COMMITTEE
During 2003, the Audit Committee was composed of Messrs. William A. Sumner,
Chairman, Immanuel Thangaraj, Alan Smith and Bruce F. Wesson. The Audit
Committee is responsible for selecting the Company's independent auditors,
approving the audit fee payable to the auditors, working with independent
auditors, reviewing the scope and results of the audit by, and the
recommendations of, the Company's independent auditors, approving the services
provided by the auditors, reviewing the financial statements of the Company and
reporting on the results of the audits to the Board, reviewing the Company's
insurance coverage, financial controls and filings with the Securities and
Exchange Commission (the "Commission"), including, meeting quarterly prior to
the filing of the Company's quarterly and annual reports containing financial
statements filed with the Commission, and submitting to the Board its
recommendations relating to the Company's financial reporting, accounting
practices and policies and financial, accounting and operational controls. The
Audit Committee held three formal meetings and numerous informal meetings during
2003. A report of the Audit Committee is also contained under Proposal 6 in this
Proxy Statement. The Charter of the Audit Committee is attached as Appendix A to
this Proxy Statement.
In assessing the independence of the Company's Audit Committee members
during 2003, the Company has reviewed and analyzed the standards for
independence provided in Section 121A of the American Stock Exchange Listing
Standards. Based on this analysis, the Company has determined that each of
Messrs. Sumner and Smith are deemed independent members of the Audit Committee.
While Messrs. Wesson and Thangaraj do not satisfy the standards for independence
set forth in the American Stock Exchange Listing Standards as a result of the
controlling interest held by each of Galen Partners III, L.P., of which Mr.
Wesson is a general partner, and Essex Woodlands Health Ventures, of which Mr.
Thangaraj is a general partner, the Board values the experience of Messrs.
Wesson and Thangaraj in the review of the Company's financial statements and
believes that each is able to exercise independent judgment in the performance
of his duties on the Audit Committee.
8
The Audit Committee does not have a financial expert (as defined under
applicable regulations of the Commission) serving on the Committee. The Board
has determined that while none of the Audit Committee members meet all of the
criteria established by the Commission to be classified as a "financial expert",
the Company believes that in general the members of the Audit Committee have a
sufficient understanding of audit committee functions, internal control over
financial reporting and financial statement evaluation so as to capably perform
the tasks required of the Audit Committee.
Commencing with the date of the Meeting, the Audit Committee will be
composed of Messrs. Sumner, Wesson and Thangaraj.
COMPENSATION COMMITTEE
The Company's Compensation Committee, composed of Messrs. Bruce F. Wesson,
Srini Conjeevaram, William Skelly and Immanuel Thangaraj during 2003, is
responsible for consulting with and making recommendations to the Board of
Directors about executive compensation arrangements and the compensation of
employees. See "Compensation of Executive Officers and Directors -- Report of
the Compensation Committee on Executive Compensation" below. The Compensation
Committee met four times in 2003. Commencing with the date of the Meeting, the
Compensation Committee will be comprised of Messrs. Karabelas, Skelly and
Reddick.
STOCK OPTION COMMITTEE
The Stock Option Committee, composed of Messrs. William Skelly, Alan Smith
and William A. Sumner during 2003, is responsible for reviewing Management's
recommendations as to employee option grants and to grant options under the
Company's stock option plans to employees, directors and consultants. The Stock
Option Committee met once in 2003. Commencing with the date of the Meeting, the
Stock Option Committee will be dissolved and the Board of Directors will
thereafter perform the functions previously conducted by the Stock Option
Committee.
EXECUTIVE COMMITTEE
The Executive Committee, composed of Messrs. Srini Conjeevaram, Joel D.
Liffmann, Bruce F. Wesson, William Skelly, Peter A. Clemens, Jerry Karabelas and
Immanuel Thangaraj during 2003, is responsible for acting on behalf of the Board
of Directors in lieu of a full Board meeting on such matters that are not of the
type required to be considered by the full Board of Directors and to advise the
Board as to the issues and matters under review by the Executive Committee at
the meetings of the Board of Directors. The Executive Committee met three times
in 2003. In view of the reduced size of the Company's Board, effective as of the
date of the Meeting the Executive Committee will be dissolved.
TECHNOLOGY COMMITTEE
The Technology Committee, composed of Messrs. Zubeen Shroff, Alan Smith and
Jerry Karabelas during 2003, is responsible for addressing and reviewing
regulatory oversight of the Company's operations, including compliance with
applicable Drug Enforcement Administration and Food and Drug Administration
regulations, compliance with state agency and regulatory requirements,
compliance with Medicare reimbursement requirements and consulting with the
Board regarding current and future compliance with applicable Federal and state
regulations, including current Good Manufacturing Practice regulations. The
Technology Committee met twice in 2003. In view of the reduced size of the
Company's Board, effective as of the date of the Meeting the Technology
Committee will be dissolved and the Board of Directors will thereafter perform
the functions previously conducted by the Technology Committee.
NOMINATING COMMITTEE
The Company does not have a standing nominating committee. Currently the
Board of Directors functions as the Company's nominating committee. The Board
performs the functions typical of a nominating committee, including the
identification, recruitment and selection of nominees for election as directors
of the
9
Company. Two of the six members of the Board (Messrs. Sumner and Skelly) are
"independent" as that term is defined by Section 121(A) of the American Stock
Exchange Listing Standards and participate with entire Board in the
consideration of director nominees. The nominees for election as directors at
the Meeting were unanimously recommended by the Board. The Board believes that a
nominating committee separate from itself is not necessary at this time, given
the size of the Company and the Board, to ensure that candidates are
appropriately evaluated and selected. The Board also believes that, given the
Company's size and the size of its Board, an additional committee of the Board
would not add to the effectiveness of the evaluation and nomination process. For
these reasons, the Board believes it is not appropriate to have a nominating
committee.
Additionally, as described below under "Proposal 1 -- Agreements Governing
Appointment of Directors", the Company is a party to a Voting Agreement dated as
of February 6, 2004 which provides, among other things, that the Board of
Directors shall be comprised of not more than seven (7) members, four (4) of
whom shall be designees of the principal investors in the Company's 2004
Debentures, two (2) of whom shall be independent directors and one (1) of whom
shall be the Company's Chief Executive Officer. In view of the contractual
provisions contained in the Voting Agreement relating to the composition of the
Board of Directors, the Board does not believe that the existence of a
nominating committee of the Board would add to the effectiveness of the director
evaluation and nomination process.
The Board's process for recruiting and selecting nominees is for Board
members to identify individuals who are thought to have the business background
and experience, industry specific knowledge and general reputation and expertise
that would allow them to contribute as effective directors to the Company's
governance, and who are willing to serve as directors of a public company. To
date, the Company has not engaged any third party to assist in identifying or
evaluating potential nominees. After a possible candidate is identified, the
individual meets with various members of the Board and is sounded out concerning
their possible interest and willingness to serve, and Board members discuss
amongst themselves the individual's potential to be an effective Board member.
If the discussions and evaluation are positive, the individual is invited to
serve on the Board.
To date, no shareholder has presented any candidate for Board membership to
the Company for consideration, and the Company does not have a specific policy
on shareholder-recommended director candidates. However, the Board believes its
process for evaluation of nominees proposed by shareholders would be no
different from the process of evaluating any other candidate. In evaluating
candidates, the Board will require that candidates possess, at a minimum, a
desire to serve on the Company's Board, an ability to contribute to the
effectiveness of the Board, an understanding of the function of the Board of a
public company and relevant industry knowledge and experience. In addition,
while not required of any one candidate, the Board would consider favorably
experience, education, training or other expertise in business or financial
matters and prior experience serving on boards of public companies.
Messrs. Reicher and Liffmann resigned as Directors of the Company effective
September 18, 2003 and November 13, 2003, respectively.
SHAREHOLDER COMMUNICATIONS TO THE BOARD
Shareholders who wish to send communications to the Company's Board of
Directors may do so by sending them in care of the Secretary of the Company at
the address which appears on cover page of this Proxy Statement. The envelope
containing such communication must contain a clear notation indicating that the
enclosed letter is a "Shareholder-Board Communication" or "Shareholder-Director
Communication" or similar statement that clearly and unmistakably indicates the
communication is intended for the Board. All such communications must clearly
indicate the author as a shareholder and state whether the intended recipients
are all members of the Board or just certain specified directors. The Secretary
of the Company will have the discretion to screen and not forward to directors
communications which the Secretary determines in his or her discretion are
communications unrelated to the business or governance of the Company and its
subsidiaries, commercial solicitations, or communications that are offensive,
obscene, or otherwise inappropri-
10
ate. The Secretary will, however, compile all shareholder communications which
are not forwarded and such communications will be available to any director.
PROPOSAL 1
ELECTION OF DIRECTORS
At the Meeting, six individuals will be elected to serve as Directors until
the next annual meeting, and until their successors are elected and qualified.
During the fiscal year ended December 31, 2003, each of nominees to the Board
with the exception of Andrew Reddick, the Company's President and Chief
Executive Officer, served as Directors. See "Agreements Governing Appointment of
Directors" below.
Unless a shareholder WITHHOLDS AUTHORITY, a properly signed and dated proxy
will be voted FOR the election of the persons named below, unless the proxy
contains contrary instructions. Management has no reason to believe that any of
the nominees will not be a candidate or will be unable to serve as a Director.
However, in the event any nominee is not a candidate or is unable or unwilling
to serve as a Director at the time of the election, unless the shareholder
withholds authority from voting, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill such vacancy.
Although the Company's Charter provides for a maximum of 11 directors, in
accordance with the terms of a certain Voting Agreement dated February 6, 2004
by and among the Company and the holders of the Company's outstanding senior
secured convertible debentures, the Company has agreed that the Board of
Directors shall be comprised of not more than seven members. The Voting
Agreement provides that each of Care Capital Investments II, LP ("Care
Capital"), Essex Woodlands Health Ventures V, L.P. ("Essex") and Galen Partners
III, L.P. ("Galen") shall designate one member to the Board of Directors, and
that Care Capital, Essex and Galen collectively may designate one additional
member to the Board. The designees to the Board of Care Capital, Essex and Galen
are Messrs. Karabelas, Thangaraj and Wesson, respectively, each of whom are
current Board members. The collective designee to the Board of Care Capital,
Essex and Galen has not yet been identified and designated. Accordingly, their
remains a vacancy on the Board. Once identified and designated by Care Capital,
Essex and Galen, their collective designee to the Board would serve in office
until the next annual meeting of shareholders following such appointment. See
"Agreements Governing Appointment of Directors" below.
The name and age of each of the six nominees, his principal occupation and
the period during which such person has served as a Director are set out below.
DIRECTOR
NAME OF NOMINEE AGE POSITION WITH THE COMPANY SINCE
--------------- --- ------------------------- --------
Jerry Karabelas(2)........................ 51 Chairman of the Board of Directors 2002
Andrew D. Reddick(2)...................... 51 President and Chief Executive --
Officer
Bruce F. Wesson(1)........................ 62 Director 1998
William A. Sumner(1)...................... 66 Director 1997
William Skelly(2)......................... 53 Director 1996
Immanuel Thangaraj(1)..................... 33 Director 2002
---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Jerry Karabelas has been a Director of the Company since December, 2002 and
Chairman of the Board since May 2003. Mr. Karabelas was Head of Healthcare and
CEO of Worldwide Pharmaceuticals for Novartis AG from 1998 until July 2000.
Prior to joining Novartis, Mr. Karabelas was Executive Vice President of
SmithKline Beecham. From July, 2000 until December, 2001, Mr. Karabelas was the
Founder and Chairman of the Novartis Bio Venture Fund. Since November, 2001 he
has been a Partner with Care Capital LLC. Mr. Karabelas holds a Ph.D. in
pharmacokinetics from the Massachusetts College of Pharmacy and serves as a
Director of SykePharma Plc., Human Genome Sciences, Nitromed, Anadys and Renova.
11
Andrew D. Reddick has been President and Chief Executive Officer since
August, 2003. From April, 2000 to September, 2002 Mr. Reddick was Chief
Operating Officer and Sr. Vice President Commercial Operations for Adolor
Corporation, a pharmaceutical company. From June, 1999 to March, 2000 he served
as President of Faulding Laboratories, Inc. and he served as Executive Vice
President Marketing, Sales & Business Development with Purepac Pharmaceuticals
from August, 1996 to June, 1999.
Bruce F. Wesson has been a Director of the Company since March, 1998. Mr.
Wesson has been a Partner of Galen Associates, a health care venture firm, and a
General Partner of Galen Partners III, L.P. since January 1991. Prior to
January, 1991, he was Senior Vice President and Managing Director of Smith
Barney, Harris Upham & Co. Inc., an investment banking firm. He currently serves
on the Boards of Encore Medical Corporation, QMed, Inc., and Crompton
Corporation, each a publicly traded company, and several privately held
companies. Mr. Wesson earned a degree from Colgate University and a Masters of
Business Administration from Columbia University.
William A. Sumner has been a Director of the Company since August, 1997.
From 1974 until his retirement in 1995, Mr. Sumner held various positions within
Hoechst-Roussel Pharmaceuticals, Inc., a manufacturer and distributor of
pharmaceutical products, including Vice President and General Manager,
Dermatology Division from 1991 through 1995, Vice President, Strategic Business
Development, from 1989 to 1991 and Vice President, Marketing from 1985 to 1989.
Since his retirement from Hoechst-Roussel Pharmaceuticals, Inc. in 1995, Mr.
Sumner has acted as a consultant to various entities in the pharmaceutical
field.
William Skelly has been a Director of the Company since May, 1996 and
served as Chairman of the Company from October, 1996 through June, 2000. Since
1990, Mr. Skelly has served as Chairman, President and Chief Executive Officer
of Central Biomedia, Inc. and its subsidiary SERA, Inc., companies involved in
the animal health industry including veterinary biologicals and custom
manufacturing of animal sera products. From 1985 to 1990, Mr. Skelly served as
President of Martec Pharmaceutical, Inc., a distributor and manufacturer of
generic prescription pharmaceuticals.
Immanuel Thangaraj has been a Director of the Company since December, 2002.
Mr. Thangaraj has been a Managing Director of Essex Woodlands Health Ventures, a
venture capital firm specializing in the healthcare industry, since 1997. Prior
to joining Essex Woodlands Health Ventures, he helped form a telecommunication
services company, for which he served as its CEO. Mr. Thangaraj also worked as
an Associate for ARCH Venture Partners, LP and managing one of its portfolio
companies, a medical information technology company. Mr. Thangaraj holds a
Bachelor of Arts and a Masters in Business Administration from the University of
Chicago and serves as a Director of iKnowMed Systems, Sound ID and CBR Systems.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
Andrew D. Reddick, President and Chief Executive Officer.
Ron J. Spivey has been Senior Vice President and Chief Scientific Officer
since April, 2004. From June, 2002 to March, 2004 Dr. Spivey was President of
Gibraltar Associates, a private company providing consulting services to the
pharmaceutical industry relating to product research and development. From
March, 1998 to May, 2002 he served as Vice President, Scientific Affairs for
Alpharma/Purepac Pharmaceuticals. Additionally, Dr. Spivey has served in a
number of senior level scientific and leadership positions at Zenith Goldline
Pharmaceuticals, Cima Labs Inc., Marion Merrell Dow, Burroughs Wellcome Company
and Warner Chilcott Division of Warner Lambert. Dr. Spivey holds a BA degree
from Indiana University and a Ph.D. degree in pharmaceutics from the University
of Iowa. Age 57.
Vijai Kumar has been Chief Operations Officer of the Company since
November, 2002. From 1996 to 2002, Mr. Kumar was President & CEO of Pharmalogix
Inc., a pharmaceutical research and development company. From 1992 to 1996, Mr.
Kumar was Director, Research and Development for the Warner Chilcott Division of
Warner Lambert. In that capacity, he coordinated all technical aspects of the
Division responsible for cGMP compliance, formulation development, analytical
development and clinical and bioequivalence
12
studies. Mr. Kumar holds B.Sc. in Chemistry from the University of Lucknow,
India, a D.Pharm. from the College of Pharmacy, New Delhi, an M.B.A. from
Fairleigh Dickinson University and an M.S. in Industrial Pharmacy from Long
Island University. Age: 57.
Peter A. Clemens has been Senior Vice President, Chief Financial Officer
and Secretary since April 2004. Mr. Clemens was Vice President and Chief
Financial Officer and Secretary of the Company from February 1998 to April 2004.
From February, 1988 until joining the Company, Mr. Clemens was employed by TC
Manufacturing Co., Inc. ("TC") which, through its various subsidiaries and
divisions, manufactures generic pharmaceuticals, industrial coatings and
flexible packaging. Mr. Clemens was TC's President from February, 1996 through
February, 1998. Prior to that time, he held the position of Vice President and
Chief Financial Officer. Mr. Clemens is a Certified Public Accountant and earned
a B.B.A. degree from the University of Notre Dame and an MBA from Indiana
University. Age: 51
James Emigh has been Vice President of Marketing and Administration since
April 2004. Prior to such time, Mr. Emigh was Vice President of Sales and
Marketing. Mr. Emigh joined the Company in May, 1998, serving first as Executive
Director of Customer Relations and then as Vice President of Operations until
November, 2002. From 1991 until joining the Company, Mr. Emigh was employed by
Organon, Inc., a pharmaceutical company, in various management positions and
most recently as its Director of Managed Care and Trade Relations. Mr. Emigh
holds a Bachelor of Pharmacy degree from Washington State University and a
Masters of Business Administration from George Mason University. Age: 47.
Robert Seiser has been a Vice President, Corporate Controller and Treasurer
since April 2004. Prior to such time, Mr. Seiser was Corporate Controller and
Treasurer. From 1992 until joining the Company in March 1998, Mr. Seiser served
as Treasurer and Corporate Controller of TC Manufacturing Co., Inc., a privately
held company based in Evanston, Illinois. Mr. Seiser is a Certified Public
Accountant and earned a B.B.A. degree from Loyola University of Chicago. Age:
41.
The term of office of each person elected as a director will continue until
the next annual meeting of shareholders and until such person's successor has
been elected and qualified. Officers are appointed by the Board of Directors and
serve at the discretion of the Board, although the employment of Andrew D.
Reddick, the Company's President and Chief Executive Officer, Vijai Kumar, the
Company's Chief Operations Officer, Ron J. Spivey, the Company's Senior Vice
President and Chief Scientific Officer, and Peter A. Clemens, the Company's
Senior Vice President and Chief Financial Officer, are subject to the provisions
of their respective Employment Agreements. See "Compensation of Executive
Officers and Directors -- Employment Agreements."
AGREEMENTS GOVERNING APPOINTMENT OF DIRECTORS
On February 10, 2004, the Company consummated a certain Debenture and Share
Purchase Agreement (the "2004 Purchase Agreement") providing for a private
offering of convertible senior secured debentures up to $14 million (the "2004
Debenture Offering"). On June 6, 2004, the 2004 Purchase Agreement was amended
to increase the principal amount of the debentures issuable thereunder from
$14.0 million to $17.5 million. As a condition to the initial closing of the
2004 Purchase Agreement on February 6, 2004, the Company, each of the investors
in the 2004 Debenture Offering and the holders of the Company's outstanding 5%
convertible senior secured debentures due March 31, 2006 executed a Voting
Agreement dated as of February 6, 2004. The Voting Agreement provides, among
other things, that the Board of Directors shall be comprised of not more than
seven members, four of whom shall be the designees of the Lead 2004 Investors
(as defined below), two of whom shall be independent directors and one of whom
shall be the Company's Chief Executive Officer. The Lead 2004 Investors consist
of Care Capital Investment II, LP ("Care Capital"), Essex Woodlands Health
Ventures V, L.P. ("Essex") and Galen Partners III, L.P. ("Galen"). Each of Care
Capital, Essex and Galen has the right, subject to shareholder approval, to
designate one member of the Company's Board of Directors and the Lead 2004
Investors collectively may designate one additional member of the Board
(collectively, the "Designees"). The Voting Agreement further provides that the
Company will permit one observer selected by Galen to attend all meetings of the
Board of Directors. The Designees of Care Capital, Essex and Galen are Messrs.
Karabelas, Thangaraj and Wesson, respectively, each
13
of whom are current Board members. The collective Designee of the Lead 2004
Investors has not yet been identified and designated. The Company has agreed to
nominate and appoint to the Board of Directors, subject to shareholder approval,
one Designee of each of Care Capital, Essex and Galen, and one collectively
designee of the Lead 2004 Investors, for so long as each holds a minimum of 50%
of the Series A Preferred shares initially issued to such party upon conversion
of the convertible debentures issued in the 2004 Debenture Offering (or at least
50% of the shares of Common Stock issuable upon conversion of the Series A
Preferred shares into which such debentures are convertible). See Proposal 2
contained in this Proxy Statement for a more detailed description of the 2004
Purchase Agreement and the Series A Shares issuable upon conversion of the
convertible debentures issued in the 2004 Debenture Offering.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid by the
Company for services rendered in all capacities to the Company during the fiscal
years ended December 31, 2003, 2002 and 2001 to the Company's Chief Executive
Officer and the Company's next four most highly compensated executive officers
(collectively, the "named executive officers") whose total annual compensation
for 2003 exceeded $100,000:
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION SECURITIES
--------------------------------- UNDERLYING
OTHER ANNUAL STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
--------------------------- ---- -------- ------- ------------ ---------- ------------
Andrew D. Reddick............. 2003 $ 96,923 0 -- -- --
President and Chief 2002 0 0 -- -- --
Executive Officer 2001 0 0 -- -- --
Michael K. Reicher(1)......... 2003 $119,231 110,000 -- -- --
Chairman and Chief 2002 200,000 0 -- -- --
Executive Officer 2001 191,346 0 -- -- --
Peter A. Clemens.............. 2003 $155,000 60,000 -- -- --
Vice President and 2002 155,000 0 -- -- --
Chief Financial Officer 2001 149,807 0 -- -- --
Vijai Kumar................... 2003 $180,000 0 -- -- --
Chief Operating Officer 2002 18,000 0 -- 400,000 --
2001 0 0 -- -- --
James Emigh................... 2003 $132,000 0 -- -- --
Vice President--Sales 2002 132,000 0 -- -- --
and Marketing 2001 125,000 0 -- -- --
---------------
(1) Mr. Reicher's services as Chief Executive Officer ceased effective June 16,
2003.
OTHER COMPENSATORY ARRANGEMENTS
Executive Officers and key employees are eligible to participate in medical
and disability insurance plans offered to all employees of the Company. The
Company also pays the automobile expenses of an executive officer. Such expenses
are less than the lesser of $6,000 or 10% of such officer's compensation
reported above in the Summary Compensation Table.
14
EMPLOYMENT AGREEMENTS
Andrew D. Reddick is employed pursuant to an Employment Agreement effective
as of August 26, 2003, which provides that Mr. Reddick will serve as the
Company's Chief Executive Officer and President for term expiring August 26,
2005. The Employment Agreement provides for an annual base salary of $300,000,
plus the payment of annual bonus of up to thirty-five percent (35%) of Mr.
Reddick's base salary based on the achievement of such targets, conditions, or
parameters as may be set from time to time by the Board of Directors or the
Compensation Committee of the Board of Directors. The Employment Agreement also
provides for the Company to issue stock options exercisable for up to 5,500,000
shares of Common Stock at an exercise price of $0.34 per share. The grant of
such stock options was subject to the receipt of shareholder approval to amend
the Company's 1998 Stock Option Plan to permit the grant of such options. In
May, 2004, the Employment Agreement was amended to adjust the Company's
commitment to issue stock options to Mr. Reddick from 5,500,000 shares to
8,750,000 shares and to provide for an exercise price of $0.13 per share for
such options . The grant of the stock options to Mr. Reddick exercisable for up
to 8,750,000 shares of Common stock is subject to the receipt of shareholder
approval to amend the Company's 1998 Stock Option Plan as sought pursuant to
Proposal 5 of this Proxy Statement. Upon grant, Mr. Reddick's options will
provide for vesting of 2,750,000 shares on June 30, 2004 with the balance
vesting in monthly increments of 250,000 shares at the expiration of each
monthly period thereafter commencing with the month ending July 31, 2004. The
Employment Agreement also permits the Company to purchase the vested portion of
Mr. Reddick's options upon his termination for Cause (as defined in the
Employment Agreement) or his resignation other than for Good Reason (as defined
in the Employment Agreement) at a purchase price equal to the positive
difference, if any, between (i) the average of the closing bid and asked prices
of the Company's Common Stock for the five trading days prior to the date of
termination or resignation, and (ii) the exercise price of the option shares,
multiplied by the numbers shares which, as of the date of termination or
resignation, are vested under the stock option. The Employment Agreement
contains standard termination provisions, including upon death, disability, for
Cause, for Good Reason and without Cause. In the event the Employment Agreement
is terminated due to death or disability, the Company is required to pay Mr.
Reddick, or his designee, a pro rata portion of the annual bonus that would have
been payable to Mr. Reddick during such year assuming full achievement of the
bonus criteria established for such bonus. Additionally, Mr. Reddick or his
designees shall have a period of twelve (12) months following such termination
to exercise Mr. Reddick's vested stock options. In the event that the Employment
Agreement is terminated by the Company without Cause or by Mr. Reddick for Good
Reason, the Company is required to pay Mr. Reddick an amount equal to the bonus
for such year, calculated on a pro rata basis assuming full achievement of the
bonus criteria for such year, as well as Mr. Reddick's base salary for the
greater of (i) the remainder of the initial term of the Employment Agreement,
and (ii) one year (the "Severance Pay"), payable in equal monthly installments
over a period of twelve (12) months. In addition, Mr. Reddick is entitled to
continued coverage under the Company's then existing benefit plans, including
medical and life insurance, for a term equal to the greater of (i) the remainder
of the initial term of the Employment Agreement, or (ii) twelve (12) months from
the date of termination. The Employment Agreement permits Mr. Reddick to
terminate the Employment Agreement in the event of a Change of Control (as
defined in the Employment Agreement), in which case such termination is
considered to be made without Cause, entitling Mr. Reddick to the benefits
described above, except that (i) the Severance Pay is payable in a lump sum
within thirty (30) days of the date of termination, and (ii) all outstanding
stock options granted to Mr. Reddick shall fully vest and be immediately
exercisable. The Employment Agreement restricts Mr. Reddick from disclosing,
disseminating or using for his personal benefit or for the benefit of others,
confidential or proprietary information (as defined in the Employment Agreement)
and, provided the Company has not breached the terms of the Employment Agreement
from competing with the Company at any time prior to one year after the
termination of his employment with the Company.
Ron J. Spivey is employed pursuant to an Employment Agreement effective as
of April 5, 2004 which provides that Mr. Spivey will serve as the Company's
Senior Vice President and Chief Scientific Officer for term expiring April 4,
2006. The Employment Agreement provides for an annual base salary of $260,000,
plus the payment of annual bonus of up to thirty-five percent (35%) of Mr.
Spivey's base salary based on the achievement of such targets, conditions, or
parameters as may be set from time to time by the Board of
15
Directors or the Compensation Committee of the Board of Directors. The
Employment Agreement also provides for the Company to issue stock options
exercisable for up to 3,000,000 shares of the Company's Common Stock at an
exercise price of $0.13 per share. The grant of such stock option is subject to
the receipt of shareholder approval to amend the Company's 1998 Stock Option
Plan. Upon grant, the stock option will provide for vesting of 1,000,000 shares
on October 1, 2004 with the remaining balance vesting in quarterly increments of
333,333 shares at the expiration of each quarterly period commencing with the
quarterly period ending December 31, 2004. The Employment Agreement also permits
the Company to purchase the vested portion of Mr. Spivey's options upon his
termination for Cause (as defined in the Employment Agreement) or his
resignation other than for Good Reason (as defined in the Employment Agreement)
at a purchase price equal to the positive difference, if any, between (i) the
average of the closing bid and asked prices of the Company's Common Stock for
the five trading days prior to the date of termination or resignation, and (ii)
the exercise price of the option shares, multiplied by the numbers shares which,
as of the date of termination or resignation, are vested under the stock
options. The Employment Agreement contains standard termination provisions,
including upon death, disability, for Cause, for Good Reason and without Cause.
In the event the Employment Agreement is terminated due to death or disability,
Mr. Spivey or his designees shall have a period of twelve (12) months following
such termination to exercise Mr. Spivey's vested stock options. In the event
that the Employment Agreement is terminated by the Company without Cause or by
Mr. Spivey for Good Reason, the Company is required to pay Mr. Spivey an amount
equal to the bonus for such year, calculated on a pro rata basis assuming full
achievement of the bonus criteria for such year, as well as Mr. Spivey's base
salary for one year (the "Severance Pay"), payable in equal monthly installments
over a period of twelve (12) months. In addition, Mr. Spivey is entitled to
continued coverage under the Company's then existing benefit plans, including
medical and life insurance, for twelve (12) months from the date of termination.
The Employment Agreement permits Mr. Spivey to terminate the Employment
Agreement in the event of a Change of Control (as defined in the Employment
Agreement), in which case such termination is considered to be made without
Cause, entitling Mr. Spivey to the benefits described above, except that (i) the
Severance Pay is payable in a lump sum within thirty (30) days of the date of
termination, and (ii) all outstanding stock options granted to Mr. Spivey shall
fully vest and be immediately exercisable. The Employment Agreement restricts
Mr. Spivey from disclosing, disseminating or using for his personal benefit or
for the benefit of others, confidential or proprietary information (as defined
in the Employment Agreement) and, provided the Company has not breached the
terms of the Employment Agreement from competing with the Company at any time
prior to one year after the termination of his employment with the Company.
Peter A. Clemens is employed pursuant to an Employment Agreement effective
as of March 10, 1998, which after giving effect to amendments dated June 28,
2000 and May 4, 2001, provides that Mr. Clemens will serve as the Company's Vice
President and Chief Financial Officer for a term expiring April 30, 2005. The
Employment Agreement provides for an annual base salary of $180,000 plus the
payment of an annual bonus to be determined based on the satisfaction of such
targets, conditions or parameters as may be determined from time to time by the
Compensation Committee of the Board of Directors. Mr. Clemens received a bonus
of $60,000 in fiscal 2003. The Employment Agreement also provides for the grant
of stock options on March 10, 1998 to purchase 300,000 shares of the Company's
common stock at an exercise price of $2.375 per share, which options vest in
equal increments of 25,000 option shares at the end of each quarterly period
during the term of the Employment Agreement (as such vesting schedule may be
amended by mutual agreement of Mr. Clemens and the Board of Directors). The
Employment Agreement also permits the Company to repurchase the vested portion
of Mr. Clemens' options upon his termination for Cause (as defined in the
Employment Agreement) or his resignation (other than for Good Reason as defined
therein), at a purchase price equal to the positive difference, if any, between
(i) the average of the closing price of the Company's common stock for the five
trading days prior to the date of termination or resignation, and (ii) the
exercise price of the option shares, multiplied by the number of option shares
which, as of the date of termination, are vested under the option. The
Employment Agreement contains standard termination provisions, including upon
death, disability, for Cause, for Good Reason and without Cause. In the event
the Employment Agreement is terminated by the Company without Cause or by Mr.
Clemens for Good Reason, the Company is required to pay Mr. Clemens an amount
equal to $360,000 or twice his then base salary, whichever is greater, payable
in a lump sum within 30 days of termination and to continue to provide
16
Mr. Clemens coverage under the Company's then existing benefit plans, including
medical and life insurance, for a term of 24 months. The Employment Agreement
permits Mr. Clemens to terminate the Employment Agreement in the event of a
Change of Control (as defined in the Employment Agreement) and for Good Reason.
The Employment Agreement also restricts Mr. Clemens from disclosing,
disseminating or using for his personal benefit or for the benefit of others
confidential or proprietary information (as defined in the Employment Agreement)
and, provided the Company has not breached the terms of the Employment
Agreement, from competing with the Company at any time prior to two years after
the earlier to occur of the expiration of the term and the termination of his
employment.
Vijai Kumar is employed pursuant to an Employment Agreement effective as of
November 18, 2002, which provides that Mr. Kumar will serve as the Company's
Chief Operations Officer for a term expiring November 18, 2004. The Employment
Agreement provides for an annual base salary of $180,000 plus the payment of an
annual bonus to be determined based on the satisfaction of such targets,
conditions or parameters as may be determined from time to time by the
Compensation Committee of the Board of Directors. The Employment Agreement also
provides for the grant of stock options on November 18, 2002 to purchase 400,000
shares of the Company's common stock at an exercise price of $1.125 per share,
which options vest in equal increments of 100,000 annually commencing on
November 18, 2003. The Employment Agreement permits the Company to repurchase
the vested portion of Mr. Kumar's options upon his termination for Cause (as
defined in the Employment Agreement) or his resignation, at a purchase price
equal to the positive difference, if any, between the average of the closing
price of the Company's common stock for the five trading days prior to the date
of termination or resignation, multiplied by the number of option shares which,
as of the date of termination, are vested under the option. The Employment
Agreement contains standard termination provisions, including upon death,
disability, for Cause (as defined in the Employment Agreement) and without
Cause. The Employment Agreement also provides that in the event of a Change of
Control (as defined in the Employment Agreement), or if Mr. Kumar's employment
with the Company is terminated without Cause, he is entitled to his base salary
for the lesser of (i) the remaining term of the Employment Agreement, and (ii)
one year. The Employment Agreement also restricts Mr. Kumar from disclosing,
disseminating or using for his personal benefit or the benefit of others
confidential or proprietary information (as defined in the Employment Agreement)
and, provided the Company has not breached the terms of the Employment
Agreement, from competing with the Company at any time prior to one year after
the earlier to occur of the expiration of the term and the termination of his
employment.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no additional or special
remuneration for their services as Directors. Directors who are not employees of
the Company receive an annual grant of options to purchase 10,000 shares of the
Company's common stock (15,000 shares in the case of the Chairman of the Board)
and $500 for each meeting attended ($250 in the case of telephonic meetings).
The Company also reimburses Directors for travel and lodging expenses, if any,
incurred in connection with attendance at Board meetings. Directors who serve on
any of the Committees established by the Board of Directors receive $250 for
each Committee meeting attended unless held on the day of a full Board meeting.
STOCK OPTION PLANS
The Company currently maintains two stock option plans adopted in 1995 and
1998, respectively. The Company in the past has used, and will continue to use,
stock options to attract and retain key employees in the belief that employee
stock ownership and stock-related compensation devices encourage a community of
interest between employees and shareholders.
The 1995 Stock Option Plan. In September, 1995, the Company established
the 1995 Halsey Drug Co., Inc. Stock Option and Restricted Stock Purchase Plan
(the "1995 Stock Option Plan"). Under the 1995 Stock Option Plan, the Company
may grant options to purchase up to 1,000,000 shares of the Company's Common
Stock. Incentive Stock Options ("ISO's") may be granted to employees of the
Company and its subsidiaries and non-qualified options may be granted to
employees, directors and other persons employed by, or performing services for,
the Company and its subsidiaries. Subject to the 1995 Stock Option Plan, the
Stock
17
Option Committee determines the persons to whom grants are made and the vesting,
timing, amounts and other terms of such grants. An employee may not receive
ISO's exercisable in any one calendar year for shares with a fair market value
on the date of grant in excess of $100,000. No quantity limitations apply to the
grant of non-qualified stock options.
As of June 1, 2004, ISO's to purchase 630,608 shares and non-qualified
options to purchase 257,780 shares have been granted under the 1995 Stock Option
Plan, leaving 111,612 shares available for grant under the Plan. The average per
share exercise price for all outstanding options under the 1995 Stock Option
Plan is approximately $1.44. No exercise price of an ISO was set at less than
100% of the fair market value of the underlying Common Stock. For grants made to
any person who owned stock possessing more than 10% of the total voting power of
the Company the exercise price was set at not less than 110% of the fair market
value of the underlying Common Stock.
The 1998 Stock Option Plan. The 1998 Stock Option Plan was adopted by the
Board of Directors in April, 1998 and approved by the Company's shareholders in
June 1998. The 1998 Stock Option Plan was amended by the Board of Directors in
April, 1999 to increase the number of shares available for the grant of options
under the Plan from 2,600,000 to 3,600,000 shares. The Company's shareholders
ratified the Plan amendment on August 19, 1999. The 1998 Stock Option Plan was
further amended by Board of Directors in April, 2001 to increase the number of
shares available for grant of options under the Plan from 3,600,000 to 8,100,000
shares. The Company's shareholders ratified the Plan amendment on June 14, 2001.
In accordance with the description contained under the caption "Proposal
5 -- Amendment to the Company's 1998 Stock Option Plan" the Board is seeking
authorization to amend the 1998 Stock Option Plan to (a) increase the number of
shares available for grant of options under the Plan from 8,100,000 to
20,000,000 shares, (b) permit the grant of non-qualified stock options having an
exercise price per share which is less than the fair market value of the
Company's Common Stock, and (c) set a limit of 8,750,000 option awards that may
be granted to one individual in any calendar year. The 1998 Stock Option Plan
permits the grant of ISO's and non-qualified stock options to purchase shares of
the Company's Common Stock. As of June 1, 2004, stock options to purchase
2,691,342 shares had been granted under the 1998 Stock Option Plan. Of such
option grants, 1,562,466 are ISOs and 1,128,876 are non-qualified options. The
average per share exercise price for all outstanding options under the 1998
Stock Option Plan is approximately $1.94. For a description of the 1998 Stock
Option Plan as well as the proposed amendment thereto, see "Proposal
5 -- Amendment to the Company's 1998 Stock Option Plan" contained in this Proxy
Statement.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table includes information as of December 31, 2003 relating
to the Company's 1995 Stock Option Plan and 1998 Stock Option Plan, which
comprise all of the equity compensation plans of the Company. The table provides
the number of securities to be issued upon the exercise of outstanding options
18
under such plans, the weighted-average exercise price of such outstanding
options and the number of securities remaining available for future issuance
under such equity compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
NUMBER OF REMAINING AVAILABLE FOR
SECURITIES TO BE ISSUED WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EQUITY
UPON EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN(A))
PLAN CATEGORY ----------------------- -------------------- ----------------------------
------------- (A) (B) (C)
Equity Compensation Plans
Approved by Security
Holders................ 3,417,270 $1.83 5,520,270
Equity Compensation Plans
Not Approved by
Security Holders....... 0 0 0
TOTAL.................. 3,417,270 $1.83 5,520,270(1)
---------------
(1) See "Proposal 5 -- Amendment to the Company's 1998 Stock Option Plan" for a
discussion of the proposed amendment to the 1998 Stock Option Plan.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
No stock options were granted to or exercised by the named executive
officers during 2003. The following table presents information regarding the
value of options outstanding at December 31, 2003 for each of the named
executive officers.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Andrew D. Reddick.................... -- -- $-- $--
Michael K. Reicher(1)................ 1,083,920 -- $-- $--
Peter A. Clemens..................... 600,000 25,000 $-- $--
Vijai Kumar.......................... 100,000 300,000 $-- $--
James Emigh.......................... 116,000 35,000 $-- $--
---------------
(1) Mr. Reicher's services as Chief Executive Officer ceased effective June 16,
2003.
(2) Value is based upon the average of the closing bid and asked price of $0.47
per share at December 31, 2003.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consisted of Messrs. Wesson,
Conjeevaram, Skelly, Reicher and Thangaraj during fiscal 2003. During 2003,
except for Mr. Reicher, there were no Compensation Committee interlocks or
insider participation in compensation decisions. Mr. Reicher resigned as a
Director of the Company effective September 18, 2003.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors and executive officers, and persons who own beneficially
more than ten percent (10%) of the Common Stock of the Company, to file reports
of ownership and changes of ownership with the Commission and, during the
19
period in which the Company's common stock was traded on the American Stock
Exchange, the AMEX. Copies of all filed reports are required to be furnished to
the Company pursuant to Section 16(a). Based solely on the reports received by
the Company and on written representations from reporting persons, the Company
believes that the Directors, executive officers and greater than ten percent
(10%) beneficial owners of the Company's Common Stock complied with all Section
16(a) filing requirements during the year ended December 31, 2003, except that
(i) Mr. Reicher filed two Form 4 filings late, (ii) Mr. Thangaraj filed three
Form 4 filings late, (iii) Mr. Feinberg filed two Form 4 filings late, and (iv)
a Form 3 filing requirement by Mr. Dennis Adams, a beneficial owner of in excess
of 10% of the Company's Common Stock, has not been filed to date.
The following report of the Compensation Committee and the performance
graph in the next section shall not be deemed to be "soliciting material" or to
be "filed" with the Commission or subject to regulations 14A or 14C of the
Commission or to the liabilities of Section 18 of the Exchange Act and shall not
be deemed to be incorporated by reference into any filing under the Securities
Act of 1933 or the Exchange Act, notwithstanding any general incorporation by
reference of this Proxy Statement into any other document.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
This report has been prepared by the Compensation Committee of the Board of
Directors of the Company (the "Compensation Committee"). The Compensation
Committee was formed in February, 1993. Messrs. Wesson, Conjeevaram, Skelly,
Reicher and Thangaraj served as members of the Compensation Committee during
2003. Mr. Reicher resigned as a director of the Company effective September 18,
2003. The Committee meets at least annually or more frequently, as the Company's
Board of Directors may request. The Compensation Committee's primary
responsibilities include the review of compensation, consisting of salary,
bonuses, benefits, and other annual compensation, of the Company's executive
officers.
EXECUTIVE COMPENSATION PHILOSOPHY
In 2004, the Company's executive compensation program will reflect the
following executive compensation philosophy, which was developed by the
Compensation Committee of the Board of Directors:
The Company's mission is to develop and, in concert with our
prospective partners, commercialize opioid abuse deterrent formulation
technology and opioid active pharmaceutical ingredient synthesis
technologies with an objective of providing cost effective solutions
intended to deter abuse of legally prescribed opioids in the US and other
key territories around the world. To support this and other strategic
objectives as approved by the Board of Directors and to provide adequate
returns to shareholders, the Company must compete for, attract, develop,
motivate and retain top quality executive and scientific talent during
periods of both favorable and unfavorable business conditions.
The Company's executive compensation program is a critical management tool
in achieving this goal. "Pay for performance" is the underlying philosophy for
the Company's executive compensation program. Consistent with this philosophy,
the program has been carefully conceived and will be independently administered
by the Compensation Committee of the Board of Directors, a majority of whom are
independent non-employee directors. The program is designed to link executive
pay to corporate performance, including share price, recognizing that there is
not always a direct and short-term correlation between performance and share
price.
To align shareholder interests and executive rewards, portions of each of
the Company's executive's compensation will represent "at risk" pay
opportunities related to accomplishment of specific business goals.
The program is designed and administered to:
- provide annual and longer term incentives that help focus each
executive's attention on approved corporate business goals the attainment
of which, in the judgment of the Compensation Committee, should increase
long-term shareholder value;
20
- link "at risk" pay with appropriate measurable quantitative and
qualitative achievements against approved performance parameters;
- reward individual and team achievements that contribute to the attainment
of the Company's business goals; and
- provide a balance of total compensation opportunities, including salary,
bonus, and longer term equity incentives, that are competitive with
similarly situated companies and reflective of the Company's performance.
In seeking to link executive pay to corporate performance, the Compensation
Committee believes that the most appropriate measure of corporate performance is
the increase in long-term shareholder value, which involves improving such
quantitative performance measures as revenue, net income, cash flow, operating
margins, earnings per share and return on shareholders' equity. The Compensation
Committee may also consider qualitative corporate and individual factors which
it believes bear on increasing the long-term value of the Company to its
shareholders. These include (i) the development of competitive advantages, (ii)
the ability to deal effectively with the complexity of the Company's businesses,
(iii) success in developing business strategies, managing costs and improving
the quality of the Company's technologies, (iv) the general performance of
individual job responsibilities, and (v) the successful development and patent
protection for opioid synthesis and abuse deterrent formulation technologies
useful in finished dosage pharmaceutical products.
COMPONENTS OF EXECUTIVE COMPENSATION PROGRAM
The Company's executive compensation program consists of (i) an annual
salary and bonus and (ii) long-term incentives represented by the issuance of
stock options. As explained below, the bonuses and stock options serve to link
executive pay to corporate performance, since the attainment of these awards
depends upon meeting the quantitative and, if applicable, qualitative
performance goals which serve to increase long-term shareholder value.
Salary and Bonus. The Company's Chief Executive Officer, Chief Scientific
Officer, Chief Operations Officer and Chief Financial Officer are parties to
employment contracts with the Company which provide the minimum annual base
salary to be payable to such officers. In addition, the employment contracts
provide for an annual bonus, in the discretion of the Compensation Committee,
subject to the satisfaction of such targets, conditions or parameters as may be
set from time to time by the Compensation Committee. For those executive
officers not subject to an employment contract, the Compensation Committee will
set the annual salary for such executive officers in or about March of each year
and establish potential bonus compensation (including Messrs. Reddick, Spivey,
Kumar and Clemens) that such executives may earn based upon quantitative and, if
applicable, qualitative performance goals established by the Compensation
Committee. The goals for 2004 will consist of a mix of targets and performance
measures of corporate revenue, development milestones relating to the Company's
opiate synthesis and finished dosage formulation technologies and qualitative
goals relating to each officer's job function. No bonus will be earned with
respect to a performance measure unless a performance "floor" for that measure
is exceeded; the bonus opportunity with respect to a measure will be earned if
the target is achieved; achievement between the floor and the target results in
a lower bonus with respect to that performance measure. An amount larger than
the bonus opportunity for each performance measure can be earned, up to a
specified limit, for exceeding the target for that measure. In setting
compensation levels, the Compensation Committee compares the Company to
companies of comparable business focus, market capitalization, technological
capabilities and market in which the Company competes for executives.
In ascertaining the achieved level of performance against the targets, the
effects of certain extraordinary events, as determined by the Compensation
Committee, such as (i) major acquisitions and divestitures, (ii) significant
one-time charges, and (iii) changes in accounting principles required by the
Financial Accounting Standards Board, are "compensation neutral" for the year in
which they occurred; that is, they are not taken into account in determining the
degree to which the targets are met in that year.
21
Stock Options. The long-term component of the Company's executive
compensation program consists of stock option grants. The options generally
permit the option holder to buy the number of shares of Common Stock covered by
the option (an "option exercise") at a price fixed at the time of grant. While
the Company historically has granted stock options having an exercise price
equal to the fair market value of the Company's Common Stock on the date of
grant, during 2003 and 2004, the Company made commitments to issue stock options
to its employees at a discount to the market price. The grant of such options is
subject to the receipt of shareholder approval to the amendments to the
Company's 1998 Stock Option Plan (see "Proposal 5 -- Amendment to the Company's
1998 Stock Option Plan"). It is the expectation of the Compensation Committee
that discounted stock option grants will occur on only an isolated basis in the
future where circumstances warrant. With respect to stock options grants having
an exercise price equal to or greater than the market price of the Company's
Common Stock on the date of grant, such options generally gain value only to the
extent the stock price exceeds the option exercise price during the life of the
option. Generally, a portion of the options vest over a period of time and
expire no later than ten years, and in some cases five years after grant.
Executives will generally be subject to limitations in selling the option stock
immediately, and therefore will be incentivized to increase shareholder value.
During fiscal 2003, the Company's Chief Executive Officer, Chief Operations
Officer and Chief Financial Officer were parties to employment contracts which
provided for a certain minimum annual base salary. Total bonuses paid during
2003 to executive officers aggregated $170,000.
In conclusion, the Compensation Committee believes the compensation
policies and practices of the Company, as described, are fair and reasonable and
are in keeping with the best interests of the Company, its employees and its
shareholders.
Submitted May 4, 2004 and signed by the members of the Compensation
Committee.
Bruce F. Wesson Srini Conjeevaram William Skelly Immanuel Thangaraj
22
PERFORMANCE GRAPH
The following graph provides a comparison on a cumulative basis of the
yearly percentage change over the last five fiscal years in (a) the total
shareholder return on the Company's Common Stock with (b) the total return on
the American Stock Exchange ("AMEX") of all domestic issuers traded on the AMEX
and (c) the total return of domestic issuers having the same Standard Industrial
Classification ("SIC") Industry Group Number as the Company (283-Drug
Manufacturers) (the "Industry Index"). Such yearly percentage change has been
measured by dividing (i) the sum of (A) the amount of dividends for the
measurement period, assuming dividend reinvestment, and (B) the difference
between the price per share at the end and at the beginning of the measurement
period, by (ii) the price per share at the beginning of the measurement period.
The AMEX Index has been selected as the required broad equity market index. The
Industry Index consists of publicly traded companies in a business similar to
that of the Company. The price of each investment unit has been set at $100 on
December 31, 1998 for purposes of preparing this graph.
PERFORMANCE GRAPH
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG HALSEY DRUG CO., INC.,
AMEX MARKET INDEX AND SIC CODE INDEX
(PERFORMANCE CHART)
ASSUMES $100 INVESTED ON JAN. 01, 1999
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2003
COMPANY/INDEX/MARKET 12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003
-------------------- ---------- ---------- ---------- ---------- ---------- ----------
HALSEY DRUG CO............. 100.00 68.18 50.91 141.82 67.04 32.73
SIC CODE INDEX............. 100.00 96.08 125.48 107.04 82.55 100.73
AMEX MARKET INDEX.......... 100.00 124.67 123.14 117.47 112.78 153.50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 20, 2002, the Company completed a private offering of
securities for an approximate aggregate purchase price of $26,394,000 (the "2002
Debenture Offering"). The securities issued in the 2002 Debenture Offering
consisted of 5% convertible senior secured debentures maturing March 31, 2006
(the "2002 Debentures"). The Debentures were issued by the Company pursuant to a
certain Debenture Purchase
23
Agreement dated December 20, 2002 (the "2002 Purchase Agreement") by and among
the Company, Care Capital, Essex, Galen and each of the purchasers listed on the
signature page thereto. The Company believes the terms of the 2002 Purchase
Agreement were at least as favorable to the Company as could have been obtained
from unrelated third parties. In accordance with the terms of the 2002 Purchase
Agreement, each of Jerry Karabelas, a designee of Care Capital, and Immanuel
Thangaraj, a designee of Essex, were appointed to the Company's Board of
Directors.
As part of the closing of the 2002 Debenture Offering, the Company's term
loan agreement (the "Watson Loan Agreement") with Watson Pharmaceuticals, Inc.
("Watson") was amended to (i) extend the maturity date of the Watson Loan
Agreement from March 31, 2003 to March 31, 2006, and (ii) increase the principal
amount of the Watson Loan Agreement from $17,500,000 to $21,401,331 (the "Watson
Term Loan") to reflect the inclusion of approximately $3,901,331 owed by the
Company to Watson under a product supply agreement between the parties. The
Company believes the terms of the Watson Loan Agreement, as amended, were at
least as favorable to the Company as could have been obtained from unrelated
third parties. In consideration for the amendment to the Watson Loan Agreement,
the Company issued to Watson a Common Stock purchase warrant exercisable for
10,700,665 shares of the Company's Common Stock (the "Watson Warrant"). The
Watson Warrant has a term expiring December 31, 2009 and an exercise price of
$0.34 per share.
At the Company's request, on May 5, 2003, the Company received a letter
executed by each of Care Capital, Galen and Essex (the "Majority 2002
Debentureholders") advising that the Majority 2002 Debentureholders would
provide funding to meet the Company's 2003 capital requirements, up to an
aggregate amount not to exceed $8.6 million (the "2003 Letter of Support"). In
consideration for the issuance of the 2003 Letter of Support, the Company
authorized the issuance of warrants to the Majority 2002 Debentureholders
exercisable for an aggregate of 645,000 shares of the Company's Common Stock at
an exercise price of $0.34 per share (such exercise price being equal to the
conversion price of the 2002 Debentures). In accordance with the terms of the
Letter of Support, the Majority 2002 Debentureholders advance to the Company an
aggregate principal amount of $8.6 million during the period from June 16, 2004
through and including December 31, 2003 to fund the Company's operating losses
and working capital requirements (the "Letter of Support Advances"). The Letter
of Support Advances were made in accordance with the terms of the 2002 Purchase
Agreement resulting in the Company's issuance of additional 2002 Debentures in
an aggregate principal amount of $8.6 million (plus additional 2002 Debentures
issued in satisfaction of accrued interest on the Letter of Support Advances).
The Company believes the terms of the 2003 Letter of Support and the Letter of
Support Advances were at least as favorable to the Company as could have been
obtained from unrelated third parties.
On February 10, 2004, the Company consummated a private offering of
convertible senior secured debentures (the "2004 Debentures") in the aggregate
principal amount of approximately $12.3 million (the "2004 Debenture Offering").
The 2004 Debentures were issued by the Company pursuant to a certain Debenture
and Share Purchase Agreement dated as of February 6, 2004, as amended June 6,
2004 (the "2004 Purchase Agreement") by and among the Company, Care Capital,
Essex, Galen and each of the purchasers listed on the signature page thereto.
The Company believes the terms of the 2004 Purchase Agreement and the 2004
Debentures were at least as favorable to the Company as could have been obtained
from unrelated third parties. Of the approximate $12.3 million in debentures
issued on February 10, 2004 under in the 2004 Debenture Offering, approximately
$2.0 million of 2004 Debentures were issued in exchange for the surrender of a
like amount of principal plus accrued and unpaid interest under the Company's
2002 Debentures issued to Care Capital, Essex and Galen during November and
December, 2003 pursuant to the Letter of Support. On April 14, 2004 and May 28,
2004, the Company completed an additional closing under the 2004 Purchase
Agreement pursuant to which the Company issued additional 2004 Debentures in the
aggregate principal amount of $579,000 and $1.121 million, respectively,
bringing the aggregate principal amount of 2004 Debentures issued by the Company
under the 2004 Purchase Agreement to $14.0 million. After giving effect to the
amendment to the 2004 Purchase Agreement dated June 6, 2004, to, among other
things, increase the principal amount of the 2004 Debentures issuable under the
2004 Purchase Agreement from $14.0 million to
24
$17.5 million, as of June 6, 2004 there remained $3.5 million in principal
amount of 2004 Debentures available for issuance under the 2004 Purchase
Agreement.
The 2004 Debentures (including the principal amount plus interest accrued
at the date of conversion) will convert automatically into the Company's series
A convertible preferred stock (the "Series A Preferred") immediately following
the Company's receipt of shareholder approval of the Company's restated
Certificate of Incorporation (the "Charter Amendment") as described in Proposal
2 of this Proxy Statement, and the filing of the Charter Amendment with the
Office of New York Department of State (the date of such filing, the "Charter
Amendment Filing Date"). The Debentures will convert into Series A Preferred at
a price per share (the "Conversion Price") of $0.6425, representing the average
of the closing bid and asked prices of the Company's Common Stock for the 20
trading days ending February 4, 2004, as reported by the Over-the-Counter
("OTC") Bulletin Board. The closing bid price for the Company's Common Stock on
January 20, 2004, the date of Board approval of the 2004 Debenture Offering, was
$0.64 per share. Based on the $0.6425 Conversion Price of the Series A Preferred
and estimating the interest accrual under the 2004 Debentures prior to the
Charter Amendment Filing Date, the 2004 Debentures issued as of June 1, 2004 in
the aggregate principal amount of $14.0 million are convertible into an
aggregate of approximately 21.9 million Series A Preferred shares, of which 5.2
million, 6.8 million and 6.8 million are issuable to Care Capital, Essex and
Galen, respectively, under the 2004 Debentures held by such parties
(representing 23.8%, 30.9% and 30.9%, respectively, of the total Series A
Preferred issuable upon conversion of the 2004 Debentures). The 2004 Purchase
Agreement also provides that the holders of the Series A Shares shall have the
right to vote as part of the single class with all holders of the Company's
voting securities on all matters to be voted on by such security holders. Each
holder of Series A Preferred shall have such number of votes as shall equal the
number of votes he would have had if such holder converted all Series A
Preferred held by such holder into shares of Common Stock immediately prior to
the record date relating to such vote. Reference is made to Proposal 2 under the
caption "Terms of Preferred Stock" for a more detailed description of the Series
A Preferred.
As a condition to the completion of the 2004 Purchase Agreement, the
Company, the investors in the 2004 Debentures and the holders of the Company's
outstanding 5% convertible senior secured debentures due March 31, 2006 issued
by the Company in 1998, 1999, 2002 and 2003 (collectively, the "1998-2002
Debentures"), executed a certain Voting Agreement dated as of February 6, 2004
(the "Voting Agreement"). The Voting Agreement provides that each of Care
Capital, Essex and Galen (collectively, the "Lead 2004 Investors") has the right
to designate for nomination one member of the Company's Board of Directors, and
that the Lead 2004 Investors collectively may designate one additional member of
the Board (collectively, the "Designees"). The Designees of Care Capital, Essex
and Galen are Messrs. Karabelas, Thangaraj and Wesson, respectively, each of
whom are current Board members. The collective Designee of the Lead 2004
Investors has not yet been identified and designated. The Company believes the
terms of the Voting Agreement were at least as favorable to the Company as could
have been obtained from unrelated third parties.
Simultaneous with the execution of a 2004 Purchase Agreement, and as a
condition to the initial closing of the 2004 Purchase Agreement, the Company,
the investors in the 2004 Debentures and each of the holders of the 1998-2002
Debentures (the 2004 Debentures and the 1998-2002 Debentures are collectively
referred to as the "Outstanding Debentures") executed a certain Debenture
Conversion Agreement dated as of February 6, 2004 (the "Conversion Agreement").
In accordance with the terms of the Conversion Agreement, each holder of the
Outstanding Debentures agreed to convert their debentures into the Company's
Preferred Stock. Specifically, the Conversion Agreement provides, among other
things, for the automatic conversion of the 2004 Debentures into the Company's
Series A Preferred and the automatic conversion of the 1998-2002 Debentures into
the Company's Series B convertible preferred stock (the "Series B Preferred")
and/or the Company's series C convertible preferred stock (the "Series C
Preferred") immediately upon the Charter Amendment Filing Date. The Series B
Preferred and the Series C Preferred are referred to collectively as the "Junior
Preferred Shares", and the Junior Preferred Shares, together with the Series A
Preferred are referred to collectively as the "Preferred Stock". Reference is
made to Proposal 2 of this Proxy Statement for a more detailed description of
the Conversion Agreement. The Company believes the terms of
25
the Conversion Agreement were at least as favorable to the Company as could have
been obtained from unrelated third parties.
After giving effect to the 2004 Debenture Offering and assuming (i) the
receipt of shareholder approval of the Charter Amendment as provided in Proposal
2 of this Proxy Statement, (ii) the filing of the Charter Amendment, (iii) the
conversion of the 2004 Debentures in the aggregate principal amount of $14.0
million outstanding as of June 1, 2004 into Series A Preferred, and (iv) the
conversion of the 1998-2002 Debentures into Junior Preferred Shares, Care
Capital, Essex and Galen would control approximately 14.7%, 17.1% and 45.5%,
respectively, of the Company's voting securities (or approximately 13.3%, 15.5%
and 46.9%, respectively, after giving effect to the conversion of all of the
Company's issued and outstanding Common Stock purchase options and warrants).
It was a condition to the completion of the 2004 Debenture Offering that
the Watson Loan Agreement be restructured to provide for a reduction in the
principal amount of the Watson Term Loan and for the assignment of the Watson
Term Loan as restructured to Care Capital, Essex, Galen and the other investors
in the 2004 Debentures as of February 10, 2004 (collectively, the "Watson Note
Purchasers"). Accordingly, simultaneous with the closing of the 2004 Purchase
Agreement, each of the Company, Watson and the Watson Note Purchasers executed
an Umbrella Agreement dated as of February 6, 2004 (the "Umbrella Agreement").
The Umbrella Agreement provides for (i) the Company's payment to Watson of
approximately $4.3 million and certain Company assets in consideration of
amendments to the Watson term notes in the aggregate principal amount of
approximately $21.4 million evidencing the Watson Term Loan (the "Watson Notes")
(A) to forgive approximately $16.4 million of indebtedness under that Watson
Notes, leaving a $5.0 million principal balance, (B) to extend the maturity date
of the Watson Notes from March 31, 2006 to June 30, 2007, (C) to provide for the
satisfaction of future interest payments under the Watson Notes in the form of
the Company's Common Stock, and (D) to provide for the forbearance from the
exercise of rights and remedies upon the occurrence of certain events of default
under the Watson Notes (the Watson Notes as so amended, the "Amended and
Restated Watson Note"), and (ii) Watson's sale and conveyance of the Amended and
Restated Watson Note to the Watson Note Purchasers for cash consideration of
$1.0 million. The Company believes the terms of the Umbrella Agreement were at
least as favorable to the Company as could have been obtained from unrelated
third parties.
In accordance with the terms of the Umbrella Agreement, simultaneous with
the Company's payment to Watson of approximately $4.3 million, the Company
conveyed to Watson approximately $165,000 in finished dosage product, free of
charge, as well as the Company's Abbreviated New Drug Application ("ANDA") for
its butalbital, acetaminophen and caffeine tablet finished dosage product, the
ANDA for its doxycycline hyclate capsule finished dosage product, and the drug
master files and certain related assets for the Company's doxycycline
monohydrate active pharmaceutical ingredient ("API") and doxycycline hyclate
API, the Company's equipment dedicated to the production of doxycycline hyclate
API and doxycycline monohydrate API (collectively, the "Transferred Assets").
The Company also granted to Watson an option to obtain a preferred source of
supply of the hydrocodone bitartrate API (the "Hydrocodone Option"). In addition
to Watson forgiveness of approximately $16.4 million of indebtedness under the
Watson Notes, as additional consideration for the payment to Watson of
approximately $4.3 million, the conveyance of the Transferred Assets, and the
grant of the Hydrocodone Option, all current supply agreements between the
Company and Watson were cancelled and Watson waived the dilution protections
contained in the Watson Warrant, to the extent such dilution protections were
triggered by the transactions contemplated in the 2004 Debenture Offering.
The Amended and Restated Watson Note in the principal amount of $5.0
million is secured by a first lien on all of the Company's and its subsidiaries'
assets, senior in right of payment and lien priority over all other Company
indebtedness, carries a floating rate of interest equal to the prime rate plus
4.5% and matures on June 30, 2007.
After giving effect to the transactions provided in the Umbrella Agreement,
the Watson Note Purchasers represent the Company's senior lenders. The
allocation of ownership of the $5.0 million Amended and Restated Watson Note
among each of the Watson Note Purchasers was based on the quotient of the
principal
26
amount of the 2004 Debentures purchased by such Watson Note Purchaser, divided
by approximately $12.3 million, representing the aggregate principal amount of
the 2004 Debentures issued by the Company on February 10, 2004. As such, of the
$5.0 million principal amount of the Amended and Restated Watson Note,
approximately $1,352,000, $1,754,000, and $1,754,000, is owed by the Company to
Care Capital, Essex and Galen, respectively (representing approximately 27%, 35%
and 35%, respectively, of the Amended and Restated Watson Note).
Each of Michael and Susan Weisbrot and Dennis Adams beneficially own in
excess of 5% of the Company's voting securities. Each of such security holders
participated as an investor in the 2004 Debentures, agreed to convert their
1998-2002 Debentures into Junior Preferred Shares and purchased a portion of the
Amended and Restated Watson Note a member of the Watson Note Purchasers. In
addition, Bernard Selz, Hemant and Varsha Shah and Oracle Strategic Partners,
L.P., each a beneficial owner of in excess of 5% of the Company's voting
securities, is a party to the Conversion Agreement pursuant to which each has
agreed to automatically convert their respective 1998-2002 Debentures into
Junior Preferred Shares on the Charter Amendment Filing Date. See "Security
Ownership of Certain Beneficial Owners and Management".
VOTE REQUIRED
Directors are elected by a plurality of the votes cast. The six candidates
receiving the highest number of votes will be elected as directors.
In accordance with the terms of 2004 Purchase Agreement, the Company and
the holders of the Outstanding Debentures executed a certain Voting Agreement
dated as of February 6, 2004. The Voting Agreement provides, among other things,
that the parties will vote all of their respective voting securities of the
Company in favor of one designee to the Board of Directors of each of Care
Capital, Essex and Galen, as well as one collective designee to the Board
specified by Care Capital, Essex and Galen. The Company has agreed to nominate
and appoint to the Board of Directors, subject to shareholder approval, one
designee of each of Care Capital, Essex and Galen, and one collective designee
of Care Capital, Essex and Galen, for so long as each holds a minimum of 50% of
the Series A Preferred shares initially issued to such party upon conversion of
the 2004 Debentures (or at least 50% of the shares of the Company's Common Stock
issuable upon conversion of the Series A Preferred). Messrs. Karabelas,
Thangaraj and Wesson are the designees of each of Care Capital, Essex and Galen,
respectively. The collective designee of each of Care Capital, Essex and Galen
has not yet been identified and designated.
The voting securities held by the parties to the Voting Agreement represent
an aggregate of approximately 78.6% percent of the aggregate voting rights under
the Company's outstanding voting securities.
The Board of Directors recommends that the shareholders vote FOR each of
the above nominees for Director.
PROPOSAL 2
AUTHORIZATION TO AMEND AND RESTATE THE COMPANY'S CERTIFICATE OF
INCORPORATION TO (I) INCREASE THE NUMBER OF AUTHORIZED SHARES OF ITS COMMON
STOCK, $.01 PAR VALUE PER SHARE, FROM 80.0 MILLION SHARES TO 650.0 MILLION
SHARES, AND (II) AUTHORIZE 290.0 MILLION SHARES OF CONVERTIBLE PREFERRED STOCK,
$.01 PAR VALUE PER SHARE, OF WHICH 45.0 MILLION SHARES SHALL BE DESIGNATED
SERIES A CONVERTIBLE PREFERRED STOCK, 25.0 MILLION SHARES SHALL BE DESIGNATED
SERIES B CONVERTIBLE PREFERRED STOCK, 70.0 MILLION SHARES SHALL BE DESIGNATED
SERIES C-1 CONVERTIBLE PREFERRED STOCK, 50.0 MILLION SHARES SHALL BE DESIGNATED
SERIES C-2 CONVERTIBLE PREFERRED STOCK, AND 100.0 MILLION SHARES SHALL BE
DESIGNATED SERIES C-3 CONVERTIBLE PREFERRED STOCK.
27
GENERAL
At the Meeting, the Company's Shareholders will be asked to consider and
approve the Company's Restated Certificate of Incorporation (the "Charter") to
(i) to increase the number of authorized shares of the Company's Common Stock,
$.01 par value per share, from 80,000,000 shares to 650,000,000 shares in order
to provide sufficient authorized shares of Common Stock for issuance upon
conversion of the Company's proposed classes of Preferred Stock (as hereinafter
defined), and the exercise of the Company's outstanding Common Stock purchase
options and warrants, and (ii) provide for additional capital stock consisting
of 290,000,000 shares of convertible preferred stock, par value $.01 per share,
of which 45,000,000 shares shall be series A convertible preferred stock (the
"Series A Preferred"), 25,000,000 shares shall be designated series B
convertible preferred stock (the "Series B Preferred"), 70,000,000 will be
designated series C-1 convertible preferred stock (the "Series C-1 Preferred"),
50,000,000 will be designated series C-2 convertible preferred stock (the
"Series C-2 Preferred"), and 100,000,000 shall be designated series C-3
convertible preferred stock (the "Series C-3 Preferred") The Series C-1
Preferred, Series C-2 Preferred and Series C-3 Preferred are referred to
collectively as the "Series C Preferred. The Series B Preferred and the Series C
Preferred are referred to collectively as the "Junior Preferred." The Series A
Preferred, Series B Preferred and Series C Preferred are referred to
collectively as the "Preferred Stock". The description of the liquidation
preference, voting rights, conversion rights and other material terms of the
Preferred Stock is set forth below under the caption "Terms of Preferred Stock".
The amendment to the Charter to authorize the Preferred Stock is to allow for
the conversion of all of the Company's outstanding convertible senior secured
debentures (collectively, the "Outstanding Debentures") into Preferred Stock.
Following such conversion, the Company will have no convertible debentures
outstanding. As such, the amendment to the Charter also provides for the
elimination of voting rights provided to the holders of the Company's
convertible debentures issued in 1998 and 1999, each of which currently possess
"as converted" voting rights. (See "Description of Charter Amendment" below). As
of June 1, 2004, the principal and accrued and unpaid interest on the
Outstanding Debentures aggregated $107.5 million. Unless this Proposal 2 is
approved, the Company will not have the ability to convert the Outstanding
Debentures into shares of Preferred Stock.
BACKGROUND
For the year ended December 31, 2003 the Company incurred a loss from
operations of $17.2 million. During 2003, revenues from the sale of the
Company's products to its primary customer, Watson Pharmaceuticals, had
diminished significantly and the Company was unable to replace these revenues
from other customers. Consequently, the Company failed to generate positive cash
flow from operations and this prevented the Company from securing additional
working capital from traditional banking sources.
In view of the Company's continuing losses from operations and diminishing
sources of working capital, during 2002 and 2003 the Company's Management
engaged in extensive capital raising efforts. During the period from August 2001
through and including December 2002, Galen Partners III L.P. and its affiliates
(collectively "Galen") advanced an aggregate of approximately $15.9 million in
bridge loans to the Company to fund ongoing operations. The Galen bridge loans
were evidenced by 10% convertible promissory notes and were secured by a lien on
all of the Company's assets. In July 2002, the Board of Directors retained MTS
Partners and CIBC as the Company's financial advisors to assist the Company in
analyzing, planning, negotiating and executing the Company's strategic and
financial plan, including the identification of a strategic partner or source of
financing, or alternatively, an acquirer of the Company's business. Through the
efforts of Senior Management and the Company's financial advisors, the Company
solicited approximately 36 entities in an effort to form a strategic
partnership, secure financing or negotiate a sale of the Company. As part of the
discussions with such third parties, Management presentations were made and a
descriptive memorandum describing the Company's operations was provided. While
there was initial interest by a number of prospects, with the exception of Care
Capital Investments II, LP and Essex Woodlands Health Ventures V, L.P. (as
described in the paragraph below), all of such prospects indicated an
unwillingness to entertain even preliminary discussions or negotiations with the
Company relating to a financing, strategic partnership or acquisition
transaction. Reasons provided by such parties included, but were not limited to,
the absence of a strategic fit and the dilutive impact the acquisition of the
Company would have on the acquirer's earnings.
28
On December 20, 2002, the Company completed a private offering of
securities for an aggregate purchase of approximately $26.4 million (the "2002
Offering"). Securities issues in the 2002 Offering consisted of 5% convertible
senior secured debentures (the "2002 Debentures"). The 2002 Debentures were
issued by the Company pursuant to a certain Debenture Purchase Agreement dated
December 20, 2002 (the "2002 Purchase Agreement") by and among the Company, Care
Capital Investments II LP, Essex Woodlands Health Ventures V, L.P., Galen and
other purchasers listed on the signature page thereto. Of the approximate $26.4
million in 2002 Debentures issued in the 2002 Offering, approximately $15.9
million of 2002 Debentures were issued in exchange for the surrender of a like
amount of principal and accrued interest under the Company's 10% convertible
promissory notes issued to Galen and certain other lenders pursuant to bridge
financing made during the period from August 2001 through December 2002. The
proceeds of the 2002 Offering were used by the Company for working capital and
to fund continuing operating losses.
Subsequent to the completion of the 2002 Offering, Senior Management
continued its efforts to identify third- party financing, a strategic partner or
a potential acquirer of the Company's business. Additionally, Senior Management
implemented changes designed to contain costs and increase product sales. In
March 2003, the Company notified Watson Pharmaceuticals ("Watson") that the
Company intended to commence the direct marketing and sale of the Company's core
products in addition to sales of such products to Watson, as provided for under
the Core Products Supply Agreement with Watson. The Company commenced the direct
sales of its products in the summer of 2003. In view of the limited number of
the Company's products and the intense market competition for these products,
the Company's direct sales of its core products did not result in significant
revenue enhancement. This combined with steadily declining purchases by Watson
under the Core Products Supply Agreement resulted in increasing operating losses
and a shortfall of cash to fund operations.
In order to provide interim financing to fund operations during the period
of Management's capital raising efforts, at the Company's request, each of Care
Capital Investments II, LP ("Care Capital"), Essex Woodlands Health Ventures V,
L.P. ("Essex") and Galen issued a letter of support dated May 5, 2003 (the
"Letter of Support"). The Letter of Support provided that Care Capital, Essex
and Galen would provide funds to meet the Company's 2003 capital requirements,
up to an amount not to exceed $8.6 million, on terms to be negotiated by the
parties. During the period from June 16, 2003 through October 7, 2003, an
aggregate of $6.6 million was advanced to the Company by Care Capital, Essex and
Galen under the Letter of Support, under the same terms as the Company's 5%
convertible senior secured debentures issued in 2002 (as described below).
Despite Management's efforts to obtain other sources of financing during this
period, the Company was unable to identify any third party willing to entertain
even preliminary discussions to provide financing to the Company. As of October
31, 2003, the Company had cash and cash equivalents of approximately $1,070,000
as compared to approximately $9,211,000 at December 31, 2002. Additionally, the
Company was in default under its $21.4 million senior term loan agreement with
Watson as well as its then outstanding debentures.
As of November 1, 2003, $2.0 million remained available for advance to the
Company under the Letter of Support with no assurances from the Majority 2002
Debentureholders that such amount would actually be transferred to the Company
pursuant to the terms of the Letter of Support. The Company projected that if
advanced, such amount would likely fund operations only through January 2004.
NEGOTIATIONS BETWEEN THE COMPANY AND THE LEAD 2004 INVESTORS
In view of the Company's current financial condition and limited cash
resources, the early stage of the Company's proprietary technologies, the
efforts of Management and each of MTS Partners and CIBC, the Company's financial
advisors, to identify and obtain additional sources of financing and/or provide
for a sale of the Company, all of which efforts were unsuccessful, at its
meeting held on October 30, 2003, the Board of Directors determined that the
Company's current securityholders could be the sole source of financing to fund
the Company's ongoing operations. As a result, during the October 30, 2003 Board
meeting, the Board formally requested that each of Care Capital, Galen Partners,
Essex Woodlands and Oracle Strategic Partners, each of which had a designee on
the Board of Directors, respond to the Board as expeditiously as possible as to
whether additional financing would be provided to the Company by such entities
and, if so, the
29
proposed terms of such financing. The representatives of each of Galen Partners,
Care Capital, Essex Woodlands and Oracle Strategic Partners in attendance at the
Board meeting advised that they would commence internal discussions as to the
provision of additional financing to the Company and would endeavor to provide
the Board with their response as soon as possible.
During the October 30, 2003 Board meeting, the Board of Directors also
authorized the creation of the Independent Committee of the Board of Directors,
consisting of Messrs. Sumner, Skelly and Smith, to review the terms of any
proposed financing to be obtained by the Company in order to ensure that the
Company's efforts with respect to any such financing transaction were
reasonable, unbiased and made on an informed basis and that all reasonable
alternatives were considered and that such transactions were fair from a
financial point of view to all holders of the Company's securities. During the
period from November 3 to November 11, 2003, the Independent Committee convened
three meetings. Also participating in such meetings was special legal counsel to
the Independent Committee and Peter Clemens, the Company's Chief Financial
Officer. At each of such meetings, Mr. Clemens provided an update to the
Independent Committee as to the Company's capital raising efforts and advised
that the Company awaited a proposed term sheet from Galen Partners, Care
Capital, Essex Woodlands and Oracle Strategic Partners providing the terms of a
proposed financing for the Company. Mr. Clemens also advised the Independent
Committee as to the Company's cash position and cash burn rate.
On November 11, 2003, a teleconference was held with representatives of
each Oracle Strategic Partners, Care Capital, Essex Woodlands and Galen
Partners, the Company's Chief Executive Officer, the Company's Chief Financial
Officer and Company legal counsel to discuss, in general, the terms of a
proposal for the investor group to provide financing to the Company. Such
discussions were conceptual in nature. The representatives of the investor group
indicated that such group may be willing to provide up to $15 million in new
debenture financing on terms to be determined, provided that the $21.4 million
term loan agreement (the "Watson Term Loan") with Watson Pharmaceuticals
("Watson") could be restructured on terms acceptable to the investors. The
teleconference between the parties concluded with the investor group indicating
that a draft term sheet relating to a proposed financing would be provided to
the Company.
On November 12, 2003, a representative of Care Capital provided to the
Company and Company counsel a summary of terms relating to a proposed debenture
financing to provided by Galen Partners, Care Capital, Essex Woodlands and
Oracle Strategic Partners. The summary of terms was delivered by the investor
group with the express understanding that it was to serve solely as a basis of
introductory discussions and that definitive financial terms were to be
negotiated on a going-forward basis. In general, the summary of terms provided
for a financing in the form of 8% convertible senior secured debentures. The
debentures would be convertible into the Company's Common Stock at a conversion
price to be negotiated between the parties. The summary of terms contemplated
that aggregate financing of approximately $15 million would be provided, that
the debentures would be secured by a lien on all assets of the Company and that
the financing documents would contain customary affirmative and negative
covenants and dilution protections. The summary of terms also provided that it
was a condition to the completion of any such financing that the Watson Term
Loan be retired in full in consideration for a payment to Watson not exceeding
$5 million.
Over the next few days, Management reviewed with Company counsel the
summary of terms and evaluated the financing proposal presented by the investor
group. In the interim, the Company's Chief Executive Office and Chief Operations
Officer coordinated with representatives of each of Care Capital, Essex
Woodlands and Galen Partners to facilitate such parties' due diligence
investigation of the Company's proprietary technologies. Additionally, on
November 14, 2003, the Board of Directors held an informational teleconference
in order for Management to advise the Board as to the status of discussions with
the investor group relating to the summary of terms received on November 12,
2003.
On November 18, 2003, the Company's Chief Executive Officer participated in
a teleconference with representatives of Care Capital and Essex Woodlands to
discuss, in general, the summary of terms dated November 12, 2003 and the
condition to the completion of any such financing that the Watson Term Loan be
retired at a substantial discount. The representatives of Care Capital and Essex
Woodlands participating in the teleconference again advised the Company that the
summary of terms provided on November 12, 2003 was
30
intended solely to commence discussions as to the terms of any proposed
financing and that following a more detailed internal review of the financing by
the investor group, a more comprehensive summary of terms would be provided to
the Company. On the same date, the Independent Committee of the Board convened a
meeting at which the Company's Chief Financial Officer participated. Mr. Clemens
advised the Independent Committee as to the current status of the Company's
capital raising efforts as well as ongoing discussions with Watson in an effort
to restructure the Watson Term Loan and retire all or a significant portion of
such indebtedness at a substantial discount.
On November 20, 2003, a teleconference was held between Company counsel and
special legal counsel for the Independent Committee. During the call, Company
counsel provided an overview of the summary of terms dated November 12, 2003
received from the investor group and the November 18, 2003 teleconference among
the Company's Chief Executive Officer and the representatives of the investor
group.
Pending the Company's receipt of a definitive term sheet, the investor
group continued their due diligence investigation of the Company's proprietary
technologies. In addition, on November 25, 2003, the Board of Directors of the
Company convened a meeting to, among other things, review the Company's
financial condition, current cash resources, the status of the Company's capital
raising efforts, the discussions with the investor group and the summary of
terms dated November 12, 2003 provided by the investor group. Management also
advised the Board that the Company expected a definitive term sheet relating to
a proposed financing from Galen, Care Capital and Essex Woodlands (the "Lead
2004 Investors") by the end of November.
On December 1, 2003, Baker & McKenzie, as lead legal counsel for the Lead
2004 Investors ("Lead Investor Counsel") delivered to Company counsel a
discussion draft of a term sheet containing the general terms of a debenture
financing proposed to be provided to the Company by the Lead 2004 Investors. In
general, the December 1, 2003 term sheet provided for the Company's issuance of
up to $12 million in 5% convertible senior secured debentures, which debentures
would have a liquidation preference equal to five times their principal amount,
be fully secured by a lien on all of the Company's assets and mature on June 30,
2005. It was also contemplated that such debentures would be convertible on
terms substantially identical to the Company's 2002 Debentures and that the
investors would receive Common Stock purchase warrants exercisable for such
number of shares as equaled 125% of the principal amount of the debentures
issued by the Company. The term sheet also provided that the investors would be
entitled to appoint up to six of the Company's 11 Board positions. Among other
customary conditions to the completion of the debenture financing, it was
condition that the Lead 2004 Investors acquire from Watson the promissory notes
issued by the Company under the Watson Term Loan. On the date of receipt of the
term sheet, Company counsel and counsel for each of Galen Partners, Essex
Woodlands and Care Capital convened a conference call to review in general the
December 1, 2003 term sheet and respond to questions from Company counsel. The
parties did not negotiate any specific provisions of the term sheet during this
call.
Following a review of the December 1, 2003 term sheet with Company counsel,
Andrew Reddick, the Company's Chief Executive Officer, spoke with a
representative of Care Capital by telephone. During the call, Mr. Reddick
advised that, based on his discussions with Company counsel, the debenture
structure and five times liquidation preference proposed by the Lead 2004
Investors in the December 1, 2003 term sheet would likely have original issue
discount (deemed interest) ramifications that would be unacceptable to the
Company and likely, the Lead 2004 Investors. Mr. Reddick requested that Care
Capital consult with the other representatives of the Lead 2004 Investors in an
effort to provide a term sheet that would contemplate a financing structure
involving the Company's equity securities as opposed to debentures and warrants.
On December 2, 2003, the Board of Directors convened a teleconference to
discuss, among other things, the Company's cash flow and cash reserves and the
status of discussions with the Lead 2004 Investors. In the course of the Board's
general review of the December 1 term sheet, Company counsel advised the Board
that in view of the implication of original issue discount contained in the term
sheet, it was likely that the financing structure proposed by the Lead 2004
Investors would be substantially revised. The Board authorized Management to
continue discussions with the Lead 2004 Investors in an effort to identify a
financing structure and financing terms acceptable to the Company.
31
On December 3, 2003, Lead Investor Counsel contacted Company counsel by
telephone to discuss the general framework of a revised financing structure
under consideration by the Lead 2004 Investors. Lead Investor Counsel advised
that the structure would likely take the form of secured notes that would be
subordinate to the existing Watson Term Loan. The secured notes would be
convertible into senior participating and convertible series A preferred stock
having a fives times liquidation preference, five times conversion right and
five times participation right. Lead Investor Counsel further advised that the
financing would be conditioned on the holders of the Company's 1998-2002
Debentures agreeing to convert all such debentures into classes of junior
preferred stock. Lead Investor Counsel further advised that it was contemplated
that the Lead 2004 Investors would acquire from Watson, at a discount to be
negotiated with Watson, the promissory notes issued by the Company under the
Watson Term Loan.
On December 4, 2003, Lead Investor Counsel and a representative of Essex
Woodlands contacted Company counsel by telephone to further discuss the
financing structure under consideration by the Lead 2004 Investors. During the
call, Lead Investor Counsel and Essex Woodlands provided an overview of the
general terms of the such financing structure, consisting of the following:
- A financing in the form of senior secured notes (subordinated to the
Watson Term Loan indebtedness), bearing interest at the Applicable
Federal Rate on the date of issuance. The notes would be convertible into
Series A Preferred Shares which would be senior to all other equity
securities of the Company and have a five times liquidation preference, a
five times conversion right and a five times participation right.
- The holders of the 1998-2002 Debentures would agree to convert such
debentures into series of preferred stock which would be junior to the
Series A Preferred Shares, have a one time liquidation preference and be
convertible into the Company's Common Stock at the conversion prices
currently provided for in such debentures.
- The Lead 2004 Investors would provide aggregate funding under the Senior
Secured Notes of approximately $10 million and such notes would convert
automatically into the Series A Preferred Shares upon receipt of
shareholder approval of the Company's Charter amendment to create the
Series A Preferred Shares and Junior Preferred Shares.
- The Lead 2004 Investors would acquire from Watson the promissory notes in
the aggregate principal amount of $21.4 million issued by the Company
under the Watson Term Loan on terms acceptable to the Lead 2004 Investors
and that such notes would remain outstanding.
- The Board of Directors would be comprised of six members, four of whom
would be appointed by the Lead 2004 Investors.
On December 5, 2003, Lead Investor Counsel provided a discussion draft of a
term sheet dated December 5, 2003. The December 5, 2003 term sheet was
consistent in all material respects with the outline of terms discussed with
Company counsel in the prior teleconferences held with Lead Investor Counsel on
December 3 and December 4, 2003. A copy of the draft term sheet was provided to
the Independent Committee and its special legal counsel.
On December 5, 2003, the Independent Committee convened a meeting to review
the draft term sheet dated December 5, 2003 provided by the Lead 2004 Investors.
During the meeting, each of the Company's Chief Executive Officer and Chief
Financial Officer and Company counsel reviewed the material issues raised by the
December 5 term sheet, including (i) the need to include a mandatory conversion
provision such that all of the Company's preferred shares would convert into
Common Stock upon the satisfaction of an agreed upon trading value for the
Common Stock, (ii) the need to extend the proposed July 31, 2004 maturity date
of the senior secured notes in order to provide the Company with sufficient time
to obtain shareholder approval to amend its Charter to authorize the preferred
shares, (iii) the need to reduce the five times multiple for each of the
liquidation preference, conversion right and participation right of the Series A
Preferred Shares contained in the term sheet, (iv) the need to include a waiver
of the dilution protections provided to each of the Company's outstanding
debentureholders, and (v) that the Company be permitted to use the proceeds of
the financing to retire the promissory notes issued by the Company under the
Watson Term Loan. During the
32
meeting, it was agreed that special legal counsel for the Independent Committee
would prepare a memorandum of issues relating to the December 5, 2003 term sheet
for review by the Independent Committee.
The Independent Committee convened a meeting on December 8, 2003 to review
the memorandum dated December 8 prepared by special legal counsel for the
Independent Committee (the "Issue Memorandum"). The Independent Committee
adopted the Issue Memorandum and requested that Management and Company counsel
further negotiate the issues contained in the Issue Memorandum with the Lead
2004 Investors and their counsel. In summary, the Issue Memorandum addressed the
following:
- The need for minimum aggregate additional financing of at least $7.5
million.
- A maturity date of the senior secured notes of July 31, 2004, subject to
extension for up to 90 days to complete SEC review of the Company's proxy
statement soliciting shareholder approval of the Charter amendment to
authorize the preferred shares.
- That the proposed five times multiple for each of the liquidation
preference, conversion right and participation right of the Series A
Preferred Shares be reduced to a multiple in the range of 1.5 to 1.
- The waiver of the dilution protections provided to the holders of the
1998-2002 Debentures relating to the proposed financing.
- A limitation on legal and other professional fees payable by the Company
on behalf of the Lead 2004 Investors.
- The automatic conversion of all preferred shares based on a trading value
of the Company's Common Stock, in an amount to be mutually agreed.
- The Company's direct purchase from Watson of the promissory notes issued
by the Company under the Watson Term Loan with the proceeds of the
financing provided by the Lead 2004 Investors.
On December 8, 2003, Company counsel provided the Issue Memorandum to the
Lead Investor Counsel. Company counsel and Lead Investor Counsel convened a
teleconference on December 8, 2003 to review the Lead 2004 Investors' response
to each of the requests of the Independent Committee contained in the Issue
Memorandum. Lead Investor Counsel advised that the Lead 2004 Investors were
willing to extend the maturity date of the senior secured notes, waive the
dilution protections relating to the 1998-2002 Debentures, and limit the
professional fees payable by the Company on behalf of the Lead 2004 Investors.
Lead Investor Counsel further advised, however, that the Lead 2004 Investors
were unwilling to revise the December 5, 2003 term sheet to address the
remaining requests of the Independent Committee contained in the Issue
Memorandum. Company counsel requested that Lead Investor Counsel again discuss
the remaining issues described in the Issue Memorandum with the Lead 2004
Investors in an effort to reach mutually agreeable terms. On the same date, the
Company's Chief Executive Officer contacted a representative of Essex Woodlands
to review the issues outlined in the Issue Memorandum. During such discussions,
Essex Woodlands indicated that the Lead 2004 Investors would consider
structuring the acquisition of the Company's promissory notes issued under the
Watson Term Loan to provide that, following the Lead 2004 Investor's acquisition
of such notes for a payment of $5 million to Watson, the remaining $16.4 million
of indebtedness under the Watson Term Loan would be forgiven. Essex Woodlands
also advised that it would discuss with the other Lead 2004 Investors the
aggregate amount of the financing that would be provided in an effort to satisfy
the Company's request for net funding of approximately $7.5 million (after
giving effect to any payments made by the Company to Watson to retire $16.4
million of indebtedness under the Watson Term Loan).
On December 11, 2003, Lead Investor Counsel provided a revised discussion
draft term sheet to Company counsel. The revised term sheet addressed some of
the issues raised by the Independent Committee in its Issue Memorandum,
including:
- Providing for aggregate funding of up to $14.0 million of which a minimum
of $11.0 million would be funded by the Lead 2004 Investors at the
initial closing of the financing.
33
- Permitting the Company to use $4.0 million of the proceeds raised in the
financing to retire approximately $16.4 million of the indebtedness under
the Watson Term Loan. The remaining $5.0 million indebtedness under the
Watson Term Loan would be purchased from Watson directly by the Lead 2004
Investors.
- Extending the maturing date of the senior secured notes to be issued in
the financing from July 31, 2004 by a period of up to 90 days thereafter.
- Limiting the legal and other professional fees payable by the Company on
behalf of the Lead 2004 Investors.
The December 11, 2003 term sheet retained the proposed five times multiple
for each of the liquidation preference, conversion right and participation
right of the Series A Preferred Shares.
Following Management's review of the December 11, 2003 term sheet with
Company counsel, on December 11, 2003, Company counsel telephoned Lead Investor
Counsel to convey comments and proposed changes to the December 11 term sheet.
The material comments consisted of:
- A reduction in the five times multiple for each of the liquidation
preference, conversion right and participation right for the Series A
Preferred Shares.
- The mandatory conversion of all preferred shares based on a trading value
of the Company's Common Stock in an amount to be mutually agreed.
- That, upon the Lead 2004 Investors' purchase of the remaining $5.0
million of indebtedness under the Watson Term Loan, the maturity date of
such indebtedness be extended from March 31, 2006 to June 30, 2007.
- That interest under the remaining $5.0 million Watson note be payable in
the Company's Common Stock.
- That the Lead 2004 Investors forbear from the exercise of rights and
remedies under the acquired $5.0 million Watson note upon the occurrence
of non-monetary events of default under such note.
Discussions on these issues continued by telephone between Company counsel
and Lead Investor Counsel as well as between the Company's Chief Executive
Officer and representatives of Essex Woodlands, acting in its capacity as the
primary contact for the Lead 2004 Investors.
On December 12, 2003, Lead Investor Counsel provided to Company counsel a
revised draft of the term sheet. The December 12 term sheet retained the
proposed five times multiple for each of the liquidation preference, conversion
right and participation right for the Series A Preferred Shares. Such term sheet
did, however, address the amendments requested by the Company with respect to
the remaining $5.0 million note issued under the Watson Term Loan. The Term
sheet provided that, after the purchase of such note by the Lead 2004 Investors,
the maturity date of the note would be extended from March 31, 2006 to June 30,
2007, and future interest payments under the note would be payable in the
Company's Common Stock based on the trading value of Common Stock at the time of
each interest payment. The note would also be amended to provide for forbearance
from the exercise of rights and remedies upon a non-monetary event of default by
the Company, subject to certain customary exceptions.
A meeting of the Independent Committee was held on December 14, 2003, to,
among other things, review the December 12, 2003 term sheet received from the
Lead 2004 Investors. While acknowledging that the terms contained in the
December 12 term sheet were more favorable to the Company than those contained
in earlier versions of the term sheet, the Independent Committee requested that
Management continue to negotiate with the Lead 2004 Investors in an effort to
reduce the proposed five times multiple for each of the liquidation preference,
the conversion right and the participation right of the Series A Preferred
Shares and to provide for the automatic conversion of all preferred shares based
on a mutually agreeable trading value of the Company's Common Stock. During the
period from December 15, 2003 through December 18, 2003, the Company's Chief
Executive Officer held a number of telephone conferences with representatives of
the Lead 2004 Investors in an effort to negotiate reductions to the liquidation
preference, conversion right and
34
participation right of the Series A Preferred Shares and to provide for an
automatic conversion mechanism relating to the preferred shares. During the same
period, Company counsel and Lead Investor Counsel held a number a
teleconferences relating to these issues.
On December 17, 2003, a representative of Care Capital, the Company's Chief
Executive Officer, and certain holders of the Company's 1998-2002 debentures met
to discuss the liquidation preference, conversion right and participation right
of the Series A Preferred Shares contained in the December 12, 2003 term sheet.
Following extended discussions on these items, Care Capital advised that in the
absence of a five times multiple for each of the liquidation preference and the
conversion right for the Series A Preferred Shares, the Lead 2004 Investors
would not provide financing to the Company. Care Capital advised, however, that
the Lead 2004 Investors would agree to a reduction of the participation right
for the Series A Preferred Shares from 5 times to 1.5 times.
On December 19, 2003, special legal counsel for the Independent Committee
and Company counsel contacted Lead Investor Counsel by telephone to discuss a
proposal to include a mandatory conversion mechanism relating to the preferred
shares. Following a number of teleconferences on December 19, 2003 among counsel
for the Lead 2004 Investors, the Company and the Independent Committee, the Lead
2004 Investors agreed to provide for the automatic conversion of all preferred
shares into the Company's Common Stock provided that the Common Stock trades at
an average price of $2.80 per share for any 30 consecutive trading day period
and the average daily trading value of the Company's Common Stock during such 30
day trading period equals or exceeds $1.75 million.
On December 19, 2003, Lead Investor Counsel provided Company counsel with a
definitive term sheet relating to the proposed financing. Such term sheet
reflected the changes previously discussed and agreed to in concept by the
parties, all as described above.
The Independent Committee convened a meeting on December 20, 2003 to review
the definitive term sheet provided by the Lead 2004 Investors dated December 19,
2003. In addition to a discussion of the mandatory conversion feature for the
preferred shares contained in the term sheet, the Independent Committee reviewed
each of the issues previously raised by the Independent Committee in its Issue
Memorandum dated December 8, 2003. Following a detailed review and discussion of
such issues and the final terms contained in the December 19, 2003 term sheet,
and considering the extensive information reviewed by the Independent Committee
(See "Information Reviewed by the Independent Committee" below) and the fairness
opinion of Agema LLC, the independent financial advisor retained by the
Independent Committee, the Independent Committee unanimously adopted a
resolution approving the terms of the December 19, 2003 term sheet and the
transactions contemplated therein.
At a meeting of the Board of Directors held on December 21, 2003, Mr.
Sumner, as Chairman of the Independent Committee, presented to the Board the
unanimous resolution of the Independent Committee approving the terms of the
December 19, 2003 term sheet and the transactions contemplated therein. After
extensive discussion of the terms of the December 19, 2003 term sheet and the
findings of the Independent Committee, including the fairness opinion provided
by Agema LLC, the Board of Directors approved and ratified the December 19, 2003
term sheet. Each of Messrs. Thangaraj, Karabelas, Wesson, Conjeevaram and Shroff
(each being a designee of Care Capital, Essex Woodlands and Galen Partners)
abstained from such action.
During the period from December 31, 2003 through January 7, 2004, Company
counsel and Lead Investor Counsel exchanged drafts of the relevant transaction
documents prepared by such counsel intended to memorialize the December 19, 2003
term sheet. Between January 9, 2004 and January 19, 2004, Lead Investor Counsel
and Company counsel exchanged marked drafts of the various documents and
participated in numerous telephone conferences in an effort to finalize the
financing agreements. During this period, no changes were made to the financial
or other material terms contained in the December 13, 2003 term sheet. Also
during this period, Company counsel, Lead Investor Counsel and counsel for
Watson finalized the agreements by which the Company would retire $16.4 million
of the Watson Term Loan indebtedness and Watson would convey the remaining $5.0
million of such indebtedness to the Lead 2004 Investors.
35
On January 20, 2004, the Board of Directors convened a meeting to, among
other things, review the status of the 2004 Debenture Offering and the
completion of the documentation relating to the such transaction. At such
meeting, the Board approved the terms of such documentation and authorized
Management to negotiate such changes to the financing documents and relating
agreements as were necessary to conclude the 2004 Debenture Offering. Each of
Messrs. Wesson, Conjeevaram, Shroff, Thangaraj and Karabelas abstained from such
action as such directors are designees of the Lead 2004 Investors. Any changes
made to the definitive 2004 Purchase Agreement and related agreements during the
period subsequent to the receipt of the approval of the Board of Directors were
not material and did not alter the financial terms of the 2004 Debenture
Offering as previously discussed and approved by the Board.
During the period from January 20 through February 5, 2004, legal counsel
for the Company, the Lead 2004 Investors and Watson finalized the 2004 Debenture
Offering documents for execution. On February 6, 2004, the 2004 Purchase
Agreement and related transaction documents were executed and held in escrow
pending the completion of the funding of the transaction on February 10, 2004,
at which time all documents were released from escrow.
2004 DEBENTURE OFFERING
On February 10, 2004, the Company consummated a private offering of
convertible senior secured debentures (the "2004 Debentures") for an aggregate
purchase price of approximately $12.3 million (the "2004 Debenture Offering").
The 2004 Debentures were issued pursuant to a certain Debenture and Share
Purchase Agreement dated as of February 6, 2004, as amended June 6, 2004 (the
"2004 Purchase Agreement") by and among the Company, the Lead 2004 Investors and
each of the purchasers listed on the signature page thereto. The 2004 Purchase
Agreement provided for the Company to issue additional 2004 Debentures in the
principal amount of up to approximately $1.7 million on or before June 5, 2004
(the date 120 days from the date of the 2004 Purchase Agreement) provided that
the aggregate principal amount of the 2004 Debentures issued pursuant to the
2004 Purchase Agreement shall not exceed $14.0 million without the consent of
the holders of 60% of the principal amount of the 2004 Debentures then held by
the Lead 2004 Investors. On April 14, 2004 and May 28, 2004, the Company
completed an additional closing under the 2004 Purchase Agreement pursuant to
which the Company issued additional 2004 Debentures in the aggregate principal
amount of $579,000 and $1.121 million, respectively, bringing the aggregate
principal amount of 2004 Debentures issued by the Company under the 2004
Purchase Agreement to $14.0 million.
On June 6, 2004, the 2004 Purchase Agreement was amended to (i) increase
the principal amount of the 2004 Debentures issuable under the 2004 Purchase
Agreement from $14.0 million to $17.5 million, and (ii) extend the date for the
issuance of additional 2004 Debentures from June 5, 2004 to June 30, 2004 (the
"2004 Purchase Agreement Amendment").
Of the approximate $14.0 million in 2004 Debentures issued in the 2004
Debenture Offering as of June 1, 2004, $2.0 million of 2004 Debentures were
issued in exchange for the surrender of a like amount of principal plus accrued
and unpaid interest outstanding under the Company's 5% convertible senior
secured debentures issued to the Lead 2004 Investors in November and December,
2003 pursuant to the Letter of Support. The Company will use the net proceeds of
the 2004 Debenture Offering to fund working capital requirements.
The 2004 Debentures, issued at par, bear interest at the rate of 1.62% per
annum, the short term Applicable Federal Rate on the date of issuance, and are
secured by a lien on all the Company's and its subsidiaries' assets.
The 2004 Debentures (including the principal amount plus accrued interest
at the date of conversion) will convert automatically into the Company's Series
A Preferred shares immediately following the Company's receipt of shareholder
approval of this Proposal 2 to restate the Company's Charter (the "Charter
Amendment") and the filing of the Charter Amendment with the Office of the New
York Department of State (the date of such filing, the "Charter Amendment Filing
Date") as provided in the 2004 Purchase Agreement, the Charter Amendment and the
Conversion Agreement (as discussed below). The 2004 Debentures will convert into
Series A Preferred shares at a price per share (the "Series A Conversion Price")
of $0.6425, representing the average of the closing bid and asked prices of the
Company's Common Stock for
36
the twenty (20) trading days ending February 4, 2004, as reported by the
Over-the-Counter ("OTC") Bulletin Board. The closing bid price for the Company's
Common Stock on January 20, 2004, the date of Board approval of the 2004
Debenture Offering, was $0.64 per share. The Series A Conversion Price is
subject to adjustment from time to time, as described below under the caption
"Terms of Preferred Stock".
Based on the $0.6425 Series A Conversion Price, and estimating the interest
accrual under the 2004 Debentures prior to the Charter Amendment Filing Date,
the 2004 Debentures with an aggregate principal amount of $17.5 million would be
convertible into an aggregate of approximately 27.2 million Series A Preferred
shares.
As of February 10, 2004, the date of the initial closing of the 2004
Purchase Agreement, the Company had issued an outstanding an aggregate of
approximately $87.7 million in principal amount of 5% convertible senior secured
debentures maturing March 31, 2006 issued pursuant to three separate Debenture
Purchase Agreements dated March 10, 1998, as amended (the "1998 Debentures"),
May 26, 1999, as amended (the "1999 Debentures") and December 20, 2002 (the
"2002 Debentures"), respectively. The 1998 Debentures, 1999 Debentures and 2002
Debentures are referred to collectively as the "1998-2002 Debentures". The terms
of the 1998-2002 Debentures are consistent in all material respects with the
2004 Debentures and are described below under the caption "Description of
Debentures". After giving effect to the Company's issuance of additional 5%
convertible senior secured debentures in satisfaction of interest payments on
the 1998-2002 Debentures, as of February 10, 2004 , the 1998-2002 Debentures
were convertible into an aggregate of approximately 190.4 million shares of the
Company's Common Stock. After considering the Company's other outstanding
convertible securities, as of June 1, 2004, the Company had committed to issue
approximately 277,593,519 shares of Common Stock in excess of its currently
authorized 80.0 million shares of Common Stock.
Simultaneous with the execution of the 2004 Purchase Agreement, and as a
condition to the initial closing of the 2004 Purchase Agreement, the Company,
the investors in the 2004 Debentures and each of the holders of the 1998-2002
Debentures execute a certain Debenture Conversion Agreement dated as of February
6, 2004 (the "Conversion Agreement"). In accordance with the terms of the
Conversion Agreement, each holder of 2004 Debentures agreed to convert the 2004
Debentures held by such holder into the Company's Series A Preferred shares and
each holder of 1998-2002 Debentures agreed to convert the 1998-2002 Debentures
held by such holder into the Company's Junior Preferred Shares. The Conversion
Agreement provides, among other things, for the automatic conversion of the 2004
Debentures and the 1998-2002 Debentures (collectively, the "Outstanding
Debentures") into the appropriate class of Preferred Stock immediately following
the Company's receipt of shareholder approval to the Charter Amendment pursuant
to this Proposal 2 and the filing of the Charter Amendment with the Office of
the New York Department of State.
Under the Conversion Agreement, the holders of approximately $6.6 million
in principal amount of 2002 Debentures issued pursuant to the Letter of Support
during 2003 will convert such 2002 Debentures (plus accrued and unpaid interest)
into Series B Preferred Shares. Of the remaining approximate $81.1 million in
principal amount of the 1998-2002 Debentures, approximately $31.6 million is
comprised of 1998 Debentures, approximately $21.8 million is comprised of 1999
Debentures and approximately $27.7 million is comprised of 2002 Debentures. The
1998 Debentures (plus accrued and unpaid interest) will be converted into Series
C-1 Preferred shares. The 1999 Debentures (plus accrued and unpaid interest)
will be converted into Series C-2 Preferred shares. The 2002 Debentures (plus
accrued and unpaid interest) shall be converted into Series C-3 Preferred
shares.
The number of Junior Preferred Shares to be received by each holder of
1998-2002 Debentures is based on the respective prices at which the 1998-2002
Debentures were convertible into Common Stock. The 2002 Debentures issued
pursuant to the Letter of Support in 2003 have a conversion price of $0.3420 per
share. The closing bid price for the Company's Common Stock on December 17,
2002, the date of Board approval of the 2002 Purchase Agreement, was $0.98 per
share. The 1998 Debentures, 1999 Debentures and the remaining balance of the
2002 Debentures have conversion prices of $0.5776, $0.5993 and $0.3481 per
share, respectively. The closing bid price for the Company's Common Stock on
February 19, 1998, May 20, 1999 and
37
December 17, 2002, the dates of Board approval of the debenture purchase
agreements pursuant to which the 1998 Debentures, the 1999 Debentures and the
2002 Debentures were issued, was $2.63, $1.94 and $0.98 per share, respectively.
Based on the respective conversion prices of the 1998-2002 Debentures, and
estimating the interest accrual on the 1998-2002 Debentures prior to the Charter
Amendment Filing Date, the 1998-2002 Debentures are convertible into an
aggregate of approximately 20 million Series B Preferred shares, 56.5 million
Series C-1 Preferred shares, 37.5 million Series C-2 Preferred shares and 80.9
million Series C-3 Preferred shares.
DILUTION TO COMMON SHAREHOLDERS AND HOLDERS OF THE 1998-2002 DEBENTURES
Prior to the completion of the 2004 Debenture Offering, the Company had
issued and outstanding an aggregate of approximately $87.7 million in principal
amount of 1998-2002 Debentures which were convertible into an aggregate of
approximately 190.4 million shares of the Company's Common Stock. After giving
effect to the conversion rights of the 1998-2002 Debentures, and the Company's
stock options and warrants then outstanding, the aggregate ownership interest in
the Company held by holders of the 1998-2002 Debentures as a group was
approximately 76.2% (calculated on a fully-diluted basis). As of February 9,
2004, the day preceding the initial closing of the 2004 Purchase Agreement, the
Company's public, non-affiliated shareholders as a group held an aggregate of
approximately 14,238,911 shares, representing approximately 5.7% of the
Company's Common Stock (calculated on a fully-diluted basis).
The following table provides the ownership percentages in the Company held
by the 2004 Debentureholders as a group, the holders of the 1998-2002 Debentures
as a group and the Company's public, non-affiliated shareholders as a group,
both before and after giving effect to the completion of the 2004 Debenture
Offering (calculated on a fully-diluted basis).
FULLY DILUTED OWNERSHIP PERCENTAGE
IN THE COMPANY AFTER THE COMPLETION
OF THE 2004 DEBENTURE OFFERING
---------------------------------------
FULLY DILUTED OWNERSHIP PERCENTAGE ASSUMES ASSUMES
IN THE COMPANY BEFORE THE COMPLETION $14.0 MILLION $17.5 MILLION
SECURITY HOLDERS OF THE 2004 DEBENTURE OFFERING IN 2004 DEBENTURES IN 2004 DEBENTURES
---------------- ------------------------------------ ------------------ ------------------
- 2004 Debentureholders as a Group... -- 30.5% 35.4%
- 1998-2002 Debentureholders as a
Group.............................. 76.2% 53.3% 49.5%
- Public, Non-Affiliated Shareholders
as a Group......................... 5.7% 4.0% 3.7%
PROCEEDS OF 2004 DEBENTURE OFFERING
As of June 1, 2004, the Company had issued 2004 Debentures in the aggregate
principal amount of $14 million. Approximately $2.0 million in principal amount
of the 2004 Debentures were issued in exchange for the surrender of a like
amount of principal plus accrued interest outstanding under Company debentures
issued in November and December 2003 pursuant to the Letter of Support. Of the
$12 million in gross proceeds received by the Company under the 2004 Debenture
Offering, approximately $4.3 million was paid to Watson to retire $16.4 million
of the Company's indebtedness to Watson under the $21.4 million Watson Term Loan
Agreement. (See "Interests of Investors in the 2004 Debenture Offering"). After
giving effect to the payment to Watson and the satisfaction of legal and other
professional fees of approximately $400,000, assuming no further 2004 Debentures
are issued, the Company estimates that it will realize net proceeds from the
2004 Debenture Offering of approximately $7.3 million.
As described under Proposal 4 under the caption "Proceeds of the Sale of
the Congers Facilities Assets", the Company estimates that it will realize net
proceeds from the asset sale transaction of approximately $2.3 million. The net
proceeds of each of the asset sale transaction and the 2004 Debenture Offering
received as of June 1, 2004, aggregating approximately $9.1 million, combined
with the Company's other cash balances and reduced by operating expenses though
May 31, 2004, provided the Company with approximately $7.3 million in cash
reserves as of June 1, 2004 to fund the development and commercialization of its
38
proprietary technologies. Set forth below is a summary of the Company's
estimated allocation of its cash resources as of June 1, 2004 to the development
of its proprietary technologies and funding of operations:
USE ITEM AMOUNT
-------- ------------
Research & Development of ADF Technology Product, including
clinical trials........................................... $ 3,250,000
Research & Development of Opiod Synthesis Technologies...... $ 600,000
Administration (i.e., insurance, finance, investor
relations, employee benefits, legal, market research)..... $ 2,000,000
Personnel (i.e., salaries, bonuses, payroll taxes).......... $ 1,450,000
------------
$7.3 million
============
While no assurance can be given, Management estimates that the existing cash on
hand at June 1, 2004 of $7.3 million will fund activities through the first
quarter of 2005. As of such time, the Company estimates that it will have
completed initial clinical trials of a product incorporating its ADF Technology
and will have entered into one or more licensing agreements for such product
with a third party. The Company expects that the payments to be derived from
such licensing agreements will provide the Company with the necessary additional
funding to continue operations and to expand and expedite its development
efforts.
The ability of the Company to enter into a license agreement with a third party
and the consideration to be received by the Company as part of any such
agreement is primarily dependent upon the favorable outcome of the initial
clinical trials of the Company's products, of which no assurance can be given.
DESCRIPTION OF CHARTER AMENDMENT
Prior to giving effect to the Charter Amendment described in this Proposed
2 and attached as Appendix C to this Proxy Statement, the Company's Charter
provides for authorized capital stock consisting of 80.0 million shares of
Common Stock, $.01 par value per share. The Charter provides that each share of
Common Stock shall entitle the holder thereof to one vote on each matter
submitted to a vote of stockholders of the Company. In addition, the Company's
1998 Debentures and 1999 Debentures have the right to vote with holders of the
Company's Common Stock on all matters submitted to stockholders of the Company
on as-converted basis giving effect to the conversion of the 1998 Debentures and
1999 Debentures into Common Stock (without the requirement of such conversion)
as of the record date set for the shareholder vote. No shares of Preferred Stock
are currently authorized for issuance under the Charter.
On January 20, 2004, the Board of Directors unanimously approved and
recommended that the Company's shareholders consider and approve the Charter
Amendment providing for (i) an increase in the number of authorized shares of
capital stock of the Company from 80.0 million to 940.0 million, consisting of
650.0 million shares of Common Stock, $.01 par value per share, and 290.0
million shares of Preferred Stock, $.01 par value per share, and (ii)
designating 45.0 million shares of the Preferred Stock as Series A Preferred,
designating 25.0 million shares of the Preferred Stock as Series B Preferred,
designating 70.0 million shares of the Preferred Stock as Series C-1 Preferred,
designating 50.0 million shares of the Preferred Stock as Series C-2 Preferred
and designating 100.0 million shares of the Preferred Stock as Series C-3
Preferred, with each class of Preferred Stock to have the rights, preferences
and limitations described in the Charter Amendment.
The Series A Preferred shares have a liquidation preference equal to five
(5) times the initial $0.6425 Series A Conversion Price (the "Series A
Liquidation Preference"). In addition, the Series A Preferred shares are
convertible into the Company's Common Stock, with each Series A Preferred share
convertible into five shares of the Company's Common Stock, subject to
adjustment, from time to time, pursuant to the dilution protections described
below under the caption "Terms of Preferred Stock". The closing bid price for
the Company's Common Stock on January 20, 2004, the date of Board approval of
the 2004 Debenture Offering, was $0.64 per share. Without limiting the Series A
Liquidation Preference, the holders of Series A Preferred shares also have the
right to participate with the holders of the Company's Common Stock upon the
occurrence of a liquidation event, including the Company's merger, sale of all
or substantially all of its assets
39
or a change of control transaction, on an as-converted basis (but for these
purposes only, assuming the Series A Preferred shares to be convertible into
only thirty percent (30%) of the shares of Common Stock into which they are
otherwise then convertible). The holders of Series A Preferred shares also have
the right to vote as part of a single class with all holders of the Company's
voting securities on all matters to be voted on by such security holders. Each
holder of Series A Preferred shares will have such number of votes as shall
equal the number of votes he would have had if such holder converted all Series
A Preferred shares held by such holder into shares of Common Stock immediately
prior to the record date relating to such vote.
The Junior Preferred Shares have a liquidation preference equal to one (1)
time the principal amount plus accrued and unpaid interest of the 1998-2002
Debentures converted into Junior Preferred Shares The liquidation preference of
the Series B Preferred has priority over, and will be satisfied prior to, the
liquidation preference of the Series C Preferred. The liquidation preference for
each class of the Junior Preferred Shares is equal to the conversion prices of
such shares. The Junior Preferred Shares are convertible into the Company's
Common Stock, with each Junior Preferred Share convertible into one share of
Common Stock. The holders of the Junior Preferred Shares have the right to vote
as part of the single class with all holders of the Company's Common Stock and
the holders of the Series A Preferred on all matters to be voted on by such
stockholders, with each holder of Junior Preferred Shares having such number of
votes as shall equal the number of votes he would have had if such holder had
converted all Junior Preferred Shares held by such holder into Common Stock
immediately prior to the record date relating to such vote.
The Charter Amendment also provides for the elimination of the voting
rights of the holders of the 1998 Debentures and the 1999 Debentures. Effective
on the Charter Amendment Filing Date, all of the 1998 Debentures and 1999
Debentures will convert automatically into Junior Preferred Shares. As a result,
no 1998 Debenture or 1999 Debentures will remain outstanding following the
Charter Amendment Filing Date for which such voting rights could be exercised.
REFERENCE IS MADE TO THE DESCRIPTION PROVIDED UNDER THE CAPTION "TERMS OF
PREFERRED STOCK" AS WELL AS THE COPY OF THE CHARTER AMENDMENT ATTACHED AS
APPENDIX C TO THIS PROXY STATEMENT FOR A MORE DETAILED DESCRIPTION OF THE TERMS
OF THE PREFERRED STOCK.
As of June 1, 2004, the Company had 21,716,025 shares of Common Stock
issued and outstanding. In addition, as of June 1, 2004, the Company had issued
Common Stock purchase options and warrants exercisable for approximately
36,492,654 shares of Common Stock. Assuming the receipt of shareholder approval
of the Proposal 2 and after giving effect to the conversion of the Company's
Outstanding Debentures into Preferred Stock, (including an estimate of accrued
interest under the Outstanding Debentures prior to the Charter Amendment Filing
Date), the Company's outstanding shares of Common Stock and Preferred Stock,
40
shares available under Company stock option plans, shares underlying outstanding
warrants, and shares of Common Stock remaining available for future issuance are
as follows:
AUTHORIZED SHARES OF COMMON STOCK..................... 650,000,000(1)
Shares of Common Stock issued and outstanding......... 21,716,025
Shares of Common Stock issuable by the Company under
convertible securities(1)
- Series A Preferred(2)............................. 136,845,321
- Series B Preferred(2)............................. 20,001,925
- Series C-1 Preferred(2)........................... 56,490,706
- Series C-2 Preferred(2)........................... 37,523,0431
- Series C-3 Preferred(2)........................... 80,937,570
- Common Stock Purchase Warrants.................... 33,075,384
- Stock Option Plans................................ 3,417,270
-----------
368,291,219 368,291,219
-----------
TOTAL SHARE OF COMMON STOCK ISSUABLE UPON CONVERSION
OF CONVERTIBLE SECURITIES........................... 390,007,245 390,007,245
-----------
SHARES OF COMMON STOCK UNRESERVED AND AVAILABLE FOR
ISSUANCE............................................ 259,992,755(1)
===========
---------------
(1) Assumes receipt of shareholder approval of this Proposal 2.
(2) Gives effect to the conversion of the Company's Outstanding Debentures in
the aggregate principal amount of $107.5 million (assuming $17.5 million in
principal amount of 2004 Debentures ) (including an estimate of accrued and
unpaid interest through the date of the Chapter Amendment Filing Date
projected to be July 1, 2004) into the applicable class of Preferred Stock.
Upon conversion of the Outstanding Debentures into Preferred Stock, the
Company will have 17,630,936, 4,998,075 and 45,048,681 shares of Series A
Preferred, Series B Preferred and Series C Preferred, respectively,
unreserved and available for issuance. Pursuant to an Investor Rights
Agreement dated as of February 6, 2004 between the Company and the holders
of the Outstanding Debentures, except for the Preferred Stock issuable upon
conversion of the Outstanding Debentures, the Company is precluded for
issuing any additional shares of any class of Preferred Stock in the absence
of the written consent of the holders of 60% of the Series A Preferred
shares.
BOARD RECOMMENDATION
THE COMPANY'S BOARD OF DIRECTORS HAS APPROVED THE CHARTER AMENDMENT TO (I)
INCREASE THE NUMBER OF AUTHORIZED SHARES OF THE COMPANY'S COMMON STOCK FROM 80.0
MILLION SHARES TO 650.0 MILLION SHARES IN ORDER TO PROVIDE SUFFICIENT AUTHORIZED
SHARES OF COMMON STOCK FOR ISSUANCE UPON CONVERSION OF THE COMPANY'S PREFERRED
STOCK AND THE EXERCISE OF THE COMPANY'S COMMON STOCK PURCHASE OPTIONS AND
WARRANTS, AND (II) PROVIDE FOR ADDITIONAL CAPITAL STOCK CONSISTING OF 290.0
MILLION SHARES OF CONVERTIBLE PREFERRED STOCK, OF WHICH 45.0 MILLION SHARES
SHALL BE DESIGNATED SERIES A PREFERRED, 25.0 MILLION SHARES SHALL BE DESIGNATED
SERIES B PREFERRED, 70.0 MILLION SHARES WILL BE DESIGNATED SERIES C-1 PREFERRED,
50.0 MILLION SHARES WILL BE DESIGNATED SERIES C-2 PREFERRED, AND 100.0 MILLION
SHARES SHALL BE DESIGNATED SERIES C-3 PREFERRED. ACCORDINGLY, THE COMPANY'S
BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS VOTE "FOR" THE
APPROVAL OF THIS PROPOSAL 2.
DESCRIPTION OF DEBENTURES
2004 DEBENTURES
The following description summarizes the material terms of the 2004
Debentures. Shareholders are urged to carefully review the Debenture and Share
Purchase Agreement by and among the Company and other
41
signatories thereto, dated as of February 6, 2004 (the "2004 Purchase
Agreement") a copy of which is attached hereto as Appendix G in its entirety.
These 2004 Debentures have been issued in the form of Appendix H attached
hereto.
Principal, Maturity and Interest. As of June 1, 2004, the aggregate
principal amount of the outstanding 2004 Debentures was $14.0 million. The
Company has a right to issue additional 2004 Debentures in the aggregate
principal amount of up to $3.5 million no later than June 30, 2004 or the time
of conversion of the 2004 Debentures, whichever is earlier, provided, however,
that such amount may be increased with prior written consent of the holders of
at least 60% of the principal amount of the 2004 Debentures then held by Capital
Investment II, LP, Essex Woodlands Health Ventures V, L.P., and Galen Partners
III, L.P. (the "Lead 2004 Investors")
Unless otherwise converted into Preferred Stock (as provided below under
the caption "Automatic Conversion of 2004 Debentures") each 2004 Debenture
generally becomes due and payable on July 31, 2004 (the "Maturity Date"),
provided, however, that (i) the Company may extend the Maturity Date, for a
period not to exceed ninety (90) days, to the extent the effectiveness of the
amendment to its Certificate of Incorporation (discussed in Proposal 2) (the
"Charter Amendment") is delayed due to the review of this Proxy Statement by the
Commission, and (ii) the holders of 2004 Debentures holding at least percent
(60%) of the aggregate principal amount of the 2004 Debentures then outstanding
may extend the Maturity Date from time to time in their sole discretion.
Interest on each 2004 Debenture accrues at the rate of the rate of (i)
1.62% per annum (the February 2004 Short Term Applicable Federal Rate) prior to
the Maturity Date, and (ii) fifteen percent (15%) per annum on and after the
Maturity Date, in each case subject to the limitations of applicable law.
Automatic Conversion of 2004 Debentures. The 2004 Debentures (including
the principal amount plus interest accrued at the date of conversion) will
convert automatically into the Company's Series A convertible preferred stock
(the "Series A Preferred") immediately following (i) the Company's receipt of
shareholder approval at its next shareholder's meeting of the Charter Amendment
to authorize, among other things, the creation of the Series A Preferred and
(ii) the filing of the Charter Amendment with the Office of the New York
Department of State (the date of such filing, the "Charter Amendment Filing
Date"), as provided in the Purchase Agreement. The 2004 Debentures will convert
into Series A Preferred Shares at a price per share (the "Series A Conversion
Price") of $0.6425, representing the average of the closing bid and asked prices
of the Company's common stock, $.01 par value per share (the "Common Stock") for
the twenty (20) trading days ending February 4, 2004, as reported by the
Over-the-Counter ("OTC") Bulletin Board. The closing bid price for the Company's
Common Stock on January 20, 2004, the date of Board approval of the 2004
Debenture Offering, was $0.64 per share.
The Series A Conversion Price is subject to adjustment, from time to time,
to equal the consideration per share received by the Company for its Common
Stock, or the conversion/exercise price per share of the Company's Common Stock
issuable under rights or options for the purchase of, or stock or other
securities convertible into, Common Stock, if lower than the then applicable
Series A Conversion Price.
After giving effect to the issuance of the 2004 Debentures in the principal
amount of $14.0 million as of June 1, 2004, the ownership in the Company of each
of the 2004 Debentureholders as a group, the 1998-2002 Debentureholders as a
group, and the Company's public, non-affiliated shareholders as a group
(calculated on a fully-diluted basis) is 30.5%, 53.3% and 4.0%, respectively
(35.4%, 49.5% and 3.7%, respectively, in the event the Company issues the
maximum principal amount of $17.5 million in 2004 Debentures under the 2004
Purchase Agreement).
Negative Covenants. Without the prior written consent of the holders of
sixty percent (60%) of the then outstanding principal amount of the 2004
Debentures, the Company may not, nor may allow any of its guaranteeing
subsidiaries, either directly or indirectly to, generally:
1) Effect any reclassification, combination or reverse stock split of
the Company's Preferred Stock or Common Stock
42
2) Incur, assume or permit to exist any liens except:
- liens in favor of Galen Partners III, L.P. and Oracle Strategic
Partners, L.P. on behalf of the holders of 1998-2002 Debentures and
the 2004 Debentures to secure payment of principal of and interest
on the 1998-2002 Debentures and the 2004 Debentures;
- liens in favor of the holders of a certain promissory note in the
principal amount of $5.0 million in favor of the Lead 2004 Investors
and the other investors in the 2004 Debentures as of February 10,
2004 (collectively, the "Watson Note Purchasers"), as assignee of
the Term Loan Agreement dated March 29, 2000 between the Company and
Watson Pharmaceuticals, Inc., as amended, (the "Amended and Restated
Watson Note") to secure payment of principal thereof and interest
thereon;
- liens securing the Company' indebtedness under a working capital
line of credit up to $5.0 million;
- attachments or judgment liens not constituting an Event of Default
under the 2004 Purchase Agreement;
- liens for taxes, assessments and other government charges;
- liens for workmen, materialmen, vendors, suppliers, mechanics,
landlords and other similar liens in the ordinary course of
business;
- liens incurred in the ordinary course of business in connection with
workers' compensation, unemployment insurance, social security,
etc.;
- easements, rights of way, etc. not interfering with the Company's
ordinary conduct of business;
- certain lessor or sublessor interests under a lease;
- liens in favor of customs and revenue authorities arising as a
matter of law; and
- zoning or similar government rights.
3) Create, incur, assume or permit to exist or guarantee any
indebtedness except:
- indebtedness under the 2004 Debentures;
- indebtedness in existence on the date of the 2004 Purchase
Agreement, including, without limitation, the 1998-2002 Debentures;
- indebtedness incurred in the ordinary course of business;
- indebtedness not to exceed $500,000, which is subordinate to the
indebtedness of the Company to the holders of the 2004 Debentures;
- indebtedness relating to contingent obligations of the Company and
its subsidiaries to their suppliers, customers and licensees
incurred in the ordinary course of business;
- indebtedness under intercompany loans between the Company and its
subsidiaries;
- indebtedness under capital leases in the amount not to exceed
$500,000;
- indebtedness under a working capital line of credit not to exceed
$5.0 million; and
- accounts or notes payable for purchase of merchandise or services in
the ordinary course of business;
4) Other than capital expenditures contained in any budget approved by
the Board of Directors, make or permit any subsidiary to make any capital
expenditure in excess of $250,000 in any fiscal year;
5) Except as contemplated by the 2004 Purchase Agreement, amend the
2004 Purchase Agreement, the 2004 Debentures, the 1998-2002 Debentures, the
Amended and Restated Watson Note and
43
the documents relative thereto without the prior written consent of the
holders of 60% of the then outstanding principal amount of the 2004
Debentures;
6) Make any cash interest payments to the holders of the 1998-2002
Debentures without the prior written consent of all holders of the 2004
Debentures;
7) Engage in non-arms-length transactions;
8) Form or permit to form any new entity in which the Company, its
subsidiaries or their respective directors have more than a 50% interest or
a material minority interest;
9) Permit The Medi-Gum Corporation, a dormant subsidiary of the
Company, to commence business or own assets not conducted or owned on the
date of the 2004 Purchase Agreement;
10) Make any loan or advance, or guarantee any obligation (except
intercompany loans in the ordinary course of business) except those loans,
advances or guarantees existing on the date of the 2004 Purchase Agreement;
11) Engage in intercompany transfers or transactions, transactions
with officers, directors or affiliates except as permitted in the 2004
Purchase Agreement or divert a corporate opportunity of the Company or its
subsidiary;
12) Make any investments in stock, option, warrant or other security
except the repurchase right of the Company's stock as contemplated by the
2004 Purchase Agreement and the purchase obligations of the US Government
or certificates of deposit or other instruments having a term of no more
than one year;
13) Engage in any business, whether directly or indirectly, not
currently conducted by the Company or any of its subsidiaries;
14) Except as otherwise approved by the Board of Directors, materially
amend any employee benefit plan, program or other arrangement with current
or former employees of the Company or its subsidiaries except as expressly
permitted by the existing arrangements or approved by the Board of
Directors, provided same does not have a material affect on the terms of
employment of such employees;
15) Except as otherwise approved by the Board of Directors, agree to
materially increase any benefit to current or former employees of the
Company or its subsidiaries from the levels provided on the date of the
2004 Purchase Agreement unless approved by the Company's Board of
Directors; or
16) Except as otherwise approved by the Board of Directors, agree to
increase the annual compensation of any employee except (i) in the ordinary
course of business not to exceed 10% of the annual salary on the date of
the 2004 Purchase Agreement, and (ii) customary annual employee bonuses not
to exceed $350,000 in the aggregate in any fiscal year.
Affirmative Covenants. The Company has agreed that so long as the 2004
Debentures remain outstanding, the Company will:
1) Maintain, and will cause its guaranteeing subsidiaries to maintain,
their corporate existence, rights, franchises, trademarks, patents,
copyrights and other intellectual property rights, which are necessary for
the conduct of the Company's business;
2) Maintain, and will cause its guaranteeing subsidiaries to maintain,
and keep in good repair its properties and to comply with the terms of
their respective leases;
3) Pay, withhold, discharge all taxes and will cause its guaranteeing
subsidiaries to do so;
4) Pay, and will cause its guaranteeing subsidiaries to pay, all items
of indebtedness, which, if unpaid, may become a lien on the property of the
Company;
5) Maintain, and will cause its subsidiaries to maintain, customary
insurance on the assets of the Company and its guaranteeing subsidiaries
with reputable insurer(s);
44
6) Furnish information and financial statements to the holders of the
20004 Debentures, including, without limitation a certificate of compliance
with the terms of the 2004 Agreement and other material contracts;
7) Provide notice of any adverse change, including, without
limitation, an Event of Default (as defined in the 2004 Purchase
Agreement);
8) Comply, and will cause its subsidiaries to comply, with the terms
and conditions of all material agreements, commitments and instruments and
the terms of the applicable law;
9) Maintain and defend, and shall cause its subsidiaries to maintain
and defend, the licenses, sublicenses and intellectual property of the
Company and its subsidiaries;
10) Maintain proper books and records and permit the holders of the
2004 Debentures to inspect such books and records and discuss the affairs,
finances and accounts of the Company and its subsidiaries with their
accountants, officers and directors;
11) Maintain a board of directors in accordance with the Voting
Agreement executed in connection with the 2004 Purchase Agreement, which
board shall meet at least 4 times a year;
12) Maintain a principal office where notices, demands and
presentments with respect to 2004 Purchase Agreement can be made and
provide a 30-day notice of any change in the principal office address;
13) Use $4.3 million of the proceeds received pursuant to the 2004
Purchase Agreement to retire $16.4 million of the $21.4 million
indebtedness to Watson Pharmaceuticals, Inc.
14) Make timely payments of principal and interest on the 2004
Debentures;
15) Take all necessary actions to facilitate the conversion of the
1998-2002 Debentures and the 2004 Debentures into Preferred Stock of the
Company in accordance with the terms of the Conversion Agreement executed
in connection with the 2004 Purchase Agreement;
16) Condition the completion of (i) any transaction among the Company
and the purchasers of the 2004 Debentures or (ii) any Liquidation Event (as
defined in the 2004 Purchase Agreement) upon the approval of same by an
Independent Committee of the Board of Directors of the Company;
17) Provide any and all documents and take such actions as to
effectuate the transactions contemplated by the 2004 Purchase Agreement;
18) Promptly convene a meeting of the Company's shareholders to
approve, among other things, the amendment to the Company's Certificate of
Incorporation;
19) File, on a timely basis, all required Commission reports, which
shall be true and accurate; and
20) Consult with the Lead 2004 Investors prior to making any press
release or public statement relating to the 2004 Purchase Agreement except
where such press release or public statement is required by law.
Events of Default. Each of the following constitutes a Event of Default
under the 2004 Purchase Agreement and the 2004 Debentures:
1) Company's default in the payment of principal of or interest on any
2004 Debenture;
2) Company's failure to issue the shares of its Common Stock and/or
Preferred Stock upon conversion of the 2004 Debentures;
3) Company's default with respect to its Negative Covenants and/or
Affirmative Covenants, subject to the applicable cure periods;
45
4) Company's or any of its guaranteeing subsidiaries' default under
any agreement executed in connection with the 2004 Purchase Agreement,
which remains unremedied to the satisfaction of the holders of 60% of the
2004 Debentures;
5) If any representation or warranty of the Company, its officer or
guaranteeing subsidiary was incorrect in any material respect when made;
6) Company's or its subsidiary's (i) default under any indenture,
mortgage, agreement, instrument or indebtedness of the Company in excess of
$500,000, or which results in the acceleration the Company's indebtedness
in excess of $1,000,000, (ii) default under the Amended and Restated Watson
Note or the 1998-2002 Debentures; or (iii) a Change of Control event (as
such term is defined in the 2004 Purchase Agreement);
7) Company's or its subsidiary's default under any agreement, which,
if uncured, will have a Material Adverse Effect (as such term is defined in
the 2004 Purchase Agreement);
8) A final judgment against the Company or its subsidiaries in excess
of $2,000,000, which continues unstayed and undischarged for sixty (60)
days after the entry thereof;
9) Failure of the Company or any of its subsidiaries to generally pay
their debts as they become due;
10) Commencement of bankruptcy or similar proceeding by or against the
Company or any of its subsidiaries;
11) Invalidity of any provision of the 2004 Purchase Agreement or any
document relative thereto or assertion thereof in writing by the Company or
its guaranteeing subsidiaries;
12) Invalidity or unenforceability of any documents creating or
evidencing a lien or security interest in the Company's and the
guaranteeing subsidiaries' collateral in favor of the holders of the 2004
Debentures or its priority; and
13) Failure to cause the conversion of the 2004 Debentures and the
1998-2002 Debentures into Preferred Stock by November 1, 2004.
Security and Intercreditor Relationship. The 2004 Debentures are secured
by a lien on all assets of the Company, tangible and intangible. In addition,
each of Houba, Inc. and Axiom Pharmaceutical Corporation has executed in favor
of the holders of the 2004 Debentures an Unconditional Agreement of Guaranty of
the Company's obligations under the 2004 Purchase Agreement. Each Guaranty is
secured by all assets of such guaranteeing subsidiary. In addition, the Company
has pledged the stock of each such guaranteeing subsidiary to the holders of the
2004 Debentures to further secure its obligations under the 2004 Purchase
Agreement.
In accordance with the terms of an Amended and Restated Subordination
Agreement dated February 6, 2004 between the Company, the holders of the 2004
Debentures and the holders of the 1998-2002 Debentures, the liens on the
Company's and its guaranteeing subsidiaries' assets as well as the payment
priority of the 2004 Debentures are (i) subordinate to the Company's lien and
payment obligations in favor of the Watson Note Purchasers under the Amended and
Restated Watson Note, and (ii) senior to the Company's lien and payment
obligations in favor of the holders of the 1998-2002 Debentures in the aggregate
principal amount of approximately $87.7 million.
1998-2002 DEBENTURES
The Company's 1998-2002 Debentures are comprised of the following:
1) 5% Convertible Senior Secured Debentures (the "1998 Debentures"),
issued pursuant to that certain Debenture and Warrant Purchase Agreement by
and among the Company, Galen Partners III, L.P., and other signatories
thereto, dated as of March 10, 1998 (the "1998 Purchase Agreement");
2) 5% Convertible Senior Secured Debentures (the "1999 Debentures"),
issued pursuant to that certain Debenture and Warrant Purchase Agreement by
and among the Company, Oracle Strategic Partners, L.P., and other
signatories thereto, dated May 26, 1999 (the "1999 Purchase Agreement");
and
46
3) 5% Convertible Senior Secured Debentures (the "2002 Debentures),
issued pursuant to that certain Debenture Purchase Agreement by and among
the Company, Care Capital Investments II, LP, Essex Woodlands Health
Ventures V, L.P., Galen Partners III, L.P. and other signatories thereto,
dated as of December 20, 2002 (the "2002 Purchase Agreement").
Principal, Maturity and Interest. The aggregate principal amount of the
1998-2002 Debentures is approximately $87.7 million. The 1998-2002 Debenture
generally become due and payable on March 31, 2006. Interest on each 1998-2002
Debenture accrues at the rate of (ii) five percent (5%) per annum prior to the
Maturity Date and (ii) seven percent (7%) per annum on upon the happening of an
event of default under the 1998-2002 Debentures.
Conversion At Holder's Option. Each 1998-2002 Debenture is convertible at
the option of its holder into Common Stock of the Company at various conversion
prices, determined at the time of the issuance of such 1998-2002 Debentures (the
"Conversion Price"). The Conversion Price is subject to adjustment, from time to
time (i) on a weighted-average dilution basis in the case of the 1998 Debentures
and 1999 Debentures and (ii) full ratchet dilution basis in the case of 2002
Debentures.
As-Converted Voting Rights. The holders of the 1998 Debentures and the
1999 Debentures are entitled to vote as part of a single class with the holders
of the Company's Common Stock on all matters to be voted on by such
stockholders. Each holder of the 1998 Debentures and the 1999 Debenture shall
have such number of votes as shall equal the number of votes he would have had
if such holder converted the entire outstanding principal amount of his 1998
Debentures and 1999 Debentures into shares of Common Stock immediately prior to
the record date relating to such vote.
Automatic Conversion of Existing Debentures. The 1998-2002 Debentures
(including the principal amount plus interest accrued at the date of conversion)
will convert automatically into the Company's Junior Preferred Shares
immediately following (i) the Company's receipt of shareholder approval of the
Charter Amendment, and (ii) the Charter Amendment Filing Date, as provided in
the Purchase Agreement.
- The 1998 Debentures will convert into Series C-1 convertible preferred
stock ("Series C-1 Preferred") at a conversion price per share of $0.5776
("Series C-1 Conversion Price"). The closing bid price for the Company's
Common Stock on February 19, 1998, the date of Board approval of the
issuance of the 1998 Debentures, was $2.63 per share;
- The 1999 Debentures will convert into Series C-2 convertible preferred
stock ("Series C-2 Preferred") at a conversion price per share of $0.5993
("Series C-2 Conversion Price"). The closing bid price for the Company's
Common Stock on May 20, 1999, the date of Board approval of the issuance
of the 1999 Debentures, was $1.94 per share;
- The 2002 Debentures issued on or before December 31, 2002 will convert
into Series C-3 convertible preferred stock ("Series C-3 Preferred') at a
conversion price per share of $0.3481 ("Series C-3 Conversion Price");
and
- The 2002 Debentures issued during 2003 up to October 31, 2003 (the "2003
Debentures") will convert into Series B convertible preferred stock
("Series B Preferred") at a conversion price per share of $0.3420
("Series B Conversion Price"). The closing bid price for the Company's
Common Stock on December 17, 2002, the date of Board approval of the
issuance of the 2002 Debentures, was $0.98 per share;
Negative Covenants. The Negative Covenants set forth in the 1998 Purchase
Agreement, the 1999 Purchase Agreement and the 2002 Purchase Agreement are
substantially similar to the Negative Covenants set forth in the 2004 Purchase
Agreement and described in more detail above.
Affirmative Covenants. The Affirmative Covenants set forth in the 1998
Purchase Agreement, the 1999 Purchase Agreement and the 2002 Purchase Agreement
are substantially similar to the Affirmative Covenants set forth in the 2004
Purchase Agreement and described in more detail above.
47
Events of Default. The Events of Default set forth in the 1998 Purchase
Agreement, the 1999 Purchase Agreement and the 2002 Purchase Agreement are
substantially similar to the Events of Default set forth in the 2004 Purchase
Agreement and described in more detail above.
Security and Intercreditor Relationship. The 1998-2002 Debentures are
secured by a lien on all assets of the Company, tangible and intangible. In
addition, each of Houba, Inc. and Axiom Pharmaceutical Corporation has executed
in favor of the holders of the 1998-2002 Debentures an Unconditional Agreement
of Guaranty of the Company's obligations under the 1998 Purchase Agreement, the
1999 Purchase Agreement and the 2002 Purchase Agreement. Each Guaranty is
secured by all assets of such guaranteeing subsidiary. In addition, the Company
has pledged the stock of each such guaranteeing subsidiary to the holders of the
1998-2002 Debentures to further secure its obligations under the 1998 Purchase
Agreement, the 1999 Purchase Agreement and the 2002 Purchase Agreement.
In accordance with the terms of an Amended and Restated Subordination
Agreement dated February 6, 2004 between the Company, the holders of the 2004
Debentures and the holders of the 1998-2002 Debentures, the liens on the
Company's and its guaranteeing subsidiaries' assets as well as the payment
priority of the holders of the 2003 Debentures are (i) subordinate to the
Company's lien and payment obligations in favor of (w) the Watson Note
Purchasers under the Amended and Restated Watson Note and (x) the holders of the
2004 Debentures, and (ii) senior to the Company's lien and payment obligations
in favor of the holders of the 1998 Debentures, the 1999 Debentures and the 2002
Debentures.
The liens on the Company's and its guaranteeing subsidiaries' assets as
well as the payment priority of the holders of the 2002 Debentures are (i)
subordinate to the Company's lien and payment obligations in favor of (w) the
Watson Note Purchasers under the Amended and Restated Watson Note, (x) the
holders of the 2004 Debentures and (y) the holders of the 2003 Debentures, and
(ii) senior to the Company's lien and payment obligations in favor of the
holders of the 1998 Debentures and the 1999 Debentures.
The liens on the Company's and its guaranteeing subsidiaries' assets as
well as the payment priority of the holders of the 1998 Debentures and the 1999
Debentures are (i) subordinate to the Company's lien and payment obligations in
favor of (w) the Watson Note Purchasers under the Amended and Restated Watson
Note, (x) the holders of the 2004 Debentures, (y) the holders of the 2003
Debentures, and (z) the holders of the 2002 Debentures and (ii) senior to the
Company's lien and payment obligations in favor of any other creditors, provided
that the liens and payment priority of the holders of the 1998 Debentures and
the 1999 Debentures shall at all times be pari passu relative to each other.
TERMS OF PREFERRED STOCK
DESCRIPTION OF SERIES A PREFERRED AND JUNIOR PREFERRED SHARES
The following description summarizes the material terms of the Preferred
Stock of the Company. Shareholders are urged to read carefully review in its
entirety the proposed Restated Certificate of Incorporation of the Company a
copy of which is attached hereto as Appendix C.
Dividends. In the event that the Company declares dividends of its Common
Stock, each holder of shares of Preferred Stock shall be entitled to receive
dividends which such holder would have received if, as of the record date for
the Common Stock dividends, such holder of Preferred Stock was a holder of the
number of whole shares of Common Stock into which his shares of Preferred Stock
were then convertible.
Liquidation Preference. In the event of a liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the preference of
the shares of Preferred Stock shall be as follows:
1) Series A Preferred shares have a liquidation preference equal to
$3.2125 per share, representing five (5) times the initial $0.6425 Series A
Conversion Price (the "Series A Liquidation Preference").
2) Series B Preferred shares have a liquidation preference equal to
the $0.3420 per share, the initial Series B Conversion Price (the "Series B
Liquidation Preference").
48
3) Series C-1 Preferred shares have a liquidation preference equal to
the $0.5776 per share, the initial Series C-1 Conversion Price (the "Series
C-1 Liquidation Preference").
4) Series C-2 Preferred shares have a liquidation preference equal to
$0.5993 per share, the initial Series C-2 Conversion Price (the "Series C-2
Liquidation Preference").
5) Series C-3 Preferred shares have a liquidation preference equal to
$0.3481 per share, the initial Series C-3 Conversion Price (the Series C-3
Liquidation Preference").
The liquidation preference of the Series A Preferred shares has priority
over, and will be satisfied prior to, the liquidation preference of Series B
Preferred shares and the Series C Preferred shares. The liquidation preference
of Series B Preferred shares has priority over, and will be satisfied prior to,
the liquidation preference of the Series C Preferred Shares. Liquidation
Preference of Series C-1 Preferred shares, Series C-2 Preferred shares and
Series C-3 Preferred shares shall rank pari passu.
Participation Rights. The assets and funds of the Company remaining after
full payment has been made to the holders of Series A Preferred shares, Series B
Preferred shares and Series C Preferred shares of the liquidation preferences
described above, if any, shall be distributed ratably among the holders of the
Company's Common Stock and the Series A Preferred shares, in proportion to the
number of shares of the Common Stock held by them on an as-converted basis,
calculated such that each of Series A Preferred Shares shall be deemed to be
convertible into only 30% of the shares of the Common into which it is otherwise
then convertible using the Series A Conversion Price, as adjusted.
Conversion Price. Each share of the Company's Preferred Stock is
convertible into the following number of shares:
1) Except as provided for in the anti-dilution provisions described
below, each of the Series A Preferred shares is convertible into five
shares of the Company's Common Stock.
2) Except as provided for in the anti-dilution provisions described
below, each of the Series B Preferred shares and Series C Preferred shares
are convertible into one share of the Company's Common Stock.
Anti-Dilution. The conversion price of the Company's Preferred Stock into
the Company's Common Stock, described in the immediately preceding paragraph, is
subject to the following anti-dilution adjustments:
- The conversion price of Series A Preferred shares into Common Stock is
subject to an anti-dilution adjustment in the event of the Company's
issuance after the Charter Amendment Filing Date of Common Stock or
securities convertible into Common Stock at a price less than $0.1285.
Upon such adjustment, the conversion price of Series A Preferred shares
shall be equal to the consideration per share received by the Company for
the issuance of such Common Stock or securities convertible into Common
Stock, provided, however, that such anti-dilution provisions shall not
apply to customarily excluded issuances of the Company's Common Stock or
convertible securities, including (i) to officers, directors, employees
and consultants of the Company pursuant to stock option or purchase plans
approved by the Board of Directors, or (ii) upon conversion or exercise
of existing convertible securities or other rights to purchase Common
Stock.
- The conversion price of Series B Preferred shares and Series C Preferred
shares into Common Stock is subject to an anti-dilution adjustment in the
event of the Company's issuance after the Charter Amendment Filing Date
of Common Stock or securities convertible into Common Stock at a price
less than the applicable conversion price of the Series B Preferred
shares and/or the Series C Preferred shares, as appropriate. Upon such
adjustment, the conversion price of the Series B Preferred shares and the
Series C Preferred shares shall be equal to a price determined by
dividing:
(x) the sum of (a) the product of the conversion price of Series B
Preferred shares or Series C Preferred shares, as appropriate, in
effect for such shares immediately prior to such additional Common
Stock issuance times the number of shares of the Common Stock (on a
fully-diluted basis) outstanding immediately prior to such Common
Stock issuance, plus (b) the aggregate
49
consideration received by or deemed to have been received by the
Company upon such Common Stock issuance; by
(y) the sum of (a) the number of shares of the Common Stock (on a
fully-diluted basis) outstanding immediately prior to such
additional Common Stock issuance, plus (b) the number of shares of
the newly issued or deemed to be issued shares of the Common Stock.
provided, however, that such anti-dilution provisions shall not apply to
customarily excluded issuances of the Company's Common Stock or convertible
securities, including (i) to officers, directors, employees and consultants
of the Company pursuant to stock option or purchase plans approved by the
Board of Directors, or (ii) upon conversion or exercise of existing
convertible securities of the Company or other rights to purchase Common
Stock.
Conversion by the Holders. Each share of the Company's Preferred Stock is
convertible at any time at the option of its holder, in whole or in part, into
the number of shares of the Company's Common Stock as determined by the
conversion price described above.
Conversion by the Company. All Series A Preferred shares, Series B
Preferred shares and Series C Preferred shares shall be automatically converted
into the Company's Common Stock in the event that
- the average of the closing bid and asked prices per share of the
Company's Common Stock as reported by the OTC Bulletin Board (or such
other over-the-counter market or exchange on which the Company's Common
Stock may then be traded or admitted for traded) during thirty (30)
consecutive trading days exceeds $2.80 (as adjusted for stock splits and
similar recapitalizations), and during such thirty (30) consecutive
trading days the average daily trading volume is at least $1.75 million
(based on the number of shares traded, multiplied by the average of the
closing bid and asked prices for each such trading day), or
- the Company has obtained the written consent of the holders of at least
51% of the then outstanding Series A Preferred shares to such conversion;
provided, however, that pursuant to the terms of the Investor Rights
Agreement, dated as of February 6, 2004, by and among the Company, the
holders of the 2004 Debentures and the holders of the 1998-2002
Debentures (the "Investor Rights Agreement") no party thereto may give
written consent in furtherance of the mandatory conversion of the
Preferred Stock in the manner described in this paragraph, unless such
mandatory conversion has been approved by the holders of 75% of the
Series A Preferred shares then held by the Lead 2004 Investors.
Voting Rights. Assuming the approval of the Charter Amendment, the holders
of Preferred Stock will have the right to vote on all matters submitted to a
vote of the stockholders of the Company. The holders of Preferred Stock shall
vote with the holders of the Common Stock, as a single class, on an as-converted
basis and shall have the number of votes equal to the number of whole shares of
the Common Stock into which such shares of Preferred Stock are then convertible
at the record date for the determination of stockholders entitled to vote on
such matters or, if no such record date is established, at the date such vote is
taken or any written consent of stockholders becomes effective.
Preemptive Rights. Pursuant to the terms of the Investor Rights Agreement,
the holders of the Preferred Stock have a right of first refusal with respect to
any subsequent issuance, sale or exchange of any shares of the Company's Common
Stock or securities convertible into Common Stock. Each Preferred Stock holder's
participation in such subsequent issuance shall be equal to the product of (i)
number of shares of the newly issued or deemed to be issued shares of the Common
Stock multiplied by (ii) the quotient of (x) the number of shares of Preferred
Stock owned by such holder as of the date of such subsequent issuance divided by
(y) the aggregate number of Preferred Stock shares held by all Preferred Stock
holders as of such date.
Veto Rights of the Holders of Series A Preferred Shares. The Investor
Rights Agreement requires approval of the holders of at least sixty percent
(60%) of the Series A Preferred shares to authorize certain material Company
transactions, including, without limitation (a) any amendment to the Company's
Certificate of Incorporation or by-laws, (b) any alteration of the preferences,
voting power, rights or privileges of the Series A Preferred shares, (c) any
action to create or issue any securities having any preference or
50
priority as to dividends or assets, whether in liquidation or otherwise,
superior to or pari passu with the Series A Preferred shares, (d) any
reclassification of any outstanding shares of any class of stock of the Company
into shares having any preference or priority as to dividends or assets, whether
in liquidation or otherwise, superior to or pari passu with the Series A
Preferred shares, (e) payment of any dividends or distributions on any
securities of the Company ranking junior in priority to the Series A Preferred
shares, other than dividends or distributions payable solely in Common Stock,
(f) any redemption or acquisition of Company securities, (g) any merger,
reorganization, consolidation or other business combination involving the
Company, or sale, transfer, lease, license or other disposition of all or
substantially all of the assets of the Company, (h) any liquidation,
dissolution, commencement of any bankruptcy or similar proceeding,
recapitalization or reorganization of the Company, (i) the consummation of any
strategic alliance, licensing arrangement or other corporate partnering
involving the issuance by the Company of in excess of $10.0 million in equity
securities of the Company, (j) entering into any transaction, contract or
commitment or the taking of any action other than at arm's length, (k) entering
into or engaging in any business other than the business currently conducted or
proposed to be conducted by the Company, (l) the creation of any mortgage,
pledge, lien or security interest on the assets or properties of the Company
(subject to certain customary exceptions), and (m) the incurrence of any
indebtedness (subject to certain customary exceptions).
Transfer Restrictions. The Investor Rights Agreement imposes certain
restrictions on the transfer of (i) Series A Preferred Shares by the signatories
to the 2004 Purchase Agreement and (ii) any shares of capital stock (together
with the Series A Preferred Shares, the "Restricted Shares") held by each of
Care Capital Investments II, LP, Essex Woodlands Health Ventures V, L.P., Galen
Partners III, L.P. and Oracle Strategic Partners, L.P. (collectively, the
"Restricted Investors"). In the event of any proposed transfer by a Restricted
Investor of any Restricted Shares held by such Restricted Investor
(collectively, the "Offered Shares"), such Restricted Investor must first offer
the Offered Shares to the Company on the terms of the proposed sale or
conveyance of such Offered Shares to a third party. In the event the Company
does not exercise its right to purchase the Offered Shares on such terms, the
other Restricted Investors may purchase their pro rata share of the Offered
Shares on the terms proposed for transfer to such third party. Additionally,
upon the sale of Offered Shares by a Restricted Investor to a third party, the
remaining Restricted Investors have the right to participate in such sale on a
pro rata basis. Finally, in the event the holders of at least 66 2/3% of all
Restricted Shares then held by all Restricted Investors (collectively, the
"Controlling Stockholders") wish to sell to any third party all Restricted
Shares held by the Controlling Stockholders, then each other Restricted Investor
must agree to sell all Restricted Shares held by such Restricted Investors to
such third party for the same price and on the same terms as the sale by the
Controlling Stockholders.
Right to Board Seat. Pursuant to the terms of the Voting Agreement, dated
as of February 6, 2004 (see, "Voting Agreement" below), for so long as each of
the Lead 2004 Investors holds a minimum of 50% of the Series A Preferred shares
initially issued to such party (or at least 50% of the shares of Common Stock
issuable upon conversion of the Series A Preferred Shares), (i) each of the Lead
2004 Investors shall have the right to designate for nomination one member of
the Company's Board of Directors and (ii) the Lead 2004 Investors collectively
may designate one additional member of the Board (collectively, the "Designees")
by consent of at least two (2) of such three (3) Lead 2004 Investors.
Additionally, if so requested by a Designee in his sole discretion, such
Designee shall be appointed to any Committee of the Board of Directors. So long
as Galen Partners III, L.P. has the right to designate a director in its
capacity as a Lead 2004 Investor, as described above, the Company will permit
one observer selected by Galen Partners III, L.P. to attend all meetings of the
Board of Directors of the Company, and shall provide such observer with such
notice and other information with respect to such meetings as are delivered to
the directors of the Company; provided, that such observer shall not be
permitted to attend any meeting or portion thereof or have access to such other
information if, in the judgment of the Company under advice of counsel, such
observer's presence or receipt of such information would adversely affect
attorney-client privilege with respect to such meeting or information.
ADDITIONAL AGREEMENTS WITH HOLDERS OF DEBENTURES/PREFERRED STOCK
Voting Agreement. The Company is a party to an Amended and Restated Voting
Agreement, dated as of February 6, 2004, by and among the holders of the 2004
Debentures and the holders of the 1998-2002
51
Debentures, consisting of Galen Partners III, L.P., Galen Partners
International, III, LP., Galen Employee Fund III, L.P., Oracle Strategic
Partners, L.P., Care Capital Investments II, L.P., Essex Woodlands Health
Ventures V, L.P., Alan Smith, a director of the Company, Peter Clemens, the
Chief Financial Officer of the Company, Patrick Coyne, Michael and Susan
Weisbrot, Greg Wood, Dennis Adams, Bernard Selz, Roger Griggs, Varsha and Hemant
Shah, Stephanie Heitmeyer, Michael and Ilene Rainisch, Kenneth Gimbel and
Michael Reicher Trust (collectively the "Voting Agreement Parties"). The Voting
Agreement Parties have agreed to vote all of their respective voting securities
of the Company in favor of:
- the Charter Amendment to (i) authorize the creation of the Series A
Preferred shares, Series B Preferred shares, Series C-1 Preferred shares,
Series C-2 Preferred shares and Series C-3 Preferred shares, having the
rights and preferences described above; and (ii) increase its authorized
shares of capital stock from 80,000,000 to 940,000,000 shares, consisting
of 650,000,000 shares of the Common Stock, and 290,000,000 shares of the
Preferred Stock, of which 45,000,000 shares will be designated Series A
Preferred shares, 25,000,000 shares will be designated Series B Preferred
shares, 70,000,000 will be designated Series C-1 Preferred shares,
50,000,000 shares will be designated Series C-2 Preferred shares and
100,000,000 shares will be designated Series C-3 Preferred shares (See
Proposal 2).
- the nomination and election to the Company's Board of Directors, to
consist of no more than seven (7) members, (i) one person designated by
each Lead 2004 Investor, (ii) one person designated collectively by the
Lead 2004 Investors by consent of at least two (2) of such three (3)
entities; (iii) one person who shall be the Chief Executive Officer of
the Company, and (iv) two persons who shall be independent directors (see
discussion under caption "Right to Board Seat" above).
Assuming no outstanding stock options or warrants are exercised from the
date of this Proxy Statement until the date of the Meeting, the aggregate voting
securities held by the Voting Agreement Parties is 51,499,223 shares of Common
Stock, representing approximately 78.4% of the voting rights under the Company's
outstanding voting securities. Given the aggregate voting securities held by the
Voting Agreement Parties, the approval of this Proposal 2 by a majority of the
Company's voting securities is assured. A copy of the Voting Agreement is
attached as Appendix J to this Proxy Statement.
Registration Rights Agreement. The Amended and Restated Registration
Rights Agreement, dated as of February 6, 2004, executed in favor of the holders
of the 2004 Debentures, the holders of the 1998-2002 Debentures, Galen Partners
III, L.P. and its affiliated entities, as the holder of certain warrants issued
pursuant to bridge loan transactions during the period 1998 through and
including 2002 (the "Galen Warrants"), the holders of shares received pursuant
to a certain Warrant Recapitalization Agreement dated December 20, 2002 between
the Company and the holders of common stock purchase warrants issued pursuant to
the offerings of the 1998 Debentures and 1999 Debentures, and Watson
Pharmaceuticals, provides for (i) the termination of the registration rights
granted to such holders pursuant to a certain Registration Rights Agreement
dated December 20, 2002, and (ii) the grant of registration rights to Watson,
the holders of the 2004 Debentures, the holders of the 1998-2002 Debentures, the
holders of shares of common stock received pursuant to the Warrant
Recapitalization Agreement (the "Warrant Recap Shares") and Galen as the holder
of the Galen Warrants, to register under the Securities Act of 1933, as amended,
the Warrant Recap Shares, the shares of Common Stock issuable upon exercise of
the Watson Warrant, the shares of Common Stock issuable upon exercise of the
Galen Warrants, and the shares of Common Stock issuable upon conversion of the
Series A Preferred Shares, the Series B Preferred Shares and the Series C
Preferred Shares (collectively, the "Registrable Securities"). The Registration
Rights Agreement provides (i) Watson with one (1) demand registration on Form
S-1 (or any successor form), and (ii) the holders of at least 25% of the
Registrable Securities with three (3) demand registrations on Form S-1 (or any
successor form). The Registration Rights Agreement also provides such parties
with unlimited piggyback registration rights.
52
BOARD APPROVAL OF THE CHARTER AMENDMENT
APPROVAL OF CHARTER AMENDMENT BY AN INDEPENDENT COMMITTEE OF THE BOARD OF
DIRECTORS
Formation of the Independent Committee
On October 30, 2003, the Board of Directors of the Company formed an
Independent Committee of the Board (the "Independent Committee") for the purpose
of evaluating the capital raising activity of the Company with the intent of
seeing that efforts devoted in such regard were reasonable and unbiased and that
all reasonable alternatives were considered in the process. The Independent
Committee consisted of Mr. William Sumner, Chairman, and Messrs. Alan Smith and
William Skelly. The Independent Committee met formally on 12 occasions during
the period from its formation on October 30, 2003 through December 20, 2003. In
addition, members of the Independent Committee had numerous other detailed
discussions with each other, the Company's Management, and with each of the
special legal counsel and the financial advisor retained by the Independent
Committee, in connection with the capital raising efforts of the Company and, in
particular, the 2004 Debenture Offering and the resulting Charter Amendment.
In December 2003, the Independent Committee engaged Agema LLC to deliver an
opinion that the terms of the 2004 Debenture Offering, including the Company's
utilization of approximately $4.3 million of the proceeds of the 2004 Debenture
Offering to retire $16.4 million in indebtedness owed by the Company to Watson
Pharmaceuticals (as described in Proposal 1 under the caption "Certain
Transactions"), was from a financial point of view fair to the Company and the
Company's creditors, debenture holders, subordinated debt holders and common
shareholders who are not investors in the 2004 Debentures. On January 16, 2004,
Agema LLC provided its written opinion to the Independent Committee. The Agema
LLC opinion is for the information and assistance of the Independent Committee
in connection with the Committee's consideration of the 2004 Debenture Offering.
Agema LLC's opinion is not a recommendation as to how any shareholder should
vote with respect to this Proposal 2 at the Meeting. The full text of the Agema
LLC opinion is attached to this Proxy Statement as Appendix D. Shareholders are
encouraged to read the opinion carefully in its entirety for a description of
the assumptions made, qualifications included, matters considered and
limitations of the review undertaken.
Information reviewed by the Independent Committee
Following its formation, the Independent Committee was provided with
extensive information as to the Company's capital raising activities and its
efforts to locate a strategic partner or potential acquirer of the Company's
business, including:
- Management's presentation describing the capital raising efforts of the
Company during the preceding 18 months, including a description of the
approximate 36 entities that the Company had approached and the results
of negotiations, if any, with such parties in an effort to form a
strategic partnership and/or obtain financing.
- The engagement letter dated July 30, 2002 between the Company and each of
MTS Partners and CIBC providing for the joint engagement of MTS Partners
and CIBC as the Company's financial advisor to assist the Company in
analyzing, planning, negotiating and executing the Company's strategic
and financial plan, including the identification of a strategic partner
and/or a financing transaction.
- Trading price information of the Company's Commons Stock for the ninety
(90) days preceding the date of the non-binding term sheet between the
Company and the Lead 2004 Investors relating to the 2004 Debenture
Offering. During this ninety (90) day period, the Company's Common Stock
traded in the range of $0.26 to $1.50 per share.
- A descriptive memorandum prepared by the Company, MTS Partners and CIBC
for purposes of soliciting third party sources of financing or a
potential acquirer of the Company's business. The descriptive memorandum
included extensive information about the Company's operations. In
addition to the descriptive memorandum, the Independent Committee
reviewed with Management those third
53
parties that had expressed initial interest in receiving a copy of the
descriptive memorandum under cover of a confidentiality agreement. While
there was initial interest expressed by a number of prospects, all of
such prospects indicated an unwillingness even to entertain preliminary
negotiations with the Company relating to a financing, strategic
partnership or acquisition transaction. Reasons offered by such parties
included, but not limited to, the absence of a strategic fit and the
dilutive impact the acquisition of the Company would have on the
acquirer's earnings.
- The Company's Form 10-K for the fiscal year ended December 31, 2002 and
the Company's quarterly reports on Form 10-Q for the quarters ended June
30, 2003 and September 30, 2003, as well as interim financial statements
and other financial and operating data concerning the Company prepared by
Management.
- Management status updates regarding (i) the process, status and prospects
of the Company's solicitation of alternative sources of financing and
strategic alternatives, and (ii) the Company's operations, financial
condition, future prospects, projected operations and performance and the
Company's ability to meet its obligations as they come due.
- Financial forecasts and projections prepared by the Company's Management
with respect to the fiscal year ending December 31, 2003 and 2004.
- Management's presentation describing the $2.0 million in financing
remaining available as of October 30, 2003 under the Letter of Support
from the Lead 2004 Investors. Management estimated that such funding
would allow the Company to continue operations only through December 31,
2003.
- Interim drafts of term sheets, and the final term sheet from the Lead
2004 Investors relating to the 2004 Debenture Offering.
- Dilution analyses and pro forma capitalization analyses prepared by
Management giving effect to the 2004 Debenture Offering.
- Liquidation analyses prepared by Management.
- The Fairness Opinion of Agema LLC, the financial advisor retained by the
Independent Committee (as described below under the caption "Fairness
Opinion").
Fairness Opinion
On December 20, 2003, Agema LLC delivered its oral opinion to the
Independent Committee (subsequently confirmed in writing on January 16, 2004
following review of certain documentation with respect to the 2004 Debenture
Offering) that, subject to and based upon the various qualifications and
assumptions described therein, the terms of the 2004 Debenture Offering were
fair from a financial point of view to the Company's creditors, debenture
holders, subordinated debt holders and common holders who are not investors in
the 2004 Debentures. The Independent Committee retained Agema LLC to render this
opinion, which is referred to in this Proxy Statement as the "Fairness Opinion."
The Fairness Opinion was prepared to assist the Independent Committee in
evaluating the terms of the 2004 Debenture Offering. The Independent Committee
retained Agema LLC based upon Agema LLC's experience in the valuation of
businesses and securities in connection with securities offerings,
recapitalizations and similar transaction. Agema LLC is corporate financial
advisory firm based in New York, New York that is engaged in providing financial
advisory services to mid-market firms. As part of its business, Agema renders
fairness opinions in connection with mergers and acquisitions, business and
securities valuations, financial restructurings and private placements of debt
and equity securities.
No limitations were imposed by the Independent Committee upon Agema LLC
with respect to the investigations made or procedures followed by it in
rendering the Fairness Opinion. Agema LLC has not been requested and does not
intend to update, revise or reaffirm the Fairness Opinion in connection with the
2004 Debenture Offering, including to reflect any circumstances or events that
have occurred since January 16, 2004. The Fairness Opinion speaks only as of its
date. Events that could affect the fairness of the 2004 Debenture Offering, from
a financial point of view, to our shareholders who are not investors in the 2004
54
Debentures include adverse changes in industry market conditions and changes to
Company's business, financial condition and results of operations.
No relationship existed between Agema LLC and the Company, including the
Company's affiliates, at the time the Fairness Opinion was prepared or
delivered, none has since developed and none is mutually understood to be
contemplated.
In arriving at its Fairness Opinion, among other things, Agema LLC did the
following:
- Reviewed certain of the Company's publicly available annual and quarterly
reports as filed with the Commission, including the Company's Form 10-K
for the fiscal year ended December 31, 2002 and the Company's quarterly
reports on Form 10-Q for the quarters ended June 30, 2003 and September
30, 2003, as well as interim financial statements and other financial and
operating data concerning the Company prepared by Management;
- Reviewed financial projections regarding the Company prepared by
Management;
- Met with members of the Independent Committee and certain members of the
Company's Management regarding (i) the process, status and prospects of
the Company's solicitation of alternative sources of financing and other
potential strategic alternatives and (ii) the Company's operations,
financial condition, future prospects, projected operations and
performance and the Company's ability to meet its obligations as they
come due;
- Reviewed forecasts and projections prepared by the Company's Management
with respect to the fiscal years ended December 31, 2003 and 2004;
- Reviewed the Company's current cash position and cash operating
requirements through fiscal year 2004;
- Discussed with the Independent Committee and Management the prospects for
the Company if the 2004 Debenture Offering was not completed;
- Reviewed the historical market prices and trading volume of the Company's
Common Stock;
- Reviewed with the Independent Committee the financial implications of
various draft terms sheets submitted by the Lead 2004 Investors to the
Company and provided financial advice to the Independent Committee in
response thereto;
- Reviewed the final term sheet from the Lead Investor Group dated December
19, 2003, and drafts of the following documents in connection with the
2004 Debenture Offering: (i) form of Voting Agreement, (ii) form of
Amended and Restated Registration Rights Agreement; (iii) Form of Third
Amendment to Loan Agreement with Watson Pharmaceuticals; (iv) form of
Secured Promissory Note to Watson Pharmaceuticals; (v) form of Debenture
and Share Purchase Agreement; (vi) form of Debenture Conversion
Agreement; (vii) form of Convertible Senior Secured Debenture; (viii)
form of Confidential Private Placement Term Sheet; (ix) form of Restated
Certificate of Incorporation, and (x) form of Debenture and Warrant
Dilution Waiver; and
- Conducted such other studies, analyses and inquiries as Agema LLC deemed
appropriate.
In reaching its conclusion that the terms of the 2004 Debenture Offering
were fair to the Company and the Company's creditors, debenture holders,
subordinated debt holders and common shareholders, Agema LLC conducted an
analysis of the terms of the 2004 Debenture Offering. Such analysis included a
review of the consideration to be received by the Company for the 2004
Debentures, including the liquidation preference, conversion right and
participation right of the Senior A Preferred shares. Agema LLC also considered
that the ownership of the Company's non-affiliated common shareholders in the
Company, calculated on a fully diluted basis, following the completion of the
2004 Debenture Offering (assuming $14 million in principal amount of 2004
Debentures) would decrease from approximately 5.7% to approximately 4.0% after
giving effect to the conversion of the Company's outstanding convertible
securities, including the conversion of the Preferred Stock into Common Stock.
Agema LLC also considered that all of
55
the Company's Outstanding Debentures would be converted into shares of Preferred
Stock and the interest expenses associated with such debentures would be
eliminated. Finally, Agema LLC considered the absence of any other sources of
financing as well as the absence of any prospective acquirer of the Company's
business and that the financing proposed to be provided under the terms of the
2004 Debenture Offering would allow the Company to avoid seeking immediate
relief under applicable bankruptcy laws. Agema LLC determined that in the
absence of completing the 2004 Debenture Offering, a liquidation of the
Company's assets in a bankruptcy proceeding would likely result and that such
liquidation would likely not yield sufficient proceeds to satisfy the Company's
$21.4 million indebtedness to Watson Pharmaceuticals, thereby leaving no
proceeds available for distribution to the holders of the Outstanding Debentures
or the Company's common shareholders.
Based on the analyses described above, Agema LLC determined that, as of the
date of the Fairness Opinion, the terms of the 2004 Debenture Offering,
including the consideration to be received by the Company in connection with the
issuance of the 2004 Debentures, was fair, from a financial point of view to the
Company and the Company's creditors, debenture holders, subordinated debt
holders and holders of the Company's Common Stock who are not investors in the
2004 Debentures.
In rendering the Fairness Opinion, Agema LLC relied upon and assumed,
without independent verification, that the financial forecasts and projections
provided to it had been reasonable and accurately prepared and reflected the
best currently available estimates and judgments of the Company's Management of
the Company's future financial results and conditions and that there had been no
material change in the Company's assets, financial condition, business or
prospects between the dates the Company's most recent financial statements were
made available to Agema LLC and the date of the Fairness Opinion. Agema LLC did
not independently verify the accuracy and completeness of the information
supplied to it with respect to the Company and did not assume any responsibility
with respect to such information, and assumed and relied upon the accuracy and
completeness of all such information provided to or discussed with Agema LLC or
publicly available.
Agema LLC did not make any physical inspection or independent appraisal of
any of the Company's properties or assets and the Fairness Opinion was
necessarily based on the business, economic, market and other conditions as they
existed on the date of the Fairness Opinion and could be evaluated by Agema LLC
at the date of the Fairness Opinion.
Under the Company's engagement letter with Agema LLC, the Company paid
Agema LLC a fee of $75,000. In addition, the Company agreed, among other things,
to reimburse Agema LLC for certain of its reasonable out-of-pocket expenses
incurred in connection with the services provided by Agema LLC, and to indemnify
and hold harmless Agema LLC and other related parties from and against various
liabilities and expenses, which may include liabilities under the federal
securities laws, in connection with its engagement.
Consultation of the Independent Committee with its Independent Legal Counsel,
Counsel for the Company and Agema LLC
The Independent Committee and its independent legal counsel, Gallagher,
Briody & Butler, discussed with Management and Company's counsel alternatives in
the event the Company was unable to secure financing to fund operations. With
the advice of its independent legal counsel, bankruptcy counsel for the Company
and Agema LLC, the Independent Committee determined that in the absence of
additional financing, including the restructuring of the Company's $21.4 million
senior term loan indebtedness to Watson Pharmaceuticals (as described in
Proposal 1 under the caption "Certain Transactions"), the Company likely would
be forced to seek protection under applicable bankruptcy laws as early as
January 2004. Based on the capital structure of the Company, including the
significant indebtedness outstanding under the $21.4 million senior term loan
with Watson Pharmaceuticals and the Outstanding Debentures, all of which were in
default, the Independent Committee determined that a liquidation of the
Company's assets in a bankruptcy proceeding would likely not yield any proceeds
to the holders of the Outstanding Debentures or the holders of Common Stock and
that a financing outside of bankruptcy presented the best alternative to
preserve and potentially enhance shareholder value.
56
Throughout the negotiation of the term sheet with the Lead 2004 Investors
relating to the 2004 Debenture Offering, including as part of the 12 formal
meetings held by the Independent Committee during such time, the Independent
Committee considered the substantial dilution to the ownership interest in the
Company of the Company's public, non-affiliated shareholders as a group given
the liquidation preference, conversion right and participation right proposed by
the Lead 2004 Investors for the Series A Shares. As discussed above under the
caption "Background", throughout the process of negotiating the term sheet for
the 2004 Debenture Offering, the Independent Committee instructed Senior
Management and Company legal counsel to continue to negotiate for terms as
favorable as possible to the Company relating to the liquidation, conversion and
participation rights of the Series A Shares in an effort to reduce the dilution
to the Company's public, non-affiliated shareholders. As also described under
the caption "Background", the efforts of the Independent Committee and Senior
Management resulted in a final term sheet containing more favorable terms to the
Company than those initially proposed by the Lead 2004 Investors, which
mitigated to some extent the dilution to the Company's common shareholders. The
dilutive impact of the 2004 Debenture Offering, among other negative factors,
was considered by the Independent Committee in its determination to approve the
2002 Debenture Offering, as described below under the caption "Additional
Factors Considered by the Independent Committee."
Additional Factors Considered by the Independent Committee
The Independent Committee also reviewed with Management the Company's
default under its interest payment obligations under the $21.4 million term loan
with Watson Pharmaceuticals (the "Watson Term Loan") and the 1998-2002
Debentures. All of such indebtedness is secured by a lien on all the Company's
and its subsidiaries' assets. The Independent Committee considered that the
completion of the 2004 Debenture Offering would provide the Company with the
approximate $4.3 million in proceeds required to restructure Watson Term Loan
and obtain Watson's forgiveness of approximately $16.4 million of such
indebtedness, resulting in new principal balance under the Watson Term Loan of
$5.0 million. Such restructuring would also allow for the conveyance of the
amended $5.0 million Watson note to the investors in the 2004 Debentures in
satisfaction of a condition to the completion of the 2004 Debenture Offering.
(See the description of the Watson Term Loan restructuring contained in Proposal
1 under the caption "Certain Transactions".) In addition, the Independent
Committee considered that in the event of the completion of the 2004 Debenture
Offering and the receipt of shareholder approval of the Charter Amendment, all
of the Company's Outstanding Debentures, including the 2004 Debentures, would be
converted into shares of Preferred Stock, thereby reducing the Company's
outstanding indebtedness by approximately $102 million.
In addition to the foregoing, in determining to authorize the 2004
Debenture Offering, the Independent Committee also considered the following
factors:
- The $0.70 average closing price for the Company's Common Stock for the
ninety (90) days prior to the December 19, 2003, the date of the final
term sheet between the Company, the Lead 2004 Investors and the holders
of the Company's Outstanding Debentures describing the terms of the 2004
Debenture Offering;
- The restricted nature of the securities being issued to the investors
pursuant to the 2004 Debenture Offering, including the restricted nature
of the securities issued upon conversion of the 2004 Debentures and the
Preferred Stock;
- The waiver by the holders of the Outstanding Debentures and Watson
Pharmaceuticals of their respective anti-dilution rights contained in the
Outstanding Debentures and the Common Stock Purchase Warrant previously
issued to Watson;
- The fact that each of Care Capital, Essex and Galen is an affiliate of
the Company and this relationship between the Company and such entities
further limits their ability to resell the shares of Common Stock
underlying the Preferred Stock received upon the conversion of their
respective Outstanding Debentures;
57
- The Company's September 30, 2003 financial statements, including the
balance sheet included as part of the September 30, 2003 Form 10-Q;
- The insolvent condition of the Company in both the sense that the
Company's liabilities greatly exceeded the Company's assets and the fact
that the Company had not been able to satisfy its obligations as they
currently matured, including, without limitation, the Company's payment
obligations under the Watson Term Loan and the Outstanding Debentures;
- Various conversations with Management and documentation supplied by the
Company's Chief Financial Officer with respect to the approximate 36
parties that were unsuccessfully approached by the Company and its
representatives for financing;
- The absence of other available sources of financing;
- The impact a bankruptcy filing by the Company would have on the public,
non-affiliated shareholders of the Company and that a bankruptcy filing
was likely in the absence of completing the 2004 Debenture Offering;
- Management's efforts to pursue a merger or sale transaction, all of which
efforts were unsuccessful; and
- The fact that the Company was in default under the Watson Term Loan and
the Outstanding Debentures.
The Independent Committee believed that each of the above factors generally
supported its determination. The Independent Committee did, however, consider
the potential adverse effects of the following factors:
- The substantial dilution to the Company's public, non-affiliated
shareholders in their ownership interest in the Company;
- The five (5) times liquidation preference of the Series A Shares issuable
upon conversion of the 2004 Debentures and the right of each Series A
Share to convert to into five common shares;
- The right of the holders of the Series A Shares to participate with the
holders of the Company's Common Stock in proportion to the number of
shares held by such parties on an as-converted basis, calculated such
that each of the Series A Shares shall be deemed to be convertible into
only 30% of the shares of Common Stock into which it is otherwise then
convertible; and
- That the Board of Directors would be fixed at seven members, four of whom
would be appointed by the Lead 2004 Investors.
The foregoing represents all material factors considered by the Independent
Committee in its evaluation of the 2004 Debenture Offering. In view of the
variety of factors considered in connection with the 2004 Debenture Offering,
the Independent Committee did not find it practical to, and did not quantify or
otherwise assign relative weights to specific factors considered in reaching its
decision.
Approval by and Recommendation of the Independent Committee
On December 20, 2003, the Independent Committee delivered a unanimous
resolution to the Board of Directors of the Company in which it concluded that
the 2004 Debenture Offering was fair from a financial point of view to the
creditors and public stockholders of the Company, other than the investors in
the 2004 Debentures, and that the capital raising efforts of the Company had
been reasonable and unbiased and that all reasonable alternatives were
considered in the process. Accordingly, the Independent Committee unanimously
recommended to the Board that the Board approve and authorize the 2004 Debenture
Offering (with abstentions by appropriate Board members as described below under
the caption "Approval by the Board of Directors"). A copy of the resolutions of
the Independent Committee is attached to this Proxy Statement as Appendix E.
On June 5, 2004, the Independent Committee unanimously adopted a resolution
approving the terms of the 2004 Purchase Agreement Amendment providing for (i)
an increase in the principal amount of the 2004
58
Debentures issuable under the 2004 Purchase Agreement from $14.0 million to
$17.5 million, and (ii) an extension of the date for issuance of additional 2004
Debentures from June 5, 2004 to June 30, 2004.
Approval by the Board of Directors
At a meeting of the Board of Directors held on January 20, 2004, the Board
of Directors considered the recommendation of the Independent Committee,
including the Fairness Opinion delivered by Agema LLC and, after concluding that
the terms of the 2004 Debenture Offering, including the restructuring of the
Watson Term Loan, represented fair value and that the terms and provisions of
the 2004 Debenture Offering were reasonable and that the completion of the 2004
Debenture Offering would permit the Company to satisfy its current liabilities,
to restructure the Watson Term Loan, to convert the Company's Outstanding
Debentures into Preferred Stock, and allow the Company to continue operations in
an effort to enhance shareholder value, the Board of Directors unanimously
approved the terms of the 2004 Debenture Offering. Messrs. Wesson, Conjeevaram,
Shroff, Karabelas and Thangaraj, as designees of Care Capital, Essex and Galen,
the Lead 2004 Investors, abstained from the vote.
On June 6, 2004, the Board of Directors considered the resolution of the
Independent Committee relating to the 2004 Purchase Agreement Amendment and
unanimously approved the terms of the 2004 Purchase Agreement Amendment.
EFFECT OF THE CHARTER AMENDMENT
IN GENERAL
The Charter Amendment will provide for an increase in the number of
authorized shares of the Company's capital stock from 80.0 million to 940.0
million, consisting of 650.0 million shares of Common Stock and 290.0 million
shares of Preferred Stock. The authorization of the Preferred Stock designates
45.0 million shares as Series A Preferred, 25.0 million shares of Series B
Preferred, 70.0 million shares as Series C-1 Preferred, 50.0 million shares as
Series C-2 Preferred and 100.0 million as Series C-3 Preferred.
The increase in the Company's authorized capital stock will provide
sufficient authorized shares to permit the following:
- The conversion of the 2004 Debentures into Series A Preferred shares
(including additional 2004 Debentures in the principal amount of up to
$3.5 million that may be issued by the Company prior to June 30, 2004
pursuant to the 2004 Purchase Agreement Amendment);
- The conversion of the 2002 Debentures issued in calendar year 2003 into
Series B Preferred shares;
- The conversion of the 1998 Debenture, 1999 Debentures and 2002 Debentures
in Series C-1 Preferred, Series C-2 Preferred and Series C-3 Preferred
shares, respectively;
- The conversion of the Series A Preferred, Series B Preferred and Series C
Preferred into Common Stock in accordance with their terms;
- The exercise of stock option agreements granted under the Company's 1998
Stock Option Plan, as amended (as described in Proposal 5 of this Proxy
Statement) to the extent of the increase in the number of shares of
Common Stock available under the Plan from 8.1 million to 20.0 million.
As more particularly described in Proposal 5, the increase in the shares
available under the 1998 Stock Option Plan, as amended, will allow the
Company to satisfy commitments to issue stock options to its officers and
employees aggregating 13,175,145 shares;
- The exercise of the Company's outstanding Common Stock purchase warrants;
- The issuance of Common Stock in satisfaction of quarterly interest
payments under the $5.0 million Amended and Restated Watson Note (see
"Interests of Investors in the 2004 Debenture Offering" below); and
59
- Assure an adequate supply of authorized, unissued and unreserved shares
available for general corporate needs and to provide the Board the
flexibility to issue Common Stock in connection with acquisitions, merger
transactions or financings without the expense and delay incidental to
obtaining shareholder approval of any amendment to the Company's Charter
at the time of such action, except as may be required for a particular
issuance by applicable law or by the rules of any stock exchange on which
the Company's securities may then be listed. The additional authorized
shares may be used for such purposes as raising additional capital or
financing an acquisition or business combination. The Company believes
that the number of shares remaining available after giving affect to the
Company's currently outstanding convertible securities, as well as the
Preferred Stock proposed to be issued upon the conversion of the
Company's Outstanding Debentures, will provide the Company with
sufficient authorized and unreserved shares to meet its future
requirements.
The additional shares of Common Stock for which authorization is sought
under the Charter Amendment would be identical to the shares of Common Stock of
the Company now authorized. Holders of Common Stock do not have preemptive
rights to subscribe for additional securities which may be issued by the
Company.
As of the date of the printing of this Proxy Statement, other than the
satisfaction of the Company's obligations under the convertible securities
described above, the Company has no commitments or agreements with any third
party provided for, or any current intention or proposal contemplating, the
issuance or reservation of any additional shares of Preferred Stock or Common
Stock proposed to be authorized by the Charter Amendments. Such shares would,
however, be available for issuance without further action by the Company's
shareholders, unless required by applicable law.
If the Charter Amendment is approved by shareholders, the 2004 Debentures
will convert automatically into Series A Preferred shares. In addition,
1998-2002 Debentures will convert automatically into Junior Preferred Shares.
After giving effect to the conversion of the Company's Outstanding Debentures
into Preferred Stock, the Series A Preferred shares will be convertible into an
aggregate of approximately 136.8 million shares of the Company's Common Stock
(assuming $17.5 million in outstanding principal amount of the 2004 Debentures),
representing approximately 35.4% of the Company's Common Stock on a fully
diluted basis and the Junior Preferred Shares will be convertible into an
aggregate of approximately 195 million shares of the Company's Common Stock,
representing approximately 49.5% of the Company's Common Stock on a
fully-diluted basis.
OTHER EFFECTS OF CHARTER AMENDMENT
Galen Control
Assuming receipt of shareholder approval of this Proposal 2, Galen would
control approximately 42.0% of the Company's voting securities (43.6% after
giving affect to the conversion of all of the Company's outstanding convertible
securities). In addition, Bruce Wesson, a nominee for Director, is the designee
of Galen. In accordance with the terms of the Voting Agreement dated as of
February 6, 2004 between the Company and the holders of the Outstanding
Debentures, the Company has agreed to nominate and appoint to the Board of
Directors, subject to shareholder approval, one designee of Galen and one
collective designee of each of Care Capital, Essex and Galen, for so long as
Galen holds a minimum of 50% of the Series A Preferred shares initially issued
to Galen (or at least 50% of the shares of Common Stock issuable upon conversion
of such Series A Preferred shares).
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Dilution of Existing Shareholders' Investment
The completion of the 2004 Debenture Offering, including the issuance of
the Series A Shares upon conversion of the 2004 Debentures, will cause
substantial dilution in the ownership interest of the Company's public,
non-affiliated shareholders. The following table provides the ownership
percentages in the Company held by the 2004 Debentureholders as a group, the
holders of the 1998-2002 Debentures as a group and the Company's public,
non-affiliated shareholders as a group, both before and after giving effect to
the completion of the 2004 Debenture Offering (calculated on a fully-diluted
basis):
FULLY DILUTED OWNERSHIP PERCENTAGE
IN THE COMPANY AFTER THE COMPLETION
OF THE 2004 DEBENTURE OFFERING
---------------------------------------
FULLY DILUTED OWNERSHIP PERCENTAGE ASSUMES ASSUMES
IN THE COMPANY BEFORE THE COMPLETION $14.0 MILLION $17.5 MILLION
SECURITY HOLDERS OF THE 2004 DEBENTURE OFFERING IN 2004 DEBENTURES IN 2004 DEBENTURES
---------------- ------------------------------------ ------------------ ------------------
- 2004 Debentureholders as a Group... -- 30.5% 35.4%
- 1998-2002 Debentureholders as a
Group.............................. 76.2% 53.3% 49.5%
- Public, Non-Affiliated Shareholders
as a Group......................... 5.7% 4.0% 3.7%
The issuance of the Preferred Stock as well as the issuance of Common Stock
upon conversion of the Preferred Stock could have an adverse affect on the
potential realizable value of a shareholder's investment. In the absence of a
proportionate increase in the Company's earnings and book value, an increase in
the aggregate number of outstanding shares of the Company caused by the issuance
of additional shares, such as the Preferred Stock or the Common Stock underlying
the Preferred Stock, would dilute the earnings per share and book value per
share of all outstanding shares of the Company's Common Stock. If such factors
were reflected in the price per share of the Common Stock, the potential
realizable value of a shareholder's investment could be adversely affected. In
addition, the anti-dilution provisions contained in the Series A Preferred and
Junior Preferred Shares could further dilute the ownership interest of existing
shareholders.
Latent Anti-Takeover Effect
As of June 1, 2004, the Company had issued an outstanding 21,716,025 shares
of its Common Stock. Assuming the receipt of shareholder approval of this
Proposal 2 and the issuance by the Company of $17.5 million in principal amount
of 2004 Debentures under the 2004 Purchase Agreement, on the Charter Amendment
Filing Date the Company will issue approximately 222.3 million shares of
Preferred Stock in consideration of the conversion of the Outstanding
Debentures. After giving effect to the issuance of such Preferred Stock, and
considering the Company's outstanding Common Stock purchase options and warrants
as of June 1, 2004 (assuming the receipt of shareholder approval to the
amendment to the 1998 Stock Option Plan as provided in Proposal 5 of this Proxy
Statement), the Company will have issued and outstanding securities convertible
into an aggregate of approximately 368.3 million shares of its Common Stock. If
all such convertible securities were exercised and/or converted, the Company
would have issued and outstanding approximately 390.0 million shares of its
Common Stock. Assuming shareholder approval of this Proposal 2, after giving
effect to such convertible securities, the Company would have approximately 67.7
million shares of Preferred Stock and 260.0 million shares of Common Stock
unreserved and available for issuance.
The increase in the number of shares of capital stock authorized for
issuance could, under certain circumstances, be construed as having an
anti-takeover effect. For example, in the event a person seeks to effect a
change in the composition of the Board of Directors of the Company or
contemplates a tender offer or other transaction for the combination of the
Company with another company, it may be possible for the Company to impede the
attempt by issuing additional shares of capital stock, thereby diluting the
voting power of the other outstanding shares and increasing the potential cost
to acquire control of the Company. The proposed Charter amendment may also have
the effect of permitting the Company's current management, including our Board
of Directors, to retain its position indefinitely and place it in a better
position to resist
61
changes that shareholders may wish to make if they are dissatisfied with the
conduct of the Company's business.
The Company's Charter does not provide for cumulative voting and the
Charter Amendment does not include cumulative voting rights. As a result, in
order to ensure representation on the Board, a shareholder must control the
votes of a majority of the voting securities present and voting at a
shareholders' meeting at which a quorum is present. The lack of cumulative
voting requires an entity seeking a takeover to acquire a substantially greater
number of shares to ensure representation on the Board than would otherwise be
necessary were cumulative voting available.
Certain provisions of the Company's By-laws could also have the effect of
deterring takeover attempts because of procedural provisions contained therein.
The By-laws provide that special shareholder meetings may be called by the
President or Secretary of the Company, or by resolution of the Board of
Directors. The Company's By-laws further provide that the Board of Directors has
the authority to postpone any previously scheduled annual or special meeting of
shareholders upon public notice given in accordance with the By-laws. In
addition, except as otherwise required by law, the By-laws limit the business
that may be transacted at a special meeting of shareholders to the matters
specified in the notice of such special meeting.
The Board of Directors did not propose the Charter Amendment in response to
any effort known to the Board of Directors to accumulate Common Stock or to
obtain control of the Company by means of a merger, tender offer or solicitation
in opposition to management. In addition, this Proposal 2 is not part of any
plan by Management to recommend a series of similar amendments to the Board of
Directors and the shareholders. Finally, the Board of Directors does not
currently contemplate recommending the adoption of any other amendments to the
Company's Charter that could be construed as affecting the ability of third
parties to take over or change the control of the Company.
Satisfaction of the Company's Obligations under the 2004 Debenture Purchase
Agreement
Shareholder approval of this Proposal 2 will allow the Company to satisfy
its contractual obligations under the 2004 Purchase Agreement. Specifically, the
2004 Purchase Agreement obligates the Company to obtain shareholder approval to
this Proposal 2 in order to provide for the automatic conversion of the 2004
Debentures into Series A Preferred shares and the automatic conversion of the
1998-2002 Debentures into Junior Preferred Shares. The 2004 Purchase Agreement
further provides that in the event the Company fails to obtain shareholder
approval to this Proposal 2 on or prior to July 31, 2004 (subject to extension
for up to ninety (90) days under certain circumstances), the rate of interest
accruing under the 2004 Debentures will increase from 1.62% to 15%. The
Company's failure to obtain shareholder approval to this Proposal 2 will render
the Company unable to issue its Preferred Stock in full satisfaction of the
Company's Outstanding Debentures. In such event, the Company would be in default
under the terms of the Outstanding Debentures as well as the Amended and
Restated Watson Note allowing the holders of the Outstanding Debentures and the
Watson Note Purchasers to accelerate the maturity of such indebtedness. The
occurrence of these events would have a material adverse affect on the Company's
financial condition.
Availability of Shares for Future Issuances
The approval of this Proposal 2 will make available shares of the Company's
Preferred Stock and Common Stock for issuance in equity financings and also
might enable the Company to pursue acquisitions or enter into transactions which
the Board believes provides the potential for growth and profit. If additional
authorized shares are available, transactions dependent on the issuance of
additional shares will be less likely to be undermined by delays and
uncertainties occasioned by the need to obtain shareholder authorization prior
to consummation of such transactions. The ability to issue shares as deemed in
the Company's best interest by the Board, would also permit the Company to avoid
the expenses which are incurred in holding certain shareholder's meetings.
Pursuant to an Investor Rights Agreement dated as of February 6, 2004,
between the Company and the holders of the Outstanding Debentures, except for
the Preferred Stock issuable upon conversion of the
62
Outstanding Debentures, the Company is precluded from issuing any additional
shares of Preferred Stock in the absence of the written consent of the holders
of 60% of the Series A Preferred shares.
INTERESTS OF INVESTORS IN THE 2004 DEBENTURE OFFERING
As of June 1, 2004, each of Care Capital, Essex and Galen (the "Lead 2004
Investors") had designees serving on the Board of Directors. Specifically, each
of Messrs. Wesson, Conjeevaram and Shroff are designees of Galen. Messrs.
Karabelas and Thangaraj are the designees of Care Capital and Essex,
respectively. In accordance with the terms of the Voting Agreement dated as of
February 6, 2004, by and among the Company and the holders of the Outstanding
Debentures, the Company has agreed to nominate to the Board one designee of each
of Galen, Care Capital and Essex and one collective designee of such parties.
See Proposal 1 under the caption "Agreements Governing Appointment of Directors"
for a more detailed description of the Voting Agreement. Pursuant to the Voting
Agreement, effective as of the Meeting date, Messrs. Wesson, Karabelas and
Thangaraj will be the Board designees of Galen, Care Capital and Essex,
respectively. The collective designee to the Board of the Lead 2004 Investors
has not yet been identified and designated.
As part of the completion of the 2004 Debenture Offering, the Lead 2004
Investors invested an aggregate of $11,970,902 in the 2004 Debentures.
Additionally, the Lead 2004 Investors own an aggregate of $68,996,368 in
principal amount of the 1998-2002 Debentures. Assuming the receipt of
shareholders approval of this Proposal 2, and after giving effect to the
conversion of the Outstanding Debentures issued and outstanding as of June 1,
2004 into Preferred Stock, Galen, Care Capital and Essex will control 45.5%,
14.7% and 17.1% of the Company's outstanding voting securities (or approximately
46.9%, 13.3% and 15.5%, respectively, after giving effect to the conversion of
all of the Company's outstanding Common Stock Purchase options and warrants).
The Company was a party to a certain loan agreement with Watson
Pharmaceuticals pursuant to which Watson made term loans to the Company (the
"Watson Term Loan Agreement") in the aggregate principal amount of $21.4 million
as evidenced by two promissory notes (the "Watson Notes"). It was a condition to
the completion of the 2004 Debenture Offering that simultaneous with the closing
of the 2004 Purchase Agreement, the Company shall have paid Watson the sum of
approximately $4.3 million (which amount was funded from the proceeds of the
2004 Debenture Offering) and conveyed to Watson certain Company assets in
consideration for Watson's forgiveness of approximately $16.4 million of
indebtedness under the Watson Notes. A part of such transaction, the Watson
Notes were amended to extend the maturity date of such notes from March 31, 2006
to June 30, 2007, to provide for satisfaction of future interest payments under
the Watson Notes in the form of the Company's Common Stock, to reduce the
principal amount of the Watson Notes from $21.4 million to $5.0 million, and to
provide for the forbearance from the exercise of rights and remedies upon the
occurrence of certain events of default under the Watson Notes (the Watson Notes
as so amended, the "Amended and Restated Watson Note"). Simultaneous with the
issuance of the Amended and Restated Watson Note, each of the Lead 2004
Investors and the other investors in the 2004 Debentures as of February 10, 2004
(collectively, the "Watson Note Purchasers") purchased the Amended and Restated
Note from Watson in consideration for a payment to Watson of $1.0 million.
In addition to Watson's forgiveness of approximately $16.4 million under
the Watson Notes, as additional consideration for the Company's payment to
Watson of approximately $4.3 million and the Company's conveyance of certain
Company assets, all current supply agreements between the Company and Watson
were cancelled and Watson waived the dilution protections contained in the
Common Stock purchase warrant dated December 20, 2002 exercisable for
approximately 10.7 million shares of the Company's Common Stock previously
issued by the Company to Watson, to the extent such dilution protections were
triggered by the transactions provided in the 2004 Debenture Offering.
The Amended and Restated Watson Note in the principal amount of $5.0
million as purchased by the Watson Note Purchasers is secured by a first lien on
all of the Company's and its subsidiaries' assets, senior to the lien securing
the Outstanding Debentures and all other Company indebtedness, carries a
floating rate of interest equal to the prime rate plus 4.5% and matures on June
30, 2007.
63
The principal amount of the $5.0 million Amended and Restated Watson Note
was allocated among the Watson Note Purchasers based on the quotient of each
Watson Note Purchaser's investment in the 2004 Debentures, divided by the
approximate $12.3 million in principal amount of the 2004 Debentures issued on
February 10, 2004. As a result, of the $5.0 million principal balance of the
Amended and Restated Watson Note, approximately $1,754,494, $1,352,051 and
$1,754,454 is owed by the Company to Galen and its affiliates, Care Capital and
Essex, respectively (representing approximately 35.1%, 27% and $35.1%
respectively, of the principal amount of the Amended and Restated Watson Note).
VOTE REQUIRED
The affirmative vote of the holders of a majority of the Company's
outstanding voting securities is required to approve this Proposal 2 to
authorize the Charter Amendment.
Pursuant to the terms of the Voting Agreement executed in connection with
the 2004 Debenture Offering, (See "Additional Agreements with Holders of
Debentures/Preferred Stock -- Voting Agreement" above) the Voting Agreement
Parties have agreed to vote all of their respective voting securities of the
Company in favor of this Proposal 2. The aggregate voting securities held by the
Voting Agreement Parties is approximately 51,653,363 shares, representing
approximately 78.6% of the voting rights under the Company's outstanding voting
securities. Given the aggregate voting securities held by the Voting Agreement
Parties, the approval of this Proposal 2 by a majority of the Company's voting
securities is assured.
If this Proposal 2 is adopted, the Company's Charter will be amended and
restated in the form of Appendix C attached to this Proxy Statement.
DISSENTING SHAREHOLDERS' RIGHT OF APPRAISAL
Pursuant to Section 806 of the New York Business Corporation Law ("NYBCL"),
holders of the Company's Common Stock who follow the procedures set forth in
Section 623 of the NYBCL (the "Appraisal Statute") will be entitled to have
their Common Stock appraised by a New York State Court and to receive payment of
the "fair value" of such shares as determined by such court. The Appraisal
Statue is reprinted in its entirety as Appendix B to this Proxy Statement. While
the following discussion summarizes all material terms of the law pertaining to
appraisal rights under the NYBCL, it is qualified in its entirety by the full
text of the Appraisal Statute. Any shareholder who wishes to exercise such
appraisal rights or to preserve the right to do so, should review the following
discussion and Appendix B carefully because failure to timely and properly
comply with the procedures specified will result in the loss of dissenters'
appraisal rights under the NYBCL.
All references in the Appraisal Statute and in this summary to a
"shareholder" are to the recordholder of the Company's Common Stock on the
Record Date. A person having a beneficial interest in shares of the Company's
Common Stock that are held of record by another person such as a broker or
nominee must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect whatever appraisal
rights the beneficial owner may have.
A shareholder wishing to exercise appraisal rights must (i) deliver to the
Company, prior to or at the Meeting but before the vote is taken on this
Proposal 2, a written objection to the proposed amendment to the Company's
Charter as provided in this Proposal 2 (the "Notice of Election"), which must
include a notice of his election to dissent, the shareholder's name, residence
address, the number of shares as to which the shareholder dissents and a demand
for payment of the fair value of such shares (which Notice of Election must be
in addition to and separate from any proxy or vote against the amendment to the
Company's Charter contemplated by this Proposal 2 (the "Charter Amendment")) and
(ii) not vote for approval and adoption of the Charter Amendment. BECAUSE A
PROXY WHICH DOES NOT CONTAIN VOTING INSTRUCTIONS WILL, UNLESS REVOKED, BE VOTED
FOR APPROVAL OF THE CHARTER AMENDMENT, A SHAREHOLDER WHO VOTES BY PROXY AND WHO
WISHES TO EXERCISE APPRAISAL RIGHTS MUST (a) VOTE AGAINST APPROVAL AND ADOPTION
OF THE CHARTER AMENDMENT OR (b) ABSTAIN FROM VOTING ON THE CHARTER
AMENDMENT.Neither a vote against the Charter Amendment, in person or by proxy,
nor a Proxy directing such vote for an abstention, will in and of itself
constitute a written objection to the Charter
64
Amendment under the Appraisal Statute (shareholders who timely file such Notice
of Election and who do not vote in favor of the Charter Amendment are referred
to as "Dissenting Shareholders").
A shareholder may not dissent as to less than all of the shares, as to
which such shareholder has a right to dissent, held by such shareholder of
record and owned beneficially. A nominee or fiduciary may not dissent on behalf
of any beneficial owner as to less than all of the shares held of record by such
nominee or fiduciary on behalf of such owner and as to which such nominee or
fiduciary has a right to dissent. All Notices of Election should be addressed to
Halsey Drug Co., Inc., 616 N. North Court, Suite 120, Palatine, Illinois 60067,
Attention: Mr. Peter Clemens, Senior Vice President.
Within 10 days after the date on which shareholders approve and adopt the
Charter Amendment, the Company must send written notice by registered mail to
each Dissenting Shareholder to such effect (the "Dissenting Shares"). At the
time of the filing of the amended Charter with the Department of State of the
State of New York (the "Effective Time"), each Dissenting Shareholder will cease
to have any rights of a shareholder of the Company except the right to be paid
the fair value of his shares and rights under the Appraisal Statute.
A Notice of Election may be withdrawn by a Dissenting Shareholder prior to
his acceptance in writing of an offer made by the Company to pay the value of
such Dissenting Shares, except that a Notice of Election may not be withdrawn
later than 60 days following the Effective Time unless the Company fails to make
a timely offer to pay such value, in which case such Dissenting Shareholder
shall have 60 days from the date an offer is made to withdraw his election. In
either event, after such time, a Notice of Election may not be withdrawn without
the written consent of the Company. In order to be effective, withdrawal of a
Notice of Election must be accompanied by a return to the Company of any advance
payment made to the Dissenting Shareholder by the Company as described below.
Upon filing the Notice of Election, or within one month thereafter,
Dissenting Shareholders must submit the certificates representing their Common
Stock to the Company, attention: Peter Clemens, Senior Vice President, at the
address set forth above or to the Company's transfer agent, Continental Stock
Transfer and Trust Company, 2 Broadway, 19th Floor, New York, New York 10004 and
there will be noted thereon that a Notice of Election has been filed and the
certificates will be returned to the Dissenting Shareholders. Any Dissenting
Shareholders who fail to submit such certificates for such notation will, at the
option of the Company exercised by written notice to such Dissenting
Shareholders within 45 days of the date of filing of such Notice of Election,
lose their appraisal rights unless a court, for good cause shown, shall
otherwise direct.
Within 15 days after the expiration of the period within which shareholders
may file their Notice of Election, or within 15 days after the Effective Time,
whichever is later (but in no case later than 90 days after the shareholders'
vote to approve and adopt the Charter Amendment), the Company must make a
written offer to pay for the Dissenting Shares held by such Dissenting
Shareholder at a price which the Company considers to be their fair value. This
offer will be accompanied by a statement setting forth the aggregate number of
shares, which will be at the same price for all Dissenting Shares, with respect
to which Notices of Election to dissent have been received and the aggregate
number of holders of such shares.
If the Effective Time has occurred at the time the offer is made, the offer
will be accompanied by (i) advance payment to each Dissenting Shareholder who
has submitted certificates for notation thereon of the election to dissent of an
amount equal to 80% of such offer or (ii) as to each Dissenting Shareholder who
has not yet submitted certificates for notation thereon of the election to
dissent, a statement that advance payment of an amount equal to 80% of the
amount of such offer will be made by the Company promptly upon submission of
certificates. If the Effective Time of the Charter Amendment has not occurred at
the time of the making of such offer, such advance payment or statement as to
advance payment will be sent to each Dissenting Shareholder entitled thereto
upon the Effective Time. Acceptance of such advance payment by a Dissenting
Shareholder will not constitute a waiver of dissenter's rights. If the Charter
Amendment is not effective within 90 days after approval of the Charter
Amendment by shareholders, such offer will be conditioned upon consummation of
the Charter Amendment.
65
If within 30 days after making such offer, the Company and any Dissenting
Shareholder agree on the price to be paid for such Dissenting Shareholder's
Dissenting Shares, the Company will pay the agreed price to such holder within
60 days after the later of the date such offer was made or the Effective Time,
upon surrender of certificates representing such holder's Common Stock.
If the Company fails to make an offer within the 15-day period described
above, or if it makes an offer and any Dissenting Shareholder fails to agree
within 30 days of the making of such offer, the Company must, within 20 days
thereafter institute a special proceeding in an appropriate court to determine
the rights of Dissenting Shareholders and to fix the fair value of the shares.
If the Company does not institute such a proceeding within such 20-day period,
any Dissenting Shareholder may, within 30 days after such 20-day period expires,
institute a proceeding for the same purpose. If such proceeding is not
instituted by any Dissenting Shareholder within such 30-day period, all
dissenters' rights will be extinguished unless the New York Supreme Court, for
good cause shown, otherwise directs. All Dissenting Shareholders, other than
those who agree with the Company as to the price to be paid for their shares,
will be made parties to such proceeding
With respect to Dissenting Shareholders entitled to payment, the court will
proceed to fix the value of the Company's Common Stock which will be the fair
value as of the close of business on the day prior to the Meeting. In fixing the
fair value of the shares of the Company's Common Stock, the court will consider
the nature of the Charter Amendment and the effects on the Company and its
shareholders, the concepts and methods then customary in relevant securities and
financial markets for determining fair value of shares of a corporation engaging
in a similar transaction under comparable circumstances and all other relevant
factors.
The court will determine the fair value of such shares without a jury and
without referral to an appraiser or referee. The final order by the court will
include an allowance for interest (unless the court finds the refusal of any
Dissenting Shareholder to accept the offer of the Company thereof as arbitrary,
vexatious, or otherwise not in good faith) of such rate as the court finds to be
equitable, accruing from the Effective Time to the date of payment.
Each party in the appraisal proceeding will bear its own costs and
expenses, including the fees of counsel and any experts employed by it. The
court may, however, in its discretion, assess any of the costs, fees and
expenses incurred by the Company against Dissenting Shareholders (including
those who withdraw their Notice of Election) if the court finds that their
refusal to accept the offer of the Company was arbitrary, vexatious or otherwise
not in good faith. Similarly, the costs, fees and expenses incurred by
Dissenting Shareholders may be assessed by the court in its discretion, against
the Company if the fair value of the shares as determined by the court
materially exceeds the amount which the Company offered to pay, the Company
failed to follow certain procedures of the Appraisal Statute or the Company's
manner of compliance with the Appraisal Statue was arbitrary, vexatious or not
otherwise in good faith.
Within 60 days after the final determination of the proceeding, the Company
will pay to each Dissenting Shareholder the amount found in such proceeding to
be due such shareholder, upon surrender of certificates of the Company's Common
Stock.
Any shareholder who duly demands, prior to the Meeting, an appraisal in
compliance with the Appraisal Statute will not, after the Effective Time, be
entitled to vote the shares subject to such demand for any purpose or to the
payment of dividends or other distributions on those shares, except dividends or
other distributions payable to shareholders of record as of a date prior to the
Effective Time.
Failure to follow the steps required by the Appraisal Statute for
perfecting appraisal rights may result in the loss of such rights. IN VIEW OF
THE COMPLEXITY OF THE PROVISIONS OF THE APPRAISAL STATUTE, SHAREHOLDERS WHO ARE
CONSIDERING DISSENTING FROM THE CHARTER AMENDMENT SHOULD CONSULT THEIR LEGAL
ADVISORS.
66
PROPOSAL 3
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY
The Board of Directors of the Company has unanimously adopted a resolution
and recommends to the shareholders for their adoption and approval an amendment
to the Company's Restated Certificate of Incorporation to change the name of the
Company from "Halsey Drug Co., Inc." to "Acura Pharmaceuticals, Inc.".
Purpose of Proposed Name Change. Following the restructuring of the
Company's operations, including the closure of the Company's finished dosage
manufacturing and packaging facilities in Congers, New York and the divestment
of the assets used in the operation of such facilities, the Company has
discontinued the manufacture and sale of finished dosage generic products and
transferred the proprietary research and development operations previously
conducted at its Congers locations to the Company's facility located in Culver,
Indiana.
At the Culver, Indiana facility, the Company will focus its efforts on the
research, development, scale up and manufacture of opioid active pharmaceutical
ingredients ("APIs") and opioid containing finished dosage form products
utilizing its proprietary opioid API synthesis technologies and finished dosage
abuse deterrent formulation technology.
As a consequence of the restructuring of operations, the use of the "Halsey
Drug Co., Inc." name will no longer serve the Company's interest because of its
association with its previous line of business and the possible confusion about
the Company's identity, which could result. Moreover, a new name better
signifies that the Company has adopted a business strategy focused primarily on
developing and commercializing proprietary pharmaceutical products directed at
deterring potential abuse and misuse of orally administered prescription opioid
containing products.
Accordingly, the Board believes that, as the Company begins to reach new
audiences, the new "Acura Pharmaceuticals, Inc." name of the Company is more
likely to have a greater intangible value, and a greater name recognition value
in the future than its current name.
Restated Certificate of Incorporation. If approved, the FIRST paragraph of
the Company's Amended Charter would be restated in its entirety as follows:
"FIRST: The name of the Corporation shall be ACURA PHARMACEUTICALS, INC."
The form of the Amended Charter is included as Appendix C hereto.
If approved, the Amended Charter will become effective upon filing of same
with the Department of State of the State of New York.
Effect of Name Change on Shareholders. The Company's shareholders will not
be required to submit their stock certificates for exchange. Stock certificates
bearing the "Halsey Drug Co., Inc." name will continue to be valid certificates
and will evidence ownership of the same number of shares of the Company's
capital stock after the name change as stated in Amended Charter. Following the
effective date of Amended Charter, all new stock certificates issued by the
Company will be printed using the Company's new name.
New Trading Symbol. Upon the approval of the Amended Charter the Company
will apply for a new trading symbol more readily identifiable with the new
Company name.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the Company's voting
securities is required for the approval of the Amended Charter.
67
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the approval of the change of
the Company's name, as provided in the Amended Charter.
PROPOSAL 4
SALE OF THE ASSETS USED IN OUR GENERIC FINISHED DOSAGE
PRODUCT OPERATIONS LOCATED IN CONGERS, NEW YORK
This section of the Proxy Statement describes certain aspects of the sale
of substantially all of the assets used in the Company's manufacturing,
labeling, packaging, storage, distribution and sale of finished dosage generic
pharmaceutical products at its Congers, New York locations. The Company
estimates that the assets to be sold represented approximately 30% of the
Company's total assets as of December 31, 2003. Shareholders are urged to read
carefully the complete Asset Purchase Agreement for the precise legal terms of
the agreement and other important information. The Asset Purchase Agreement is
attached as Appendix I to this Proxy Statement. While the Company is seeking
shareholder approval for the sale of substantially all of its assets located in
Congers, New York, the Company does not intend to wind up its affairs. The
Company intends to use the proceeds from this sale, together with additional
capital raised from the sale of securities to develop certain products utilizing
its opioid abuse deterrent formulation technology and opioid synthesis
technologies.
THE COMPANIES
HALSEY DRUG CO., INC.
The Company, a New York corporation established in 1935, and its
subsidiaries, have been engaged in the development, manufacture, sale and
distribution of a variety of generic finished dosage pharmaceutical products and
active pharmaceutical ingredients ("APIs"). Prior to the restructuring of the
Company's operations largely completed on January 30, 2004, the generic drug
products manufactured and sold by the Company generally consisted of an
analgesic product, anti-infectives, antitussives, cough and cold preparations,
and a steroid product. Since March 1999, the Company has manufactured active
pharmaceutical ingredients ("APIs") at its Culver, Indiana facility and
manufactured, packaged and sold its generic finished dosage products at two
leased locations in Congers, New York.
On November 6, 2003, the Company announced its plan to restructure the
Company's operations to focus on research and development related to certain
proprietary opioid synthesis and finished dosage formulation technologies. The
Board of Directors determined, among other factors, that the Company's ability
to generate positive cash flow from the operation of the Company's finished
dosage manufacturing, packaging, labeling and distribution facilities located in
Congers, New York (collectively, the "Congers Facilities") in the manufacture
and distribution of finished dosage generic products pursuant to abbreviated new
drug applications ("ANDAs") was compromised by the highly competitive market
environment, low market pricing and declining market size for its existing
generic products and the lack of new generic products in development. The
Company incurred losses of $48.5 million in 2003, $59.6 million in 2002 and
$12.6 million in 2001. The Board determined that near term sales of the
Company's finished dosage generic products would likely result in negative gross
margins in view of the market environment. Based on this analysis and other
factors, the Board concluded that the Company's manufacture and sale of finished
dosage products licensed to be produced at the Congers Facilities would result
in continuing negative cash flow in the foreseeable future.
After due consideration of alternative strategies and considering the
optimal use of available funding, the Board adopted a strategy to substantially
restructure the Company's business. The restructured operations will be
conducted at the Company's Culver, Indiana facility and will include the
following material components:
- The development and commercial scale up of the Company's novel API opioid
synthesis technologies at the Culver, Indiana facility.
68
- The prosecution of the Company's application to the DEA to receive a
registration to import Narcotic Raw Materials ("NRMs") for use in the
production of opioid API's.
- The development of the Company's proprietary abuse deterrent formulation
technologies for use in orally administered opioid containing finished
dosage products.
- The manufacture of clinical trial supplies of abuse deterrent
formulations.
- The evaluation of products utilizing abuse deterrent formulation
technology in appropriate clinical trials.
- Entering into license agreements with strategic partners providing that
such licensees will further develop such abuse deterrent formulation
finished dosage products, file for regulatory approval with the U.S. Food
and Drug Administration ("FDA") and commercialize such products.
- The Company's manufacture of commercial quantities of such products for
sale by the Company's licensees.
- The cessation of operations at the Congers Facilities and the sale of the
assets used in such operations for manufacturing generic products.
Shareholders are cautioned that there can be no assurance that the Company
will succeed in implementing all or any portion of its restructured operations
or, even if implemented, that the Company will succeed in the development and
commercialization of its API opioid synthesis or finished dosage formulation
technologies.
Manufacturing of the Company's generic finished dosage products at the
Congers Facilities substantially ceased on January 30, 2004. Such date also
marks the completion, in large part, of the reduction in work force associated
with the restructuring of the Company's operations by approximately 100
employees, 70 of whom were employed by the Company at the Congers Facilities.
Operation of the Congers Facilities. Since March 1999, the Company has
manufactured, labeled, packaged, distributed and sold a variety of generic
prescription and over-the-counter products at its facilities in Congers, New
York. The facilities in Congers consisted of a 35,000 square foot manufacturing
facility located on Brenner Drive (the "Brenner Drive Facility"), and an 18,000
square foot packaging and labeling facility located at 125 Wells Avenue (the
"Wells Avenue Facility" and collectively with the Brenner Drive Facility, the
"Congers Facilities"). The lease agreement for the Brenner Drive Facility
provided for annual fixed rent of approximately $600,000 per year. On March 19,
2004, the Company exercised the purchase option under the lease for the Brenner
Drive facility, which included the right to purchase from the landlord the
related leased equipment at the Brenner Drive Facility, and assigned the
Company's rights under the contract of sale to IVAX. On the same day,
simultaneous with the closing of the sale of the Brenner Drive Facility from Par
Pharmaceutical, Inc. to IVAX, the Company terminated the lease for the Brenner
Drive Facility. The lease also contained an option to purchase the facility and
certain equipment subject to the lease for a price of $5.0 million, which
purchase option was transferred to IVAX in accordance with the terms of the
Asset Purchase Agreement. Simultaneous with the parties execution of the Asset
Purchase Agreement on March 19, 2004, IVAX purchased the Brenner Drive Facility
and the related leased equipment from the landlord of such facility. The lease
agreement for the Wells Avenue Facility provides for annual fixed rent of
approximately $135,000 per year and expires on June 30, 2004. The lease
agreement for the Wells Avenue Facility was transferred to IVAX upon the
parties' execution of the Asset Purchase Agreement.
Prior to the cessation of manufacturing activities at the Congers
Facilities the Company's operations at such facilities consisted of the
manufacture, packaging, labeling, and distribution of approximately 12 dosage
forms and strengths of prescription drugs and 4 dosage forms and strengths of
over-the-counter products. Such products were sold in various forms, including
liquids, tablets and capsules. In general, the generic drug products
manufactured by the Company at the Congers Facilities consisted of an analgesic,
anti-infectives antihistamine decongestants, antitussives and a steroid product.
During fiscal 2003, the Company had net product revenues of $5.75 million, all
of which were attributable to sales of finished dosage products
69
manufactured at the Congers Facilities. For the year ended December 31, 2003,
the Company reported a net loss of $48.5 million, as compared to a net loss of
$59.6 million for 2002.
Development and Commercialization of Proprietary API and Finished Dosage
Technologies. The Company has developed proprietary API opioid synthesis
technologies that the Company believes provides an efficient and cost effective
alternative to current technologies used to produce certain opioid APIs (the
"API Technology"). The Company has also developed certain proprietary abuse
deterrent formulation technologies which the Company believes can be applied to
orally administered opioid containing finished dosage products.(the "ADF
Technology"). The Company has filed three patent applications encompassing the
API Technology and an application encompassing the ADF Technology with the U.S.
Patent and Trademark Office. To date, only a limited portion of the Company's
technologies have been tested in laboratory settings, none have been tested in
clinical settings and all of such technologies will need to be successfully
scaled up to be commercially viable, of which no assurance can be given.
The development of the API Technology and the ADF Technology demonstrate
the Company's continuing efforts to develop and manufacture APIs and finished
dosage formulations focusing on opioid containing products. It is the Company's
intention to continue focusing on opioids by developing novel manufacturing
processes and finished dosage formulations incorporating the Company's
technologies. Such development efforts may be performed solely by the Company or
in partnership with third-party licensees.
The Company's facility located in Culver, Indiana is registered by the U.S.
Drug Enforcement Administration ("DEA") for research, development and
manufacture of Schedule II to V controlled substances in bulk and finished
dosage forms. In addition, the Company has filed an application with the DEA to
obtain a registration to import NRMs directly from foreign sources for use in
the Company's API manufacturing processes (the "Import Registration"). The
Company's application for the Import Registration has been opposed by four
parties, including the DEA and two firms that the Company believes represent the
largest importers of NRMs used to manufacture opioid APIs in the U.S.
Pursuant to established procedures, an evidentiary hearing relating to the
Company's Import Registration application was held before a DEA Administrative
Law Judge ("ALJ") in August 2003. The ALJ later re-opened the administrative
record, at the request of opposing parties, to consider the Company's November
and December 2003 announcements concerning Company restructuring and financing
activities. Pursuant to the ALJ's order on March 30, 2004, the administrative
record will remain open for at least 10 days following the Company's filing with
the Securities and Exchange Commission of its annual report on Form 10-K to
allow the opposing parties to file statements indicating whether they intend to
submit additional evidence in response to such filing. Upon the closure of the
administrative record, the ALJ will make findings of fact, draw legal
conclusions and recommend a specific decision on the Company's Import
Registration application to the DEA Deputy Administrator. The Deputy
Administrator will then consider the ALJ's decision and administrative record
and issue a final order relating to the Company's application. DEA will judge
whether the issuance of an Import Registration is appropriate based on, among
other considerations, whether adequate security safeguards and controls are
maintained at the Culver Facility and at all points in the chain of transfer of
the NRMs from foreign suppliers to its Culver Indiana facility, whether the AP1
Technologies are viable processes, whether market demand for opioid containing
products or other factors support the approval of another import registration,
and whether the Company has established itself as an eligible party to obtain
NRMs for foreign sources. The Company must continue to maintain compliance with
DEA's requirements for maintenance of its Manufacturing Registration in the
meantime.
Subsequent to the completion of the Company's sale to IVAX of the assets
used in the operation of the Congers Facilities, the Company will focus on its
opioid API Technologies and the ADF Technology. Assuming the Company is
successful in its development relating to these technologies, of which no
assurance can be given, the Company intends to vertically integrate its
operations at a single location in Culver, Indiana (the "Culver Facility").
Beginning with NRMs and utilizing its opioid API Technology, the Company will
manufacture bulk opioid APIs at the Culver Facility. Such bulk opioid APIs will
be formulated and manufactured into finished dosage orally administered products
utilizing the Company's ADF Technology. The Company expects to contract with
third-party pharmaceutical companies to complete the development
70
and testing of such abuse deterrent products and to obtain required regulatory
approvals and to commercialize such products.
The Company's administrative office is located at 616 N. North Court, Suite
120, Palatine, Illinois 60067, and the telephone number is (847) 705-7709. The
Company's website is www.halseydrug.com and the Company's annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to those reports are made available to the public free of charge, as
soon as reasonably practicable after the Company electronically files such
material with, or furnishes it to, the Securities and Exchange Commission, by
contacting us by telephone, mail or through our website.
IVAX PHARMACEUTICALS NEW YORK LLC
IVAX Pharmaceuticals New York LLC ("IVAX"), a wholly-owned subsidiary of
IVAX Corporation, was formed for the purpose of completing the purchase of the
assets used in the operation of the Congers Facilities. IVAX Corporation is a
multi-national company engaged in the research, development, manufacturing and
marketing of branded and generic pharmaceuticals and veterinary products in the
United States and internationally. IVAX Corporation's mission is to provide high
quality pharmaceuticals that improve the health of its customers and to operate
as an ethical and honorable corporate citizen. IVAX Corporation works to
complete these missions by enhancing its existing products as well as by
continually developing important new medications to treat a wide variety of
illnesses. IVAX Corporation has direct operations in 30 countries and markets
products in more than 80 countries around the world.
IVAX' principal executive office is located at 77 Brenner Drive, Congers,
New York 10920 and their telephone number is (305) 575-6000.
BACKGROUND OF THE SALE OF ASSETS USED IN THE OPERATION OF THE CONGERS FACILITIES
The decision of the Board to approve and recommend the Asset Purchase
Agreement was the result of an extensive evaluation process. During the last few
years, the Board and senior management have, from time to time, evaluated and
considered a number of alternatives, including strategic partnerships, mergers
and disposition transactions, all as more particularly described in this section
below.
On March 29, 2000, the Company completed various strategic alliance
transactions with Watson Pharmaceuticals, Inc ("Watson"). The transactions with
Watson provided for Watson's purchase of a certain pending abbreviated new drug
application ("ANDA") from the Company, for Watson's rights to negotiate for
Halsey to manufacture and supply certain identified future products to be
developed by Halsey, for Watson's marketing and sale of the Company's core
products, and for Watson's extension of a $17.5 million term loan to the
Company.
As part of its alliance with Watson, the Company and Watson executed a
manufacturing and supply agreement providing for Watson's marketing and sale of
the Company's existing core products portfolio (the "Core Products Supply
Agreement"). The products subject to the Core Products Supply Agreement
represented substantially all of the Company's then existing finished dosage
product formulations.
Concurrent with the execution of the Core Products Supply Agreement, Watson
extended a $17.5 million term loan to the Company. The term loan was secured by
a lien on all of the Company's assets, senior to the lien securing all other
Company indebtedness, carried a floating rate of interest equal to prime plus 2%
and had an original maturity date of March 31, 2003. In December 2002, as part
of the Company's completion of an offering of convertible senior secured
debentures, the Watson term loan was amended to (i) extend the maturity date to
March 31, 2006, (ii) increase the interest rate to prime plus 4 1/2%, and (iii)
increase the principal amount of a loan from $17.5 million to approximately
$21.4 million to reflect the inclusion of the excess payments made by Watson to
the Company under the Core Products Supply Agreement.
In entering into the alliance with Watson, the Company's expectation was
that sales of the Company's core products would increase through Watson's
marketing and sales of such products under Watson's label. Additionally, the
Company believed that the anticipated increased revenue from sales of the
Company's products to Watson combined with the proceeds of the Watson term loan
would provide a sufficient source of
71
working capital to allow the Company to develop and commercialize its
proprietary API Technology and ADF Technology. As a result, and in accordance
with the terms of the Core Products Supply Agreement, the Company ceased the
direct marketing and sale of its products and, with the exception of the
contract manufacture of certain products for third parties, supplied its
products solely to Watson for marketing and sale under Watson's label.
The alliance with Watson did not generate the results either party had
originally expected. The Company's revenue during the years ended December 31,
2002, 2001 and 2000 (excluding revenue derived from the sale of the ANDA to
Watson as a part of the Watson alliance) was $8.2 million, $8.4 million and
$15.2 million, respectively, resulting in net losses during such fiscal years of
($59.6 million), ($12.6 million) and ($11.7 million), respectively. The
disappointing results of the Watson alliance resulted in continuing operating
losses and a shortage of working capital. As a consequence, and as described
below, in order to continue operations, the Company was required to raise
additional financing in the form of numerous bridge loans and private offerings
of the Company's securities.
Faced with declining product revenue and limited working capital, the
Company secured bridge loan financing from Galen Partners, L.P. and its
affiliates (collectively "Galen"), the largest holder of the Company's senior
secured convertible debentures. Specifically, during the period from August 2001
through December 2002, Galen advanced an aggregate of $15.9 million in bridge
loans to the Company to fund ongoing operations. The Galen bridge loans were
evidenced by 10% convertible promissory notes and were secured by a lien on all
of the Company's assets, junior to the security interest granted to Watson under
the Watson term loan but senior to the security interest granted to secure all
other Company indebtedness.
In July 2002, the Board of Directors retained MTS Partners and CIBC as the
Company's financial advisor to assist the Company in analyzing, planning,
negotiating and executing the Company's strategic and financial plan, including
the identification of a strategic partner or source of financing, or
alternatively, an acquirer of the Company's business. Through the efforts of
senior management and the Company's financial advisor, the Company solicited
approximately 35 entities in an effort to form a strategic partnership, secure
financing or negotiate a sale of the Company. As part of the discussions with
such third parties, management presentations were made and a detailed
descriptive memorandum describing the Company's operations was provided. While
there was initial interest by a number of prospects, all of such prospects
indicated an unwillingness even to entertain preliminary discussions or
negotiations with the Company relating to a financing, strategic partnership or
acquisition transaction. Reasons provided by such parties included, but not
limited to, the absence of a strategic fit and the dilutive impact the
acquisition of the Company would have on the acquirer's earnings.
On December 20, 2002, the Company completed a private offering of
securities for an aggregate purchase price of approximately $26.4 million (the
"2002 Offering"). Securities issued in the 2002 Offering consisted of 5%
convertible senior secured debentures (the "2002 Debentures"). The 2002
Debentures were issued by the Company pursuant to a certain debenture purchase
agreement dated December 20, 2002 (the "2002 Purchase Agreement") by and among
the Company, Care Capital Investment II, LP, Essex Woodlands Health Ventures V,
L.P., Galen and the other purchasers listed on the signature page thereto. Of
the approximate $26.4 million in 2002 Debentures issues in the 2002 Offering,
approximately $15.9 million of 2002 Debentures were issued in exchange for the
surrender of a like amount of principal and accrued interest under the Company's
outstanding 10% convertible promissory notes issued to Galen and certain other
lenders pursuant to bridge financing made during the period from August 2001
through December 2002. The proceeds of the 2002 Offering were used by Company
for working capital and to fund continuing operating losses.
Subsequent to completion of the 2002 Offering, senior management continued
it efforts to identify a strategic partner or potential acquirer of the
Company's business. Additionally, senior management implemented changes designed
to contain costs and increase product sales. In March 2003, the Company notified
Watson that the Company intended to commence the direct marketing and sale of
the Company's core products in addition to sales of such products to Watson, as
provided for under the Core Products Supply Agreement. The Company commenced the
direct sale of its products in the summer of 2003. In view of the limited number
of the Company's products and the intense market competition for these products,
the
72
Company's direct sales of its core products did not result in significant
revenue enhancement. This combined with steadily declining purchases by Watson
under the Core Products Supply Agreement resulted in increasing operating losses
and a shortfall of cash to fund operations.
At the Company's request, on May 5, 2003, the Company received a letter
executed by each of Care Capital, Essex Woodlands and Galen (the "Majority 2002
Debentureholders") advising that the Majority 2002 Debentureholders would
provide funding to meet the Company's 2003 capital requirements, up to an
aggregate amount not to exceed $8.6 million (the "Letter of Support"). During
the period from May 2003 through December 31, 2003, the Majority 2002
Debentureholders advanced an aggregate of $8.6 million under the Letter of
Support. Such advances were made in accordance with the terms of the 2002
Offering, resulting in the Company's issuance of additional 2002 Debentures in
the aggregate principal amount of $8.6 million. The proceeds of the advances
under the Letter of Support were used for working capital and to fund continuing
operating losses.
On August 26, 2003, the Company announced the appointment of Andrew Reddick
as President and Chief Executive Officer, bringing with him approximately 29
years of pharmaceutical industry experience. Mr. Reddick replaced Michael
Reicher whose services as Chief Executive Officer ceased effective June 16,
2003. Mr. Reddick immediately engaged in an assessment of the strengths and
weaknesses of the Company's business operations, including the focus of the
Company's research and development efforts and its dual-site vertical
integration strategy.
At Board meetings held on each of October 9, 2003 and October 30, 2003,
Management reviewed with the Board the challenges inherent in operating two
separate manufacturing locations with a limited existing product portfolio and a
lack of any new products pending for approval and subsequent launch. At such
time, the Company manufactured API at its Culver, Indiana facility and
manufactured finished dosage form products at its facilities in Congers, New
York. The Board evaluated the Company's operating losses and the inability to
stem such losses in view of the Company's product mix, operating margins and
lack of pending new product approvals. The Board determined that near term sales
of the Company's finished dosage form generic products would likely result in
continuing negative gross margins due to intense market competition and
resultant decreasing market prices and market dollar volume. Based on this
analysis and other factors, the Board concluded that the Company's manufacture
and distribution of finished dosage generic products produced at the Congers
facilities would result in continuing negative cash flow for the foreseeable
future. In addition, the Board concluded that in the long term, due to the
timing and uncertainty relating to the approval process for its application for
an Import Registration for NRMs for use in the manufacture of opioid APIs at its
Culver, Indiana facility, the Company would have difficulty sustaining
operations faced with continuing operating losses and negative cash flow.
On October 30, 2003, the Board approved the restructuring of the Company's
operations. The restructuring provided, among other things, for the closure of
the Congers Facilities and the sale of the assets used in such operations. The
Company estimates that such assets represented approximately 30% of the
Company's total assets as of December 31 2003. The Company publicly announced
the implementation of the restructuring on November 6, 2003.
On October 21, 2003, Management met with representatives of Watson in an
effort to negotiate to convey to Watson the assets used in the operation of the
Congers Facilities, including the Company's purchase option to acquire the
Brenner Drive Facility, in consideration of restructuring the Watson term loan.
Thereafter, on October 29, 2003 Watson conducted a site tour of the Congers
Facilities and on November 7, 2004, Watson advised the Company that it was not
interested in acquiring the Congers Facilities.
In the three months following the Company's November 6, 2003 press release
announcing the implementation of the restructuring of the Company's operations,
the Company contacted, or was contacted by, a total of 21 parties expressing
interest in the Congers Facilities. Such parties were provided with a detailed
descriptive memorandum relating to the assets and operations of the Congers
Facilities. The majority of such parties completed a tour of the facilities and
varying degrees of diligence investigation. Of such parties four provided draft
letters of intent outlining non-binding terms for the acquisition of the assets
of the Congers
73
Facilities, including the direct purchase by such parties of the Brenner Drive
Facility from the landlord of this site.
During December, 2003 and January 2004, three of the four parties that
provided a draft letters of intent notified the Company that based on the
diligence they had completed, they had no further interest in an acquisition of
the Congers Facilities. The remaining party that had provided a letter of intent
to the Company and continued to express interest in completing an acquisition of
the assets used in the operation of the Conger Facilities was IVAX.
In the meantime, on each of November 25, 2003, December 21, 2003, December
29, 2003, January 5, 2004, January 20, 2004 and February 10, 2004, the Board of
Directors held meetings to, among other things, review the status of the
implementation of the restructuring of the Company's operations, review the
progress of discussions with third parties relating to the proposed sale of the
assets used in the operation of the Congers Facilities, review the Company's
efforts to complete a financing involving a private offering of its securities,
and review the Company's progress in restructuring the Watson term loan. At each
of such meetings the Board instructed management to continue negotiations with
all interested parties in an effort to maximize the value of the sale of the
assets used in the operation of the Congers Facilities and to complete such sale
on an expeditious basis.
On January 26, 2004, Mr. Reddick received a call from Gerry Price, Vice
President of Business Development of IVAX Corporation, expressing IVAX
Corporation's interest in the Congers Facilities. Mr. Price was formerly the
President of Halsey and resigned effective November 7, 2002. In view of Mr.
Price's former role with the Company, he was familiar with the Company's
operations at the Congers Facilities. On January 26, 2004 IVAX signed a
confidentiality agreement with the Company.
On January 27, 2004, the Company provided to Mr. Price the Company's draft
template of a non-binding letter of intent contemplating IVAX' purchase of
substantially all of the Company's assets used in the operation of the Congers
Facilities, including the direct purchase by IVAX of the Brenner Drive Facility
pursuant to the purchase option included in the Company's lease agreement for
this site. On February 4, 2004 IVAX provided the Company with a non-binding
letter of intent, generally following the form of the Company's template letter
of intent. The IVAX initial letter of intent proposed a total aggregate purchase
price for the Congers Assets, including certain products and equipment of $4.3
million, of which $1.5 million would be paid upon the closing of the purchase by
IVAX of the Brenner Road Facility from the owner of such facility, with the
balance of $2.8 million payable on the conveyance of substantially all of the
Company's assets used in the operation of the Congers Facilities following
shareholder approval of the sale of such assets. The IVAX non binding letter of
intent was subject to, among other things, satisfactory completion of
negotiations and due diligence.
On February 6, 2004 nine representatives of IVAX Corporation toured the
Congers Facilities for the first time and began an extensive due diligence
process. At the end of the day on February 6, 2004, after completing a
preliminary general assessment of the Congers Facilities, IVAX informed Company
management that the total purchase price included in the February 4, 2004 non
binding letter of intent would be reduced to an aggregate of $3.5 million due to
the need, in the judgment of IVAX, for substantial upgrades to among other
things, the air handling, heating, ventilation and air conditioning (HVAC)
systems at the Brenner Road facility. Of the $3.5 million, $1.5 million was
proposed to be paid at the execution of the asset purchase agreement, at which
time IVAX would also purchase the Brenner Road Facility from the owner of such
facility. The remaining $2.0 million would be paid upon receipt of approval of
the Company's shareholders to the asset sale transaction. IVAX stated that the
proposed aggregate payment of $3.5 million remained subject to further due
diligence and a comprehensive inspection of the HVAC system.
Over approximately the next week, representatives of the Company, IVAX and
their respective legal counsel negotiated the terms of the letter of intent.
During this period, senior management advised the Board as to the status and
progress of the negotiations with IVAX. As part of the parties' negotiations,
additional drafts of the letter of intent containing changes proposed by the
parties were prepared and circulated.
74
On February 10, 2004, the Board of Directors met to discuss, among other
things, the status of the negotiations with IVAX and the terms then proposed by
IVAX for the acquisition of the Congers Facilities assets. The Board directed
senior management to continue the negotiations with IVAX and authorized senior
management to provide counterproposals as required.
On or about February 14, 2004, the parties abandoned the process of
negotiating and executing a non-biding letter of intent electing instead to
negotiate the terms of the acquisition as part of the preparation and
negotiation of the definitive asset purchase agreement. As a result, IVAX
commenced the preparation of a draft asset purchase agreement and continued with
its due diligence review of the Congers Facilities. In addition to further
on-site diligence conducted by IVAX and the review of a variety of diligence
information provided by the Company to IVAX and its legal counsel during
February, 2004, IVAX conducted Phase I and Phase II environmental audits of the
Brenner Drive Facility and the Wells Avenue Facility. Based on the results of
the IVAX due diligence investigation, IVAX' further evaluation of the products
included in the assets to be purchased, and the continuing negotiations between
the Company and IVAX on asset value and number of other issues, the parties
continued their negotiation of the asset purchase agreement.
In the meantime, on February 6, 2004, the Company completed a private
offering of securities for an aggregate purchase price of approximately $12.3
million (the "2004 Offering"). The securities issued in the 2004 Offering
consisted of convertible senior secured debentures (the "2004 Debentures") and
were issued by the Company pursuant to a certain debenture and share purchase
agreement dated as of February 6, 2004 (the "2004 Purchase Agreement") by and
among the Company, Care Capital, Essex Woodlands, Galen and the other purchasers
listed on the signature page thereto. Of the approximate $12.3 million in 2004
Debentures issued in the 2004 Offering, $2.0 million of debentures were issued
in exchanged for the surrender of a like amount of principal plus accrued
interest under outstanding bridge loans advanced to the Company by Care Capital,
Essex Woodlands and Galen during November and December, 2003. As part of the
completion of the 2004 Offering, the Company paid Watson $4.3 million (derived
from the proceeds of the 2004 Offering) to restructure the Watson term loan to,
among other things, reduce the principal amount of the Watson term loan from
approximately $21.4 million to $5.0 million. The restructured Watson term loan
in the principal amount of $5.0 million was assigned to Care Capital, Essex,
Galen and certain other purchasers of the 2004 Debentures in consideration for a
cash payment by such parties to Watson of $1.0 million. The Company will use the
net proceeds from the 2004 Offering to fund the development and
commercialization of the Company's technologies and to fund operating expenses.
On February 25, 2004, the Company received the initial draft of the asset
purchase agreement from legal counsel for IVAX. The draft asset purchase
agreement did not contain the purchase price or the allocation of the purchase
price as between the First Closing and the Second Closing.
During the period between February 26, 2004 and March 1, 2004, senior
management and legal counsel for the Company held numerous telephonic meetings
to review the draft asset purchase agreement and prepared a revised draft of the
agreement to reflect the Company's comments. On March 2, 2004, the Company's
legal counsel provided IVAX and its counsel with a revised draft of the asset
purchase agreement. In addition to comments and revisions typical in the
negotiations of this type of transaction, the Company inserted an aggregate
purchase price of $3.5 million, $1.5 million of which was payable at the
execution of the asset purchase agreement, with the $2.0 million balance payable
at the closing of the asset purchase agreement following receipt of approval of
the Company's shareholders. The Company's revised draft of the asset purchase
agreement also provided for limited representations and warranties and certain
limits on the Company's indemnity obligations.
Between March 3 and March 5, 2004, legal counsel for the parties continued
discussions and negotiations relating to the asset purchase agreement. On March
5, 2004, the parties and their respective legal counsel participated in a
conference call to negotiate the remaining material open issues in the draft
asset purchase agreement. At the conclusion of the conference call, after
considering, among other things, IVAX' concerns relating to the HVAC system at
the Congers Facilities and requirements for upgrades to the system, the parties
had reached conceptual agreement (subject to finalizing and executing definitive
agreements) providing for: (i) an aggregate purchase price of $2.5 million,
payable $2.0 million at the execution of the asset
75
purchase agreement and $0.5 million at the closing of the asset purchase
agreement following receipt of approval of the Company's shareholders, (ii) the
conveyance of the Company's manufacturing equipment and products on an "as is"
basis, and (iii) a limitation of the Company's indemnity obligations to the
amount of the purchase price, subject to certain exceptions for representations
relating to title, taxes and environmental matters.
During the negotiations and discussions of the asset purchase agreement,
senior management continually provided updates to the Board on the status of the
negotiations and the resolution of material issues. On March 12, 2004, IVAX
provided the Company and its legal counsel with a revised draft of the asset
purchase agreement reflecting, among other items, the resolution of the material
issues discussed during the conference call on March 5, 2004. During the period
from March 12, 2004 through March 14, 2004, senior management and the Company's
legal counsel reviewed and revised the asset purchase agreement and other
related agreements. On March 14, 2004, Company legal counsel provided IVAX and
its legal counsel with a revised draft of the asset purchase agreement and a use
and license agreement.
Between March 15 and March 18, 2004, negotiations and discussions of the
definitive asset purchase agreement and related agreements between the Company,
IVAX and their respective legal counsel progressed. On March 18, 2004, the Board
of Directors, acting by unanimous written consent, approved the terms of the
substantially complete asset purchase agreement and authorized senior management
to negotiate such changes to asset purchase agreement and related agreements as
were necessary to conclude the execution of the definitive agreement. Any
changes made to the definitive asset purchase agreement and related transaction
agreements during the period subsequent to the receipt of Board approval were
not material and did not alter the consideration to be received by the Company
as previously discussed with the Board. The purchase price was determined based
upon arms'-length negotiations.
As described below under the caption "Reasons for the Sale of the Congers
Facilities Assets" the Board of Directors did not engage an independent
financial advisor to determine the fairness of the asset sale transaction to the
Company's shareholders. In approving the transaction to sell substantially all
of the Company's assets used in the operation of the Congers Facilities, the
Board considered, among other factors, the continuing losses from operations,
the cessation of the manufacturing operations at the Congers Facilities, the
March 21, 2004 expiration date of the lease agreement for the Brenner Drive
Facility, the lack of capital resources to exercise the $5.0 million purchase
option to purchase such facility, the cash consideration to be received by the
Company, the assumption by IVAX of the Company's obligations under the lease
agreement for the Wells Avenue Facility, and the overall structure of the
transaction and the terms of the asset purchase agreement. In addition to the
foregoing, the Board determined that the consideration to be received by the
Company was fair considering the value ascribed to the assets by other third
parties that had expressed initial interest in the assets, the Board's general
familiarity with the value of pharmaceutical manufacturing and packaging
facilities, and the arm's-length nature of the negotiations between the Company
and IVAX. Based on the foregoing, the Board of Directors unanimously resolved to
recommend that the Company's shareholders approve and adopt the asset purchase
agreement and the sale of substantially all the assets used in the Company's
operation of the Congers Facilities.
The Asset Purchase Agreement was executed on March 19, 2004. The Company
publicly announced the execution of the Asset Purchase Agreement on March 24,
2004.
REASONS FOR THE SALE OF THE CONGERS FACILITIES ASSETS
The Company is proposing to sell substantially all of the assets used by
the Company in the operation of the Congers Facilities to IVAX, a wholly-owned
subsidiary of IVAX Corporation. The Board of Directors believes that the sale
and the terms of the related Asset Purchase Agreement are in the best interests
of the Company and its shareholders. The Board of Directors has identified
various benefits that are likely to result from the sale of the Congers
Facilities assets. The Board believes that the sale of such assets will:
- Allow the Company to direct its resources to the development and
commercialization of the Company's opioid API Technologies and ADF
Technology;
76
- Reduce the cash burn in the operation of the Company's business. Although
the Congers Facilities assets were used in the manufacturing and
packaging operations responsible for all of the Company's net product
revenues in 2003 and 2002, the negative gross profits for the products
produced at such facilities and the Company's expenses in the operation
of such facilities, resulted in significant operating losses (net of
plant shutdown expenses) of approximately $15.3 million and $12.8 million
in fiscal 2003 and 2002, respectively. After giving effect to the sale of
the Congers Facilities assets, the Company's monthly cash burn has been
reduced from approximately $1.5 million to approximately $420,000;
- Provide an improved organizational focus and free up senior management
from directing the operation of multiple development, manufacturing and
administrative locations in separate states;
- Allow the Company to a focus on a streamlined business strategy that the
Board believes will provide competitive advantages potentially leading to
greater return for the Company's shareholders; and
- Allow the Company to increase its cash reserves by approximately $2.35
million (net of expenses) and thereby provide the Company with increased
resources to continue the development of the Company's proprietary
technologies and fund operating losses pending the commercialization of
such technologies.
As discussed above under the caption "Background", at Board meetings held
on each of October 9, 2003 and October 30, 2003, Management reviewed with the
Board the challenges inherent in operating two separate manufacturing locations
with a limited existing product portfolio and a lack of any new products pending
for approval and subsequent launch. At such time, the Company manufactured API
at its Culver, Indiana facility and manufactured finished dosage form products
at its facilities in Congers, New York. The Board evaluated the Company's
operating losses and the inability to stem such losses in view of the Company's
product mix, operating margins and lack of pending new product approvals. The
Board determined that near term sales of the Company's finished dosage form
generic products would likely result in continuing negative gross margins due to
intense market competition and resultant decreasing market prices and market
dollar volume. Having concluded that it would be prudent to consolidate
remaining operations into a single site, the Board considered that the Congers,
New York facilities were leased facilities whereas the Company owned the Culver,
Indiana facility. Furthermore, in light of the restructured Company's primary
focus on research and development, the Board chose to retain the Culver, Indiana
facility given that the majority of the Company's research and development
capabilities in terms of laboratory and personnel were based at such location.
In arriving at its determination that the asset sale was in the best
interests of the Company and its shareholders, the Board of Directors carefully
considered the terms of the Asset Purchase Agreement as well as the potential
impact of the asset sale on the Company. As part of this process, the Board of
Directors consulted with senior management and considered the advice and
assistance of Company legal counsel. In determining to authorize the asset sale,
the Board of Directors considered the factors set out above as well as the
following factors:
- The fact that IVAX' offer, after completion of their due diligence, was
the only offer the Company received that was not subsequently withdrawn,
and following an extended search and evaluation process for alternative
purchasers, it is the Board's belief that it was not likely that any
party other than IVAX would propose and complete a transaction on terms
more favorable to the Company and its shareholders;
- The amount of cash included in the IVAX offer, the payment of such
consideration at each of the signing of the Asset Purchase Agreement and
the closing of the asset sale transaction, and the fact that IVAX agreed
to assume the Company's liabilities under the lease agreement for the
Wells Avenue Facility;
- The terms and conditions of the Asset Purchase Agreement and the Board's
belief that the Asset Purchase Agreement could be completed expeditiously
without regulatory delay;
77
- The fact that the sale of the Congers Assets must be approved by the
holders of 66 2/3% of the Company's outstanding voting securities, which
insures that the Board will not be taking action disapproved of by the
Company's shareholders; and
- The fact that New York law entitles shareholders who do not vote in favor
of the Asset Purchase Agreement and the related transactions and who file
a written notice of intent with the Company, to obtain the "fair value"
for their shares as determined in accordance with New York's statutory
procedures, if the transactions described in the Asset Purchase Agreement
are completed.
The Board believed that each of the above factors generally supported its
determination. The Board did, however, consider the potential adverse effects of
other factors on the proposed asset sale as described below:
- The risk that, after the asset sale, the Company will have no ability to
manufacture finished dosage generic products and that all of the
Company's previous revenue generating products will have been sold;
- The fact that the finished dosage manufacturing, packaging, labeling and
distribution operations conducted at the Congers Facilities represented
essentially all of the Company's product revenues for fiscal 2003 and
2002;
- The risk that the Company will be able to develop and commercialize the
Company's proprietary technologies;
- The fact that in the absence of the Company's ability to successfully
develop and commercialize the Company's proprietary technologies, the
Company will have no ability to generate revenues to partially offset
operating expenses from sales of generic products;
- The risk that the Company's cash resources to fund the development and
commercialization of the Company's proprietary technologies and
continuing operating losses may be insufficient to sustain the Company's
cash needs until such time as revenues may be generated from such
technologies;
- The fact that the Company has a history of cash flow problems and may
need to raise additional capital (if available to the Company) to develop
and commercialize the Company's proprietary technologies;
- The risk that the Company could be exposed to future indemnification
obligations under the Asset Purchase Agreement which, in certain cases,
could require the Company to make payments to IVAX in excess of the
consideration received by the Company under the Asset Purchase Agreement;
and
- The risk that shareholders do not approve the asset sale, in which case
the Company would be required to repay to IVAX the $2.0 million payment
received from IVAX at the signing of the Asset Purchase Agreement.
The foregoing represents all material factors considered by the Board in
connection with its evaluation of the asset sale transaction. In view of the
variety of factors considered in connection with its evaluation of the asset
sale, the Board of Directors did not find it practical to and did not quantify
or otherwise attempt to assign relative weights to the specific factors
considered in reaching its conclusions. In addition, individual members of the
Board may have given different weight to different factors and therefore may
have viewed certain factors more positively or negatively than others.
The Board of Directors did not engage an independent financial advisor to
determine the fairness of the transactions to the Company's shareholders and
determined, based on the factors set forth above, that the transactions
contemplated by the Asset Purchase Agreement are fair to the Company's
shareholders. Further, based on the procedural safeguard of the unanimous
approval of our directors, including those directors who are not employees, the
required approval of our shareholders and the availability of the dissenter's
rights, the Board believes that the transactions contemplated by the Asset
Purchase Agreement are procedurally fair to shareholders. A fairness opinion
from an independent financial advisor typically entails a substantial fee to the
requesting company. In the context of an asset sale, the financial advisor would
typically review the Company's historical and projected revenues, operating
results of that portion of the Company's business being sold and certain other
publicly held companies it believed to be comparable to the business operations
78
conducted at the Congers Facilities, and make certain assumptions regarding the
value, including the liquidation value, of the assets and liabilities associated
with such business operations, which may be difficult to predict, in order to
render its opinion. In addition to the speculative nature of such analysis, the
Board believes undertaking these analyses would involve a significant
unnecessary expense that would reduce the amount of cash received by the Company
in the proposed transaction that could be used to develop and commercialize the
Company's proprietary technologies. The Board believes that the approval of the
Asset Purchase Agreement by shareholders, together with the right of any
shareholder that objects to the transaction to exercise the dissenter's rights
to obtain fair value of their shares, provide procedural safeguards to the
shareholders in reaching its determination that the transactions contemplated by
the Asset Purchase Agreement are fair to the Company's shareholders. See the
discussion below under the caption "Dissenter's Rights".
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has determined that the sale of the assets used in
the operation of the Congers Facilities is in the best interest of the Company
and its shareholders. The Board of Directors has unanimously approved the Asset
Purchase Agreement and unanimously recommends that the Company's shareholders
vote in favor of the proposal to approve the sale of the Congers Assets to IVAX
pursuant to the Asset Purchase Agreement and the transactions contemplated by
the Asset Purchase Agreement.
PROCEEDS OF THE SALE OF THE CONGERS FACILITIES ASSETS
The Company will retain the proceeds from the sale of the assets used at
the Congers Facilities. After giving effect to legal and other professional fees
relating to the asset sale transaction, the Company estimates that it will
realize aggregate net proceeds from the asset sale of approximately $2.3
million.
As described under Proposal 2 under the caption "Proceeds of 2004 Debenture
Offering," as of June 1, 2004, the Company had issued 2004 Debentures in the
aggregate principal amount of $14 million. After giving effect to (i) the
issuance of $2.0 million in principal amount of 2004 Debentures in exchange for
the surrender of a like amount of principal plus accrued interest outstanding
under Company debentures issued in November and December 2003 pursuant to the
Letter of Support, (ii) the payment to Watson of approximately $4.3 million in
retirement of $16.4 million of indebtedness under the Watson Term Loan (See
"Proposal 2 -- Interests of Investors in the 2004 Debenture Offering"), and
(iii) the satisfaction of legal and other professional fees of approximately
$400,000 relating to the 2004 Debenture Offering, the Company estimates that it
will realize net proceeds from the 2004 Debenture Offering of approximately $7.3
million. The aggregate net proceeds of the asset sale transaction and the 2004
Debenture Offering received as of June 1, 2004, combined with the Company's
other cash balances and reduced by operating expenses through May 31, 2004
provided the Company with approximately $7.3 million in cash reserves as of June
1, 2004 to fund the Company's development and commercialization of its
proprietary technologies. Set forth below is a summary of the Company's
estimated allocation of its cash resources as of June 1, 2004 to the development
of its proprietary technologies and funding of operations.
USE ITEM AMOUNT
-------- ------------
Research & Development of ADF Technology Product, including
clinical trials........................................... $ 3,250,000
Research & Development of Opiod Synthesis Technologies...... $ 600,000
Administration (i.e., insurance, finance, investor
relations, employee benefits, legal, market research)..... $ 2,000,000
Personnel (i.e., salaries, bonuses, payroll taxes).......... $ 1,450,000
------------
$7.3 million
============
While no assurance can be given, Management estimates that the existing cash on
hand at June 1, 2004 of $7.3 million will fund activities through the first
quarter of 2005. As of such time, the Company estimates that it will have
completed initial clinical trials of a product incorporating the ADF Technology
and will have entered into one or more licensing agreements for such product
with a third party. The Company expects that
79
the payments to be derived from such licensing agreements will provide the
Company with the necessary additional funding to continue operations and to
expand and expedite its development efforts.
The ability of the Company to enter into a license agreement with a third party
and the consideration to be received by the Company as part of any such
agreement is primarily dependent upon the favorable outcome of the initial
clinical trials of the Company's products, of which no assurance can be given.
SHAREHOLDER APPROVAL OF THE SALE OF THE CONGERS FACILITIES ASSETS; VOTE
REQUIRED.
Under Section 909 of the New York Business Corporation Law, the sale of
"all or substantially all" of the Company's assets requires approval by the
affirmative vote of two-thirds of all outstanding voting securities entitled to
vote thereon. The Company, in consultation with legal counsel, has determined
that the sale of the Congers Assets might be deemed to constitute a sale of "all
or substantially all" of the Company's assets based on interpretations of that
term. The Asset Purchase Agreement provides that, as a condition to each party's
obligation to consummate the Second Closing contemplated by the Asset Purchase
Agreement, the Company must have obtained the consent of its shareholders
pursuant to the New York Business Corporation Law. Therefore, the affirmative
vote of the holders of at least two-thirds of the Company's outstanding voting
securities entitled to vote on the record date must be obtained.
DISSENTER'S RIGHTS
Pursuant to Section 910 of the New York Business Corporation Law ("NYBCL"),
holders of the Company's Common Stock who follow the procedures set forth in
Section 623 of the NYBCL (the "Appraisal Statute") will be entitled to have
their Common Stock appraised by a New York State Court and to receive payment of
the "fair value" of such shares as determined by such court. The Appraisal
Statue is reprinted in its entirety as Appendix B to this Proxy Statement. While
the following discussion summarizes all material terms of the law pertaining to
appraisal rights under the NYBCL, it is qualified in its entirety by the full
text of the Appraisal Statute. Any shareholder who wishes to exercise such
appraisal rights or to preserve the right to do so, should review the following
discussion and Appendix B carefully because failure to timely and properly
comply with the procedures specified will result in the loss of dissenters'
appraisal rights under the NYBCL.
All references in the Appraisal Statute and in this summary to a
"shareholder" are to the recordholder of the Company's Common Stock on the
Record Date. A person having a beneficial interest in shares of the Company's
Common Stock that are held of record by another person such as a broker or
nominee must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect whatever appraisal
rights the beneficial owner may have.
A shareholder wishing to exercise appraisal rights must (i) deliver to the
Company, prior to or at the Meeting but before the vote is taken on this
Proposal 4, a written objection to the proposed sale of the Company's assets as
provided in this Proposal 4 (the "Notice of Election"), which must include a
notice of his election to dissent, the shareholder's name, residence address,
the number of shares as to which the shareholder dissents and a demand for
payment of the fair value of such shares (which Notice of Election must be in
addition to and separate from any proxy or vote against the proposed sale of the
Company's assets contemplated by this Proposal 4 (the "Asset Sale")) and (ii)
not vote for approval of the Asset Sale. BECAUSE A PROXY WHICH DOES NOT CONTAIN
VOTING INSTRUCTIONS WILL, UNLESS REVOKED, BE VOTED FOR APPROVAL OF THE ASSET
SALE, A SHAREHOLDER WHO VOTES BY PROXY AND WHO WISHES TO EXERCISE APPRAISAL
RIGHTS MUST (A) VOTE AGAINST APPROVAL OF THE ASSET SALE OR (B) ABSTAIN FROM
VOTING ON THE ASSET SALE. Neither a vote against the Asset Sale, in person or by
proxy, nor a Proxy directing such vote for an abstention, will in and of itself
constitute a written objection to the Asset Sale under the Appraisal Statute
(shareholders who timely file such Notice of Election and who do not vote in
favor of the Asset Sale are referred to as "Dissenting Shareholders").
A shareholder may not dissent as to less than all of the shares, as to
which such shareholder has a right to dissent, held by such shareholder of
record and owned beneficially. A nominee or fiduciary may not dissent on behalf
of any beneficial owner as to less than all of the shares held of record by such
nominee or fiduciary on behalf of such owner and as to which such nominee or
fiduciary has a right to dissent. All Notices of Election
80
should be addressed to Halsey Drug Co., Inc., 616 N. North Court, Suite 120,
Palatine, Illinois 60067, Attention: Mr. Peter Clemens, Senior Vice President.
Within 10 days after the date on which shareholders approve the Asset Sale,
the Company must send written notice by registered mail to each Dissenting
Shareholder to such effect (the "Dissenting Shares"). At the time of the
completion of the Asset Sale transaction by the Company (the "Effective Time"),
each Dissenting Shareholder will cease to have any rights of a shareholder of
the Company except the right to be paid the fair value of his shares and rights
under the Appraisal Statute.
A Notice of Election may be withdrawn by a Dissenting Shareholder prior to
his acceptance in writing of an offer made by the Company to pay the value of
such Dissenting Shares, except that a Notice of Election may not be withdrawn
later than 60 days following the Effective Time unless the Company fails to make
a timely offer to pay such value, in which case such Dissenting Shareholder
shall have 60 days from the date an offer is made to withdraw his election. In
either event, after such time, a Notice of Election may not be withdrawn without
the written consent of the Company. In order to be effective, withdrawal of a
Notice of Election must be accompanied by a return to the Company of any advance
payment made to the Dissenting Shareholder by the Company as described below.
Upon filing the Notice of Election, or within one month thereafter,
Dissenting Shareholders must submit the certificates representing their Common
Stock to the Company, attention: Peter Clemens, Senior Vice President, at the
address set forth above or to the Company's transfer agent, Continental Stock
Transfer and Trust Company, 2 Broadway, 19th Floor, New York, New York 10004 and
there will be noted thereon that a Notice of Election has been filed and the
certificates will be returned to the Dissenting Shareholders. Any Dissenting
Shareholders who fail to submit such certificates for such notation will, at the
option of the Company exercised by written notice to such Dissenting
Shareholders within 45 days of the date of filing of such Notice of Election,
lose their appraisal rights unless a court, for good cause shown, shall
otherwise direct.
Within 15 days after the expiration of the period within which shareholders
may file their Notice of Election, or within 15 days after the Effective Time,
whichever is later (but in no case later than 90 days after the shareholders'
vote to approve the Asset Sale), the Company must make a written offer to pay
for the Dissenting Shares held by such Dissenting Shareholder at a price which
the Company considers to be their fair value. This offer will be accompanied by
a statement setting forth the aggregate number of shares, which will be at the
same price for all Dissenting Shares, with respect to which Notices of Election
to dissent have been received and the aggregate number of holders of such
shares.
If the Effective Time has occurred at the time the offer is made, the offer
will be accompanied by (i) advance payment to each Dissenting Shareholder who
has submitted certificates for notation thereon of the election to dissent of an
amount equal to 80% of such offer or (ii) as to each Dissenting Shareholder who
has not yet submitted certificates for notation thereon of the election to
dissent, a statement that advance payment of an amount equal to 80% of the
amount of such offer will be made by the Company promptly upon submission of
certificates. If the Effective Time of the Asset Sale has not occurred at the
time of the making of such offer, such advance payment or statement as to
advance payment will be sent to each Dissenting Shareholder entitled thereto
upon the Effective Time. Acceptance of such advance payment by a Dissenting
Shareholder will not constitute a waiver of dissenter's rights. If the Asset
Sale transaction is not completed within 90 days after approval of the Asset
Sale by shareholders, such offer will be conditioned upon consummation of the
Asset Sale.
If within 30 days after making such offer, the Company and any Dissenting
Shareholder agree on the price to be paid for such Dissenting Shareholder's
Dissenting Shares, the Company will pay the agreed price to such holder within
60 days after the later of the date such offer was made or the Effective Time,
upon surrender of certificates representing such holder's Common Stock.
If the Company fails to make an offer within the 15-day period described
above, or if it makes an offer and any Dissenting Shareholder fails to agree
within 30 days of the making of such offer, the Company must, within 20 days
thereafter institute a special proceeding in an appropriate court to determine
the rights of Dissenting Shareholders and to fix the fair value of the shares.
If the Company does not institute such a
81
proceeding within such 20-day period, any Dissenting Shareholder may, within 30
days after such 20-day period expires, institute a proceeding for the same
purpose. If such proceeding is not instituted by any Dissenting Shareholder
within such 30-day period, all dissenters' rights will be extinguished unless
the New York Supreme Court, for good cause shown, otherwise directs. All
Dissenting Shareholders, other than those who agree with the Company as to the
price to be paid for their shares, will be made parties to such proceeding
With respect to Dissenting Shareholders entitled to payment, the court will
proceed to fix the value of the Company's Common Stock which will be the fair
value as of the close of business on the day prior to the Meeting. In fixing the
fair value of the shares of the Company's Common Stock, the court will consider
the nature of the Asset Sale and the effects on the Company and its
shareholders, the concepts and methods then customary in relevant securities and
financial markets for determining fair value of shares of a corporation engaging
in a similar transaction under comparable circumstances and all other relevant
factors.
The court will determine the fair value of such shares without a jury and
without referral to an appraiser or referee. The final order by the court will
include an allowance for interest (unless the court finds the refusal of any
Dissenting Shareholder to accept the offer of the Company thereof as arbitrary,
vexatious, or otherwise not in good faith) of such rate as the court finds to be
equitable, accruing from the Effective Time to the date of payment.
Each party in the appraisal proceeding will bear its own costs and
expenses, including the fees of counsel and any experts employed by it. The
court may, however, in its discretion, assess any of the costs, fees and
expenses incurred by the Company against Dissenting Shareholders (including
those who withdraw their Notice of Election) if the court finds that their
refusal to accept the offer of the Company was arbitrary, vexatious or otherwise
not in good faith. Similarly, the costs, fees and expenses incurred by
Dissenting Shareholders may be assessed by the court in its discretion, against
the Company if the fair value of the shares as determined by the court
materially exceeds the amount which the Company offered to pay, the Company
failed to follow certain procedures of the Appraisal Statute or the Company's
manner of compliance with the Appraisal Statue was arbitrary, vexatious or not
otherwise in good faith.
Within 60 days after the final determination of the proceeding, the Company
will pay to each Dissenting Shareholder the amount found in such proceeding to
be due such shareholder, upon surrender of certificates of the Company's Common
Stock.
Any shareholder who duly demands, prior to the Meeting, an appraisal in
compliance with the Appraisal Statute will not, after the Effective Time, be
entitled to vote the shares subject to such demand for any purpose or to the
payment of dividends or other distributions on those shares, except dividends or
other distributions payable to shareholders of record as of a date prior to the
Effective Time.
Failure to follow the steps required by the Appraisal Statute for
perfecting appraisal rights may result in the loss of such rights. IN VIEW OF
THE COMPLEXITY OF THE PROVISIONS OF THE APPRAISAL STATUTE, SHAREHOLDERS WHO ARE
CONSIDERING DISSENTING FROM THE ASSET SALE SHOULD CONSULT THEIR LEGAL ADVISORS.
REGULATORY MATTERS
No material regulatory approvals, filings or consents, other than filings
in compliance with applicable Commission requirements, are required to complete
the sale of the assets used in the operation of the Congers Facilities.
ACCOUNTING TREATMENT
The proposed sale of substantially all of the Company's assets used in the
operation of the Congers Facilities and the assignment of certain related
liabilities will be accounted for as a disposition of assets. As of December 31,
2003, the related assets of the Congers facilities had been written down to
their estimated net realizable value of approximately $2.0 million.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following describes the material United States federal income tax
consequences of the proposed sale of substantially all of the Company's assets
used in the operation of the Congers Facilities that are generally applicable to
the Company and the shareholders. The following discussion is based on current
provisions of the Internal Revenue Code, existing, temporary and proposed
Treasury regulations thereunder and current administrative rulings and court
decisions. Future legislative, judicial or administrative actions or decisions,
which may be retroactive in effect, may affect the accuracy of any statements in
this summary with respect to the transactions entered into or contemplated prior
to the effective date of those changes.
The proposed sale of the assets used in the Company's operation of the
Congers Facilities will be a transaction taxable to the Company for United
States federal income tax purposes. The Company will recognize taxable income
equal to the amount realized on the sale in excess of the Company's tax basis in
the assets sold. The amount realized on the sale will consist of the cash the
Company receives in exchange for the assets sold, plus the amount of related
liabilities assumed by IVAX. The taxable income is estimated to be less than
$250,000.
Although the sale of the assets used by the Company in the operation of its
Congers Facilities will result in a taxable gain to the Company, the Company's
available federal income tax net operating and net capital loss carry forwards,
as currently reflected on the Company's consolidated federal income tax returns,
are in excess of the estimated amount of the gain.
The Company's shareholders will experience no federal income tax
consequences as a result of the consummation of the proposed sale of the assets
used in the operation of the Congers Facilities to IVAX.
The Company files income tax returns in more than one state. Because state
income tax laws do not necessarily follow federal law, and because state laws
themselves differ, the state income tax consequences of the sale of the assets
to IVAX will vary state by state. The tax loss carry forwards in a particular
state may not completely offset state taxable income and state income tax may be
incurred on the sale. However, it is not anticipated that the sale will result
in a material amount of state income taxes.
VOTING AGREEMENT
As a condition to the execution of the Asset Purchase Agreement, the
Company, IVAX and the holders of substantially all of the Company's outstanding
convertible debentures possessing voting rights and certain other holders of the
Company's common stock, consisting of Galen Partners, III, L.P., Galen Partners
International III, L.P., Galen Employee Fund III, L.P., Oracle Strategic
Partners, L.P., Care Capital Investments II, LP, Essex Woodlands Health Ventures
V, L.P., Alan Smith, a director of the Company, Andrew Reddick, President and
Chief Executive Officer of the Company, Peter Clemens, Senior Vice President and
Chief Financial Officer of the Company, William Skelly, a director of the
Company, James Emigh, Vice President of Marketing and Administration of the
Company, Patrick Coyne, Michael and Susan Weisbrot, Greg Wood, Dennis Adams,
Bernard Selz, Roger Griggs, Hemant and Varsha Shah, Stephanie Heitmeyer, Michael
and Ilene Rainisch, Kenneth Gimbel, Michael Reicher Trust, Peter Stieglitz,
George Boudreau and John Heppe, Jr., (the "Asset Sale Voting Agreement
Parties"), executed a voting agreement dated as of March 19, 2004 (the "Voting
Agreement"). The aggregate voting securities held by the Asset Sale Voting
Agreement Parties is approximately 51.5 million shares, representing
approximately 78.4% of the Company's voting securities. The Asset Sale Voting
Agreement Parties have agreed to vote in favor of the proposal to sell
substantially all of the assets used in the operation of the Congers Facilities
to IVAX pursuant to the terms of the Asset Purchase Agreement. Given the
aggregate voting securities held by the Asset Sale Voting Agreement Parties, the
approval of the proposal to sell substantially all of the assets used in the
operation of the Congers Facilities by at least two-thirds of the Company's
voting securities is assured. A copy of the Voting Agreement is attached as
Appendix K to this Proxy Statement.
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SPECIAL CONSIDERATIONS SHAREHOLDERS SHOULD TAKE INTO ACCOUNT IN DECIDING HOW TO
VOTE ON THE PROPOSAL TO SELL THE ASSETS USED IN THE OPERATION OF THE CONGERS
FACILITIES.
Shareholders should carefully consider the special considerations described
below as well as other information provided in this Proxy Statement in deciding
how to vote on the proposal to sell substantially all of the Company's assets
used in the operation of the Congers Facilities. The special considerations
described below are not necessarily the only ones facing the Company. Additional
considerations not presently known to the Company or that are currently
perceived as immaterial may also impair the Company's business operations. If
any of the following special considerations occur, the Company's business,
financial condition or results of operations could be materially adversely
affected, the value of the Company's common stock could decline and shareholders
may lose part or all of their investment.
SPECIAL CONSIDERATIONS REGARDING THE PROPOSAL TO SELL THE CONGERS FACILITIES
ASSETS
THE AMOUNT OF CASH THE COMPANY ULTIMATELY RECEIVES IN THE ASSET SALE
TRANSACTION MAY VARY DEPENDING ON SOME FURTHER CONTINGENCIES, SUCH THAT THE
COMPANY MAY NOT RECEIVE ALL OF THE CASH PROVIDED IN THE ASSET PURCHASE
AGREEMENT.
Pursuant to the terms of the Asset Purchase Agreement, the Company may be
subject to potential indemnification claims relating to any inaccuracy in any
representation or the breach of any warranty made by the Company in the Asset
Purchase Agreement, the failure to perform or observe any covenant or agreement
in the Asset Purchase Agreement and claims related to liabilities and
obligations that IVAX has not assumed. Additionally, the Asset Purchase
Agreement provides IVAX with certain rights of set off against the remaining
$500,000 payment to be made by IVAX to the Company at the Second Closing
relating to such indemnification obligations.
While the Company's indemnification obligations in general are capped at
the amount of the purchase price paid by IVAX to the Company, there are certain
indemnification obligations for which the Company's liability could exceed the
payments received from IVAX. Significant indemnification claims by IVAX could
have a material adverse effect on the Company's business.
THERE IS NO PLAN TO DISTRIBUTE ANY OF THE PROCEEDS OF THE ASSET SALE TO THE
COMPANY'S SHAREHOLDERS.
The Company does not intend to distribute to shareholders any portion of
the proceeds from the sale of substantially all of the Company's assets used in
the operation of the Congers Facilities. Currently, the Company intends to use
the proceeds from the asset sale to fund the development and commercialization
of the Company's proprietary technologies.
THE FAILURE TO COMPLETE THE SALE OF THE ASSETS USED IN THE OPERATION OF THE
CONGERS FACILITIES MAY RESULT IN A DECREASE IN THE MARKET VALUE OF THE
COMPANY'S COMMON STOCK AND MAY CREATE SUBSTANTIAL DOUBT AS TO THE COMPANY'S
ABILITY TO IMPLEMENT THE COMPANY'S BUSINESS STRATEGY.
The sale of substantially all of the Company's assets used in the operation
of the Congers Facilities is subject to a number of contingencies and other
customary closing conditions, including the requirement that the Company obtain
shareholder approval to complete the sale of the Congers Assets. In addition,
the Asset Purchase Agreement may be terminated if the sale does not occur on or
before ten (10) days following the receipt of shareholder approval or if any
governmental authority takes any action to enjoin the asset sale.
The Company cannot guarantee that it will be able to meet the closing
conditions set forth in the Asset Purchase Agreement or that the events that
would lead to a termination of the Asset Purchase Agreement will not occur. As a
result, the Company is unable to assure shareholders that the sale of the assets
used in the operation of the Congers Facilities will be completed. If the
Company's shareholders fail to approve the asset sale proposal or if the asset
sale is not completed for any other reason, the market price of the Company's
common stock may decline. In addition, the failure to complete the asset sale
may substantially limit the Company's ability to implement its business
strategy.
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IF SHAREHOLDERS DO NOT APPROVE THE ASSET SALE, THERE MAY NOT BE ANY OTHER
OFFERS FROM POTENTIAL ACQUIRERS.
If shareholders do not approve the sale of the Congers Assets to IVAX, the
Company would seek another purchaser for such assets. It is likely that the
value of such assets would be substantially compromised since the Company would
not have the manufacturing and packaging facilities available to enhance the
value of such assets. Additionally, although the Company has had discussions
with numerous parties concerning the purchase of such assets, with the exception
of IVAX, after completion of due diligence, none of such parties expressed a
willingness to purchase the assets.
SPECIAL CONSIDERATIONS RELATING TO THE COMPANY IF THE ASSETS USED IN THE
OPERATION OF THE CONGERS FACILITIES ARE SOLD.
THE COMPANY'S FINANCIAL SUCCESS WILL DEPEND ON ITS ABILITY TO SUCCESSFULLY
IMPLEMENT ITS NEW BUSINESS STRATEGY.
In accordance with the restructuring of the Company's operations, the
Company is transitioning to a single vertically integrated site located at its
Culver, Indiana facility. At such site, the Company will seek to develop and
commercialize its proprietary API and finished dosage formulation technologies
and ultimately, manufacture APIs and finished dosage products for sale by
third-party licensees of the Company's technologies. The development and
commercialization of APIs and finished dosage products incorporating the
Company's proprietary technologies are subject to various factors, many of which
are outside the Company's control. For instance, only a limited portion of the
Company's technologies have been tested in laboratory settings and none have
been tested in clinical settings. Such technologies will need to be successfully
scaled up to commercial scale to be commercially viable. The Company is
currently unable to provide any assurance that any of such technologies can be
scaled up to commercial scale or that they will be commercially viable. The
Company is committing substantially all of its resources and available capital
to the development of its proprietary technologies. The Company's failure to
successfully develop such technologies will have a material adverse effect on
the Company's operations and financial condition.
THE COMPANY HAS NO NEAR TERM SOURCES OF REVENUE AND MUST RELY ON CURRENT
CAPITAL RESOURCES AND THIRD PARTY FINANCING TO FUND OPERATIONS.
Pending the completion of the development and commercial scale up of the
Company proprietary technologies, and the receipt of regulatory approval of
products incorporating such technologies, of which no assurance can be given,
the Company must rely on its current capital resources and available third-party
financing to fund the Company's operations. As a consequence of the Company's
restructuring of operations, including the cessation of its finished dosage
manufacturing and packaging operations at the Congers Facilities and the
proposed sale of the related assets to IVAX, the Company will have no ability to
generate revenues from the sale of generic products. As a result, the Company
must rely on its current cash resources or available third-party financing to
fund operations. As of June 1, 2004, the Company had cash and cash equivalents
of approximately $7.3 million, plus an additional $500,000 to be paid by IVAX on
the closing of the asset sale transaction following the receipt of shareholder
approval. No assurance can be given that such cash resources will be sufficient
to fund the continued development and commercialization of the Company's
proprietary technologies until such time as the Company generates revenue from
the license of products incorporating such technologies to third parties.
Moreover, in the event of a cash shortfall, no assurance can be given that the
Company will succeed in raising additional financing to fund operations or that
if funding is obtained, that such funding will be sufficient to fund operations
until the Company's proprietary technologies, or products incorporating such
proprietary technologies, may be commercialized.
THE COMPANY RECEIVED A "GOING CONCERN" OPINION FROM ITS INDEPENDENT AUDITORS,
HAS A HISTORY OF OPERATING LOSSES AND MAY NOT ACHIEVE PROFITABILITY SUFFICIENT
TO GENERATE A POSITIVE RETURN ON SHAREHOLDERS' INVESTMENT.
The Company has incurred net losses since 1992. The Company's consolidated
financial statements for the year ended December 31, 2003 and the quarter ended
March 31, 2004 have been prepared on a going-
85
concern basis, expressing substantial doubt about the Company's ability to
continue as a going-concern as a result of recurring losses and negative cash
flows. The Company's loss from operations for the year ended December 31, 2003
and the three months ended March 31, 2004 was $17.2 million and $1.8 million,
respectively. The Company's accumulated deficit as of March 31, 2004 was $208.8
million. The Company expects to incur net operating losses at least through
2004. There can be no assurance that the Company will ever generate revenues or
achieve profitability at a level sufficient to generate a positive return on
shareholders' investment. If the Company is unable to successfully develop and
commercialize its proprietary technologies with its currently available cash
resources or available sources of third-party financing, the Company's ability
to execute its business plan and remain a going-concern will be significantly
impaired.
THERE CAN BE NO ASSURANCE THAT EVEN IF THE COMPANY IS SUCCESSFUL IN DEVELOPING
AND COMMERCIALIZING ITS PROPRIETARY TECHNOLOGIES, THAT PRODUCTS INCORPORATING
SUCH TECHNOLOGIES WILL BE ACCEPTED IN THE MARKET.
The commercial success of products incorporating the Company's technologies
that are approved for marketing by the FDA and other regulatory authorities will
depend upon their acceptance by the medical community and third party payors as
clinically useful, cost effective and safe. There can be no assurance that, even
if the Company succeeds in the development of products incorporating its
technologies and receives FDA approval for such products, that the Company's
products will be accepted by the medical community and others. Factors that the
Company believes could materially affect market acceptance of its products
include:
- The relative advantages and disadvantages of the Company's technologies
and timing to commercial launch of products utilizing such technologies
compared to products incorporating competitive technologies;
- The timing of the receipt of market approvals and the countries in which
such approvals are obtained;
- The safety and efficacy of products incorporating the Company's
technologies as compared to competitive products; and
- The cost-effectiveness of the products incorporating the Company's
technologies and the ability to receive third party reimbursement.
THE COMPANY MUST OBTAIN REQUIRED REGULATORY APPROVALS FROM THE FDA AND DEA.
The Company's business strategy focuses on the development of opioid
containing products incorporating the Company's proprietary technologies. The
development, marketing and sale of products incorporating the Company's
technologies is subject to extensive regulation by the DEA and FDA. At present,
the Company's facility located in Culver, Indiana is approved to manufacture
Schedule II to V controlled substance APIs and finished dosage products. To
continue the development and commercialization of the Company's API
Technologies, the Company is seeking to obtain a registration from the DEA to
import narcotic raw materials ("NRMs") and has begun the application process
seeking approval to import NMRs directly from foreign countries for use in the
Company's opioid API manufacturing efforts.
As part of the DEA's analysis of whether to issue to the Company an import
registration, the DEA will consider, among other things, whether adequate
security and controls exist at the Company's Culver, Indiana facility and at all
points in the chain of transfer of NRMs from suppliers in foreign countries to
the Culver, Indiana facility, whether the Company's API Technologies are viable
and efficient processes, whether the United States market demand for opioid
containing products supports the approval of another import registration, and
whether the Company has established itself as an eligible party to source and
obtain NRMs from foreign countries. No assurance can be given that the Company
will have the capital necessary to complete additional capital improvements at
its Culver, Indiana facility, that the Company will succeed in establishing
sources in foreign markets to meet DEA requirements, or that the DEA will
determine that the Company's API Technologies and the market demand for opioid
containing products merit the approval of another NRM importer.
Three of the four existing parties possessing import registrations are
opposed to the proposed issuance by the DEA of an import registration for NRMs
to the Company. These parties are Mallinckrodt Inc. of
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St. Louis, MO, Noramco of Athens, GA and Penick Corporation of Newark, NJ. Such
opposing parties have advised the DEA that they believe the market for NRMs is
adequately serviced by the parties currently authorized by the DEA to import
NRMs and that the importation of additional NRMs would lead to increased illegal
diversion of the resulting controlled substances. A hearing before the Office of
Administrative Law Judge ("OALJ") relating to the Company's application for an
Import Registration for NRMs was held in the third quarter of 2003. The process
requires all parties to submit evidence relating to the Import Registration to
the OALJ. Thereafter the evidentiary record will be closed and the OALJ will
then establish a schedule for the parties to submit written briefing documents.
Thereafter the OALJ will prepare a Findings of Fact, Conclusions of Law, Rulings
and a Decision (the "OALJ Report"). The Company and the opposing parties will be
provided an opportunity to comment on the OALJ Report after which time such
report will be forwarded to the DEA Administrator and certified by the OALJ.
Thereafter the DEA Administrator will issue an order granting or denying the
Company's application for the Import Registration. Either the Company or the
opposing parties may file a petition for judicial review of such order in the
U.S. Court of Appeals. No assurance can be given that the Company's application
for the Import Registration will be granted or if granted, that such decision
will be upheld by the U.S. Court of Appeals.
THE MARKETING AND SALE OF PRODUCTS INCORPORATING THE COMPANY'S TECHNOLOGIES
REQUIRES FDA APPROVAL WHICH CAN BE TIME-CONSUMING AND EXPENSIVE.
The development, testing, manufacture, marketing and sale of pharmaceutical
products are subject to extensive federal, state and local regulation in the
United States and other countries. The regulatory approval process and the
Company's ongoing compliance with FDA regulations, is time-consuming and often
expensive. Substantially all of the Company's activities are subject to
compliance with FDA regulations. Failure to adhere to applicable FDA regulations
would have a material adverse effect on the Company's financial condition. In
addition, in the event the Company is successful in developing products for sale
in other countries, the Company would be subject to regulation in such
countries.
The Company may encounter delays or rejections during any stage of the
regulatory approval process based upon the failure of clinical or laboratory
data to demonstrate compliance with, or upon the failure of the product to meet,
the FDA's requirements for safety, efficacy and quality. After the Company's
submission to the FDA of a marketing application, in the form of a new drug
application and/or a 505(b)(2) application the FDA may deny the application, may
require additional testing or data and/or may require post-marketing testing and
surveillance to monitor the safety or efficacy of a product. The FDA commonly
takes one to two years to grant final approval to a marketing application.
Further, the terms of approval of any marketing application, including the
labeling content, may be more restrictive than the Company desires and could
affect the marketability of products incorporating the Company's technologies.
The FDA also has the authority to revoke or suspend approvals of previously
approved products for cause, to debar companies and individuals from
participating in the drug-approval process, to request recalls of allegedly
violative products, to seize allegedly violative products, to obtain injunctions
to close manufacturing plants allegedly not operating in conformity with current
Good Manufacturing Practice regulations and to stop shipments of allegedly
violative products. Any future source of Company revenue will be derived from
the sale of FDA approved products, and the taking of any such action by the FDA
would have a material adverse effect on the Company.
THE COMPANY MAY BECOME INVOLVED IN PATENT LITIGATION OR OTHER INTELLECTUAL
PROPERTY PROCEEDINGS RELATING TO IS PRODUCTS OR TECHNOLOGIES WHICH COULD
RESULT IN LIABILITY FOR DAMAGES OR STOP THE COMPANY'S DEVELOPMENT AND
COMMERCIALIZATION EFFORTS.
The pharmaceutical industry has been characterized by significant
litigation and other proceedings regarding patents and other intellectual
property rights. The situations in which the Company may become a party to such
litigation or proceedings include:
- The Company may initiate litigation or other proceedings against third
parties to enforce the Company's patent rights;
87
- The Company may initiate litigation or other proceedings against third
parties to seek to invalidate the patents held by such third parties or
to obtain a judgment that the Company's products or processes due not
infringe such third parties' patents;
- If the Company's competitors file patent applications claiming technology
also claimed by the Company, the Company may participate in interference
or opposition proceedings to determine the priority of inventions;
- If third parties initiate litigation claiming that the Company's
processes or products infringe such third parties' patent or intellectual
property rights, the Company will need to defend against such
proceedings; and
- An adverse outcome in any litigation or other proceeding could subject
the Company to significant liabilities to third parties and require that
the Company cease using the technology that is at issue or to license the
technology from third parties. The Company may not be able to obtain any
required license on commercially acceptable terms or at all.
The cost of any patent litigation or other proceeding, even if resolved in
the Company's favor, could be substantial. Uncertainties resulting from the
initiation and continuation of patent litigation or other proceedings could have
a material adverse effect on the Company's ability to compete in the
marketplace. Patent litigation and other proceedings may also consume
significant management time.
THE COMPANY FACES SIGNIFICANT COMPETITION, WHICH MAY RESULT IN OTHERS
DISCOVERING, DEVELOPING OR COMMERCIALIZING PRODUCTS BEFORE OR MORE
SUCCESSFULLY THAN THE COMPANY.
The pharmaceutical industry is highly competitive and is affected by new
technologies, government regulations, health care legislation, availability of
financing, litigation and other factors. Most of the Company's competitors have
longer operating histories and greater financial and other resources than the
Company.
The Company will be concentrating essentially all of its efforts and
resources on the development of its proprietary technologies. The success of
products incorporating such technologies, if any, will depend, in large part, on
the intensity of competition from branded and generic opioid containing
products, abuse deterrent and opioid synthesis technologies developed by other
companies that compete with the Company's technologies and the relative timing
of product approval by the FDA of the Company's products compared to competitive
products.
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THE ASSET PURCHASE AGREEMENT
We believe this summary describes the material terms of the asset purchase
agreement. However, we recommend that you read carefully the complete agreement
for the precise legal terms of the asset purchase agreement and other
information that may be important to you. The asset purchase agreement is
included in this proxy statement as Appendix I.
ASSETS SOLD
Subject to and upon the terms and conditions of the asset purchase
agreement, we are selling to IVAX substantially all of the assets used in the
operation of our Congers, New York facilities.
FIRST CLOSING
We transferred or licensed the following assets to IVAX at a first closing
on March 19, 2004:
- All formulae, formulations, specifications, technologies, inventions,
assays, quality control and testing methods and procedures, manufacturing
processes, registrations, know-how and trade secrets relating to certain
Products (as defined herein):
- All information, data, documentation, schedules and procedures relating
to manufacturing processes, process validation, process qualification,
equipment validation, equipment qualification, equipment maintenance,
equipment calibration, equipment installation, equipment control
parameters, environmental controls, and equipment and process operating
information, operating manuals and training materials relating to the
operation of:
- Our Wells Avenue and Brenner Drive facilities; and
- All equipment owned by Par Pharmaceutical, Inc. (the landlord of the
Brenner Drive facility) and located at our Brenner Drive facility.
- The security deposit and prepaid rent under the lease for our Wells
Avenue facility.
- All of our rights and obligations under:
- the lease for our Wells Avenue facility;
- the contract of sale for our Brenner Drive facility; and
- certain communications-related service contracts for our Wells Avenue
and Brenner Drive facilities.
SECOND CLOSING
Following shareholder approval, we will transfer the following assets to
IVAX at a second closing:
- All of our tangible assets and equipment located at our Wells Avenue and
Brenner Drive facilities.
- All information, data, documentation, schedules and procedures relating
to manufacturing processes, process validation, process qualification,
equipment validation, equipment qualification, equipment maintenance,
equipment calibration, equipment installation, equipment control
parameters, environmental controls, and equipment and process operating
information, operating manuals and training materials relating to our
tangible assets and equipment located at our Wells Avenue and Brenner
Drive facilities.
- The approvals, registrations, applications, licenses and permits for the
following products (collectively, the "Products"):
- Prednisolone Syrup;
- Homatropine-Hydrocodone Syrup;
- Guaifenesin-Codeine Liquid;
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- Guaifenesin-Pseudoephedrine-Codeine Liquid;
- Guaifenesin-Hydrocodone Liquid;
- Dextromethorphan-Guaifenesin-Pseudoephedrine Liquid;
- Dextromethorphan-Guaifenesin Liquid;
- Dextromethorphan-Guaifenesin-Pyrilamine Liquid; and
- Pseudoephedrine-Dextromethorphan-Chlorpheniramine Liquid.
- All documentation pertaining to the validation, approval, analysis,
manufacture, marketing or distribution of the Products.
- All formulae, formulations, specifications, technologies, inventions,
assays, quality control and testing methods and procedures, manufacturing
processes, know-how and trade secrets relating to the Products.
- All information, data, documentation, schedules and procedures relating
to manufacturing processes, process validation, process qualification,
equipment validation, equipment qualification, equipment maintenance,
equipment calibration, equipment installation, equipment control
parameters, environmental controls, and equipment and process operating
information, operating manuals and training materials relating to the
Products.
ASSUMED LIABILITIES
Except for the lease for our Wells Avenue facility, the contract of sale
for our Brenner Drive facility and the communications-related service contracts
noted above, IVAX will not assume any liabilities in connection with the
transaction.
CLOSING DATES
The first closing occurred on March 19, 2004. The second closing will take
place within three business days following shareholder approval of the
transaction.
CONSIDERATION
IVAX will pay us a total of $2.5 million in cash, $2.0 million of which we
received at the first closing. At the second closing, IVAX will pay us $500,000,
less the amount of any losses incurred by IVAX prior to the second closing and
arising out of or resulting from:
- any breach of any representation or warranty made by us in the asset
purchase agreement or in any related agreement or document;
- our failure to perform any covenant or agreement in the asset purchase
agreement or any related agreement;
- any liabilities and obligations that IVAX has not assumed;
- any environmental conditions caused by us at the Wells Avenue or Brenner
Drive facilities existing on or before the first closing;
- any challenge, suit, action or investigation relating to shareholder
approval of the asset sale, this proxy statement or any of the
transactions contemplated by the asset purchase agreement or any related
agreement;
- the business that we conducted at the Wells Avenue and Brenner Drive
facilities; and
- any fees or expenses that we owe to any brokers or financial advisors in
connection with the transactions contemplated by the asset purchase
agreement.
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As of the date of this proxy statement, we do not believe that we will have
any obligation to indemnify IVAX for any of the above-described losses. This
belief is based on our active negotiation of the representations and warranties
in the asset purchase agreement and our related investigations to ascertain the
accuracy of these representations and warranties. Future events are, however,
difficult to foresee. Therefore, we can give no assurance that the $500,000
payment due to us at the second closing will not be reduced by any obligation
that we may have to indemnify IVAX.
We believe that the source of the cash that IVAX will use to pay the cash
consideration will be from IVAX Corporation's working capital. While we cannot
be certain that IVAX will have the necessary cash on hand to pay the amount due
to us at the second closing, we believe that it is reasonable to assume that
IVAX will have the cash on hand. Our belief is based upon the general business
reputation of IVAX and its parent corporation, IVAX Corporation.
REPRESENTATIONS AND WARRANTIES
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In the asset purchase agreement, we make customary representations and
warranties to IVAX, including with respect to the matters set forth below:
- Subject to shareholder approval of the asset purchase agreement, there
are no conflicts between the asset purchase agreement and our charter
documents, our contracts or applicable law.
- The manufacturing, labeling and packaging equipment located at the Wells
Avenue and Brenner Drive facilities was, when last used by us, in working
order, normal wear and tear excepted.
- We have good and marketable title to the assets that we are selling to
IVAX.
- We own the rights to the intellectual property necessary to conduct of
the business that we conducted at our Wells Avenue and Brenner Drive
facilities. We are not infringing the intellectual property rights of any
third party.
- We have set forth on a schedule all of the computer systems that are
necessary to conduct the business that we conducted at our Wells Avenue
and Brenner Drive facilities.
- We have set forth on a schedule all of the material contracts that relate
to the business that we conducted at our Wells Avenue and Brenner Drive
facilities and, except as noted in the asset purchase agreement, these
contracts are in full force and effect, are assignable to IVAX and, to
our knowledge, there are no outstanding or threatened disputes under
these contracts.
- Except as described in the asset purchase agreement, we are in compliance
with all applicable laws.
- Except as described in the asset purchase agreement, there are no legal
proceedings related to the assets that we are transferring to IVAX.
- We have delivered to IVAX copies of all documentation related to serious
adverse event reports and periodic adverse event reports for the
Products.
- No party is entitled to a finder's fee, brokerage commission or similar
payment as a result of the transactions contemplated by the asset
purchase agreement.
- Except as noted in the asset purchase agreement, we are in material
compliance with all applicable environmental laws.
- We have paid all taxes that have become due and payable. There are no
liens for taxes due and payable on any of the assets that are being
transferred to IVAX.
- We have delivered to IVAX copies of our general liability and other forms
of insurance under which our assets, properties and operations are
insured.
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- We have delivered to IVAX true, correct and complete copies of the Wells
Avenue facility lease, the Brenner Drive facility lease and the contract
of sale for the Brenner Drive facility. To our knowledge, neither the
Wells Avenue facility nor the Brenner Drive facility is in material
violation of any applicable law.
REPRESENTATIONS AND WARRANTIES OF IVAX
In the asset purchase agreement, IVAX makes customary representations and
warranties to us, including with respect to the matters set forth below:
- There are no conflicts between the asset purchase agreement and IVAX's
organizational documents, its contracts or applicable law.
- No consents or approvals are necessary for IVAX's consummation of the
transactions contemplated by the asset purchase agreement.
- No party is entitled to a finder's fee, brokerage commission or similar
payment as a result of the transactions contemplated by the asset
purchase agreement.
COVENANTS
In the asset purchase agreement, we and IVAX have agreed, among other
things, that:
- Each party will notify the FDA that we are no longer manufacturing and
selling the Products.
- Until the second closing, we will be responsible for any and all fees
assessed with respect to the Products under the Prescription User Drug
Fee Act.
- Until the second closing, IVAX will notify us if it receives any
complaints or inquiries concerning the Products.
- Until the second closing, we will be responsible for all regulatory
filings related to the Products. IVAX will be responsible for all
regulatory filings related to the Products after the second closing.
- We will investigate all quality complaints and adverse drug events for
any Products that we sold.
- After the second closing, we will notify IVAX if we receive any
complaints or inquiries concerning the Products
- We will continue to conduct stability testing on the Products that we
manufactured through the expiration date of the last lot of product
manufactured at the Wells Avenue or Brenner Drive facilities.
- We will complete the Prednisolone Syrup annual reports for May 2002
through April 2003 within 30 days after the first closing.
- No later than by May 31, 2004, we will complete all other annual reports
for the Products required by the FDA which have been due since 12/1/2000
or cover the period ending April 2004 and until the second closing.
- We will pay in a timely manner all taxes, other than sales taxes,
resulting from the transactions contemplated by the asset purchase
agreement.
- Each party will take such action as may be reasonably requested by the
other party to make effective the transactions contemplated by the asset
purchase agreement and each related agreement.
- For a period of one year following the second closing, we will not
solicit any employees of IVAX.
- Until our shareholders approve the sale of assets to IVAX, we will not:
- file a registration statement under the Securities Act of 1933, other
than an amendment to a Form S-8 that was filed before the first closing
or pursuant to demand registration rights held by a third party on or
prior to the first closing;
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- directly or indirectly, offer, sell, grant any option to purchase, or
otherwise dispose of (or announce any offer, sale, grant or any option
to purchase or other disposition of ) any equity or equity equivalent
securities, including, without limitation, any debt, preferred stock or
other instrument or security that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable
for securities that have voting rights;
- issue more than 10.5 million of our authorized, reserved shares of
common stock to any of our existing shareholders, option holders and
warrant holders;
- issue more than our currently authorized 80.0 million shares of common
stock;
- subdivide any outstanding shares of our common stock into a greater
number of shares; or
- redeem, call or cancel any of our debentures that were outstanding as of
the first closing.
- We will not authorize any third party to place a lien on any of the
assets being transferred to IVAX.
- We will maintain products liability and general liability insurance in
amount not less than $5.0 million until the third anniversary of the
second closing.
CONDITIONS TO SECOND CLOSING
Each party's obligation to complete the sale of assets to IVAX at the
second closing is subject to the prior satisfaction or waiver of certain
conditions. In addition to customary closing conditions, the following
conditions must be satisfied or waived before the second closing:
- There will be no statute, regulation, order, decree or judgment of any
governmental authority that makes illegal or enjoins or prevents the
consummation of the transactions contemplated by the asset purchase
agreement.
- Each party will have performed in all material respects all obligations
and covenants required to performed or complied with by such party under
the asset purchase agreement.
- We will have obtained shareholder approval of the sale in accordance with
the New York Business Corporation Law and our charter documents.
- There will be no liens on any asset to be transferred at the second
closing.
- The parties will have filed with the FDA all information necessary to
transfer ownership of the abbreviated new drug applications for
Prednisolone Syrup and Homatropine-Hydrocodone Syrup.
TERMINATION OF THE ASSET PURCHASE AGREEMENT
TERMINATION
The asset purchase agreement may be terminated at any time prior to the
second closing, in any of the following ways:
- By the mutual written consent of the parties.
- By either party if a governmental authority takes any action to restrain,
enjoin, or otherwise prohibit the transaction.
- By IVAX if the second closing does not occur within ten business days
following shareholder approval of the asset sale and we are then in
breach of the asset purchase agreement.
- By either party if, on January 1, 2005, our shareholders have considered
and voted against the transaction.
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EFFECTS OF TERMINATION
If the asset purchase agreement is terminated prior to the second closing,
neither we nor IVAX will have any liability or obligation to one another except
for agreements contained in the asset purchase agreement, including our
obligation to pay to IVAX the refundable amount described below, and damages for
any breach of the asset purchase agreement. The transfer of assets consummated
at the first closing will be unaffected by any termination of the asset purchase
agreement.
REFUNDABLE AMOUNT
If the asset purchase agreement is terminated prior to the second closing,
we will refund to IVAX the $2.0 million payment that we received at the first
closing.
INDEMNIFICATION
INDEMNIFICATION
Under the asset purchase agreement, we are obligated to indemnify and hold
harmless IVAX from and against all losses that IVAX incurs arising out of or
resulting from:
- any breach of any representation or warranty made by us in the asset
purchase agreement or in any related agreement or document;
- our failure to perform any covenant or agreement in the asset purchase
agreement or any related agreement;
- the liabilities and obligations that IVAX has not assumed;
- any environmental conditions at the Wells Avenue or Brenner Drive
facilities existing on or before the first closing;
- any challenge, suit, action or investigation relating to shareholder
approval of the asset sale, this proxy statement or any of the
transactions contemplated by the asset purchase agreement or any related
agreement;
- the business that we conducted at the Wells Avenue and Brenner Drive
facilities; and
- any fees or expenses that we owe to any brokers or financial advisors in
connection with the transactions contemplated by the asset purchase
agreement.
The asset purchase agreement provides that IVAX will indemnify and hold us
harmless from and against all losses that we incur arising out of or resulting
from:
- any breach of any representation or warranty made by IVAX in the asset
purchase agreement or in any related agreement or document;
- the liabilities and obligations assumed by IVAX; or
- any Products sold by IVAX.
LIMITS ON INDEMNIFICATION
Except for losses related to taxes, title to the transferred assets and
environmental matters, for which there is no limitation on indemnification, we
will not be obligated to indemnify IVAX for any losses in excess of $2.5
million.
EXPENSES
Each party to the asset purchase agreement will bear its own expenses
incurred in connection with the transaction. Our expenses include the costs of
preparing, filing with the SEC, printing and mailing this proxy statement.
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ADDITIONAL AGREEMENTS RELATED TO THE ASSET PURCHASE AGREEMENT
Concurrently with the execution of the asset purchase agreement, certain of
our security holders entered into a voting agreement with us and IVAX. These
security holders granted to IVAX an irrevocable proxy to vote their securities
in favor of the transaction. In addition, pursuant to a use and license
agreement, we granted to IVAX the right to use, from the date of the first
closing, the assets that will be transferred at the second closing.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
PROPOSED SALE OF SUBSTANTIALLY ALL OF THE ASSETS USED IN
THE OPERATION OF CONGERS, NEW YORK FACILITIES.
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CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION
Certain information contained in this Proxy Statement that does not relate
to historical information may be deemed to constitute forward-looking
statements. The words or phrases "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," "believe" or similar
expressions identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, as amended. This Proxy
Statement contains certain forward-looking statements with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of the Company and the effects of the asset sale.
Because such statements are subject to risks and uncertainties, actual results
may differ materially from historical results and those presently anticipated or
projected. Shareholders are cautioned not to place undue reliance on such
statements, which speak only as of the date hereof. Among the factors that could
cause actual results in the future to differ materially from any opinions or
statements expressed with respect to future periods are those described under
the caption "Proposal 4, Sale of the Assets Used in the Company's Finished
Dosage Product Operations Located in Congers, New York -- Special Considerations
Shareholders Should Take into Account in Deciding How to Vote on the Proposal to
Sell the Assets Used in the Operation of the Congers Facilities." The Company
undertakes no obligation to release publicly any revisions to such forward-
looking statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for Halsey Drug Co., Inc. as of the dates and for the periods indicated.
The consolidated balance sheet data and the consolidated operations data for
fiscal years 1999 through 2003 have been derived from the Company's audited
consolidated financial statements included in the Company's filings on Form 10-K
for each of the respective periods. The consolidated balance sheet data as of
March 31, 2004 and the consolidated operations data for the three months ended
March 31, 2004 have been derived from the Company's unaudited consolidated
financial statements included in the Company's Form 10-Q for the quarter ended
March 31, 2004.
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------------------------------- MARCH 31,
1999 2000 2001 2002 2003 2004
-------- -------- -------- -------- -------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenue....................... $ 11,420 $ 20,223 $ 16,929 $ 8,205 $ 5,750 $ 628
Operating loss................ (15,685) (6,602) (5,939) (12,937) (17,244) (2,084)
Net (loss) income............. (20,063) (11,654) (12,563) (59,589) (48,455) 680
Amortization of deferred debt
discount and private
offering costs.............. (1,825) (2,448) (2,591) (12,558) (24,771) (10,843)
Net (loss) income available to
common shareholders......... (20,063) (11,654) (12,563) (59,589) (48,455) 680
Net (loss) income per share
available to common
shareholders................ (1.40) (.80) (.84) (3.90) (2.28) --
Weighted average shares
outstanding................. 14,326 14,503 15,021 15,262 21,227 21,602
BALANCE SHEET DATA:
Working capital (deficit)..... $ 97 $ (2,561) $ (8,276) $ 5,933 $ (3,770) $ (1,698)
Total assets.................. 7,217 8,143 3,776 12,500 2,122 11,578
Long-term liabilities......... 42,471 57,854 64,453 25,065 52,797 41,159
Shareholders' equity
(deficit)................... (42,374) (53,349) (65,436) (12,268) (52,067) (38,759)
---------------
Financial results include the following unusual items:
(1) December 31, 2003 results include a charge against earnings totaling
$3,619,000 resulting from an impairment of assets related to the write down
on inventories ($1,619,000) and property, plant and equipment ($1,926,000)
in conjunction with (1) the Company's restructuring.
(2) March 31, 2004 results include gain on sale of assets totaling $1,754,000
and gain on restructuring of debt of $12,401,000.
Unaudited pro forma financial information has not been provided as the sale
of substantially all of the assets used in the operation of the Congers
facilities and the assignment of certain related liabilities will be accounted
for as a disposition of assets and the Company's financial statements for the
year ended December 31, 2003 reflect the write down of such assets to their
estimated net realizable value of approximately $2.0 million.
PROPOSAL 5
AMENDMENT TO THE COMPANY'S 1998 STOCK OPTION PLAN
On August 26, 2003, the Board of Directors of the Company amended the
Company's 1998 Stock Option Plan (the "1998 Plan"), to (a) increase the number
of shares available for grant of options under the 1998 Plan from 8,100,000
shares to 12,000,000 shares, (b) permit the grant of non-qualified stock options
having an
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exercise price per share which is less than the fair market value of the
Company's Common Stock, and (c) set a limit of 5,500,000 option awards that may
be granted to one individual in any calendar year. On May 5, 2004 the Board of
Directors of the Company further amended the 1998 Plan to (i) further increase
the number of shares available for grant of options under the 1998 Plan from
12,000,000 to 20,000,000 shares, and (ii) increase the limit on option awards
that may be granted to one individual in any calendar year to 8,750,000 shares.
A copy of the 1998 Plan, as amended, is set forth in Appendix F to this Proxy
Statement. The amendment to the 1998 Plan will not become effective unless it is
approved by the holders of record of a majority of the Company's voting
securities. The 1998 Plan allows for the grant of stock options to employees,
officers, and consultants of the Company. Approximately 23 employees, officers
and directors were eligible to participate in the 1998 Plan as of June 1, 2004.
Except for the amendments adopted by the Board on August 26, 2003 and May 5,
2004 as described above, the 1998 Plan remains unchanged.
The 1998 Plan is intended to assist the Company in securing and retaining
key employees and directors by allowing them to participate in the ownership and
growth of the Company through the grant of incentive stock options, as defined
in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options to which Section 422 of the Code does not apply
(collectively, the "Options"). The granting of Options will serve as partial
consideration for and give key employees, directors and consultants an
additional inducement to, remain in the service of the Company and will provide
them with an increased incentive to work for the Company's success.
The Company currently maintains a 1995 Stock Option Plan. See "Compensation
of Executive Officers and Directors -- Stock Option Plans." As of June 1, 2004,
options to purchase an aggregate of 838,388 shares have been granted under the
Company's 1995 Stock Option Plan, of which Options for 140,460 shares had been
exercised. As of June 1, 2004, 111,612 shares remained available for issuance
under the 1995 Stock Option Plan.
The Board of Directors believes that it would be in the best interests of
the Company for the shareholders to ratify the amendment to the 1998 Plan to (a)
increase the number of shares available for the grant of Options under the 1998
Plan from 8,100,000 to 20,000,000 shares, (b) permit the grant of non-qualified
stock options having an exercise price per share which is less than the fair
market value of the Company's Common Stock, and (c) set a limit of 8,750,000
option awards that may be granted to one individual in any calendar year. The
Board of Directors believes that it is in the best interests of the Company to
assure that a sufficient reserve of Common Stock is available to continue to
implement a comprehensive equity incentive program for the Company. This will
provide a meaningful opportunity for the Company's officers, employees and non-
employee Board members and other such parties to acquire a substantial
proprietary interest in the enterprise and thereby encourage such individuals to
remain in the Company's service and more closely align their interests with
those of the Company's shareholders. In addition, the grant of stock options can
be made without the expenditure of the Company's cash or other liquid resources,
which are being preserved for the development of the Company's opioid API
Technologies and ADF Technology.
On March 9, 2004 and March 30, 2004, the Stock Option Committee of the
Board of Directors approved the commitment to issue stock options exercisable
for an aggregate of 13,175,145 shares of Common Stock. The grant of such stock
options is contingent on the receipt of shareholder approval to amend the 1998
Plan as provided in this Proposal 5 (the "Contingent Options"). Upon grant, all
of the Contingent Options will have an exercise price of $0.13 per share, which
exercise price is less than the fair market value of the Company's Common Stock
on the date of the Stock Option Committee's commitment to issue such options. In
the event shareholders do not approve this Proposal 5 and Proposal 2, the
Contingent Options will not be granted. As of June 1, 2004, options to purchase
an aggregate of 2,691,342 shares of Common Stock have been granted under the
1998 Plan, of which 22,000 shares had been exercised. Assuming the receipt of
shareholder approval of the amendment to the 1998 Plan, and after giving effect
to the grant of the Contingent Options following such approval, 4,133,513 shares
will remain available for the grant of Options under the 1998 Plan.
In addition to the increase in the number of shares available for the grant
of Options under the 1998 Plan, the 1998 Plan has been amended to permit the
grant of non-qualified stock options at an exercise price per share which is
less than the fair market value of the Company's Common Stock on the date of
grant. Prior to
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the Board's amendment, the 1998 Plan provided that an Option must have an
exercise price no less than the fair market value of the Company's Common Stock
on the date of grant. In adopting the amendment to the 1998 Plan, the Board
determined that the additional flexibility afforded by the ability to grant
Options at less than fair market value would assist the Company in attracting
and retaining key employees, which will enhance long-term shareholder value.
Additionally, the grant of non-qualified stock options to employees at a
discount to fair market value would serve, in part, to offset the substantial
dilution to previously granted employee options as a result of the completion of
the Company's offering of its 2002 Debentures and 2004 Debentures. As described
below under the caption "2003 and 2004 Stock Option Commitments", the Stock
Option Committee has approved the commitment to issue the Contingent Options be
exercisable for an aggregate of 13,175,145 shares. Upon grant, all of the
Contingent Options will have an exercise price less than the fair market value
of the Company's Common Stock on the date of the Stock Option Committee's
commitment to issue such options.
Except for grant of the Contingent Options described above and under the
caption "2003 and 2004 Stock Option Commitments" below, the Board of Directors
does not contemplate granting non-qualified stock options in the future having
an exercise price less than fair market value. Any such discounted Options
granted in the future would be of considerably smaller magnitude and be made on
an isolated basis.
In addition to the increase in the number of shares available under the
1998 Plan and the discretion to grant non-qualified stock options having an
exercise prior less than the fair market value of the Company's Common Stock,
the Board amended the 1998 Plan to set a limit of 8,750,000 Option awards that
may be made to an individual in any calendar year. Prior to the Board's
amendment, the 1998 Plan contained no limit on the number of Options that the
Board or Stock Option Committee may grant to any employee in any year or during
the term of the 1998 Plan. The annual option limit of 8,750,000 Options to any
individual under the 1998 Plan is included to qualify the 1998 Plan under
Section 162(m) of the Internal Revenue Code. Section 162(m) of the Internal
Revenue Code precludes a public company from taking a deduction for annual
compensation in excess of $1,000,000 paid to its Chief Executive Officer or any
of its four other highest-paid officers. However, compensation that qualifies
under Section 162(m) of the Internal Revenue Code as "performance-based" is
specifically exempted from the deduction limit. Based on Section 162(m) and the
regulations promulgated under such section, the Company's ability to deduct
compensation expense generated in connection with the exercise of stock options
should not be limited for stock options granted at fair market value, provided
the 1998 Plan contains the annual limit proposed in this Proposal 5. The
inclusion in the 1998 Plan of the limit of 8,750,000 Options to an individual
within any calendar year will be used by the Company to determine whether the
compensation realized by an individual would be included in the amount in
determining whether an executive's annual compensation exceeds the $1,000,000
deductibility limitation under Section 162(m) of the Internal Revenue Code. The
exercise of Options having a fair market value exercise price which have been
granted within the limitations provided in the amended 1998 Plan are not counted
toward the deductibility limitation. The annual limit provided in the amended
1998 Plan of 8,750,000 Options is arbitrary and the number is not specified in
the Internal Revenue Code. The Board of Directors believes, however, that the
amount provides sufficient flexibility to address the Company's compensation
objectives while allowing the Company to take advantage of the tax benefits of
compensation paid to an executive.
The following discussion of the principal features and effects of the 1998
Plan, as amended, is qualified in its entirety by reference to the text of the
1998 Plan, as amended, set forth in Appendix F attached hereto.
ADMINISTRATION
The 1998 Plan has been administered by the Stock Option Committee of the
Board of Directors (the "Stock Option Committee"), consisting of not less than
two members of the Board of Directors of the Company appointed by the Board.
Each member of the Stock Option Committee was a "non-employee director" as
defined in Rule 16b-3 of the Securities Exchange Act of 1934, as amended. The
Stock Option Committee selected the employees, directors and consultants that
were granted Options under the 1998 Plan and, subject to the provisions of the
1998 Plan, determined the terms and conditions and number of shares subject to
each Option. During 2003, the Stock Option Committee was comprised of Messrs.
Skelly, Sumner,
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and Smith. Effective as of the date of the Meeting, the Stock Option Committee
will be dissolved and the Board of Directors shall administer the 1998 Plan and
perform the functions previously conducted by the Stock Option Committee.
SHARES SUBJECT TO THE 1998 PLAN
The 1998 Plan authorizes the granting of either incentive stock options or
non-qualified stock options to purchase in the aggregate up to 8,100,000 shares
of the Company's Common Stock. The amendments to the 1998 Plan approved by the
Board on August 26, 2003 and May 5, 2004, subject to shareholder approval as
provided in this Proposal 5, will increase the number of shares available for
grant of Options under the 1998 Plan to 20,000,000 shares. The shares available
for issuance will be increased or decreased according to any reclassification,
recapitalization, stock split, stock dividend or other such subdivision or
combination of the Company's Common Stock. Shares of the Company's Common Stock
subject to unexercised Options that expire or are terminated prior to the end of
the period during which Options may be granted under the 1998 Plan will be
restored to the number of shares available for issuance under the 1998 Plan.
Assuming the receipt of shareholder approval of this Proposal 5 and Proposal 2,
after giving effect to the grant of the Contingent Options following receipt of
shareholder approval of the amended 1998 Plan, 4,133,513 shares of common stock
will remain available for the grant of Options under the 1998 Plan.
ELIGIBILITY
Any employee of the Company or any subsidiary of the Company shall be
eligible to receive incentive stock options and non-qualified stock options
under the 1998 Plan. Non-qualified stock options may be granted to employees as
well as non-employee directors and consultants of the Company under the 1998
Plan as determined by the Board or the Stock Option Committee. Any person who
has been granted an Option may, if he is otherwise eligible, be granted an
additional Option or Options.
Each grant of an Option shall be evidenced by an Option Agreement, and each
Option Agreement shall (i) specify whether the Option is an incentive stock
option or a non-qualified stock option and (ii) incorporate such other terms and
conditions as the Board of Directors or the Stock Option Committee acting in its
absolute discretion deems consistent with the terms of the 1998 Plan, including,
without limitation, a restriction on the number of shares of Common Stock
subject to the Option which first become exercisable during any calendar year.
To the extent that the aggregate fair market value of the Common Stock of
the Company underlying a grant of incentive stock options (determined as of the
date such an incentive stock option is granted), which first become exercisable
in any calendar year, exceeds $100,000, such Options shall be treated as
non-qualified stock options. This $100,000 limitation shall be administered in
accordance with the rules under Section 422(d) of the Code.
The amendment to the 1998 Plan approved by the Board on August 26, 2003,
subject to shareholder approval as provided in this Proposal 5, will set a limit
of 8,750,000 shares that may be subject to an Option award that may be made to
an individual in any calendar year.
EXERCISE PRICE OF OPTIONS
Upon the grant of an Option to an employee, director or consultant of the
Company, the Stock Option Committee will fix the number of shares of the
Company's Common Stock that the optionee may purchase upon exercise of the
Option and the price at which the shares may be purchased. The Option price for
incentive stock options shall not be less than the fair market value of the
Common Stock at the time the Option is granted, except that the Option price
shall be at least 110% of the fair market value where the Option is granted to
an employee who owns more than 10% of the voting power of all classes of stock
of the Company or any parent or subsidiary. Under the terms of the 1998 Plan,
the aggregate fair market value of the stock (determined at the time the Option
is granted) with respect to which incentive stock options are exercisable for
the first time by such individual during any calendar year shall not exceed
$100,000. The Option price for non-qualified stock options granted under the
1998 Plan may not be less than the fair market
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value of the Company's Common Stock. The amendment to the 1998 Plan approved by
the Board on August 26, 2003, subject to shareholder approval as provided in
this Proposal 5, permits the Stock Option Committee to grant non-qualified stock
options at a per share price less than the fair market value of the Company's
Common Stock on the date of grant. "Fair market value" is determined by the
Stock Option Committee based on the average of the closing bid and asked price
of the Common Stock on the OTC Bulletin Board. On June 1, 2004, the average of
the closing bid and asked price of the Company's Common Stock, as reported by
the OTC Bulletin Board, was approximately $0.49.
TERMS
All Options available to be granted under the 1998 Plan must be granted by
April 16, 2008. The Stock Option Committee will determine the actual term of the
Options but no Option will be exercisable after the expiration of 10 years from
the date of grant. No incentive stock option granted to an employee who owns
more than 10% of the combined voting power of all the outstanding classes of
stock in the Company may be exercised after five years from the date of grant.
The Options granted pursuant to the 1998 Plan shall not be transferable
except (i) by will or the laws of descent and distribution and (ii)
non-qualified options may be transferred in limited circumstances to immediate
family members and family limited partnerships, with the consent of the Stock
Option Committee.
EXERCISE OF OPTIONS
Options granted to employees, directors or consultants under the 1998 Plan
may be exercised during the optionee's lifetime only by the optionee during his
employment or service with the Company or for a period not exceeding one year if
the optionee ceased employment or service as a director or consultant because of
permanent or total disability within the meaning of Section 22(e)(3) of the
Code. Options may be exercised by the optionee's estate, or by any person who
acquired the right to exercise such Option by bequest or inheritance from the
optionee for a period of twelve months from the date of the optionee's death. If
such Option shall by its terms expire sooner, such Option shall not be extended
as a result of the optionee's death.
The consideration to be paid to the Company upon exercise of an Option may
consist of any combination of cash, checks, promissory notes, shares of Common
Stock, and/or any other forms of consideration permitted under New York law and
approved by the Stock Option Committee and/or the Board of Directors. With the
exception of the consideration received by the Company upon the exercise of
Options granted under the 1998 Plan, no consideration is received by the Company
for the granting or extension of any Options.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO INCENTIVE STOCK OPTIONS
Certain Options granted under the 1998 Plan are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Code. Set
forth below is a discussion of all relevant Federal income tax consequences to
participants and the Company of incentive stock options granted under the 1998
Plan.
An employee to whom an incentive stock option is granted pursuant to the
1998 Plan will not recognize any compensation income at the time an incentive
stock option is granted or at the time an incentive stock option is exercised.
In the year of exercise, however, the amount by which the fair market value of
the Common Stock exceeds the Option price will be included as a positive
adjustment in the calculation of the optionee's alternative minimum taxable
income in the year of exercise. The "alternative minimum tax" imposed on
individual taxpayers is generally equal to the amount by which 28% (26% of
alternative minimum tax income below certain amounts) of the individual's
alternative minimum tax income (reduced by certain exemption amounts) exceeds
his or her regular income tax liability for the year. If the optionee incurs
minimum tax in the year of exercise, however, he should qualify for the credit
for prior year maximum tax liability in the first future year he has regular tax
liability.
In general, neither the exercise of an incentive stock option nor the sale
of any Common Stock acquired under the incentive stock option will have any tax
consequences to the Company. However, the Company will generally be entitled to
a business-expense deduction with respect to any ordinary compensation income
101
recognized by an optionee, including as a result of a disqualifying disposition
of the Common Stock acquired under the incentive stock option (discussed in the
following paragraph), at the same time that the optionee recognizes ordinary
income compensation.
In order to obtain incentive stock option treatment for Federal income tax
purposes upon the subsequent sale (or other disposition) by the optionee of the
shares of Common Stock received upon exercise of the Option, the sale (or other
disposition) must not occur within two years from the date the Option was
granted nor within one year after the issuance of such shares upon exercise of
the Option (the "incentive stock option holding period requirements"). If the
incentive stock option holding period requirements are satisfied, on the
subsequent sale (or other disposition) by the optionee of the shares of Common
Stock received upon the exercise of an Option, the optionee generally will
recognize income from the sale of a capital asset equal to the difference, if
any, between the proceeds realized from the sale (or other disposition) and the
amount paid as the exercise price of the Option. Alternatively, if the incentive
stock option holding period requirements are not satisfied, on the subsequent
sale (or other disposition) by the optionee of the shares of Common Stock
received upon the exercise of the Option, the optionee generally will recognize
income taxable as compensation (and the Company will recognize a compensation
deduction) in an amount equal to the lesser of (a) the difference, if any,
between the fair market value of the shares on the date of exercise and the
amount paid as the exercise price of the Option and (b) the difference, if any,
between the proceeds realized from the sale or other disposition and the amount
paid as the exercise price of the Option. Any additional gain realized on such
sale or disposition (in addition to the compensation income referred to above)
would give rise to income from the sale of a capital asset and taxed
accordingly.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO NON-QUALIFIED STOCK OPTIONS
The non-qualified stock options which may be granted under the 1998 Plan
are not intended to qualify as incentive stock options within the meaning of
Section 422 of the Code. Set forth below is a discussion of all relevant Federal
income tax consequences to participants and the Company of non-qualified stock
options granted under the 1998 Plan.
An individual to whom a non-qualified stock option is granted pursuant to
the 1998 Plan will generally not recognize any compensation income, and the
Company will not realize any compensation deduction, at the time the
non-qualified stock option is granted. In the year of exercise, however, the
optionee generally will realize income taxable as compensation (and the Company
will realize a compensation deduction) in an amount equal to the difference, if
any, between the fair market value of the shares on the date of exercise and the
amount paid as the exercise price of the Option.
The tax basis of the shares of Common Stock received by the optionee upon
exercise will be equal to the amount paid as the exercise price plus the amount,
if any, includable in his gross income as compensation income. The holding
period for the shares will commence on the date of exercise.
On the subsequent sale (or other disposition) by the optionee of the shares
of Common Stock received upon the exercise of the Option, any gain realized on
such sale or disposition would give rise to income from the sale of a capital
asset and taxed accordingly.
Section 162(m) of the Internal Revenue Code generally disallows a public
corporation's tax deduction for compensation to its Chief Executive Officer or
any of its four other most highly compensated officers in excess of $1,000,000
within a year. Compensation that qualifies as "performance-based compensation"
is excluded from the $1,000,000 deductibility cap, and therefore remains fully
deductible by the corporation that pays it. The Company's 1998 Plan has been
amended by the Board of Directors and, subject to your approval of this Proposal
5, will set a limit of 8,750,000. Options that may be granted to an individual
in any calendar year. If the amended 1998 Plan is adopted by the Company's
shareholders, stock options granted to the Company's Chief Executive Officer and
next four highest compensated officers having an exercise price at least equal
to fair market value will be deemed "performance based" as provided in Section
162(m) of the Internal Revenue Code and not subject to the $1,000,000
deductibility cap. With respect to a stock options granted to the Company's
Chief Executive Officer and next four highest compensated officers having an
exercise price less than the fair market value of the Company's Common Stock at
the date of grant, the
102
compensation expense resulting from the exercise of any such stock options will
not qualify as a "performance based" compensation under the requirements of
Section 162(m) of the Internal Revenue Code and will be subject to the
$1,000,000 deductibility cap.
PREVIOUSLY GRANTED OPTIONS
As of December 31, 2002, the Company had granted options to purchase an
aggregate of 3,193,617 shares of Common Stock under the 1998 Plan at a weighted
average exercise price of $1.97 per share. Of such options, 2,410,034 shares and
783,583 shares were vested and unvested, respectively, and 22,000 Options
granted under the 1998 Plan had been exercised. The following table sets forth
information concerning option grants made during fiscal 2002 with respect to (i)
each executive officer; (ii) all current executive officers as a group; (iii)
each nominee for election as a Director; (iv) all current Directors who are not
executive officers as a group; (v) each person who has received or is to receive
5% of such Options or rights; and (vi) all employees, including all current
officers who are not executive officers, as a group:
OPTIONS GRANTED WEIGHTED AVERAGE
DURING FISCAL 2002 EXERCISE PRICE
------------------ ----------------
Michael K. Reicher, Chief Executive Officer(1)....... -- $ --
Vijai Kumar, Chief Operations Officer................ 400,000 1.15
Peter Clemens, Chief Financial Officer............... -- --
James Emigh, Vice President -- Sales and Marketing... -- --
Carol Whitney, Vice President -- Administration(2)... -- --
Robert Seiser, Corporate Controller.................. -- --
William Skelly, Director............................. 10,000 2.08
William A. Sumner, Director.......................... 10,000 2.08
Bruce F. Wesson, Director(3)......................... -- --
Jerry Karabelas, Director(4)......................... -- --
Immanuel Thangaraj, Director(4)...................... -- --
All current executive officers as a group (6
persons)........................................... 400,000 1.15
All current directors who are not executive officers
as a Group (8 persons)............................. 20,000 2.08
All employees, including current officers who are not
Executive officers as a group (114)................ -- --
As of December 31, 2002 the average of the closing bid and ask price of the
Common Stock was $0.96 per share.
---------------
(1) Mr. Reicher's services as Chief Executive Officer ceased effective June 16,
2003.
(2) Ms. Whitney's services as Vice President -- Administration ceased effective
March 26, 2004.
(3) Stock options issuable to Mr. Wesson in 2002 to purchase 10,000 shares of
the Company's Common Stock were issued to Galen Partners III, L.P.
(4) Messrs. Karabelas and Thangaraj were appointed as Directors effective
December 20, 2002 and received no option grants in 2002.
2003 AND 2004 STOCK OPTION COMMITMENTS
Subject to shareholder approval of Proposal 2 to amend the Company's
Charter to increase its authorized shares, and this Proposal 5, (i) effective
August 26, 2003, the Stock Options Committee of the Board of Directors approved
the commitment to issue stock options exercisable for an aggregate of 5,500,000
shares of Common Stock, (ii) effective March 9, 2004 the Stock Option Committee
of the Board of Directors approved the commitment to issue Stock Options
exercisable for an aggregate of 1,495,142 shares of Common Stock, and (iii)
effective May 5, 2004, the Stock Option Committee of the Board of Directors
approved a change in
103
the commitment adopted August 26, 2003 to increase the Stock Options subject to
such commitment from 5,500,000 shares to 8,750,000 (collectively, the
"Contingent Options"). Upon grant, the Contingent Options will provide for an
exercise price of $0.13 per share. Prior to the receipt of shareholder approval
to the amendment to the 1998 Plan as provided in this Proposal 5, the 1998 Plan
did not provide for the grant of stock options at less than the trading price of
the Company's Common Stock on the date of grant. As such the grant of the
Contingent Options is subject to the receipt of shareholder approval to amend
the 1998 Plan as provided in this Proposal 5. In the event shareholders do not
approve this Proposal 5, the Contingent Options will be not be granted.
The following table sets forth information concerning the Contingent
Options with respect to (i) each executive officer; (ii) all current executive
officers as a group; (iii) each nominee for election as a Director; (iv) all
current Directors who are not executive officers as a group; (v) each person who
has received or is to receive 5% of such options or rights; and (vi) all
employees, including all current officers who are not executive officers, as a
group. Except for the Contingent Options, there have been no commitments for or
grants of Stock Options in 2003 or year-to-date 2004.
CONTINGENT WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
Andrew D. Reddick, Chief Executive Officer and
President.............................................. 8,750,000 $.13
Ron J. Spivey, Sr. VP & Chief Scientific Officer......... 3,000,000 .13
Vijai Kumar, Chief Operations Officer.................... -- --
Peter Clemens, Sr. VP & Chief Financial Officer.......... 375,000 .13
James Emigh, VP -- Marketing & Administration............ 249,000 .13
Robert Seiser, VP & Controller & Treasurer............... 249,000 .13
William Skelly, Director................................. -- --
William A. Sumner, Director.............................. -- --
Bruce F. Wesson, Director................................ -- --
Jerry Karabelas, Director................................ -- --
Immanuel Thangaraj, Director............................. -- --
All current executive officers as a group (6 persons).... 12,623,000 .13
All current directors who are not executive officers as a
group (8 persons)...................................... -- --
All employees, including current officers who are not
Executive officers as a group (12 persons)............. 552,145 .13
As of June 1, 2004, the average of the closing bid and ask price of the
Company's Common Stock was $0.49 per share.
AMENDMENTS AND DISCONTINUANCE OF THE 1998 PLAN
The 1998 Plan can be amended, suspended or terminated at any time by action
of the Company's Board of Directors, except that no amendment to the 1998 Plan
can be made without prior shareholder approval where such amendment would result
in (i) any material increase in the total number of shares of Common Stock
subject to the 1998 Plan, (ii) any change in the class of eligible participants
for Options under the 1998 Plan, (iii) any material increase in the benefits
accruing to participants under the 1998 Plan, or (iv) shareholder approval being
required for continued compliance with Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the Company's voting
securities is required for the approval of the amendment to the 1998 Plan.
104
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the approval of the amendment
to the 1998 Plan.
PROPOSAL 6
RATIFICATION OF APPOINTMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
There will also be submitted for consideration and voting at the Meeting,
the ratification of the appointment by the Company's Board of Directors of Grant
Thornton LLP as independent certified public accountants for the purpose of
auditing and reporting upon the financial statements of the Company for the
fiscal year ending December 31, 2004. The Board of Directors of the Company
selected and approved the accounting firm of Grant Thornton LLP as independent
certified public accountants to audit and report upon the Company's financial
statements for the fiscal years ended December 31, 1984 through and including
2003. Grant Thornton LLP has no direct or indirect financial interest in the
Company.
Representatives of Grant Thornton LLP are expected to be present at the
Meeting, and they will be afforded an opportunity to make a statement at the
Meeting if they desire to do so. It is also expected that such representatives
will be available at the Meeting to respond to appropriate questions by
shareholders.
AUDIT FEES
The aggregate fees billed for professional services rendered by the
Company's principal accountant for the audit of the Company's annual financial
statements for the fiscal years ended December 31, 2002 and December 31, 2003,
and for the reviews of the financial statements included in the Company's
Quarterly Reports on Form 10-Q for such fiscal years, were$176,000 and $150,623,
respectively, all of which were attributable to Grant Thornton LLP.
AUDIT-RELATED FEES
The aggregate fees billed for professional services rendered by the
Company's principal accountant and which are reasonably related to the
performance of the audit or review of the Company's financial statements and
which are not reported above under the caption "Audit Fees" for each of the
fiscal years ended December 31, 2002 and December 31, 2003, were $14,180 and
$36,620, respectively, all of which were attributable to Grant Thornton LLP.
These fees relate to services provided in connection with the audit of the
Company's 401(k) and profit sharing plan.
TAX FEES
The aggregate fees bills for professional services rendered by the
Company's principal accountant for tax compliance, tax advice and tax planning
for the fiscal years ended December 31, 2002 and December 31, 2003 were $54,000
and $51,236,respectively, all of which were attributable to Grant Thornton LLP.
These services related to the preparation of various state and Federal tax
returns.
ALL OTHER FEES
There were no fees billed for professional services rendered by the
Company's principal accountant for products and services provided, other than
those described above under the captions "Audit Fees", "Audit-Related Fees" and
"Tax Fees", for the fiscal years ended December 31, 2002 and December 31, 2003.
AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES
Consistent with policies of the Commission regarding auditor independence
and the Audit Committee Charter, the Audit Committee has the responsibility for
appointing, setting compensation and overseeing the work of the independent
auditor. The Audit Committee's policy is to pre-approve all audit and
permissible non-audit services provided by the independent auditor. Pre-approval
is detailed as to the particular service or
105
category of services and is generally subject to a specific budget. The Audit
Committee may also pre-approve particular services on a case-by-case basis. In
assessing requests for services by the independent auditor, the Audit Committee
considers whether such services are consistent with the auditor's independence,
whether the independent auditor is likely to provide the most effective and
efficient service based upon their familiarity with the Company, and whether the
service could enhance the Company's ability to manage or control risk or improve
audit quality.
All of the audit-related, tax and other services provided by Grant Thornton
LLP in fiscal year 2003 and related fees (as described in the captions above)
were approved in advance by the Audit Committee.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors of the Company (the "Audit
Committee") was composed of four directors during 2003 and operates under a
written charter adopted by the Board of Directors. The written charter is
attached to this Proxy Statement as Appendix A. Management is responsible for
the Company's internal control and financial reporting process. The Company's
independent public accountants are responsible for performing an independent
audit of the Company's consolidated financial statements in accordance with
generally accepted auditing standards and to issue a report thereon. The Audit
Committee's responsibility is to monitor and oversee these processes.
In this context, the Audit Committee has met and held discussions with
Management and the Company's independent public accountants. Management
represented to the Audit Committee that the Company's consolidated financial
statements were prepared in accordance with generally accepted accounting
principles, and the Audit Committee has reviewed and discussed the consolidated
financial statements with Management and the Company's independent public
accountants. The Audit Committee discussed with the independent public
accountants matters required to be discussed by Statement of Auditing Standards
Numbers 90 and 61 (communication with Audit Committees). The Company's
independent public accountants also provided to the Audit Committee the written
disclosures required by Independence Standard No. 1 (independent discussions
with Audit Committee), and the Audit Committee discussed with the independent
public accountants that firm's independence. The Audit Committee has also
considered whether the independent auditors' provision of non-audit services to
the Company is compatible with the auditor's independence.
Based upon the Audit Committee's discussions with Management and the
independent public accountants and the Audit Committee's review of the
representation of Management and the report of the independent public
accountants, the Audit Committee recommended that the Board of Directors include
the audited consolidated financial statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 filed with the Securities and
Exchange Commission.
The foregoing has been approved by all members of the Audit Committee.
William A. Sumner (Chairman)
Bruce F. Wesson
Immanuel Thangaraj
Alan Smith
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the ratification of the
appointment of Grant Thornton LLP as the Company's independent certified public
accountants for the fiscal year ending December 31, 2004.
106
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Common Stock, as of June 1, 2004, for individuals or entities
in the following categories: (i) each of the Company's Directors and nominees
for Directors; (ii) the Chief Executive Officer and the next four highest paid
executive officers of the Company whose total annual compensation for 2003
exceeded $100,000 (the "named executive officers"); (iii) all Directors and
executive officers as a group; and (iv) each person known by the Company to be a
beneficial owner of more than 5% of the Common Stock. Unless indicated
otherwise, each of the shareholders has sole voting and investment power with
respect to the shares beneficially owned.
AMOUNT AND PERCENTAGE BENEFICIALLY AMOUNT AND PERCENT BENEFICIALLY
OWNED IF SHAREHOLDER APPROVAL OF OWNED IF SHAREHOLDER APPROVAL OF
PROPOSAL 2 IS NOT OBTAINED PROPOSAL 2 IS OBTAINED
-------------------------------------- ---------------------------------------
SHARES OF COMMON STOCK ON AN SHARES OF COMMON STOCK ON AN
AS-CONVERTED AND AS-EXERCISED BASIS AS-CONVERTED AND AS-EXERCISED BASIS
-------------------------------------- ---------------------------------------
AMOUNT PERCENT OF PERCENT OF AMOUNT PERCENT OF PERCENT OF
NAME OF BENEFICIAL OWNER OWNED(1) CLASS(2) CLASS(3) OWNED(1) CLASS(2) CLASS(3)
------------------------ ---------- ---------- ---------- ----------- ---------- ----------
Galen Partners III, L.P.(4).............. 37,038,114(5) 63.1% 56.3% 154,488,449(21) 87.7% 43.8%
610 Fifth Avenue, 5th Floor
New York, New York 10020
Galen Partners International III,
L.P.(4)................................ 3,796,736(6) 15.0% 5.8% 15,003,121(22) 41.0% 4.3%
610 Fifth Avenue, 5th Floor
New York, New York 10020
Oracle Strategic Partners, L.P.(4)....... 13,515,299(7) 38.5% 20.6% 24,034,693(23) 52.7% 6.8%
712 Fifth Ave, 45th Floor
New York, New York 10019
Care Capital Investments II, LP(4)....... 30,914 * * 47,454,708(24) 68.7% 13.5%
c/o Care Capital, L.L.C.
Princeton Overlook One
100 Overlook Center, Suite 102
Princeton, New Jersey 08540
Essex Woodlands Health Ventures V,
L.P.(4)................................ 41,115 * * 55,680,695(25) 72.0% 15.8%
c/o Essex Woodlands Health
Ventures V, L.L.C.
190 South LaSalle Street, Suite 2800,
Chicago, Illinois 60603
Watson Pharmaceuticals, Inc. ............ 10,700,665(8) 33.1% 16.3% 10,700,665(8) 33.1% 3.0%
311 Bonnie Circle
Corona, California 92880
Dennis Adams............................. 2,578,246(9) 10.7% 3.9% 4,975,100(26) 18.7% 1.4%
c/o Delaware Investment Advisors
One Commerce Square
Philadelphia, Pennsylvania 19103
Hemant K. Shah and Varsha H. Shah........ 1,885,627(10) 8.0% 2.9% 2,897,607(27) 11.8% *
29 Christy Drive
Warren, New Jersey 07059
Bernard Selz............................. 974,552(11) 4.3% 1.5% 2,564,043(28) 10.6% *
c/o Furman Selz
230 Park Avenue
New York, New York 10069
Michael and Susan Weisbrot............... 1,627,734(12) 7.0% 2.5% 3,652,925(29) 14.5% 1.0%
1136 Rock Creek Road
Gladwyne, Pennsylvania 19035
Andrew D. Reddick........................ -- -- -- -- -- --
Michael K. Reicher....................... 1,142,426(13) 5.0% 1.7 1,226,585(30) 5.4% *
William Skelly........................... 211,000(14) 1.0% * 211,000(14) 1.0% *
Bruce F. Wesson.......................... -- * * -- * *
107
AMOUNT AND PERCENTAGE BENEFICIALLY AMOUNT AND PERCENT BENEFICIALLY
OWNED IF SHAREHOLDER APPROVAL OF OWNED IF SHAREHOLDER APPROVAL OF
PROPOSAL 2 IS NOT OBTAINED PROPOSAL 2 IS OBTAINED
-------------------------------------- ---------------------------------------
SHARES OF COMMON STOCK ON AN SHARES OF COMMON STOCK ON AN
AS-CONVERTED AND AS-EXERCISED BASIS AS-CONVERTED AND AS-EXERCISED BASIS
-------------------------------------- ---------------------------------------
AMOUNT PERCENT OF PERCENT OF AMOUNT PERCENT OF PERCENT OF
NAME OF BENEFICIAL OWNER OWNED(1) CLASS(2) CLASS(3) OWNED(1) CLASS(2) CLASS(3)
------------------------ ---------- ---------- ---------- ----------- ---------- ----------
Srini Conjeevaram........................ -- * * -- * *
William A. Sumner........................ 50,000(15) * * 50,000(15) * *
Zubeen Shroff............................ -- * * -- * *
Peter A. Clemens......................... 774,843(16) 3.5% 1.2% 900,170(31) 4.0% *
Jerry Karabelas.......................... -- * * -- * *
Immanuel Thangaraj....................... -- * * -- * *
Alan Smith............................... 83,468(17) * * 105.288(32) * *
Vijai Kumar.............................. 100,000(18) * * 100,000(18) * *
James Emigh.............................. 173,500(19) * * 173,500(19) * *
All Directors and Officers as a Group (14
persons)............................... 1,521,311(20) 6.6% 2.3% 1,668,458(33) 7.2% *
---------------
* Represents less than 1% of the outstanding shares of the Company's Common
Stock.
(1) The information with respect to Hemant K. Shah and Varsha H. Shah, Dennis
Adams, Bernard Selz and Michael and Susan Weisbrot and Watson
Pharmaceuticals, is based upon filings with the Commission and/or
information provided to the Company.
(2) Shows percentage ownership assuming (i) such party converts all of its
currently convertible securities or securities convertible within 60 days
of June 1, 2004 into the Company's common stock, and (ii) no other Company
securityholder converts any of its convertible securities.
(3) Shows percentage ownership assuming such party and all other
securityholders of the Company convert all of their convertible securities
into the Company's common stock.
(4) The following natural persons exercise voting, investment and dispositive
rights over the Company's securities held of record by such entities:
(i) Galen Partners III, L.P. and Galen Partners International III,
L.P. -- William R. Grant, Bruce F. Wesson, L. John Wilkerson, Srini
Conjeevaram, David W. Jahns and Zubeen Shroff;
(ii) Care Capital Investments II, LP -- Jan Leschly, Argeris Karabelas
and David Ramsay;
(iii) Essex Woodlands Health Ventures V, L.P. -- Immanuel Thangaraj;
and
(iv) Oracle Strategic Partners, L.P. -- Larry N. Feinberg.
(5) Includes (i) 22,195,668 shares issuable upon conversion of 1998 Debentures
and 1999 Debentures, (ii) 5,068,748 shares issuable upon exercise of 1998
Warrants and 1999 Warrants, (iii) 4,932,231 shares issuable upon exercise
of common stock purchase warrants issued in connection with the 1998/1999
and 2001/2002 Galen Bridge Loans, (iv) 4,276,062 shares issuable upon
conversion of Debentures issued in lieu of quarterly cash interest
payments, and (v) 150,000 shares subject to currently exercisable stock
options.
(6) Includes (i) 2,356,348 shares issuable upon conversion of 1998 Debentures
and 1999 Debentures, (ii) 537,358 shares issuable upon exercise of 1998
Warrants and 1999 Warrants, (iii) 447,876 shares issuable upon exercise of
common stock purchase warrants issued in connection with the 1998/1999 and
2001/2002 Galen Bridge Loans, and (iv) 455,154 shares issuable upon
conversion of Debentures issued in lieu of quarterly cash interest
payments.
(7) Includes (i) 8,533,847 shares issuable upon conversion of the 1999
Debentures, and (ii) 1,301,991 shares issuable upon conversion of
Debentures issued in lieu of quarterly cash interest payments, and (iii)
30,000 shares subject to currently exercisable stock options.
(8) Includes 10,700,665 shares issuable upon exercise of the Watson Warrant.
108
(9) Includes 1,553,641 shares issuable upon conversion of 1998 Debentures and
1999 Debentures.
(10) Includes 1,053,627 shares issuable upon conversion of 1998 Debentures and
1999 Debentures.
(11) Includes 614,309 shares issuable upon conversion of 1998 Debentures and
1999 Debentures.
(12) Includes 814,415 shares issuable upon conversion of 1998 Debentures and
1999 Debentures.
(13) Includes (i) 62,590 shares issuable upon conversion of 1998 Debentures,
(ii) 14,666 shares issuable upon conversion of Debentures issued in lieu of
quarterly interest payments and (iii) 1,065,170 shares subject to currently
exercisable stock options.
(14) Includes 200,000 shares subject to currently exercisable stock options.
(15) Includes 50,000 shares subject to currently exercisable stock options.
(16) Includes (i) 110,908 shares issuable upon conversion of 1998 Debentures,
(ii) 17,885 shares issuable upon conversion of Debentures issued in lieu of
quarterly interest payments, and (iii) 600,000 shares subject to currently
exercisable stock options.
(17) Includes (i) 50,000 shares subject to currently exercisable common stock
purchase options, and (ii) 22,490 shares issuable upon conversion of 1998
Debentures.
(18) Includes 100,000 shares subject to currently exercisable stock options.
(19) Includes 128,500 shares subject to currently exercisable stock options.
(20) Includes 1,408,283 shares which Directors and executive officers have the
right to acquire within the next 60 days through the conversion of
Debentures and the exercise of outstanding stock options.
(21) Includes (i) 30,717,349 shares issuable upon conversion of Series A
Preferred shares, (ii) 5,982,791 shares issuable upon conversion of Series
B Preferred shares, (iii) 42,462,365 shares issuable upon conversion of
Series C-1 Preferred shares, (iv) 12,506,978 shares issuable upon
conversion of Series C-2 Preferred shares, (v) 42,777,671 shares issuable
upon conversion of Series C-3 Preferred shares, (vi) 19,476,890 shares
issuable upon conversion of outstanding common stock purchase warrants, and
(vii) 150,000 shares subject to currently exercisable stock options.
(22) Includes (i) 2,780,321 shares issuable upon conversion of Series A
Preferred shares, (ii) 541,543 shares issuable upon conversion of Series B
Preferred shares, (iii) 4,705,592 shares issuable upon conversion of Series
C-1 Preferred shares, (iv) 1,132,099 shares issuable upon conversion of
Series C-2 Preferred shares, (v) 3,872,011 shares issuable upon conversion
of Series C-3 Preferred shares, and (vi) 1,971,555 shares issuable upon
conversion of outstanding common stock purchase warrants.
(23) Includes (i) 20,255,232 shares issuable upon conversion of Series C-2
Preferred shares and (ii) 30,000 shares subject to currently exercisable
stock options.
(24) Includes (i) 25,911,205 shares issuable upon conversion of Series A
Preferred shares, (ii) 6,531,789 shares issuable upon conversion of Series
B Preferred shares, (iii) 14,830,800 shares issuable upon conversion of
Series C-3 Preferred shares, and (iv) 150,000 shares issuable upon exercise
of outstanding common stock purchase warrants.
(25) Includes (i) 33,623,781 shares issuable upon conversion of Series A
Preferred shares, (ii) 6,551,045 shares issuable upon conversion of Series
B Preferred shares, (iii) 15,120,754 shares issuable upon conversion of
Series C-3 Preferred shares, and (iv) 345,000 shares issuable upon exercise
of outstanding common stock purchase warrants.
(26) Includes (i) 899,696 shares issuable upon conversion of Series A Preferred
shares, (ii) 2,543,959 shares issuable upon conversion of Series C-1
Preferred shares, and (iii) 506,840 shares issuable upon conversion of
Series C-2 Preferred shares.
(27) Includes 2,065,607 shares issuable upon conversion of Series C-1 Preferred
shares.
(28) Includes (i) 869,728 shares issuable upon conversion of Series C-1
Preferred shares, (ii) 337,893 shares issuable upon conversion of Series
C-2 Preferred shares and (iii) 996,179 shares issuable upon conversion of
Series C-3 Preferred shares.
(29) Includes (i) 1,115,619 shares issuable upon conversion of Series A
Preferred shares, (ii) 652,296 shares issuable upon conversion of Series
C-1 Preferred shares, (iii) 953,617 shares issuable upon conversion of
109
Series C-2 Preferred shares, and (iv) 118,074 shares issuable upon
conversion of Series C-3 Preferred shares.
(30) Includes (i) 161,415 shares issuable upon conversion of Series C-1
Preferred shares, and (ii) 1,065,170 shares subject to currently
exercisable stock options.
(31) Includes 254,120 shares issuable upon conversion of Series C-1 Preferred
shares and (ii) 600,000 shares subject to currently exercisable stock
options.
(32) Includes 21,742 shares issuable upon conversion of Series C-1 Preferred
shares, (ii) 22,568 shares issuable upon conversion of Series C-2 Preferred
shares, and (iii) 50,000 shares subject to currently exercisable stock
options.
(33) Includes 1,257,000 shares which Directors and executive officers have the
right to acquire within the next 60 days through the exercise of
outstanding stock options.
GENERAL
Management of the Company does not know of any matters other than those
stated in this Proxy Statement that are to be presented for action at the
Meeting. If any other matters should properly come before the Meeting, proxies
will be voted on those other matters in accordance with the judgment of the
persons voting the proxies. Discretionary authority to vote on such matters is
conferred by such proxies upon the persons voting them.
The Company will bear the cost of preparing, printing, assembling and
mailing all proxy materials that may be sent to shareholders in connection with
this solicitation. Arrangements will also be made with brokerage houses, other
custodians, nominees and fiduciaries, to forward soliciting material to the
beneficial owners of the Common Stock of the Company held by such persons. The
Company will reimburse such persons for reasonable out-of-pocket expenses
incurred by them. In addition to the solicitation of proxies by use of the
mails, officers and regular employees of the Company may solicit proxies without
additional compensation, by telephone or facsimile. The Company does not expect
to pay any compensation for the solicitation of proxies.
Copies of the Company's Annual Report to Shareholders on Form 10-K for the
fiscal year ended December 31, 2003, and the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2004, each as filed with the Commission,
accompany this Proxy Statement. Upon written request, the Company will provide
each shareholder being solicited by this Proxy Statement with a free copy of any
exhibits and schedules thereto. All such requests should be directed to Halsey
Drug Co., Inc., 616 N. North Court, Suite 120, Palatine, Illinois 60067,
Attention: Mr. Peter A. Clemens, Senior Vice President and Chief Financial
Officer.
The Company hereby incorporates by reference into this Proxy Statement the
following documents filed with the Commission pursuant to Section 13 or 15(b) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"):
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004; and
(c) All other Reports and other documents filed by the Company
pursuant to Section 13(e) or 15(d) of the Exchange Act subsequent to March
31,2004 and prior to the date of the Meeting or such later date or dates to
which the Meeting may be adjourned.
All properly executed proxies delivered pursuant to this solicitation by
the Company and not revoked, will be voted at the Meeting and will be voted in
accordance with the specifications made thereon. In voting by proxy in regard to
the election of directors, shareholders may vote in favor of each nominee or
withhold votes as to all nominees or votes as to a specific nominee. With
respect to (i) voting on the authorization to amend the Company's Charter to
increase the number of authorized shares of common stock and to authorize the
Preferred Stock, (ii) voting on the authorization to amend the Company's Charter
to change the name of the
110
Company to Acura Pharmaceuticals, Inc., (iii) voting on the authorization to
sell substantially all of the assets used in the operation of the Company's
Congers, New York locations, (iv) voting on the authorization to amend the
Company's 1998 Stock Option Plan, and (v) the ratification of the Company's
independent public accountants, shareholders may vote in favor of, may vote
against or may abstain from voting on each of such proposals. Shareholders
should specify their choices on the enclosed Proxy. If no specific instructions
are given with respect to the matters to be acted upon, the shares represented
by the Proxy will be voted FOR the election of all directors, FOR the
authorization to amend the Company's Charter to increase the number of
authorized shares of common stock and to authorize the Preferred Stock, FOR the
authorization to amend the Company's Charter to change the Company's name to
Acura Pharmaceuticals, Inc, FOR the authorization to sell substantially all of
the assets used in the operation of the Company's Congers, New York locations,
FOR the authorization to amend the Company's 1998 Stock Option Plan, and FOR the
ratification of the appointment of Grant Thornton LLP as the Company's
independent certified public accountants for the fiscal year ending December 31,
2004.
SHAREHOLDER PROPOSALS FOR 2005 ANNUAL MEETING
Any shareholder proposals intended to be presented at the Company's 2005
Annual Meeting of Shareholders must be received by the Company on or before
February 15, 2005 in order to be considered for inclusion in the Company's proxy
statement and proxy relating to such meeting.
By Order of the Board of Directors
Peter A. Clemens,
Secretary
July 6, 2004
111
APPENDIX A
HALSEY DRUG CO., INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
It is the objective of the Audit Committee of the Board of Directors of
Halsey Drug Co., Inc. to provide assistance to the corporate directors in
fulfilling fiduciary responsibilities relating to internal controls, corporate
accounting, auditing and financial reporting practices.
MEMBERS
The Audit Committee of the Board of Directors shall consist of at least
three directors who shall be elected annually by the Board. The members should
be independent of senior management and the operating executives and free from
any relationship that might in the opinion of the Board of Directors be
considered a conflict of interest. One of the members shall be designated
Chairman by the Board.
RESPONSIBILITIES AND LIMITATIONS
- Selection, approval, oversight and retention of the independent
accountants to be selected by Halsey Drug Co., Inc. as its independent
auditors, subject to ratification by the Company's shareholders. Such
appointment shall include the review and approval of the proposed fees of
the independent accountant and require that the independent accountant
report directly to the Committee.
- Pre-approval all audit and permissible non-audit services provided by the
independent accountants. Pre-approval shall be specific to a particular
service or category of services, and may be made on a case-by-case basis.
In assessing the pre- approval of services by the independent
accountants, the Committee shall consider whether such services are
consistent with the accountant's independence, whether the service could
enhance the Company's ability to manage or control risk or improve audit
quality, or such other factors as the Committee shall determine.
- Meet with the independent auditors and Halsey Drug Co., Inc.'s financial
management to review the scope of the proposed audit for the current year
and the audit procedures to be utilized, and review the completed audit
including any comments or recommendations of the independent accountants.
- Evaluate with Halsey's financial management and the independent
accountants, together and separately, the adequacy and effectiveness of
Halsey's internal administrative, business process and accounting
controls, and elicit any recommendations to correct any material
weaknesses in such controls.
- With general counsel, appropriate financial management, and the
independent accounts review programs being maintained by management with
respect to compliance with laws and regulations relating to financial
matters.
- Review Halsey's financial management function including the proposed
audit plan for the coming year and the coordination of such plan with the
external auditors and ascertain, through discussion with the independent
accountants whether the scope and procedures of the plan are adequate to
meet the objectives set forth in the Charter herewith presented.
- Review with independent accountants those major accounting policy changes
that could impact Halsey Drug Co., Inc.
- The Audit Committee may investigate any matter within the scope of its
duties or brought to its attention by employees or the Board of
Directors, with the power to retain outside counsel and other advisors
for this purpose. However, in no way is it intended that the Audit
Committee shall alter the traditional roles and responsibilities of
management and independent accountants with respect to internal
administrative, business process and accounting controls and financial
statement presentation.
A-1
MEETINGS
- The Committee will hold a minimum of four regular meetings per year, and
additional meetings as the Chairman of the Audit Committee may deem
necessary. In addition to the committee members, these meetings normally
will be attended by representatives of the independent accountants, and
by the Vice President and Chief Financial Officer. The principal
financial officers as well as the Chairman, the CEO and the President,
may attend, except for portions of the meetings where their presence
would be inappropriate, as determined by the Chairman. Minutes will be
kept of all meetings.
/s/ WILLIAM A. SUMNER
--------------------------------------
William A. Sumner
Chairman, Audit Committee of
The Board of Directors
A-2
APPENDIX B
NEW YORK BUSINESS CORPORATION LAW
SECTION 623
PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT TO RECEIVE PAYMENT FOR SHARES
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of
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such expiration or completion, but without prejudice otherwise to any corporate
proceedings that may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of the transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
B-2
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in
the case of merger or consolidation, the surviving or new corporation is a
foreign corporation without an office in this state, such proceeding shall
be brought in the county where the office of the domestic corporation,
whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholder's
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action
was consummated to the date of payment. In determining the rate of
interest, the court shall consider all relevant factors, including the rate
of interest which the corporation would have had to pay to borrow money
during the pendency of the proceeding. If the court finds that the refusal
of any shareholder to accept the corporate offer of payment for his shares
was arbitrary, vexatious or otherwise not in good faith, no interest shall
be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its
discretion, apportion and assess all or any part of the costs, expenses and
fees incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including
B-3
any who have withdrawn their notices of election as provided in paragraph
(e), if the court finds that their refusal to accept the corporate offer
was arbitrary, vexatious or otherwise not in good faith. The court may, in
its discretion, apportion and assess all or any part of the costs, expenses
and fees incurred by any or all of the dissenting shareholders who are
parties to the proceeding against the corporation if the court finds any of
the following: (A) that the fair value of the shares as determined
materially exceeds the amount which the corporation offered to pay; (B)
that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined
exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificate for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting shareholders,
and if it is not liquidated, retain his right to be paid for his shares,
which right the corporation shall be obliged to satisfy when the
restrictions of this paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given
to him within twenty days after the expiration of such period of thirty
days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e) (2) of section 907 (Merger or consolidation of domestic and
foreign corporations). (Last amended by Ch. 117, L. '86, eff. 9-1-86.)
B-4
APPENDIX C
RESTATED CERTIFICATE OF INCORPORATION
OF
HALSEY DRUG CO., INC.
UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW
WE, THE UNDERSIGNED, Andrew D. Reddick and Peter A. Clemens, being
respectively the President and the Secretary of Halsey Drug Co., Inc., hereby
certify:
1. The name of the Corporation is Halsey Drug Co., Inc. The Corporation was
originally incorporated under the name of Halsey Drug Co. Inc.
2. The Certificate of Incorporation was filed by the Department of State on
April 10, 1935 and has been amended at various times by action of the Board of
Directors and shareholders of the Corporation.
3. The Certificate of Incorporation, as amended heretofore, is further
amended as follows:
(a) Article FIRST of the Certificate of Incorporation, relating to the
name of the Corporation, is hereby amended to read as follows:
"FIRST: The name of the Corporation shall be ACURA PHARMACEUTICALS,
INC."
(b) Article SECOND of the Certificate of Incorporation, relating to
the purposes for which the Corporation is formed, is hereby amended to read
as follows:
"SECOND: The purpose of the Corporation is to engage in any lawful
act or activity for which Corporations may be organized under the
Business Corporation Law of the State of New York; provided, however,
that it is not formed to engage in any act or activity requiring the
consent or approval of any state official, department, board, agency or
any other body without such consent or approval first being obtained."
(c) Article THIRD of the Certificate of Incorporation, relating to the
amount of authorized capital stock of the Corporation, is amended to (i)
increase the authorized shares of capital stock of the Corporation from
80,000,000 to 940,000,000, consisting of 650,000,000 shares of common
stock, par value $.01 per share, and 290,000,000 shares of preferred stock,
par value $.01 per share; (ii) designate 45,000,000 shares of the
Corporation's preferred stock as Series A Convertible Preferred Stock, par
value $.01 per share, having the rights, preferences and limitations set
forth herein; (iii) designate 25,000,000 shares of the Corporation's
preferred stock as Series B Convertible Preferred Stock, par value $.01 per
share, having the rights, preferences and limitations set forth herein;
(iv) designate 70,000,000 shares of the Corporation's preferred stock as
Series C-1 Convertible Preferred Stock, par value $.01 per share, having
the rights, preferences and limitations set forth herein; (v) designate
50,000,000 shares of the Corporation's preferred stock as Series C-2
Convertible Preferred Stock, par value $.01 per share, having the rights,
preferences and limitations set forth herein; (vi) designate 100,000,000
shares of the Corporation's preferred stock as Series C-3 Convertible
Preferred Stock, par value $.01 per share, having the rights, preferences
and limitations set forth herein, and (vii) eliminate the voting rights of
the holders of the Corporation's Debentures. To effect the foregoing,
Article THIRD is hereby amended to read as follows:
"THIRD: The Corporation is authorized to issue two classes of
stock, to be designated, respectively, "Common Stock" and "Preferred
Stock". The total number of shares which the Corporation is authorized
to issue is 940,000,000 of which (A) 290,000,000 shares shall be
Preferred Stock (the "Preferred"), and (B) 650,000,000 shares shall be
Common Stock, $.01 par value (the "Common"). Of the Preferred,
45,000,000 shares shall be designated Series A Convertible Preferred
Stock, $.01 par value per share (the "Series A Preferred"), 25,000,000
shares shall be designated Series B Convertible Preferred Stock, $.01
par value per share (the "Series B Preferred"), 70,000,000 shares shall
be designated Series C-1 Convertible Preferred Stock, $.01 par value per
C-1
share (the "Series C-1 Preferred"), 50,000,000 shares shall be
designated Series C-2 Convertible Preferred Stock, $.01 par value per
share (the "Series C-2 Preferred") and 100,000,000 shares shall be
designated Series C-3 Convertible Preferred Stock, $.01 par value per
share (the "Series C-3 Preferred"). The Series C-1 Preferred, Series C-2
Preferred and Series C-3 Preferred are sometimes referred to
collectively as the "Series C Preferred". The rights, preferences and
privileges of and restrictions on the Series A Preferred, Series B
Preferred, Series C Preferred and Common are as follows:
SECTION 1. PREFERRED STOCK
(a) Voting Rights. Except as otherwise required by law, each share
of outstanding Series A Preferred, Series B Preferred and Series C
Preferred shall entitle the record holder thereof to vote on each matter
submitted to a vote of the stockholders of the Corporation and to have
the number of votes equal to the number of whole shares of Common into
which such share of Series A Preferred, Series B Preferred or Series C
Preferred, as the case may be, is then convertible pursuant to the
provisions hereof at the record date for the determination of
stockholders entitled to vote on such matters or, if no such record date
is established, at the date such vote is taken or any written consent of
stockholders becomes effective. Except as otherwise required by law or
by this Certificate, the holders of shares of Common, Series A
Preferred, Series B Preferred and Series C Preferred shall vote together
and not as separate classes. Fractional votes shall not be permitted and
any fractional voting rights resulting from the above formula shall be
rounded to the nearest whole number (with one-half rounded upwards).
(b) Dividends. If any dividend or other distribution payable in
cash, securities or other property is declared on the Common (other than
in connection with Section 1(c) below), each holder of shares of
Preferred on the record date for such dividend or distribution shall be
entitled to receive, on the date of payment or distribution of such
dividend or other distribution, the same cash, securities or other
property which such holder would have received on such record date if
such holder was the holder of record of the number of whole shares of
Common into which the shares of Preferred then held by such holder are
then convertible (with any resulting fractions rounded to the nearest
whole share, with one-half rounded up).
(c) Liquidation Rights. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up (each, a "Liquidation
Event"):
(1) Prior and in preference to any payments or distributions
under Sections 1(c)(2), 1(c)(3) and 1(c)(4) below, the holder of each
then outstanding share of Series A Preferred shall be entitled to
receive, out of the assets of the Corporation legally available for
distribution to stockholders, and before any payment or declaration
and setting apart for payment of any amount or dividend pursuant to
Sections 1(c)(2) or 1(c)(3) below or with respect to the Common or
any other junior equity security of the Corporation, the amount (the
"Series A Preference") equal to $3.2125 per share (such amount to be
adjusted proportionally in the event the Series A Preferred is
subdivided into a greater number or combined into a lesser number of
shares). If the Corporation shall have insufficient assets and funds
to pay such amounts in full to the holders of the Series A Preferred,
then all assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the
Series A Preferred in proportion to the preferential amount each such
holder is otherwise entitled to receive pursuant to this Section
1(c)(1).
(2) After full payment of the distributions under Section
1(c)(1) above, but prior and in preference to any payments or
distributions under Sections 1(c)(3) and 1(c)(4) below, the holder of
each then outstanding share of Series B Preferred shall be entitled
to receive, out of the assets of the Corporation legally available
for distribution to stockholders, and before any payment or
declaration and setting apart for payment of any amount or dividend
pursuant to Section 1(c)(3) below or with respect to the Common or
any other junior equity security of the
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Corporation, the amount (the "Series B Preference") equal to $.3420
per share (such amount to be adjusted proportionally in the event the
Series B Preferred is subdivided into a greater number or combined
into a lesser number of shares). If the Corporation shall have
insufficient assets and funds to pay such amounts in full to the
holders of the Series B Preferred (after payment in full of all
amounts pursuant to Section 1(c)(1) above), then all remaining assets
and funds of the Corporation legally available for distribution shall
be distributed ratably among the holders of the Series B Preferred in
proportion to the preferential amount each such holder is otherwise
entitled to receive pursuant to this Section 1(c)(2).
(3) After full payment of the distributions under Sections
1(c)(1) and 1(c)(2) above, but prior and in preference to any
payments or distributions under Section 1(c)(4) below, the holder of
each then outstanding share of Series C Preferred shall be entitled
to receive, out of the assets of the Corporation legally available
for distribution to stockholders, and before any payment or
declaration and setting apart for payment of any amount or dividend
with respect to the Common or any other junior equity security of the
Corporation, (i) in the case of Series C-1 Preferred, the amount (the
"Series C-1 Preference") equal to $.5776 per share, (ii) in the case
of Series C-2 Preferred, the amount (the "Series C-2 Preference")
equal to $.5993 per share, and (iii) in the case of Series C-3
Preferred, the amount (the "Series C-3 Preference") equal to $.3481
per share, (in each case such amount to be adjusted proportionally in
the event the Series C-1 Preferred, Series C-2 Preferred or Series
C-3 Preferred, as applicable, is subdivided into a greater number or
combined into a lesser number of shares). If the Corporation shall
have insufficient assets and funds to pay such amounts in full to the
holders of the Series C Preferred (after payment in full of all
amounts pursuant to Sections 1(c)(1) and 1(c)(2) above), then all
remaining assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the
Series C Preferred in proportion to the preferential amount each such
holder is otherwise entitled to receive pursuant to this Section
1(c)(3).
(4) After full payment has been made to the holders of Series A
Preferred, Series B Preferred and Series C Preferred of the
liquidation preferences in Sections 1(c)(1), 1(c)(2) and 1(c)(3), the
entire remaining assets and funds, if any, shall be distributed
ratably among the holders of Common and the Series A Preferred, in
proportion to the number of shares of Common held by them on an
as-converted basis; provided, that for purposes of calculating the
distribution pursuant to this Section 1(c)(4), and for no other
purposes whatsoever, each share of Series A Preferred shall be deemed
to be convertible into only 30% of the shares of Common into which it
is convertible pursuant to the terms of Section 1(d) below.
(5) For purposes of this Section 1(c), unless the holders of a
majority of the then outstanding shares of Series A Preferred Stock,
given in writing or by vote at a meeting, consenting or voting (as
the case may be) together as a single class, elect otherwise, (i) the
consummation of any merger, consolidation or similar transaction or
series of related transactions, the result of which is that the
holders of the Corporation's capital stock outstanding immediately
prior to such transaction own, immediately upon the consummation of
such transaction(s), shares of capital stock possessing in the
aggregate less than a majority of the voting power of the surviving
entity or rights to liquidation distributions of less than 50% of the
assets of the surviving entity, (ii) a sale, lease, exclusive
license, transfer or other conveyance of all or substantially all of
the assets of the Corporation, or (iii) the sale of 50% or more of
the Corporation's voting stock in one or more series of transactions,
shall (for purposes of the distribution of such securities or other
consideration to the holders of Common and Preferred) be treated as a
Liquidation Event and shall entitle the holders of Common and
Preferred to receive at closing in cash, securities or other property
(valued as provided in Section 1(c)(6) below) as specified above and
in the order of preference as set forth in this Section 1(c).
(6) Whenever the distribution provided in this Section 1(c)
shall be payable in property other than cash, subject to the
provisions regarding valuation of securities set forth below, the
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value of such distribution shall be its fair market value as
determined in good faith by the Board of Directors of the Corporation
(the "Board"). The holders of a majority of the Series A Preferred
will have 10 days from the determination of the valuation of any
securities or other property pursuant this Section 1(c) to object to
such valuation in writing to the Corporation. In the event of such
objection, the Corporation and a majority in interest of the
objecting stockholders will in good faith seek a resolution of any
disputed valuation. If the Corporation and the objecting investors
are unable to agree on a valuation within 5 days of the objection by
the holders of the Series A Preferred, the valuation will be
determined by an independent third party appraiser jointly selected
by the Corporation and the holders of a majority of the then
outstanding shares of Series A Preferred, whose written appraised
value will be binding on the Corporation and its stockholders. Any
distributions pursuant to this Section 1(c) will be delayed until
after the delivery of the appraiser's report. Any securities shall be
valued as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability covered by (ii) below:
(A) If traded on a securities exchange or through the
Nasdaq National Market or the Nasdaq SmallCap Market, the
value shall be deemed to be the average of the closing prices
of the securities on such exchange over the 30-day period
ending three (3) days prior to the date of determination;
(B) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty-day period ending
three (3) days prior to the date of determination; and
(C) If there is no active public market, the value shall
be determined by an independent third party appraiser jointly
selected by the Corporation and the holders of a majority of
the then outstanding shares of Series A Preferred.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability
(other than restrictions arising solely by virtue of a
stockholder's status as an affiliate or former affiliate) shall
be to apply an appropriate discount determined in good faith by
the Board from the market value determined as above in (A), (B)
or (C).
(7) The Corporation shall promptly provide to the holders of
shares of Preferred such information concerning the terms of any
event or transaction specified in Section 1(c)(5) and the value of
the assets of the Corporation as may reasonably be determined by the
Board. If the transaction is a sale of all or substantially all of
the assets of the Corporation, the Corporation will give written
notice of such transaction to each holder of Preferred not less than
20 or more than 60 days before the stockholders' meeting called to
approve the transaction or, if no stockholders' meeting will be
called, not less than 20 or more than 60 days before the date that
the transaction is reasonably anticipated to be consummated, and will
also notify the holders in writing of the final approval of the
transaction. The initial notice will describe the material terms and
conditions of the proposed transaction. The Corporation will give the
holders of Preferred prompt notice of any material changes to the
terms of the proposed transaction. The Corporation will not
consummate the proposed transaction sooner than 20 days after the
Corporation has given notice of any material changes. By written
consent or vote, the holders of a majority of the shares of Series A
Preferred outstanding may shorten the notice periods provided in this
Section. In the event the requirements of this Section are not
complied with, the Corporation will either: (i) cause the closing to
be postponed until the requirements of this Section have been
complied with; or (ii) cancel the transaction, in which event the
rights, preferences, privileges and restrictions of the holders of
the Preferred will revert to the rights, preferences, privileges and
restrictions existing immediately before the date of the first notice
referred to in this Section.
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(d) Conversion.
(1) Terms of Conversion.
(i) Optional Conversion. The holder of each share of Series A
Preferred, Series B Preferred and Series C Preferred shall have the
right ("Conversion Right"), at such holder's option, to convert such
share at any time, without cost, on the terms of this Section 1(d)
and at the office of the Corporation or its transfer agent, into the
number of fully paid and non-assessable shares of Common that results
from dividing (A) in the case of the Series A Preferred, the Series A
Preference by the Series A conversion price that is in effect at the
time of conversion (the "Series A Conversion Price"), (B) in the case
of the Series B Preferred, the Series B Preference by the Series B
conversion price that is in effect at the time of conversion (the
"Series B Conversion Price"), (C) in the case of the Series C-1
Preferred, the Series C-1 Preference by the Series C-1 conversion
price that is in effect at the time of conversion (the "Series C-1
Conversion Price"), (D) in the case of the Series C-2 Preferred, the
Series C-2 Preference by the Series C-2 conversion price that is in
effect at the time of conversion (the "Series C-2 Conversion Price")
and (E) in the case of the Series C-3 Preferred, the Series C-3
Preference by the Series C-3 conversion price that is in effect at
the time of conversion (the "Series C-3 Conversion Price"). The
initial Series A Conversion Price is equal to $.6425. The initial
Series B Conversion Price is equal to the Series B Preference. The
initial Series C-1 Conversion Price is equal to the Series C-1
Preference. The initial Series C-2 Conversion Price is equal to the
Series C-2 Preference. The initial Series C-3 Conversion Price is
equal to the Series C-3 Preference. The Series A Conversion Price,
the Series B Conversion Price, the Series C-1 Conversion Price, the
Series C-2 Conversion Price and the Series C-3 Conversion Price shall
be subject to adjustment from time to time as provided in Section
1(d)(3) below.
(ii) Mandatory Conversion.
(A) Upon the occurrence of a Qualified Trading Event, each share
of Series A Preferred, Series B Preferred and Series C Preferred
shall be automatically converted, without cost and on the terms of
this Section 1(d), into the number of whole shares of Common into
which such share of Series A Preferred, Series B Preferred or Series
C Preferred, as the case me be, would be convertible under Section
1(d)(1)(i) above immediately prior to such Qualified Trading Event
(with any resulting fractions rounded to the nearest whole share,
with one-half rounded up). "Qualified Trading Event" means the first
such time that (A) the Common has a closing price of at least $2.80
per share (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar
recapitalization affecting such shares) for thirty consecutive
trading days, and (B) the average daily trading value of all shares
of Common traded during such thirty consecutive trading day period is
at least $1,750,000. For purposes of this test, (x) closing prices
shall be determined as the average between the closing bid and ask
prices at the close of each trading day (as reported by such exchange
or over-the-counter market on which the Common may then be listed or
admitted for trading), and (y) the trading value shall be determined
by multiplying the number of shares so traded by such day's closing
price as determined above.
(B) Without limiting subsection (ii)(A) above, each share of
Series A Preferred, Series B Preferred and Series C Preferred shall
be automatically converted without cost and on the terms of this
Section 1(d), into the number of whole shares of Common into which
such share of Series A Preferred, Series B Preferred or Series C
Preferred, as the case may be, would be convertible under Section
1(d)(1)(i) above upon the receipt of the written consent of the
holders of at least 51% of the shares of Series A Preferred.
(2) Mechanics of Conversion.
(i) Optional Conversion. A holder of any share of Convertible
Preferred may exercise the Conversion Right of such share by
surrendering the certificate therefor, duly endorsed, at
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the office of the Corporation or of any transfer agent for the
applicable Preferred, together with a written notice to the
Corporation which shall state (A) that such holder elects to convert
the same, and (B) the number of shares of Preferred being converted.
Thereupon the Corporation shall issue and deliver to the holder of
such shares within two (2) business days a certificate or
certificates for the number of shares of Common to which such holder
shall be entitled. If the certificate evidencing the Preferred being
converted shall also evidence shares of Preferred not being
converted, then the Corporation shall also deliver to the holder of
such certificate within such two (2) business day period a new stock
certificate evidencing the Preferred not converted. The conversion of
any shares of Preferred shall be deemed to have been made immediately
prior to the close of business on the date that the shares to be
converted are surrendered to the Corporation, and the person or
persons entitled to receive the shares of Common issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common on such date. Any dividends or
distributions declared but unpaid at the time of conversion with
respect to the Preferred so converted shall be paid to the holder of
Common issued upon conversion of the Preferred. If a stockholder
notifies the Corporation or its transfer agent in writing that the
stockholder's certificate has been lost, stolen or destroyed, and
executes an agreement in a form reasonably satisfactory to the
Corporation and its transfer agent to indemnify them from any loss
incurred in connection with the lost, stolen or destroyed
certificates (without requirement of posting any bond), then such
actions shall be treated for purposes of this Section as delivery of
such lost, stolen or destroyed certificate.
(ii) Mandatory Conversion. The Corporation shall give written
notice to each holder of a share of Preferred not more than ten (10)
days after the occurrence of a Qualified Trading Event or the receipt
of the written consent required pursuant to Section 1(d)(1)(ii)(B),
as applicable. Following the conversion of such shares, each holder
of shares so converted shall, if requested by the Corporation,
surrender the certificate therefor at the office of the Corporation
or any transfer agent for the applicable Preferred. Upon such
surrender, the Corporation shall issue and deliver to each holder a
certificate or certificates for the number of shares of Common to
which such holder is entitled. The conversion of shares of Preferred
shall be effective as of the occurrence of the Qualified Trading
Event or upon receipt of the written consent provided in Section
1(d)(1)(ii)(B), as applicable, whether or not the certificates
representing such shares of Preferred shall have been surrendered or
new certificates representing the shares of Common into which such
shares have been converted shall have been issued. Any dividends or
distributions declared but unpaid at the time of a mandatory
conversion with respect to the Preferred so converted shall be paid
upon such mandatory conversion. If a stockholder notifies the
Corporation or its transfer agent in writing that the stockholder's
certificate has been lost, stolen or destroyed, and executes an
agreement in a form reasonably satisfactory to the Corporation and
its transfer agent to indemnify them from any loss incurred in
connection with the lost, stolen or destroyed certificates (without
requirement of posting any bond), then such actions shall be treated
for purposes of this Section as delivery of such lost, stolen or
destroyed certificate.
(3) Adjustment of Conversion Prices. The Series A Conversion
Price, the Series B Conversion Price, the Series C-1 Conversion
Price, the Series C-2 Conversion Price and the Series C-3 Conversion
Price (each a "Conversion Price") and the kind of securities issuable
upon the conversion of any share of Series A Preferred, Series B
Preferred, Series C-1 Preferred, Series C-2 Preferred and Series C-3
Preferred (collectively, the "Convertible Preferred"), shall be
adjusted from time to time after the Filing Date (as defined below)
as follows:
(i) Subdivision or Combination of Shares. If the
Corporation at any time after the date that this Amended and
Restated Certificate of Incorporation was filed with the New York
Secretary of State ("Filing Date") effects a subdivision or
combination of the outstanding Common, the Conversion Price for
each share of outstanding Convertible
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Preferred shall be decreased, in the case of a subdivision, or
increased, in the case of a combination, in the same proportions
as the Common is subdivided or combined, in each case effective
automatically upon, and simultaneously with, the effectiveness of
the subdivision or combination which gives rise to the
adjustment.
(ii) Stock Dividends. If the Corporation at any time after
the Filing Date pays a dividend, or makes any other distribution,
to holders of Common payable in shares of Common, or fixes a
record date for the determination of holders of Common entitled
to receive a dividend or other distribution payable in shares of
Common, the Conversion Price for each share of Convertible
Preferred shall be decreased by multiplying it by a fraction: (A)
the numerator of which shall be the total number of shares of
Common outstanding immediately prior to the time of payment of
such dividend or distribution; and (B) the denominator of which
shall be the total number of shares of Common outstanding
immediately after such dividend or distribution, in each case
effective automatically as of the date the Corporation shall take
a record of the holders its Common for the purpose of receiving
such dividend or distribution (or if no such record is taken, as
of the effectiveness of such dividend or distribution).
(iii) Reclassification, Consolidation or Merger. If at any
time after the Filing Date, as a result of (a) a capital
reorganization or reclassification (other than a subdivision,
combination or dividend which gives rise to an adjustment of a
Conversion Price pursuant to clauses (i) or (ii) of this Section
1(d)(3)); or (b) a merger or consolidation of the Corporation
with another corporation (whether or not the Corporation is the
surviving corporation), the Common issuable upon the conversion
of the Convertible Preferred shall be changed into or exchanged
for the same or a different number of shares of any class or
classes of stock of the Corporation or any other corporation, or
other securities convertible into such shares, then, as a part of
such reorganization, reclassification, merger or consolidation,
appropriate adjustments shall be made in the terms of the
Convertible Preferred (or of any securities into which the
Convertible Preferred is changed or for which the Convertible
Preferred is exchanged), so that: (x) the holders of Convertible
Preferred or of such substitute securities shall thereafter be
entitled to receive, upon conversion of the Convertible Preferred
or of such substitute securities, the kind and amount of shares
of stock, other securities, money and property which such holders
would have received at the time of such capital reorganization,
reclassification, merger, or consolidation, if such holders had
converted their Convertible Preferred immediately prior to such
capital reorganization, reclassification, merger, or
consolidation, and (y) the Convertible Preferred or such
substitute securities shall thereafter be adjusted on terms as
nearly equivalent as may be practicable to the adjustments
theretofore provided in this Section 1(d)(3). No consolidation or
merger in which the Corporation is not the surviving corporation
shall be consummated unless the surviving corporation shall
agree, in writing, to the provisions of this Section
1(d)(3)(iii). The provisions of this Section 1(d)(3)(iii) shall
similarly apply to successive capital reorganizations,
reclassifications, mergers, and consolidations.
(iv) Adjustment upon Certain Issuances.
(A) For purposes of this Section 1(d)(3)(iv), "Additional
Shares of Common" means all shares of Common issued by the
Corporation after the Filing Date other than: (1) shares of
Common issued in transactions giving rise to adjustments under
Sections 1(d)(3)(i), (ii), or (iii) above; (2) shares of Common
issued upon conversion of shares of Convertible Preferred; (3)
shares of Common which may be issued in the discretion of the
Board to employees or directors of, or consultants or advisors
to, strategic partners of the Corporation or any wholly-owned
subsidiary of the Corporation, and options or warrants or other
rights for the purchase of such shares; (4) options or warrants
or other rights outstanding as of the Filing Date or issued under
Section 1(d)(3)(iv)(3) above for the purchase of such shares; (5)
securities issued pursuant to any anti-dilution rights of the
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Convertible Preferred or the warrants outstanding as of the
Filing Date; and (6) shares of Common Stock issued in
satisfaction of interest on the Corporation's indebtedness for
borrowed money, provided the number of shares of Common Stock
issuable is calculated based on the average closing bid and asked
prices for the Common Stock for the twenty (20) trading days
preceding the interest payment.
(B) Except as otherwise provided in this Section 1(d)(3)(iv)
below, if at any time the Corporation issues or is deemed to
issue Additional Shares of Common for a consideration per share
less than the Conversion Price in effect for a given share at
such issuance or deemed issuance:
(1) in the case of the Series A Preferred, the
Conversion Price shall be reduced for such share to a price
equal to a price determined by dividing: (x) the aggregate
consideration received by or deemed to have been received by
the Corporation upon such issue, by: (y) the number of shares
of Additional Shares of Common issued or deemed to have been
issued in such issue; and
(2) in the case of the Series B Preferred, Series C-1
Preferred, Series C-2 Preferred or Series C-3 Preferred, the
Conversion Price shall be reduced for such share to a price
equal to a price determined by dividing:
(x) the sum of (a) the product derived by
multiplying the Conversion Price in effect for such share
immediately prior to such issue times the number of
shares of Common (on a fully-diluted basis) outstanding
immediately prior to such issue, plus (b) the aggregate
consideration received by or deemed to have been received
by the Corporation upon such issue; by
(y) the sum of (a) the number of shares of Common
(on a fully-diluted basis) outstanding immediately prior
to such issue, plus (b) the number of shares of
Additional Shares of Common issued or deemed to have been
issued in such issue;
provided, that no adjustment pursuant to this Section
1(d)(3)(iv)(B)(2) shall be made in connection with any
issuance or deemed issuance of Additional Shares of
Common for a consideration of at least the then
applicable Series A Conversion Price.
(v) Convertible Securities.
(A) "Convertible Securities" means all rights or options for
the purchase of, or stock or other securities convertible into,
Additional Shares of Common or other Convertible Securities,
whenever and each time issued.
(B) The "Effective Price" with respect to any Convertible
Securities means the result of dividing:
(1) the sum of (x) the total consideration, if any,
received by the Corporation for the issuance of such
Convertible Securities, plus (y) the minimum consideration,
if any, payable to the Corporation upon exercise or
conversion of such Convertible Securities (assuming that the
full amount of securities issuable upon exercise or
conversion are issued), plus (z) the minimum consideration,
if any, payable to the Corporation upon exercise or
conversion of any Convertible Securities issuable upon
exercise or conversion of such Convertible Securities, by:
(2) the maximum number of Additional Shares of Common
issuable upon exercise or conversion of such Convertible
Securities or of any Convertible Securities issuable upon
exercise or conversion of such Convertible Securities.
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(C) If at any time after the Filing Date the Corporation
issues or is deemed to issue a Convertible Security with respect
to which the Effective Price is less than the Conversion Price
for a share of Convertible Preferred in effect at such issuance
or deemed issuance, the Conversion Price for such share of
Convertible Preferred shall be reduced to the Effective Price.
(D) If Convertible Securities by their terms provide, with
the passage of time or otherwise (including by operation of the
anti-dilution provisions thereof), for any increase or decrease
in the consideration payable to the Corporation or decrease or
increase in the number of shares of Common issuable upon the
exercise, conversion or exchange thereof (or if any such change
is made by amending such Convertible Securities), the Conversion
Price computed upon the original issue thereof, and any
subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect
such increase or decrease insofar as it affects such the rights
of conversion or exchange under such Convertible Securities. No
readjustment pursuant to this clause (D) shall have the effect of
increasing the applicable Conversion Price in effect to an amount
which exceeds the lower of (1) the Conversion Price immediately
following, and as adjusted to reflect, the Company's issuance of
such Convertible Securities (subject to appropriate adjustment in
the event of any stock dividend, stock split, combination or
other similar recapitalization affecting such shares), or (2) the
Conversion Price that would have resulted from any issuances of
Additional Shares of Common or Convertible Securities between the
date the Company adjusted the Conversion Price to reflect the
issuance of such original Convertible Securities and such
readjustment date.
(E) If an adjustment has been made under this Section
1(d)(3)(v) as a consequence of any issuance of a Convertible
Security, then no further adjustment shall be made under Section
1(d)(3)(iv) above upon the actual issuance of Additional Shares
of Common upon the exercise or conversion of such Convertible
Securities, or upon the issuance of Convertible Securities
issuable upon exercise or conversion of the original Convertible
Security.
(vi) Valuation of Consideration. For purposes of the
operation of Sections 1(d)(3)(iv) and (v) above, the
consideration received by the Corporation for any issue or sale
of securities shall:
(A) to the extent it consists of cash, be computed as
the aggregate net amount of cash received by the Corporation;
(B) to the extent it consists of property other than
cash, be computed at the fair value of that property as
determined in good faith by the Board in accordance with the
terms of Section 1(c)(6) above; and
(C) to the extent Additional Shares of Common or
Convertible Securities are issued or sold together with other
stock or securities or other assets of the Corporation for a
consideration that covers both, be such portion of the
consideration so received that may be reasonably determined
in good faith by the Board to be allocable to such Additional
Shares of Common or Convertible Securities.
(vii) Other Action Affecting Common. If at any time the
Corporation takes any action affecting its Common which, in the
opinion of the Board, would have an adverse effect upon the
Conversion Rights of a given share of the Convertible Preferred,
the Conversion Price for such share and the kind of securities
issuable upon the conversion of such share shall be adjusted in
such manner and at such time as the Board may in good faith
determine to be equitable in the circumstances.
(vii) Notice of Adjustments. Whenever the Conversion Price
or the kind of securities issuable upon the conversion of any one
of or all of the Convertible Preferred shall be
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adjusted pursuant to Section 1(d)(3)(i)-(v) or (vii) above, the
Corporation shall make a certificate signed by its Chief
Financial Officer, Secretary or Assistant Secretary, setting
forth, in reasonable detail, the event requiring the adjustment,
the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the
Board made any determination hereunder), and the Conversion Price
and the kind of securities issuable upon the conversion of such
share(s) of the Convertible Preferred after giving effect to such
adjustment, and shall cause copies of such certificate to be
mailed (by first class mail postage prepaid) to each holder of
Convertible Preferred promptly after each adjustment.
(4) Full Consideration. All shares of Common which shall be
issued upon the conversion of any Convertible Preferred (which is
itself fully paid and non-assessable) will, upon issuance, be fully
paid and non-assessable. The Corporation will pay such amounts and
will take such other action as may be necessary from time to time so
that all shares of Common which shall be issued upon the conversion
of any Convertible Preferred will, upon issuance and without cost to
the recipient, be free from all pre-emptive rights, taxes, liens and
charges with respect to the issue thereof.
(5) No Impairment. The Corporation will not, by amendment of
its Amended and Restated Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 1(d) and in the
taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of any holder of the Convertible
Preferred against impairment. The Corporation shall at all times when
the Convertible Preferred shall be outstanding, reserve and keep
available out of its authorized but unissued stock, for the purpose
of effecting the conversion of the Convertible Preferred, such number
of its duly authorized shares of Common as shall from time to time be
sufficient to effect the conversion of all outstanding shares of
Convertible Preferred.
(6) No Reissuance of Preferred. No share of Preferred acquired
by the Corporation upon conversion, redemption or purchase shall be
reissued and all such shares shall be canceled, retired and
eliminated from the shares which the Corporation may be authorized to
issue. The Corporation shall take all such corporate action necessary
or appropriate to reduce the authorized number of Preferred
accordingly.
(7) Minimum Conversion Price. Before taking any action which
would cause an adjustment reducing the Conversion Price below the
then par value of the shares of Common issuable upon conversion of
the shares of Convertible Preferred, the Corporation will take any
corporate action which may, in the opinion of its counsel, be
necessary in order that the Corporation may validly and legally issue
fully paid and nonassessable shares of Common at such adjusted
Conversion Price.
SECTION 2. COMMON STOCK
(a) Voting Rights. Except as otherwise required by law or by this
Certificate, each share of Common shall entitle the holder thereof to
one vote on each matter submitted to a vote of the stockholders of the
Corporation, and the holders of shares of Common, Series A Preferred,
Series B Preferred and Series C Preferred shall vote together and not as
separate classes.
(b) Dividend Rights. Subject to the dividend rights of the holders
of the Preferred set forth in Sections 1(b) and 1(c) above, the holders
of the Common shall be entitled to receive, as, when and if declared by
the Board, but only out of funds legally available therefor, cash
dividends in such amounts as the Board may determine.
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(c) Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, after payment or provision for payment of the debts and
other liabilities of the Corporation and the preferential amounts to
which the holders of any outstanding shares of Preferred shall be
entitled to receive upon dissolution, liquidation, or winding up, the
holders of the Common shall be entitled to share on a share for share
basis in the remaining assets of the Corporation (together with the
holders of Series A Preferred as set forth in Section 1(c)(4) above).
(d) Residual Rights. All rights accruing to the outstanding shares
of the Corporation not otherwise expressly provided for herein shall be
vested in the Common.
(d) Article FOURTH of the Certificate of Incorporation, relating to
the location of the Corporation's office in New York and its agent for
service of process, is hereby amended to read as follows:
"FOURTH: The office of the Corporation is to be located in the
County of New York, State of New York. The Secretary of State of the
State of New York is designated as agent of the Corporation upon whom
process in any action or proceeding against the Corporation may be
served. The address to which the Secretary of State shall mail a copy of
any such process so served is:
Halsey Drug Co., Inc.
616 N. North Court, Suite 120
Palatine, Illinois 60067
Attention: President"
(e) Articles SEVENTH, EIGHTH and NINTH, relating to the first
directors and the original subscribers for shares of the Corporation are
hereby deleted in their entirety.
(f) Article TENTH, relating to shareholder preemptive rights, is
hereby renumbered as Article SEVENTH.
(g) Article ELEVENTH, relating to interested director transactions, is
hereby renumbered as Article EIGHTH and amended to read as follows:
"EIGHTH: No contract or transaction between the corporation and one
or more of its directors or officers, or between the corporation and any
other corporation, partnership, association, or other organization in
which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely
for this reason, or solely because the director or officer is present at
or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely because
his or their votes are counted for such purpose, if: (1) the material
facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or (2) the material facts as to his
relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and
the contract or transaction is specifically approved in good faith by
vote of the stockholders; or (3) the contract or transaction is fair as
to the corporation as of the time it is authorized, approved or
ratified, by the Board of Directors, a committee thereof, or the
stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or
transaction."
(h) Article TWELFTH, relating to indemnification, is hereby renumbered
as Article NINTH and amended to read as follows:
"NINTH: The Corporation shall, to the fullest extent possible
permitted by Sections 721 through 726 of the Business Corporation Law of
New York, indemnify any and all directors and officers whom it shall
have the power to indemnify under said sections from and against any and
all
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of the expenses, liabilities or other matters referred to in or covered
by such sections of the Business Corporation Law, and the
indemnification provided for herein shall not be deemed exclusive of any
other rights to which the person so indemnified may be entitled under
any By-Law, agreement, vote of shareholders or disinterested directors
or otherwise, both as to action in his/her official capacity and as to
action in another capacity by holding such office, and shall continue as
to a person who has ceased to be a director or officer and shall inure
to the benefit of the heirs, executors and administrators of such
person."
(i) Article TENTH, limiting the personal liability of the
Corporation's directors to the Corporation and its shareholders, is hereby
added to read:
"TENTH: A director of the Corporation shall not be personally
liable to the Corporation or its shareholders for damages for any breach
of duty as a director; provided that, except as hereinafter provided,
this Article TENTH shall neither eliminate nor limit liability: (a) if a
judgment or final adjudication adverse to the director establishes that
(i) the director's acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law, (ii) the director
personally gained in fact a financial profit or other advantage to which
the director was not legally entitled, or (iii) the director's acts
violated Section 719 of the New York Business Corporation Law; or (b)
for any act or omission prior to the effectiveness of this Article
TENTH. If the Corporation hereafter may by law be permitted to further
eliminate or limit the personal liability of directors, then pursuant
hereto the liability of a director of the Corporation shall, at such
time, automatically be further eliminated or limited to the fullest
extent permitted by law. Any repeal of or modification to the provisions
of this Article TENTH shall not adversely affect any right or protection
of a director of the Corporation existing pursuant to this Article TENTH
immediately prior to such repeal or modification."
4. The text of the Certificate of Incorporation, as amended heretofore, is
hereby restated as further amended to read as herein set forth in full:
FIRST: The name of the Corporation shall be ACURA PHARMACEUTICALS,
INC.
SECOND: The purpose of the Corporation is to engage in any lawful act
or activity for which Corporations may be organized under the Business
Corporation Law of the State of New York; provided, however, that it is not
formed to engage in any act or activity requiring the consent or approval
of any state official, department, board, agency or any other body without
such consent or approval first being obtained.
THIRD: The Corporation is authorized to issue two classes of stock,
to be designated, respectively, "Common Stock" and "Preferred Stock". The
total number of shares which the Corporation is authorized to issue is
940,000,000 of which (A) 290,000,000 shares shall be Preferred Stock (the
"Preferred"), and (B) 650,000,000 shares shall be Common Stock, $.01 par
value (the "Common"). Of the Preferred, 45,000,000 shares shall be
designated Series A Convertible Preferred Stock, $.01 par value per share
(the "Series A Preferred"), 25,000,000 shares shall be designated Series B
Convertible Preferred Stock, $.01 par value per share (the "Series B
Preferred"), 70,000,000 shares shall be designated Series C-1 Convertible
Preferred Stock, $.01 par value per share (the "Series C-1 Preferred"),
50,000,000 shares shall be designated Series C-2 Convertible Preferred
Stock, $.01 par value per share (the "Series C-2 Preferred") and
100,000,000 shares shall be designated Series C-3 Convertible Preferred
Stock, $.01 par value per share (the "Series C-3 Preferred"). The Series
C-1 Preferred, Series C-2 Preferred and Series C-3 Preferred are sometimes
referred to collectively as the "Series C Preferred". The rights,
preferences and privileges of and restrictions on the Series A Preferred,
Series B Preferred, Series C Preferred and Common are as follows:
SECTION 1. PREFERRED STOCK
(a) Voting Rights. Except as otherwise required by law, each share
of outstanding Series A Preferred, Series B Preferred and Series C
Preferred shall entitle the record holder thereof to vote on
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each matter submitted to a vote of the stockholders of the Corporation
and to have the number of votes equal to the number of whole shares of
Common into which such share of Series A Preferred, Series B Preferred
or Series C Preferred, as the case may be, is then convertible pursuant
to the provisions hereof at the record date for the determination of
stockholders entitled to vote on such matters or, if no such record date
is established, at the date such vote is taken or any written consent of
stockholders becomes effective. Except as otherwise required by law or
by this Certificate, the holders of shares of Common, Series A
Preferred, Series B Preferred and Series C Preferred shall vote together
and not as separate classes. Fractional votes shall not be permitted and
any fractional voting rights resulting from the above formula shall be
rounded to the nearest whole number (with one-half rounded upwards).
(b) Dividends. If any dividend or other distribution payable in
cash, securities or other property is declared on the Common (other than
in connection with Section 1(c) below), each holder of shares of
Preferred on the record date for such dividend or distribution shall be
entitled to receive, on the date of payment or distribution of such
dividend or other distribution, the same cash, securities or other
property which such holder would have received on such record date if
such holder was the holder of record of the number of whole shares of
Common into which the shares of Preferred then held by such holder are
then convertible (with any resulting fractions rounded to the nearest
whole share, with one-half rounded up).
(c) Liquidation Rights. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up (each, a "Liquidation
Event"):
(1) Prior and in preference to any payments or distributions
under Sections 1(c)(2), 1(c)(3) and 1(c)(4) below, the holder of each
then outstanding share of Series A Preferred shall be entitled to
receive, out of the assets of the Corporation legally available for
distribution to stockholders, and before any payment or declaration
and setting apart for payment of any amount or dividend pursuant to
Sections 1(c)(2) or 1(c)(3) below or with respect to the Common or
any other junior equity security of the Corporation, the amount (the
"Series A Preference") equal to $3.2125 per share (such amount to be
adjusted proportionally in the event the Series A Preferred is
subdivided into a greater number or combined into a lesser number of
shares). If the Corporation shall have insufficient assets and funds
to pay such amounts in full to the holders of the Series A Preferred,
then all assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the
Series A Preferred in proportion to the preferential amount each such
holder is otherwise entitled to receive pursuant to this Section
1(c)(1).
(2) After full payment of the distributions under Section
1(c)(1) above, but prior and in preference to any payments or
distributions under Sections 1(c)(3) and 1(c)(4) below, the holder of
each then outstanding share of Series B Preferred shall be entitled
to receive, out of the assets of the Corporation legally available
for distribution to stockholders, and before any payment or
declaration and setting apart for payment of any amount or dividend
pursuant to Section 1(c)(3) below or with respect to the Common or
any other junior equity security of the Corporation, the amount (the
"Series B Preference") equal to $.3420 per share (such amount to be
adjusted proportionally in the event the Series B Preferred is
subdivided into a greater number or combined into a lesser number of
shares). If the Corporation shall have insufficient assets and funds
to pay such amounts in full to the holders of the Series B Preferred
(after payment in full of all amounts pursuant to Section 1(c)(1)
above), then all remaining assets and funds of the Corporation
legally available for distribution shall be distributed ratably among
the holders of the Series B Preferred in proportion to the
preferential amount each such holder is otherwise entitled to receive
pursuant to this Section 1(c)(2).
(3) After full payment of the distributions under Sections
1(c)(1) and 1(c)(2) above, but prior and in preference to any
payments or distributions under Section 1(c)(4) below, the holder of
each then outstanding share of Series C Preferred shall be entitled
to receive, out of
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the assets of the Corporation legally available for distribution to
stockholders, and before any payment or declaration and setting apart
for payment of any amount or dividend with respect to the Common or
any other junior equity security of the Corporation, (i) in the case
of Series C-1 Preferred, the amount (the "Series C-1 Preference")
equal to $.5776 per share, (ii) in the case of Series C-2 Preferred,
the amount (the "Series C-2 Preference") equal to $.5993 per share,
and (iii) in the case of Series C-3 Preferred, the amount (the
"Series C-3 Preference") equal to $.3481 per share, (in each case
such amount to be adjusted proportionally in the event the Series C-1
Preferred, Series C-2 Preferred or Series C-3 Preferred, as
applicable, is subdivided into a greater number or combined into a
lesser number of shares). If the Corporation shall have insufficient
assets and funds to pay such amounts in full to the holders of the
Series C Preferred (after payment in full of all amounts pursuant to
Sections 1(c)(1) and 1(c)(2) above), then all remaining assets and
funds of the Corporation legally available for distribution shall be
distributed ratably among the holders of the Series C Preferred in
proportion to the preferential amount each such holder is otherwise
entitled to receive pursuant to this Section 1(c)(3).
(4) After full payment has been made to the holders of Series A
Preferred, Series B Preferred and Series C Preferred of the
liquidation preferences in Sections 1(c)(1), 1(c)(2) and 1(c)(3), the
entire remaining assets and funds, if any, shall be distributed
ratably among the holders of Common and the Series A Preferred, in
proportion to the number of shares of Common held by them on an
as-converted basis; provided, that for purposes of calculating the
distribution pursuant to this Section 1(c)(4), and for no other
purposes whatsoever, each share of Series A Preferred shall be deemed
to be convertible into only 30% of the shares of Common into which it
is convertible pursuant to the terms of Section 1(d) below.
(5) For purposes of this Section 1(c), unless the holders of a
majority of the then outstanding shares of Series A Preferred Stock,
given in writing or by vote at a meeting, consenting or voting (as
the case may be) together as a single class, elect otherwise, (i) the
consummation of any merger, consolidation or similar transaction or
series of related transactions, the result of which is that the
holders of the Corporation's capital stock outstanding immediately
prior to such transaction own, immediately upon the consummation of
such transaction(s), shares of capital stock possessing in the
aggregate less than a majority of the voting power of the surviving
entity or rights to liquidation distributions of less than 50% of the
assets of the surviving entity, (ii) a sale, lease, exclusive
license, transfer or other conveyance of all or substantially all of
the assets of the Corporation, or (iii) the sale of 50% or more of
the Corporation's voting stock in one or more series of transactions,
shall (for purposes of the distribution of such securities or other
consideration to the holders of Common and Preferred) be treated as a
Liquidation Event and shall entitle the holders of Common and
Preferred to receive at closing in cash, securities or other property
(valued as provided in Section 1(c)(6) below) as specified above and
in the order of preference as set forth in this Section 1(c).
(6) Whenever the distribution provided in this Section 1(c)
shall be payable in property other than cash, subject to the
provisions regarding valuation of securities set forth below, the
value of such distribution shall be its fair market value as
determined in good faith by the Board of Directors of the Corporation
(the "Board"). The holders of a majority of the Series A Preferred
will have 10 days from the determination of the valuation of any
securities or other property pursuant this Section 1(c) to object to
such valuation in writing to the Corporation. In the event of such
objection, the Corporation and a majority in interest of the
objecting stockholders will in good faith seek a resolution of any
disputed valuation. If the Corporation and the objecting investors
are unable to agree on a valuation within 5 days of the objection by
the holders of the Series A Preferred, the valuation will be
determined by an independent third party appraiser jointly selected
by the Corporation and the holders of a majority of the then
outstanding shares of Series A Preferred, whose written appraised
value will be binding on the Corporation and its stockholders. Any
distributions pursuant to this Section 1(c) will be
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delayed until after the delivery of the appraiser's report. Any
securities shall be valued as follows:
(i) Securities not subject to investment letter or other
similar restrictions on free marketability covered by (ii) below:
(A) If traded on a securities exchange or through the
Nasdaq National Market or the Nasdaq SmallCap Market, the
value shall be deemed to be the average of the closing prices
of the securities on such exchange over the 30-day period
ending three (3) days prior to the date of determination;
(B) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty-day period ending
three (3) days prior to the date of determination; and
(C) If there is no active public market, the value shall
be determined by an independent third party appraiser jointly
selected by the Corporation and the holders of a majority of
the then outstanding shares of Series A Preferred.
(ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability
(other than restrictions arising solely by virtue of a
stockholder's status as an affiliate or former affiliate) shall
be to apply an appropriate discount determined in good faith by
the Board from the market value determined as above in (A), (B)
or (C).
(7) The Corporation shall promptly provide to the holders of
shares of Preferred such information concerning the terms of any
event or transaction specified in Section 1(c)(5) and the value of
the assets of the Corporation as may reasonably be determined by the
Board. If the transaction is a sale of all or substantially all of
the assets of the Corporation, the Corporation will give written
notice of such transaction to each holder of Preferred not less than
20 or more than 60 days before the stockholders' meeting called to
approve the transaction or, if no stockholders' meeting will be
called, not less than 20 or more than 60 days before the date that
the transaction is reasonably anticipated to be consummated, and will
also notify the holders in writing of the final approval of the
transaction. The initial notice will describe the material terms and
conditions of the proposed transaction. The Corporation will give the
holders of Preferred prompt notice of any material changes to the
terms of the proposed transaction. The Corporation will not
consummate the proposed transaction sooner than 20 days after the
Corporation has given notice of any material changes. By written
consent or vote, the holders of a majority of the shares of Series A
Preferred outstanding may shorten the notice periods provided in this
Section. In the event the requirements of this Section are not
complied with, the Corporation will either: (i) cause the closing to
be postponed until the requirements of this Section have been
complied with; or (ii) cancel the transaction, in which event the
rights, preferences, privileges and restrictions of the holders of
the Preferred will revert to the rights, preferences, privileges and
restrictions existing immediately before the date of the first notice
referred to in this Section.
(d) Conversion.
(1) Terms of Conversion.
(i) Optional Conversion. The holder of each share of Series A
Preferred, Series B Preferred and Series C Preferred shall have the
right ("Conversion Right"), at such holder's option, to convert such
share at any time, without cost, on the terms of this Section 1(d)
and at the office of the Corporation or its transfer agent, into the
number of fully paid and non-assessable shares of Common that results
from dividing (A) in the case of the Series A Preferred, the Series A
Preference by the Series A conversion price that is in effect at the
time of conversion (the "Series A Conversion Price"), (B) in the case
of the Series B Preferred, the
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Series B Preference by the Series B conversion price that is in
effect at the time of conversion (the "Series B Conversion Price"),
(C) in the case of the Series C-1 Preferred, the Series C-1
Preference by the Series C-1 conversion price that is in effect at
the time of conversion (the "Series C-1 Conversion Price"), (D) in
the case of the Series C-2 Preferred, the Series C-2 Preference by
the Series C-2 conversion price that is in effect at the time of
conversion (the "Series C-2 Conversion Price") and (E) in the case of
the Series C-3 Preferred, the Series C-3 Preference by the Series C-3
conversion price that is in effect at the time of conversion (the
"Series C-3 Conversion Price"). The initial Series A Conversion Price
is equal to $.6425. The initial Series B Conversion Price is equal to
the Series B Preference. The initial Series C-1 Conversion Price is
equal to the Series C-1 Preference. The initial Series C-2 Conversion
Price is equal to the Series C-2 Preference. The initial Series C-3
Conversion Price is equal to the Series C-3 Preference. The Series A
Conversion Price, the Series B Conversion Price, the Series C-1
Conversion Price, the Series C-2 Conversion Price and the Series C-3
Conversion Price shall be subject to adjustment from time to time as
provided in Section 1(d)(3) below.
(ii) Mandatory Conversion.
(A) Upon the occurrence of a Qualified Trading Event, each share
of Series A Preferred, Series B Preferred and Series C Preferred
shall be automatically converted, without cost and on the terms of
this Section 1(d), into the number of whole shares of Common into
which such share of Series A Preferred, Series B Preferred or Series
C Preferred, as the case me be, would be convertible under Section
1(d)(1)(i) above immediately prior to such Qualified Trading Event
(with any resulting fractions rounded to the nearest whole share,
with one-half rounded up). "Qualified Trading Event" means the first
such time that (A) the Common has a closing price of at least $2.80
per share (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar
recapitalization affecting such shares) for thirty consecutive
trading days, and (B) the average daily trading value of all shares
of Common traded during such thirty consecutive trading day period is
at least $1,750,000. For purposes of this test, (x) closing prices
shall be determined as the average between the closing bid and ask
prices at the close of each trading day (as reported by such exchange
or over-the-counter market on which the Common may then be listed or
admitted for trading), and (y) the trading value shall be determined
by multiplying the number of shares so traded by such day's closing
price as determined above.
(B) Without limiting subsection (ii)(A) above, each share of
Series A Preferred, Series B Preferred and Series C Preferred shall
be automatically converted without cost and on the terms of this
Section 1(d), into the number of whole shares of Common into which
such share of Series A Preferred, Series B Preferred or Series C
Preferred, as the case may be, would be convertible under Section
1(d)(1)(i) above upon the receipt of the written consent of the
holders of at least 51% of the shares of Series A Preferred.
(2) Mechanics of Conversion.
(i) Optional Conversion. A holder of any share of Convertible
Preferred may exercise the Conversion Right of such share by
surrendering the certificate therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for the applicable
Preferred, together with a written notice to the Corporation which
shall state (A) that such holder elects to convert the same, and (B)
the number of shares of Preferred being converted. Thereupon the
Corporation shall issue and deliver to the holder of such shares
within two (2) business days a certificate or certificates for the
number of shares of Common to which such holder shall be entitled. If
the certificate evidencing the Preferred being converted shall also
evidence shares of Preferred not being converted, then the
Corporation shall also deliver to the holder of such certificate
within such two (2) business day period a new stock certificate
evidencing the Preferred not converted. The conversion of any shares
of Preferred shall be deemed to have been made immediately prior to
the close of business on the date that the shares to be converted are
surrendered to the
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Corporation, and the person or persons entitled to receive the shares
of Common issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common on
such date. Any dividends or distributions declared but unpaid at the
time of conversion with respect to the Preferred so converted shall
be paid to the holder of Common issued upon conversion of the
Preferred. If a stockholder notifies the Corporation or its transfer
agent in writing that the stockholder's certificate has been lost,
stolen or destroyed, and executes an agreement in a form reasonably
satisfactory to the Corporation and its transfer agent to indemnify
them from any loss incurred in connection with the lost, stolen or
destroyed certificates (without requirement of posting any bond),
then such actions shall be treated for purposes of this Section as
delivery of such lost, stolen or destroyed certificate.
(ii) Mandatory Conversion. The Corporation shall give written
notice to each holder of a share of Preferred not more than ten (10)
days after the occurrence of a Qualified Trading Event or the receipt
of the written consent required pursuant to Section 1(d)(1)(ii)(B),
as applicable. Following the conversion of such shares, each holder
of shares so converted shall, if requested by the Corporation,
surrender the certificate therefor at the office of the Corporation
or any transfer agent for the applicable Preferred. Upon such
surrender, the Corporation shall issue and deliver to each holder a
certificate or certificates for the number of shares of Common to
which such holder is entitled. The conversion of shares of Preferred
shall be effective as of the occurrence of the Qualified Trading
Event or upon receipt of the written consent provided in Section
1(d)(1)(ii)(B), as applicable, whether or not the certificates
representing such shares of Preferred shall have been surrendered or
new certificates representing the shares of Common into which such
shares have been converted shall have been issued. Any dividends or
distributions declared but unpaid at the time of a mandatory
conversion with respect to the Preferred so converted shall be paid
upon such mandatory conversion. If a stockholder notifies the
Corporation or its transfer agent in writing that the stockholder's
certificate has been lost, stolen or destroyed, and executes an
agreement in a form reasonably satisfactory to the Corporation and
its transfer agent to indemnify them from any loss incurred in
connection with the lost, stolen or destroyed certificates (without
requirement of posting any bond), then such actions shall be treated
for purposes of this Section as delivery of such lost, stolen or
destroyed certificate.
(3) Adjustment of Conversion Prices.
The Series A Conversion Price, the Series B Conversion Price,
the Series C-1 Conversion Price, the Series C-2 Conversion Price and
the Series C-3 Conversion Price (each a "Conversion Price") and the
kind of securities issuable upon the conversion of any share of
Series A Preferred, Series B Preferred, Series C-1 Preferred, Series
C-2 Preferred and Series C-3 Preferred (collectively, the
"Convertible Preferred"), shall be adjusted from time to time after
the Filing Date (as defined below) as follows:
(i) Subdivision or Combination of Shares. If the
Corporation at any time after the date that this Amended and
Restated Certificate of Incorporation was filed with the New York
Secretary of State ("Filing Date") effects a subdivision or
combination of the outstanding Common, the Conversion Price for
each share of outstanding Convertible Preferred shall be
decreased, in the case of a subdivision, or increased, in the
case of a combination, in the same proportions as the Common is
subdivided or combined, in each case effective automatically
upon, and simultaneously with, the effectiveness of the
subdivision or combination which gives rise to the adjustment.
(ii) Stock Dividends. If the Corporation at any time after
the Filing Date pays a dividend, or makes any other distribution,
to holders of Common payable in shares of Common, or fixes a
record date for the determination of holders of Common entitled
to receive a dividend or other distribution payable in shares of
Common, the Conversion Price for each share of Convertible
Preferred shall be decreased by multiplying it by a fraction:
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(A) the numerator of which shall be the total number of shares of
Common outstanding immediately prior to the time of payment of
such dividend or distribution; and (B) the denominator of which
shall be the total number of shares of Common outstanding
immediately after such dividend or distribution, in each case
effective automatically as of the date the Corporation shall take
a record of the holders its Common for the purpose of receiving
such dividend or distribution (or if no such record is taken, as
of the effectiveness of such dividend or distribution).
(iii) Reclassification, Consolidation or Merger. If at any
time after the Filing Date, as a result of (a) a capital
reorganization or reclassification (other than a subdivision,
combination or dividend which gives rise to an adjustment of a
Conversion Price pursuant to clauses (i) or (ii) of this Section
1(d)(3)); or (b) a merger or consolidation of the Corporation
with another corporation (whether or not the Corporation is the
surviving corporation), the Common issuable upon the conversion
of the Convertible Preferred shall be changed into or exchanged
for the same or a different number of shares of any class or
classes of stock of the Corporation or any other corporation, or
other securities convertible into such shares, then, as a part of
such reorganization, reclassification, merger or consolidation,
appropriate adjustments shall be made in the terms of the
Convertible Preferred (or of any securities into which the
Convertible Preferred is changed or for which the Convertible
Preferred is exchanged), so that: (x) the holders of Convertible
Preferred or of such substitute securities shall thereafter be
entitled to receive, upon conversion of the Convertible Preferred
or of such substitute securities, the kind and amount of shares
of stock, other securities, money and property which such holders
would have received at the time of such capital reorganization,
reclassification, merger, or consolidation, if such holders had
converted their Convertible Preferred immediately prior to such
capital reorganization, reclassification, merger, or
consolidation, and (y) the Convertible Preferred or such
substitute securities shall thereafter be adjusted on terms as
nearly equivalent as may be practicable to the adjustments
theretofore provided in this Section 1(d)(3). No consolidation or
merger in which the Corporation is not the surviving corporation
shall be consummated unless the surviving corporation shall
agree, in writing, to the provisions of this Section
1(d)(3)(iii). The provisions of this Section 1(d)(3)(iii) shall
similarly apply to successive capital reorganizations,
reclassifications, mergers, and consolidations.
(iv) Adjustment upon Certain Issuances.
(A) For purposes of this Section 1(d)(3)(iv), "Additional
Shares of Common" means all shares of Common issued by the
Corporation after the Filing Date other than: (1) shares of
Common issued in transactions giving rise to adjustments under
Sections 1(d)(3)(i), (ii), or (iii) above; (2) shares of Common
issued upon conversion of shares of Convertible Preferred; (3)
shares of Common which may be issued in the discretion of the
Board to employees or directors of, or consultants or advisors
to, strategic partners of the Corporation or any wholly-owned
subsidiary of the Corporation, and options or warrants or other
rights for the purchase of such shares; (4) options or warrants
or other rights outstanding as of the Filing Date or issued under
Section 1(d)(3)(iv)(3) above for the purchase of such shares; (5)
securities issued pursuant to any anti-dilution rights of the
Convertible Preferred or the warrants outstanding as of the
Filing Date; and (6) shares of Common Stock issued in
satisfaction of interest on the Corporation's indebtedness for
borrowed money, provided the number of shares of Common Stock
issuable is calculated based on the average closing bid and asked
prices for the Common Stock for the twenty (20) trading days
preceding the interest payment.
(B) Except as otherwise provided in this Section 1(d)(3)(iv)
below, if at any time the Corporation issues or is deemed to
issue Additional Shares of Common for a
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consideration per share less than the Conversion Price in effect
for a given share at such issuance or deemed issuance:
(1) in the case of the Series A Preferred, the
Conversion Price shall be reduced for such share to a price
equal to a price determined by dividing: (x) the aggregate
consideration received by or deemed to have been received by
the Corporation upon such issue, by: (y) the number of shares
of Additional Shares of Common issued or deemed to have been
issued in such issue; and
(2) in the case of the Series B Preferred, Series C-1
Preferred, Series C-2 Preferred or Series C-3 Preferred, the
Conversion Price shall be reduced for such share to a price
equal to a price determined by dividing:
(x) the sum of (a) the product derived by
multiplying the Conversion Price in effect for such share
immediately prior to such issue times the number of
shares of Common (on a fully-diluted basis) outstanding
immediately prior to such issue, plus (b) the aggregate
consideration received by or deemed to have been received
by the Corporation upon such issue; by
(y) the sum of (a) the number of shares of Common
(on a fully-diluted basis) outstanding immediately prior
to such issue, plus (b) the number of shares of
Additional Shares of Common issued or deemed to have been
issued in such issue;
provided, that no adjustment pursuant to this Section
1(d)(3)(iv)(B)(2) shall be made in connection with any
issuance or deemed issuance of Additional Shares of Common
for a consideration of at least the then applicable Series A
Conversion Price.
(v) Convertible Securities.
(A) "Convertible Securities" means all rights or options for
the purchase of, or stock or other securities convertible into,
Additional Shares of Common or other Convertible Securities,
whenever and each time issued.
(B) The "Effective Price" with respect to any Convertible
Securities means the result of dividing:
(1) the sum of (x) the total consideration, if any,
received by the Corporation for the issuance of such
Convertible Securities, plus (y) the minimum consideration,
if any, payable to the Corporation upon exercise or
conversion of such Convertible Securities (assuming that the
full amount of securities issuable upon exercise or
conversion are issued), plus (z) the minimum consideration,
if any, payable to the Corporation upon exercise or
conversion of any Convertible Securities issuable upon
exercise or conversion of such Convertible Securities, by:
(2) the maximum number of Additional Shares of Common
issuable upon exercise or conversion of such Convertible
Securities or of any Convertible Securities issuable upon
exercise or conversion of such Convertible Securities.
(C) If at any time after the Filing Date the Corporation
issues or is deemed to issue a Convertible Security with respect
to which the Effective Price is less than the Conversion Price
for a share of Convertible Preferred in effect at such issuance
or deemed issuance, the Conversion Price for such share of
Convertible Preferred shall be reduced to the Effective Price.
(D) If Convertible Securities by their terms provide, with
the passage of time or otherwise (including by operation of the
anti-dilution provisions thereof), for any increase or decrease
in the consideration payable to the Corporation or decrease or
increase in the number of shares of Common issuable upon the
exercise, conversion or exchange thereof
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(or if any such change is made by amending such Convertible
Securities), the Conversion Price computed upon the original
issue thereof, and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it
affects such the rights of conversion or exchange under such
Convertible Securities. No readjustment pursuant to this clause
(D) shall have the effect of increasing the applicable Conversion
Price in effect to an amount which exceeds the lower of (1) the
Conversion Price immediately following, and as adjusted to
reflect, the Company's issuance of such Convertible Securities
(subject to appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar
recapitalization affecting such shares), or (2) the Conversion
Price that would have resulted from any issuances of Additional
Shares of Common or Convertible Securities between the date the
Company adjusted the Conversion Price to reflect the issuance of
such original Convertible Securities and such readjustment date.
(E) If an adjustment has been made under this Section
1(d)(3)(v) as a consequence of any issuance of a Convertible
Security, then no further adjustment shall be made under Section
1(d)(3)(iv) above upon the actual issuance of Additional Shares
of Common upon the exercise or conversion of such Convertible
Securities, or upon the issuance of Convertible Securities
issuable upon exercise or conversion of the original Convertible
Security.
(vi) Valuation of Consideration. For purposes of the
operation of Sections 1(d)(3)(iv) and (v) above, the
consideration received by the Corporation for any issue or sale
of securities shall:
(A) to the extent it consists of cash, be computed as
the aggregate net amount of cash received by the Corporation;
(B) to the extent it consists of property other than
cash, be computed at the fair value of that property as
determined in good faith by the Board in accordance with the
terms of Section 1(c)(6) above; and
(C) to the extent Additional Shares of Common or
Convertible Securities are issued or sold together with other
stock or securities or other assets of the Corporation for a
consideration that covers both, be such portion of the
consideration so received that may be reasonably determined
in good faith by the Board to be allocable to such Additional
Shares of Common or Convertible Securities.
(vii) Other Action Affecting Common. If at any time the
Corporation takes any action affecting its Common which, in the
opinion of the Board, would have an adverse effect upon the
Conversion Rights of a given share of the Convertible Preferred,
the Conversion Price for such share and the kind of securities
issuable upon the conversion of such share shall be adjusted in
such manner and at such time as the Board may in good faith
determine to be equitable in the circumstances.
(vii) Notice of Adjustments. Whenever the Conversion Price
or the kind of securities issuable upon the conversion of any one
of or all of the Convertible Preferred shall be adjusted pursuant
to Section 1(d)(3)(i)-(v) or (vii) above, the Corporation shall
make a certificate signed by its Chief Financial Officer,
Secretary or Assistant Secretary, setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated
(including a description of the basis on which the Board made any
determination hereunder), and the Conversion Price and the kind
of securities issuable upon the conversion of such share(s) of
the Convertible Preferred after giving effect to such adjustment,
and shall cause copies of such certificate to be mailed (by first
class mail postage prepaid) to each holder of Convertible
Preferred promptly after each adjustment.
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(4) Full Consideration. All shares of Common which shall be
issued upon the conversion of any Convertible Preferred (which is
itself fully paid and non-assessable) will, upon issuance, be fully
paid and non-assessable. The Corporation will pay such amounts and
will take such other action as may be necessary from time to time so
that all shares of Common which shall be issued upon the conversion
of any Convertible Preferred will, upon issuance and without cost to
the recipient, be free from all pre-emptive rights, taxes, liens and
charges with respect to the issue thereof.
(5) No Impairment. The Corporation will not, by amendment of
its Amended and Restated Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 1(d) and in the
taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of any holder of the Convertible
Preferred against impairment. The Corporation shall at all times when
the Convertible Preferred shall be outstanding, reserve and keep
available out of its authorized but unissued stock, for the purpose
of effecting the conversion of the Convertible Preferred, such number
of its duly authorized shares of Common as shall from time to time be
sufficient to effect the conversion of all outstanding shares of
Convertible Preferred.
(6) No Reissuance of Preferred. No share of Preferred acquired
by the Corporation upon conversion, redemption or purchase shall be
reissued and all such shares shall be canceled, retired and
eliminated from the shares which the Corporation may be authorized to
issue. The Corporation shall take all such corporate action necessary
or appropriate to reduce the authorized number of Preferred
accordingly.
(7) Minimum Conversion Price. Before taking any action which
would cause an adjustment reducing the Conversion Price below the
then par value of the shares of Common issuable upon conversion of
the shares of Convertible Preferred, the Corporation will take any
corporate action which may, in the opinion of its counsel, be
necessary in order that the Corporation may validly and legally issue
fully paid and nonassessable shares of Common at such adjusted
Conversion Price.
SECTION 2. COMMON STOCK
(a) Voting Rights. Except as otherwise required by law or by this
Certificate, each share of Common shall entitle the holder thereof to one
vote on each matter submitted to a vote of the stockholders of the
Corporation, and the holders of shares of Common, Series A Preferred,
Series B Preferred and Series C Preferred shall vote together and not as
separate classes.
(b) Dividend Rights. Subject to the dividend rights of the holders of
the Preferred set forth in Sections 1(b) and 1(c) above, the holders of the
Common shall be entitled to receive, as, when and if declared by the Board,
but only out of funds legally available therefor, cash dividends in such
amounts as the Board may determine.
(c) Liquidation Rights. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, after
payment or provision for payment of the debts and other liabilities of the
Corporation and the preferential amounts to which the holders of any
outstanding shares of Preferred shall be entitled to receive upon
dissolution, liquidation, or winding up, the holders of the Common shall be
entitled to share on a share for share basis in the remaining assets of the
Corporation (together with the holders of Series A Preferred as set forth
in Section 1(c)(4) above).
(d) Residual Rights. All rights accruing to the outstanding shares of
the Corporation not otherwise expressly provided for herein shall be vested
in the Common.
C-21
FOURTH: The office of the Corporation is to be located in the
County of New York, State of New York. The Secretary of State of the
State of New York is designated as agent of the Corporation upon whom
process in any action or proceeding against the Corporation may be
served. The address to which the Secretary of State shall mail a copy of
any such process so served is:
Halsey Drug Co., Inc.
616 N. North Court, Suite 120
Palatine, Illinois 60067
Attention: President
FIFTH: The duration of said Corporation shall be perpetual.
SIXTH: The number of directors shall be not less than three (3) nor
more than eleven (11), none of whom need be stockholders of the
Corporation.
SEVENTH: Except as may be otherwise expressly provided in the
Certificate of Incorporation, as from time to time amended, or in any
duly adopted vote or resolution of the Board of Directors, no
stockholder shall have any preemptive rights to subscribe to any issue
of stock of the Corporation whether now or hereafter authorized or to
any issue of any obligations of the Corporation convertible into stock
of the Corporation, or to any issue of warrants for the issuance of or
options for the purchase of stock of the Corporation, for whatever
consideration the same may be issued, whether or not such issue of
stock, obligations, warrants or options are offered to any other holders
of stock or obligations of the Corporation.
EIGHTH: No contract or transaction between the corporation and one
or more of its directors or officers, or between the corporation and any
other corporation, partnership, association, or other organization in
which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely
for this reason, or solely because the director or officer is present at
or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely because
his or their votes are counted for such purpose, if: (1) the material
facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or (2) the material facts as to his
relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and
the contract or transaction is specifically approved in good faith by
vote of the stockholders; or (3) the contract or transaction is fair as
to the corporation as of the time it is authorized, approved or
ratified, by the Board of Directors, a committee thereof, or the
stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or
transaction.
NINTH: The Corporation shall, to the fullest extent possible
permitted by Sections 721 through 726 of the Business Corporation Law of
New York, indemnify any and all directors and officers whom it shall
have the power to indemnify under said sections from and against any and
all of the expenses, liabilities or other matters referred to in or
covered by such sections of the Business Corporation Law, and the
indemnification provided for herein shall not be deemed exclusive of any
other rights to which the person so indemnified may be entitled under
any By-Law, agreement, vote of shareholders or disinterested directors
or otherwise, both as to action in his/her official capacity and as to
action in another capacity by holding such office, and shall continue as
to a person who has ceased to be a director or officer and shall inure
to the benefit of the heirs, executors and administrators of such
person.
TENTH: A director of the Corporation shall not be personally liable
to the Corporation or its shareholders for damages for any breach of
duty as a director; provided that, except as hereinafter provided, this
Article TENTH shall neither eliminate nor limit liability: (a) if a
judgment or final
C-22
adjudication adverse to the director establishes that (i) the director's
acts or omissions were in bad faith or involved intentional misconduct
or a knowing violation of law, (ii) the director personally gained in
fact a financial profit or other advantage to which the director was not
legally entitled, or (iii) the director's acts violated Section 719 of
the New York Business Corporation Law; or (b) for any act or omission
prior to the effectiveness of this Article TENTH. If the Corporation
hereafter may by law be permitted to further eliminate or limit the
personal liability of directors, then pursuant hereto the liability of a
director of the Corporation shall, at such time, automatically be
further eliminated or limited to the fullest extent permitted by law.
Any repeal of or modification to the provisions of this Article TENTH
shall not adversely affect any right or protection of a director of the
Corporation existing pursuant to this Article TENTH immediately prior to
such repeal or modification.
5. The foregoing amendments and restatement of the Certificate of
Incorporation were authorized by the unanimous written consent of the Board of
Directors followed by an affirmative vote of the holders of a majority of the
outstanding shares of common stock of the Corporation entitled to vote thereon.
6. IN WITNESS WHEREOF, we have signed this certificate on the 6th day of
February, 2004 and we affirm the statements contained herein as true under
penalties of perjury.
/s/ ANDREW D. REDDICK
--------------------------------------
Andrew D. Reddick
President
/s/ PETER A. CLEMENS
--------------------------------------
Peter A. Clemens
Secretary
C-23
APPENDIX D
AGEMA LLC
January 16, 2004
STRICTLY PRIVATE AND CONFIDENTIAL
Independent Committee of the Board of Directors
Halsey Drug Co., Inc.
695 North Perryville Road
Rockford, Illinois 61107
Gentlemen:
We understand that Halsey Drug Co., Inc. ("Halsey" or the "Company") has
sought the advice of an Independent Committee of Halsey's Board of Directors
(the "Committee") with regard to financial transactions by Halsey pursuant to
terms and conditions more fully described in drafts of the transaction documents
and related agreements listed in Exhibit A of this letter (the "Transaction
Documents"). The financial transactions embodied in the Transaction Documents
collectively constitute the "Financing". Amongst other terms and Conditions, the
Financing provides for:
1. the sale of convertible senior secured debentures (the
"Debentures") of $11.3 million principal amount to Essex Woodlands Health
Ventures V, L.P., Care Capital Investments, LP, Galen Partners III, L.P.
and Oracle Strategic Partners L.P. (collectively, including affiliated
entities, the "Investors"), and
2. the exchange of (i) approximately $2.0 million of aggregate funding
which has occurred since November 21, 2003, and (ii) any funding provided
by the Investors during the period from January 16, 2004 to the initial
closing (collectively, the "Bridge Notes"), together with accrued interest
thereon, for Debentures on the initial closing; and
3. the sale of up to $1.7 million in Debentures within 120 days of the
initial closing in addition to the Debentures to be acquired by the
Investors; and
4. the utilization of $4.0 million of the proceeds raised to retire
$16.4 million of indebtedness owing by the Company to Watson
Pharmaceuticals, Inc. in the aggregate principal amount of approximately
$21.4 million.
Persons and entities that have preemptive rights and other third parties
will also be permitted to purchase Debentures ("Other Purchasers"), so long as
the Investors are able to make their desired purchases.
You have asked us for our opinion as to whether the Financing is fair from
a financial point of view to the Company as well as fair from a financial point
of view to the Company's creditors, debenture holders, subordinated debt holders
and common shareholders not including the Investors and the Other Purchasers
(the "Stakeholders").
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company;
(ii) reviewed internal financial statements and other financial and
operating data concerning the Company prepared by the management of the
Company;
(iii) reviewed, financial projections regarding the Company prepared
by the management of the Company;
(iv) conducted detailed meetings and telephonic discussions with
members of the senior management of the Company concerning the financial
condition, current operating results and business outlook for the Company
on a stand-alone basis;
(v) reviewed the reported prices and trading activity of the Company's
common stock;
D-1
(vi) discussed with management the Company's efforts during 2003 to
identify and negotiate alternative sources of funding on an acceptable
basis other than on the terms proposed by the Investors and Other
Purchasers;
(vii) reviewed the Company's current cash position and cash operating
requirements through fiscal year 2004;
(viii) participated in discussions among the Company's senior
executives, the Committee and legal representatives regarding the status of
negotiations with the Investors and Other Purchases and provided financial
advice to the Committee;
(ix) discussed with the Committee and with management the prospects
for the Company if the Financing is not completed;
(x) reviewed with the Committee the financial implications of various
term sheets submitted by the Investors and Other Purchasers to the Company
and provided financial advice to the Committee in response thereto;
(xi) discussed the tax implications of the consummation of the
Financing with the Committee and their counsel;
(xii) reviewed the Transaction Documents; and
(xiii) performed such other analyses and considered such other factors
as we have deemed appropriate.
The payment of our fee for this opinion is not contingent upon the
consummation of the Financing. The Company has also agreed to indemnify us
against certain liabilities in connection with our services.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the future financial performance of the
Company. We have not made and do not assume any responsibility for making any
independent valuation or appraisal of the assets or liabilities of the Company,
nor have we been furnished with any such appraisals. We express no opinion as to
the relative financial impact of the Financing upon the Stakeholders of the
Company, including without limitation, no opinion as to the recoverability of
financial investments or credit extended by any of the Stakeholders of the
Company. We have assumed that the Financing will be consummated in accordance
with the terms and conditions set forth in the Transaction Documents without
material modification or waiver. Our opinion is necessarily based on financial,
economic market and other conditions as in effect on, and the information made
available to us as of, the date hereof, but our opinion does not address the
Company's underlying business decision to effect the transactions contemplated
by the Transaction Documents.
We have acted as financial advisor to the Committee of the Board of
Directors of the Company and have received fees from the Company for our
services.
It is understood that this letter is for the information of the Committee
of the Board of Directors of the Company and may not be used for any other
purpose without our prior written consent, except that this opinion may be
included in its entirety in any filing made by the Company in respect of the
Financing with the Securities and Exchange Commission subject to our prior
review. We make no recommendation as to how the common shareholders of the
Company should vote with respect to the Financing.
D-2
Based on the foregoing, we are of the opinion on the date hereof that the
Financing is fair from a financial point of view to the Company and its
Stakeholders.
Very truly yours,
AGEMA LLC
By: /s/ JAMES W. NEAL, JR.
------------------------------------
James W. Neal, Jr.
Chairman and Chief Executive Officer
D-3
EXHIBIT A
1. Draft Term Sheet dated December 19, 2003.
2. Draft letter from Halsey Drug Co., Inc. to investors in the 1998
Debentures, 1999 Debentures and 2002 Debentures dated January, 2004.
3. Draft Voting Agreement dated December 29, 2003.
4. Draft Amended and Restated Registration Rights Agreement dated December
30, 2003.
5. Draft Third Amendment to Loan Agreement Note between Halsey Drug Co.,
Inc. and Watson Pharmaceutical, Inc. dated December 29, 2003.
6. Draft Secured Promissory Note between Halsey Drug Co., Inc. and Watson
Pharmaceutical, Inc. dated December 29, 2003.
7. Draft Debenture and Share Purchase Agreement.
8. Draft Debenture Conversion Agreement.
9. Draft Convertible Senior Secured Debenture.
10. Draft Confidential Private Placement Term Sheet dated December 30,
2003.
11. Draft Restated Certificate of Incorporation of Halsey Drug Co., Inc.
12. Draft Debenture and Warrant Dilution Waiver dated December 30, 2003.
D-4
APPENDIX E
HALSEY DRUG CO., INC.
RESOLUTIONS OF THE INDEPENDENT COMMITTEE
OF THE BOARD OF DIRECTORS
DECEMBER 20, 2003
WHEREAS, the Board of Directors of Halsey Drug Co., Inc. (the "Company") on
October 30, 2003 formed an independent committee of the Board (the "Committee")
for the purpose of evaluating the capital raising activities of the Company with
the intent of seeing that those efforts are reasonable and unbiased and that all
alternatives are considered in the process;
WHEREAS, the Committee has undertaken and completed a thorough and detailed
evaluation of the Company's capital raising activities including without
limitation, but with particular attention to, the proposed terms and conditions
of the financing set forth in the Company's December 19, 2003 term sheet
attached hereto (the "Term Sheet") to be fully embodied in transaction documents
in connection with a convertible senior secured debentures financing with Essex
Woodlands Health Ventures Fund V, L.P. ("Essex Woodlands"), Care Capital
Investments, L.P. ("Care Capital"), Galen Partners III, L.P. and other Galen
entities ("Galen"), Oracle Strategic Partners, L.P. ("Oracle"), and other
purchasers (the "2003 Financing");
WHEREAS, the Committee has met formally on numerous occasions and, in
addition to those meetings, Committee members have had numerous detailed
communications with each other and with the Company's Chief Executive Officer
and Chief Financial Officer and other members of management and with the
Committee's special legal counsel and financial advisory firm, and the Committee
has also been updated from time to time by the Company's outside general counsel
as to the progress and status of the 2003 Financing;
WHEREAS, during the course of these meetings and communications the
Committee has assembled and thoroughly examined, analyzed and evaluated a
substantial body of information and materials which the Committee Chairman has
instructed the Company's Chief Financial Officer and the Committee's special
counsel to retain and preserve in their respective files;
WHEREAS, the Committee's evaluations have taken into account the following
factors, among other things: the Company's current distressed financial
condition and urgent need to obtain new capital and to restructure its existing
debt; the fact that the Company is in default of its principal loan agreements;
discussions with the Company's management and outside professionals including
advice (a) from the Company's bankruptcy counsel as to bankruptcy alternatives
which appear to be inevitable in the absence of consummating the 2003 Financing
and (b) that the Company's independent certified public accountants expect that
in the absence of the 2003 Financing that the Company's 2003 financial
statements will almost certainly at a minimum have a going-concern
qualification; the substantial effort and numerous attempts made by the Company
to obtain necessary financing during 2003 from other sources on acceptable terms
but without success other than the proposed 2003 Financing, including the
Committee's review of the financing terms that were offered to the Company but
found by the Company to be unacceptable; the market price and volume for the
Company's publicly traded common stock during the 90-day period through and
including December 19, 2003; the dilutive effects on existing stockholders
resulting from the 2003 Financing; the Company's financial information,
including financial forecasts, and information relating to the Company's
business, earnings, cash flow, assets, liabilities, recent aged accounts payable
statements, current defaults on existing indebtedness, and prospects of the
Company; discussions with members of senior management of the Company concerning
the Company's history, current operations and financial status, and future
prospects, as well as the outlook for the Company's industry generally and the
Company's 2004 business plan and current efforts to liquidate certain assets and
reduce payroll; review of documentation and analyses regarding the Company's
existing debt financing and liquidity issues; the restricted nature of the
securities being issued to the investors pursuant to the 2003 Financing
including the restricted nature of the securities issueable upon conversion of
the new securities; the Bulletin Board status of the Company and its impact on
the liquidity of the Company's securities; the insolvent condition of the
Company in both the sense that the Company's liabilities greatly
E-1
exceed the Company's assets and the fact that the Company has not been able to
satisfy its obligations as they mature; the advice from Agema, LLC (the
Committee's financial advisory firm) received at the Committee's December 20,
2003 meeting that the transaction described in the Term Sheet is fair to the
Company and its creditors and stockholders from a financial point of view which
advice will be confirmed by Agema in a customary fairness opinion letter to be
delivered promptly and prior to the closing; and review and evaluation of such
other financial information and analyses and such other information and matters
as the Committee considered appropriate including the Committee's assessment of
general economic, market, and monetary conditions;
WHEREAS, the Committee has reviewed the terms and conditions of the 2003
Financing as stated in the Term Sheet and will rely on management and the
Company's outside general counsel to assure that the definitive legal documents
are consistent with and reflect the terms and conditions outlined in the Term
Sheet subject to negotiated changes to the transaction's terms after the Term
Sheet which management or the Company's general counsel determines are not
material to the Committee's financial evaluation of the transaction;
WHEREAS, the Committee's members have actively participated in the
negotiation of the Term Sheet, and the material comments and concerns raised by
the Committee members have been addressed to their satisfaction in the Term
Sheet, taking into account the Company's bargaining position and all the other
relevant facts and circumstances of the Company's present situation and
financial condition and the customary gives-and-takes during the negotiating
process in a transaction of this kind. The Committee has assumed and relied on
the accuracy and completeness of all information supplied or otherwise made
available to it, assumed that the Company's financial forecasts and
forward-looking materials have been reasonably prepared and reflect the best
currently available estimates and judgment of management as to the expected
future financial performance of the Company, and assumed that any differences
between the final executed closing documents and the Term Sheet would not change
the Committee's conclusions and recommendation.
NOW, THEREFORE, be it hereby
RESOLVED, that the Committee hereby concludes, with reliance on the
financial fairness opinion of Agema LLC and the other factors recited above,
that the 2003 Financing presents the best and, in all likelihood as assessed by
the Committee, the only source of capital to satisfy the Company's short-term
and long-term needs; that the 2003 Financing is fair from a financial point of
view to the creditors and public stockholders of the Company other than Essex,
Care Capital, Oracle, and Galen; and that the capital raising activities of the
Company have been reasonable and unbiased and that all reasonable alternatives
were considered in the process; and, accordingly, the Committee hereby
recommends to the Board that the Board approve and authorize the 2003 Financing
(with abstentions by appropriate Board members) and proceed to a prompt closing
of the transaction.
Attachments:
1. 12/19/03 Term Sheet
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APPENDIX F
HALSEY DRUG CO., INC.
1998 STOCK OPTION PLAN(1)
1. Purposes. The Plan described herein, as amended and restated, shall be
known as the "Halsey Drug Co., Inc. 1998 Stock Option Plan" (the "Plan"). The
purposes of the Plan are to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to
Employees, Directors and Consultants of the Company or its Subsidiaries (as
defined in Section 2 below) to whom Option's may be granted under this Plan, and
to promote the success of the Company's business.
Options granted hereunder may be either "incentive stock options," as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
"Non-ISO's," at the discretion of the Board and as reflected in the terms of the
written option agreement.
The Plan is not intended as an agreement or promise of employment. Neither
the Plan, nor any Option granted pursuant to the Plan, shall confer on any
person any right to continue in the employ of the Company. The right of the
Company to terminate an Employee is not limited by the Plan, nor by any Option
granted pursuant to the Plan, unless such right is specifically described by the
terms of any such Option.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Committee, if one has been appointed, or
the Board of Directors of the Company, if no Committee is appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Committee appointed under Section 4(a)
hereof.
(d) "Common Stock" shall mean the Common Stock, $.01 par value, of the
Company.
(e) "Company" shall mean Halsey Drug Co. Inc., a New York corporation.
(f) "Continuous Service or Continuous Status as an Employee" shall
mean the absence of any interruption or termination of service as an
Employee. Continuous Status as an Employee shall not be considered
interrupted in the case of sick leave, military leave, or any other leave
of absence approved by the Board.
(g) "Director" shall mean any person serving on the Board of
Directors.
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(1) Amended by the Board of Directors on April 15, 1999 to increase the number
of shares available for grant under the Plan from 2,600,000 shares to
3,600,000 shares. Ratified by the Company's shareholders on August 19, 1999.
Amended further by the Board of Directors on April 20, 2001 to increase the
number of shares available for grant under the Plan from 3,600,000 shares to
8,100,000 shares. Ratified by the Company's shareholders on June 14, 2001.
Amended further by the Board of Directors on August 26, 2003 to (i) increase
the number of shares available for grant under the Plan from 8,100,000
shares to 12,000,000 shares, (ii) permit the grant of Non-ISO's at a per
share price less than the fair market value of the Company's Common Stock on
the date of grant, and (iii) provide a maximum limit on options granted to
any individual during any calendar year of 5,500,000 shares. Amended further
by the Board of Directors on May 5, 2004 to (i) further increase the number
of shares available for grant under the Plan from 12,000,000 to 20,000,000
shares, and (ii) increase the maximum limit on options granted to any
individual during any calendar year to 8,750,000 shares. The Plan amendments
approved by the Board on August 26, 2003 and May 5, 2004 are subject to
ratification by the Company's shareholders.
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(h) "Employee" shall mean any person, including officers, employed by
the Company or any Parent or Subsidiary of the Company. The payment of a
Director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" shall mean (i) the closing price for a share
of the Common Stock on the exchange or quotation system which reports or
quotes the closing prices for a share of the Common Stock, as accurately
reported for any date (or, if no shares of Common Stock are traded on such
date, for the immediately preceding date on which shares of Common Stock
were traded) in The Wall Street Journal (or if The Wall Street Journal no
longer reports such price, in a newspaper or trade journal selected by the
Committee) or (ii) if no such price quotation is available, the price which
the Committee acting in good faith determines through any reasonable
valuation method that a share of Common Stock might change hands between a
willing buyer and a willing seller, neither being under any compulsion to
buy or to sell and both having reasonable knowledge of the relevant facts.
(k) "Incentive Stock Option" shall mean an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(l) "Non-ISO" shall mean an Option to purchase stock which is not
intended by the Committee to satisfy the requirements of Section 422 of the
Code.
(m) "Option" shall mean a stock option granted pursuant to the Plan.
(n) "Optioned Stock" shall mean the Common Stock subject to an Option.
(o) "Optionee" shall mean an Employee, Director or Consultant who
receives an Option.
(p) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(q) "Plan" shall mean this Halsey Drug Co. Inc. 1998 Stock Option
Plan, as amended from time to time.
(r) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Exchange Act.
(s) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(t) "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(u) "Ten Percent Shareholder" shall mean a person who owns (after
taking into account the attribution rules of Section 424(d) of the Code)
more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company, or a Subsidiary.
3. Stock Authorized.
Subject to the provisions of Section 11 of the Plan, the maximum aggregate
number of shares which may be Optioned and sold under the Plan is Twenty Million
(20,000,000) shares of authorized, but unissued, or reacquired Common Stock. The
maximum number of shares which may be subject to an Option granted in any
calendar year shall not exceed 8,750,000 shares (subject to adjustment under
Section 11 hereof consistent with Section 162(m) of the Code). If the shares
that would be issued or transferred pursuant to any Options are not issued or
transferred and ceased to be issuable or transferable for any reason, the number
of shares subject to such Option will no longer be charged against a limitation
provided for herein and may again be subject to Options. Notwithstanding the
proceeding sentence, with respect to any Option granted to any individual who is
a "covered employee" within the meaning of Section 162(m) of the Code that is
cancelled, the number of shares subject to such Option shall continue to count
against the maximum number of shares which may be the subject of Options granted
to such individual. For purposes of the preceding sentence if,
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after grant, the exercise price of an Option is reduced, such reduction shall be
treated as a cancellation of such Option and the grant of a new Option, and both
the cancellation of the Option and the new Option shall reduce the maximum
number of shares for which Options may be granted to the holder of such Option
in a calendar year.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for further
grant under the Plan.
4. Administration.
(a) Procedure. The Company's Board of Directors may appoint a Committee to
administer the Plan which shall be constituted so as to permit the Plan to
continue to comply with Rule 16b-3, as currently in effect or as hereafter
modified or amended. The Committee appointed by the Board of Directors shall
consist of not less than two members of the Board of Directors, to administer
the Plan on behalf of the Board of Directors, subject to such terms and
conditions as the Board of Directors may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board of
Directors. From time to time, the Board of Directors may increase the size of
the Committee and appoint additional members thereof, remove members (with or
without cause), and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan; provided, however, that at no time shall a Committee of
less than two members administer the Plan. Subject to the provisions of the
Plan, the Committee shall be authorized to interpret the Plan, to establish,
amend and rescind any rules and regulations relating to the Plan and to make all
other determinations necessary or advisable for the administration of the Plan.
Notwithstanding anything to the contrary contained herein, no member of the
Committee shall serve as such under this Plan unless such person is a
"Non-Employee Director" within the meaning of Rule 16b-3(b)(3)(i) of the
Exchange Act. A majority vote of the members of the Committee shall be required
for all of its actions.
A majority of the entire Committee shall constitute a quorum, and the
action of the majority of the Committee members present at any meeting at which
a quorum is present shall be the action of the Committee. All decisions,
determinations, and interpretations of the Committee shall be final and
conclusive on all persons affected thereby and shall, as to Incentive Stock
Options, be consistent with Section 422 of the Code. The Committee shall have
all of the powers and duties set forth herein, as well as such additional powers
and duties as the Board of Directors may delegate to it; provided, however, that
the Board of Directors expressly retains the right in its sole discretion (i) to
elect and to replace the members of the Committee, and (ii) to terminate or
amend this Plan in any manner consistent with applicable law.
(b) Powers of the Committee. Subject to the provisions of the Plan, the
Committee shall have the authority, in its discretion: (i) to grant Incentive
Stock Options, in accordance with Section 422 of the Code, or to grant
Non-ISO's; (ii) to determine the Fair Market Value of the Common Stock; (iii) to
determine the exercise price per share of Options to be granted which exercise
price shall be determined in accordance with Section 8 of the Plan; (iv) to
determine the persons to whom (including, without limitation, members of the
Committee) and the time or times at which, Options shall be granted and the
number of Shares to be represented by each Option; (v) to interpret the Plan;
(vi) to prescribe, amend and rescind rules and regulations relating to the Plan;
(vii) to determine the terms and provisions of each Option granted (which need
not be identical) and, with the consent of the holder thereof, modify or amend
each Option; (viii) to accelerate or defer (with the consent of the Optionee)
the exercise date of any Option; (ix) to authorize any person to execute on
behalf of the Company any instrument required to effectuate the grant of an
Option previously granted by the Board; and (x) to make all other determinations
deemed necessary or advisable for the administration of the Plan.
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(c) Subject to the provisions of this Plan and compliance with Rule 16b-3
of the Exchange Act, the Committee may grant options under this Plan to members
of the Company's Board of Directors, including members of the Committee, and in
such regard may determine:
(i) the time at which any such Option shall be granted;
(ii) the number of Shares covered by any such Option;
(iii) the time or times at which, or the period during which, any such
Option may be exercised or whether it may be exercised in whole or in
installments;
(iv) the provisions of the agreement relating to any such Option; and
(v) the Option Price of Shares subject to an Option granted such Board
member.
(d) Effect of the Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and binding on all Optionees and
any other holders of any Options granted under the Plan.
5. Eligibility. Incentive Stock Options may be granted only to Employees.
Non-ISO's may be granted to Employees as well as non-employee Directors and
Consultants of the Company as determined by the Board or any Committee. Any
person who has been granted an Option may, if he is otherwise eligible, be
granted an additional Option or Options.
Each grant of an Option shall be evidenced by an Option Agreement, and each
Option Agreement shall (1) specify whether the Option is an Incentive Stock
Option or a Non-ISO and (2) incorporate such other terms and conditions as the
Committee acting in its absolute discretion deems consistent with the terms of
this Plan, including, without limitation, a restriction on the number of shares
of stock subject to the Option which first become exercisable during any
calendar year.
To the extent that the aggregate Fair Market Value of the stock of the
Company subject to Incentive Stock Options granted (determined as of the date
such an Incentive Stock Option is granted) which first become exercisable in any
calendar year exceeds $100,000, such Options shall be treated as Non-ISO's. This
$100,000 limitation shall be administered in accordance with the rules under
Section 422(d) of the Code.
6. Effective Date and Term of Plan. The effective date of this Plan
("Effective Date") shall be the date it is adopted by the Board, provided the
shareholders of the Company (acting at a duly called meeting of such
shareholders or by the written consent of shareholders) approve this Plan within
twelve (12) months after such Effective Date. The effectiveness of Options
granted under this Plan prior to the date such shareholder approval is obtained
shall be contingent on such shareholder approval.
Subject to the provisions of Section 13 hereof, no Option shall be granted
under this Plan on or after the earlier of
(1) the tenth anniversary of the Effective Date of this Plan in which
event the Plan otherwise thereafter shall continue in effect until all
outstanding Options shall have been surrendered or exercised in full or no
longer are exercisable, or
(2) the date on which all of the Common Stock reserved for issuance
under Section 3 of this Plan has (as a result of the exercise or expiration
of Options granted under this Plan) been issued or no longer is available
for use under this Plan, in which event the Plan also shall terminate on
such date.
7. Term of Option. An Option shall expire on the date specified in such
Option, which date shall not be later than the tenth anniversary of the date on
which the Option was granted, except that, if any Employee, at any time an
Incentive Stock Option is granted to him or her, owns stock representing more
than ten percent (10%) of the total combined voting power of all classes of
Common Stock (or, under Section 424(d) of the Code is deemed to own stock
representing more than ten percent (10%) of the total combined voting power of
all such classes of Common Stock, by reason of the ownership of such classes of
stock, directly or indirectly, by or for any brother, sister, spouse, ancestor
or lineal descendant of such Employee, or by or for any corporation,
partnership, state or trust of which such Employee is a shareholder, partner or
beneficiary), the
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Incentive Stock Option granted him or her shall not be exercisable after the
expiration of five years from the date of grant or such earlier expiration as
provided in the particular Option agreement.
8. Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, immediately before the grant of
such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company
or any Parent or Subsidiary, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee, the per share exercise price shall be
no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Non-ISO, the per Share exercise price shall be
determined by the Board on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the Board
and may consist entirely of
(i) cash;
(ii) check;
(iii) promissory note, provided such promissory note shall be full
recourse as to principal and interest and shall bear interest at the market
rate, which market rate shall be equal to the rate of interest available to
the Optionee in a third party arms-length loan transaction of similar
nature and amount;
(iv) Shares of Common Stock having been held by the Optionee for at
least six (6) months prior to being surrendered as consideration for the
Shares to be issued upon exercise of an Option and having a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, or any combination of
such methods of payment; or
(v) such other consideration and method of payment for the issuance of
Shares to the extent permitted under New York law.
The Company shall be permitted to withhold shares to be issued under the Option
to pay related income tax withholding requirements. The amount of such tax
withholding shall be no greater than the applicable statutory withholding
amount.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Committee, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance, which in no event will be delayed more than thirty (30) days
from the date of the exercise of the Option, (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a shareholder shall exist with respect
to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment
will be made for a dividend or
F-5
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee, or Director or Consultant with
Respect to Non-ISO's. Non-ISO's granted pursuant to the Plan may be exercised
notwithstanding the termination of the Optionee's status as an employee, a
non-employee Director or a Consultant, except as provided in the Plan or as
provided by the terms of the Stock Option Agreement.
(c) Termination of Service as an Employee with Respect to Incentive Stock
Options. If the Continuous Service of any Employee terminates, he or she may,
but only within thirty (30) days (or such other period of time not exceeding
three (3) months as is determined by the Committee) after the date he or she
ceases to be an Employee of the Company, exercise his or her Option to the
extent that he or she was entitled to exercise it as of the date of such
termination. To the extent that he or she was not entitled to exercise the
Option at the date of such termination, or if he or she does not exercise such
Option (which he or she was entitled to exercise) within the time specified
herein, the Option shall terminate.
(d) Disability of Optionee. Notwithstanding the provisions of Section 9(c)
above, in the event an Employee is unable to continue his or her Continued
Service with the Company as a result of his or her total and permanent
disability (within the meaning of Section 22(e)(3) of the Code), he or she may,
but only within three (3) months (or such other period of time not exceeding
twelve (12) months as is determined by the Committee) from the date of
disability, exercise his or her Option to the extent he or she was entitled to
exercise it at the date of such disability. To the extent that he or she was not
entitled to exercise the Option at the date of disability, or if he or she does
not exercise such Option (which he or she was entitled to exercise) within the
time specified herein, the Option shall terminate.
(e) Death of Optionee. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his or her
death an Employee of the Company and who shall have been in Continuous
Status as an Employee, a Director or Consultant since the date of grant of
the Option, the Option may be exercised, at any time within twelve (12)
months following the date of death, by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that would have accrued had
the Optionee continued living one (1) month after the date of death; or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Committee) after the
termination of Continuous Status as an Employee, a Director or Consultant,
the Option may be exercised, at any time within three (3) months following
the date of death, by the Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the
extent of the right to exercise that had accrued at the date of
termination.
10. Transferability of Options.
(a) Incentive Stock Options may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by
the laws of descent or distribution and may be exercised, during the life time
of the Optionee only by the Optionee.
(b) The Committee may, in its discretion, authorize all or a portion of the
Non-ISOs to be granted to an Optionee to be on terms which permit transfer by
such Optionee to (i) the spouse, children or grandchildren of the Optionee (the
"Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of
such Immediate Family Members, or (iii) a partnership in which such Immediate
Family Members are the only partners, provided that (x) there may be no
consideration for any such transfer, (y) the Non-ISO Stock Option Agreement
pursuant to which such options are granted must be approved by the Committee,
and must expressly provide for transferability in a manner consistent with this
section, (z) subsequent transfers of transferred Options shall be prohibited
except those made by will or by the laws of descent or distribution, and
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(zz) such transfer is approved in advance by the Committee. Following transfer,
any such Options shall continue to be subject to the same terms and conditions
as were applicable immediately prior to transfer, provided that for purposes of
determining the rights of exercise under the Option, the term "Optionee" shall
be deemed to refer to the transferee. The termination of service as an employee,
non-employee director or consultant shall continue to be applied with respect to
the original Optionee, following which the options shall be exercisable by the
transferee only to the extent, and for the periods specified in Section 9 of the
Plan and in the Stock Option Agreement.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split or the payment of a stock dividend with
respect to the Common Stock or any other increase or decrease in the number of
issued shares of Common Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
exercise price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, or
in the event of a proposed sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another corporation, the
Board may, in the exercise of its sole discretion in such instances, accelerate
the vesting of all or any portion of Options then outstanding.
12. Time for Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee,
non-employee Director and Consultant to whom an Option is so granted within a
reasonable time after the date of such grant.
13. Amendment and Termination of the Plan. (a) The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable; provided that, the following revisions or amendments shall require
approval of the holders of a majority of the outstanding shares of the Company
entitled to vote:
(i) any increase in the number of Shares subject to the Plan, other
than in connection with an adjustment under Section 11 of the Plan;
(ii) any change in the class of Employees which are eligible
participants for Options under the Plan; or
(iii) if shareholder approval of such amendment is required for
continued compliance with Rule 16b-3.
(b) Shareholder Approval. Any amendment requiring shareholder approval
under Section 13(a) of the Plan shall be solicited as described in Section 17 of
the Plan.
(c) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the Board,
which agreement must be in writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as
F-7
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written Option
agreements in such form as the Committee shall approve.
17. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve months before or after
the date the Plan is adopted. If such shareholder approval is obtained at a duly
held shareholders' meeting, it may be obtained by the affirmative vote of the
holders of a majority of the outstanding shares of the Company present or
represented and entitled to vote thereon. The approval of such shareholders of
the Company shall be (1) solicited substantially in accordance with Section
14(a) of the Exchange Act and the rules and regulations promulgated thereunder,
or (2) solicited after the Company has furnished in writing to the holders
entitled to vote substantially the same information concerning the Plan as that
which would be required by the rules and regulations in effect under Section
14(a) of the Exchange Act at the time such information is furnished.
18. Miscellaneous Provisions. An Optionee shall have no rights as a
shareholder with respect to any Shares covered by his Option until the date of
the issuance of a stock certificate to him for such shares.
19. Other Provisions. The stock option agreement authorized under the
Plan shall contain such other provisions, including, without limitation,
restrictions upon the exercise of the Option, as the Committee shall deem
advisable. Any such stock option agreement shall contain such limitations and
restrictions upon the exercise of the Option as shall be necessary in order that
such option will be an Incentive Stock Option as defined in Section 422 of the
Code if an Incentive Stock Option is intended to be granted.
20. Indemnification of Committee. In addition to such other rights of
indemnification as they may have as Directors or as members of the Committee,
the members of the Committee shall be indemnified by the Company against the
reasonable expenses, including attorneys' fees actually and necessarily incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such Board
member is liable for negligence or misconduct in the performance of his duties;
provided that within 60 days after institution of any such action, suit or
proceeding a Board member shall in writing offer the Company the opportunity, at
its own expense, to handle and defend the same.
21. Application of Funds. The proceeds received by the Company from the
sale of Common Stock pursuant to Options will be used for general corporate
purposes.
22. No Obligation to Exercise Option. The granting of an Option shall
impose no obligation upon the Optionee to exercise such Option.
23. Other Compensation Plans. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plans in effect for
the Company or any Subsidiary, nor shall the Plan preclude the Company from
establishing any other forms of incentive or other compensation for employees
and Directors of the Company or any Subsidiary.
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24. Singular, Plural; Gender. Whenever used herein, nouns in the singular
shall include the plural, and the masculine pronoun shall include the feminine
gender.
25. Headings, Etc., No Part of Plan. Headings of Articles and Sections
hereof are inserted for convenience and reference; they constitute no part of
the Plan.
26. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of New York, except to the extent
preempted by Federal law. The Plan is intended to comply with Rule 16b-3. Any
provisions inconsistent with Rule 16b-3 shall be inoperative and shall not
affect the validity of the Plan, unless the Board of Directors shall expressly
resolve that the Plan is no longer intended to comply with Rule 16b-3.
Dated: May 5, 2004
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APPENDIX G
DEBENTURE AND SHARE PURCHASE AGREEMENT
This Debenture and Share Purchase Agreement ("Agreement") is made as of
February 6, 2004 by and among Halsey Drug Co., Inc., a New York corporation
("Company"), Essex Woodlands Health Ventures V, L.P., a Delaware limited
partnership ("Essex"), Care Capital Investments, L.P., a Delaware limited
partnership ("Care Capital"), Galen Partners III, L.P., a Delaware limited
partnership ("Galen and, together with Essex, Care Capital, Galen and the
Additional Investors joining the Agreement in accordance with its terms, the
"Purchasers").
PRELIMINARY STATEMENTS
The Company desires to sell to the Purchasers, and the Purchasers desire to
purchase from the Company, the Convertible Senior Secured Debentures in the
aggregate principal amount of up to $14 million, subject to increase as provided
herein, substantially in the form of Exhibit A attached to this Agreement (as
they may be amended, supplemented or otherwise modified from time to time in
accordance with their terms, the "Debentures"), all on the terms and subject to
the conditions set forth in this Agreement.
AGREEMENT
In consideration of the mutual covenants contained in this Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereby agree as follows:
ARTICLE I
INTENTIONALLY OMITTED
ARTICLE II
SALE AND PURCHASE OF DEBENTURES; SECURITY DOCUMENTS
2.1. Sale and Purchase of Debentures
At the initial Closing, on the terms and subject to the conditions and in
reliance on the representations and warranties contained in this Agreement, or
made pursuant to this Agreement, the Company shall issue, sell and deliver to
each Purchaser and such Purchaser's designees, and each Purchaser, severally and
not jointly, will purchase from the Company, the Debentures for the purchase
prices set forth opposite such Purchaser's name on Exhibit B. Such purchase
price may be paid in a combination of cash payments and the exchange of Bridge
Notes plus accrued and unpaid interest, in each case as specified on Exhibit B.
2.2. Company Security Documents
All of the obligations of the Company under the Transaction Documents to or
for the benefit of the Purchasers (or their agents and representatives) shall be
secured by the following items (collectively, the "Company Debenture
Collateral"), each of which, except for Permitted Liens, shall be (i) junior and
subordinate to the lien granted to the holders of the Senior Notes, and (ii)
senior and superior to those liens granted to the investors in the Existing
Debentures, all as more specifically set forth in the Subordination Agreement:
(a) a lien on all the personal property and assets of the Company now
existing or hereinafter acquired granted pursuant to the Company General
Security Agreement, including, without limitation, a lien on and security
interest in all of the issued and outstanding shares of common stock of the
Guarantors pursuant to a separate Stock Pledge Agreement; and
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(b) collateral assignments of all leases, contracts, patents,
copyrights, trademarks and service marks of the Company.
Notwithstanding the foregoing, each of the Purchasers acknowledge and agree
that the liens and security interests granted by the Company to secure the
Company's obligations under the Debentures and the Transaction Documents shall
be released upon the written consent of the holders of at least 60% of the
outstanding principal amount of the Debentures, and that upon receipt of such
consent, the Company shall be authorized to file UCC-3 Termination Statements
(or such other filings as shall be necessary) in the appropriate jurisdictions
to release the lien and security interests granted by the Company in favor of
the Purchasers under the Transaction Documents.
2.3. Guaranties
All of the obligations of the Company under the Debentures shall be
guaranteed pursuant to the Guaranties by the Guarantors.
2.4. Guarantor Security Documents
All of the obligations of the Guarantors under the Guaranties shall be
secured by the following (collectively, the "Guarantor Debenture Collateral")
each of which, except for Permitted Liens, shall be a lien ranking (i) junior
and subordinate to the lien granted to the holders of the Senior Notes, and (ii)
senior and superior to those liens granted to the investors in the Existing
Debentures, all as more specifically set forth in the Subordination Agreement:
(a) a lien on all of the personal property and assets of the
respective Guarantors now existing or hereinafter acquired, granted
pursuant to the Guarantors General Security Agreement; and
(b) collateral assignments of all leases, contracts, patents,
copyrights, trademarks and service marks of the Guarantors.
Notwithstanding the foregoing, each of the Purchasers acknowledge and agree
that the liens and security interests granted by the Guarantors to secure each
such Guarantor's obligations under the Transaction Documents shall be released
upon the written consent of the holders of at least 60% of the outstanding
principal amount of the Debentures, and that upon receipt of such consent, the
Company shall be authorized to file UCC-3 Termination Statements (or such other
filings as shall be necessary) in the appropriate jurisdictions to release the
liens and security interests granted by the Guarantors in favor of the
Purchasers under the Transaction Documents.
ARTICLE III
CLOSING; ADJUSTMENTS TO CONVERSION PRICE
3.1. Closing
The initial Closing will take place at the offices of St. John & Wayne,
L.L.C., Two Penn Plaza East, Newark, New Jersey 07105 simultaneously with the
execution of this Agreement, or such other place, time and date as shall be
mutually agreed to by the Company and the Purchasers. The Company and the
Purchasers acknowledge and agree that the Debentures may be sold by the Company
on one or more Closing Dates; provided, however, that (i) the aggregate
principal amount of the Debentures shall not exceed $14 million without the
prior written consent of the holders of at least 60% of the principal amount of
the Debentures then held by Capital Investment II, LP, Essex Woodlands Health
Ventures V, L.P., Galen Partners III, L.P. and (ii) that no Debentures shall be
issued after the Termination Date. Upon the issuance of additional Debentures
under this Agreement, any additional Purchaser (each an "Additional Investor")
shall be required to execute a Joinder Agreement, which Joinder Agreement shall
include the aggregate principal amount of the Debentures issued to such
Purchaser. Any Additional Investors in the Debentures executing a Joinder
Agreement shall be deemed a "Purchaser" for all purposes of this Agreement. Each
issuance to an Additional Investor shall be made on the terms and conditions of
this Agreement.
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3.2. Closing Deliveries
On the Closing Date, the Company shall deliver to each Purchaser a
Debenture, dated the Closing Date, in the principal amount set forth opposite
the name of such Purchaser in Exhibit B. The Company shall deliver the foregoing
Debentures against receipt by the Company from each Purchaser of an amount equal
to the aggregate purchase price for the Debentures to be purchased by such
Purchaser at the Closing, as set forth opposite the name of such Purchaser on
Exhibit B, in each case by surrender of Bridge Notes and/or wire transfer in
immediately available funds in U.S. dollars to an account designated by the
Company or a certified or official bank check payable to the order of the
Company drawn upon or issued by a bank which is a member of the New York
Clearinghouse for banks.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As a material inducement to each Purchaser to enter into and perform its
obligations under this Agreement, except as set forth in the Schedule of
Exceptions, the Company hereby represents and warrants to each Purchaser as
follows:
4.1. Organization and Existence
The Company is a corporation duly organized, validly existing and in good
standing under the laws of New York and is qualified to do business in such
other jurisdictions as the nature or conduct of its operations or the ownership
of its properties require such qualification. The Company does not own or lease
any property or engage in any activity in any jurisdiction that might require
qualification to do business as a foreign corporation in such jurisdiction and
where the failure to so qualify could reasonably be expected to have a Material
Adverse Effect or subject the Company to a material liability. The Company has
furnished the Purchasers with true, correct and complete copies of its
Certificate of Incorporation, By-Laws and all amendments thereto, as of the date
hereof.
4.2. Subsidiaries and Affiliates
Section 4.2 of the Schedule of Exceptions sets forth the name, jurisdiction
of incorporation and authorized and outstanding capitalization of each
Subsidiary. Except as disclosed in Section 4.2 of the Schedule of Exceptions,
all of the outstanding shares of capital stock of each of the Subsidiaries are
duly and validly authorized, are validly issued and are fully paid and
nonassessable and have been offered, issued, sold and delivered in compliance
with applicable federal and state securities laws. Except as set forth in
Section 4.2 of the Schedule of Exceptions, the Company has, and upon the Closing
will have, no Subsidiaries and will not own of record or beneficially any
capital stock or equity interest or investment in any corporation, association
or business entity. Except as disclosed in Section 4.2 of the Schedule of
Exceptions, each Subsidiary is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation and has
all requisite corporate power and authority to carry on its business as now
conducted and proposed to be conducted. Except as set forth in Section 4.2 of
the Schedule of Exceptions, no Subsidiary owns or leases any property or engages
in any activity in any jurisdiction which might require such Subsidiary to
qualify to do business as a foreign corporation in such jurisdiction and where
the failure to so qualify could reasonably be expected to have a Material
Adverse Effect or subject such Subsidiary to a material liability.
4.3. Capitalization
(a) As of the date hereof, the Company's authorized capital stock consists
of 80,000,000 shares of Common Stock, of which 21,601,704 shares are outstanding
and approximately 239,200,000 shares are reserved for issuance for the purposes
set forth in Section 4.3 of the Schedule of Exceptions. Set forth in Section 4.3
of the Schedule of Exceptions is a complete and correct list, as of the date
hereof, and as of the Closing Date, of the number of shares of Common Stock held
by the Company's public stockholders generally, stockholders holding in excess
of 5% of the Company's Common Stock and all holders of options,
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warrants, debentures and other securities convertible or exercisable for Common
Stock. Such schedule is complete and correct in all material respects.
(b) Upon the effectiveness of the Charter Amendment, the Company's
authorized capital stock will consist of (i) 650,000,000 shares of Common Stock,
and (ii) 290,000,000 shares of Preferred Stock, of which (1) 45,000,000 shares
will be Series A Preferred, (2) 25,000,000 shares will be Series B Preferred,
(3) 70,000,000 shares will be Series C-1 Preferred, (4) 50,000,000 shares will
be Series C-2 Preferred and (5) 100,000,000 shares will be Series C-3 Preferred.
(c) All the issued and outstanding shares of capital stock of the Company
are (i) duly authorized and validly issued, (ii) fully paid and nonassessable
and (iii) have been offered, issued, sold and delivered by the Company in
compliance with applicable federal and state securities laws. Other than as set
forth in Section 4.3 of the Schedule of Exceptions, there are no outstanding
preemptive, conversion or other rights, options, warrants, calls, agreements or
commitments granted or issued by or binding upon the Company or any Subsidiary,
for the purchase or acquisition of any shares of its capital stock or securities
convertible into or exercisable or exchangeable for capital stock.
4.4. Authorization
(a) Each of the Company and the Guarantors has all requisite corporate
power and authority (i) to execute and deliver, and to perform and observe their
respective obligations under, the Transaction Documents to which it is a
respective party, and (ii) to consummate the transactions contemplated hereby
and thereby, including, without limitation, the grant of any security interest,
mortgage, payment trust, guaranty or other security arrangement by the Company
in, on or in respect of the Company Debenture Collateral, and by any and all of
the Guarantors in, on or in respect of the Guarantor Debenture Collateral.
(b) All corporate action on the part of (i) the Company and the directors
and, except as set forth in Section 4.4(b) of the Schedule of Exceptions or as
otherwise provided in Sections 9.7 and 9.17 of this Agreement, the stockholders
of the Company necessary for the authorization, execution, delivery and
performance by the Company of the Transaction Documents and the transactions
contemplated therein, and for the authorization, issuance and delivery of the
Debentures and Shares, has been taken and (ii) each Guarantor and their
respective directors and stockholders necessary for the authorization,
execution, delivery and performance by each Guarantor of the Guarantors General
Security Document, the Guaranties and the transactions contemplated therein or
in any other Transaction Document with respect to the Guarantors, has been
taken.
4.5. Binding Obligations; No Material Adverse Contracts
The Transaction Documents constitute valid and binding obligations of the
Company and the Guarantors enforceable in accordance with their respective
terms. Except as set forth in Section 4.5 of the Schedule of Exceptions and as
provided in Section 9.17 of this Agreement, the execution, delivery and
performance by the Company and the Guarantors of the Transaction Documents and
compliance therewith will not result in any violation of and will not conflict
with, or result in a breach of any of the terms of, or constitute a default, or
accelerate or permit the acceleration of any rights or obligations, under, any
provision of state, local, federal or foreign law to which the Company or either
of the Guarantors is subject, the Certificate of Incorporation, as amended, or
the By-Laws, as amended, of the Company or either of the Guarantors, the Watson
Term Loan and the Existing Debentures or any other mortgage, indenture,
agreement, instrument, judgment, decree, order, rule or regulation or other
restriction to which the Company or either of the Guarantors is a party or by
which it is bound, and except for Permitted Liens, result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company or either of the Guarantors pursuant to any such term.
Except as set forth in Section 4.3 of the Schedule of Exceptions, no stockholder
of the Company or either Guarantor has or will have any preemptive rights or
rights of first refusal by reason of the issuance of the Debentures or Shares
issuable upon conversion or exercise of the Debentures.
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4.6. Compliance with Instruments
Neither the Company nor any Subsidiary (a) is in violation of its
organizational documents, (b) is in default, and no event has occurred which,
with the giving of notice, or the lapse of time, or both, would constitute such
a default, in the due performance or observance of any term, covenant or
condition contained in any material agreement, including, without limitation,
the Watson Term Loan, and the Existing Debentures, any license, indenture or
other instrument to which it is a party or by which it is bound or to which any
of its property or assets is subject or (c) is in violation of any law,
ordinance, governmental rule, regulation or court decree to which it or its
property may be subject (including without limitation any Legal Requirements
relating to the biotechnology and pharmaceutical industry) except for (x) such
defaults and violations set forth in Section 4.6 of the Schedule of Exceptions,
and (y) such violations under clause (b) and (c) that would not, individually or
in the aggregate, have a Material Adverse Effect.
4.7. Litigation
Except as set forth in Section 4.7 of the Schedule of Exceptions, there are
no actions, suits or proceedings (including governmental or administrative
proceedings), investigations, third-party subpoenas or inquiries by any
regulatory agency, body or other governmental authority, to which the Company or
any of the Subsidiaries is a party or is subject, or to which any of their
authorizations, consents and approvals or other properties or assets, is
subject, which is pending, or, to the best knowledge of the Company, threatened
or contemplated against the Company or any Subsidiary, or any of such property
or assets, that, individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect. The Company is not subject to any actions,
suits or proceedings (including governmental or administrative proceedings),
investigation, third-party subpoenas or inquiries by any regulatory agency, body
or other governmental authority or any third Person regarding its accounting
practices or policies.
4.8. Financial Information; SEC Documents
(a) The Company has furnished to the Purchasers complete and correct copies
of the consolidated financial statements of the Company and its Subsidiaries,
including consolidated balance sheets as of December 31, 2002 and 2001 and
consolidated statements of operations, changes in cash flows and stockholders'
equity, covering the three years ended December 31, 2002, all of which
statements have been certified by Grant Thornton LLP, independent accountants
within the meaning of the Securities Act and the rules and regulations
thereunder, and all of which statements are included or incorporated by
reference in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 filed with the SEC under the Exchange Act. Such financial
statements have been prepared in conformity with GAAP applied on a consistent
basis throughout the periods involved, except as otherwise stated therein and
fairly present the consolidated financial position of the Company and its
Subsidiaries as of the dates thereof and their consolidated results of
operations for such periods. The Company's auditors have raised no material
issues nor delivered any material correspondence with respect to any of the
Company's financial statements or financial affairs.
(b) The Company has also furnished to the Purchasers the unaudited
consolidated balance sheet of the Company and its Subsidiaries as of September
30, 2003, and the related unaudited consolidated statements of operations,
consolidated statements of cash flow and consolidated statements of
stockholders' equity for the nine months ended September 30, 2003. Such
financial statements were prepared in conformity with GAAP applied on a basis
consistent with the financial statements referred to in Section 4.8(a) and
fairly present the consolidated financial position of the Company and its
Subsidiaries as of such date and their consolidated results of operations for
such periods (subject to normal year-end adjustments).
(c) None of the documents filed by the Company with the SEC since December
31, 1997 contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements contained therein not false or misleading in light of the
circumstances in which they were made. There are no facts which the Company has
not disclosed to the Purchasers which, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect.
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(d) Except as set forth in Section 4.8 of the Schedule of Exceptions or in
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
2003, subsequent to December 31, 2002, (i) none of the Company or any Guarantor
has incurred any liability or obligations, direct or indirect, or entered into
any transactions not in the ordinary course of business, in either case which is
material to the Company or any Guarantor, as a whole, (ii) there has not been
any material change in the short-term debt or long-term debt of any of the
Company or any Guarantor, (iii) there has been no material change in the
Company's accounting principles and (iv) none of the Company or any Guarantor
has taken any actions which would have been prohibited under Article X if taken
after the date hereof.
(e) Except as set forth in Section 4.8 of the Schedule of Exceptions or in
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
2003, since December 31, 2002, there has been no Material Adverse Effect with
respect to the Company and its Subsidiaries.
4.9. Offering Exemption
(a) None of the Company, its Affiliates or any Person acting on its or
their behalf has engaged or will engage, in connection with the offering and
sale of the Debentures, in any form in general solicitation or general
advertising within the meaning of Rule 502(c) under the Securities Act, and none
of the Company, or any of its Affiliates has, directly or indirectly, solicited
any offer to buy, sell or offer to sell or otherwise negotiate in respect of, in
the United States or to any United States citizen or resident, any security
which is or would be integrated with the sale of the Debentures in a manner that
would require the Debentures to be registered under the Securities Act. Assuming
the accuracy of the representations and warranties given by the Purchasers in
Article V below, the offering, sale and issuance of the Debentures and Shares
have been, are, and will be exempt from registration under the Securities Act,
and such offering, sale and issuance is also exempt from registration under
applicable state securities and "blue sky" laws.
(b) None of the Company or any Guarantor is, or upon consummation of the
transactions contemplated under the Transaction Documents, will be, subject to
registration as an "investment company" under the 1940 Act.
4.10. Permits; Governmental and Other Approvals
(a) Other than as set forth in Section 4.10 of the Schedule of Exceptions
or in the Company Reports, each of the Company and its Subsidiaries possesses
all necessary consents, approvals, authorizations, orders, registrations,
stamps, filings, qualifications, licenses, permits or other analogous acts by,
of, from or with all public, regulatory or governmental agencies, bodies and
authorities and all other third parties, to own, lease and operate its
respective properties and to carry on its business as now conducted and proposed
to be conducted except to the extent that the failure to obtain any such
consents, approvals, authorizations, orders, registrations, stamps, filings,
qualifications, licenses or permits would not have a Material Adverse Effect.
Other than as set forth in Section 4.10 of the Schedule of Exceptions, or as
otherwise contemplated in Article VI and IX hereof, no approval, consent,
authorization or other order of, and no designation, filing, registration,
qualification or recording with, any governmental authority or any other Person
is required in connection with the Company's valid execution, delivery and
performance of this Agreement or the offer, issuance and sale of the Debentures
by the Company to the Purchasers or the consummation of any other transaction
contemplated on the part of the Company hereby.
(b) Without limiting the generality of the representations and warranties
made in Section 4.10(a), the Company represents and warrants that (i) it and the
Guarantors are in compliance with all applicable provisions of the FDC Act,
except where any such noncompliance could not reasonably be expected to have a
Material Adverse Effect; (ii) its products and those of the Guarantors are not
adulterated or misbranded and are in lawful distribution; and (iii) it and the
Guarantors are, and will be, in compliance with the following specific
requirements: (A) the Company and the Guarantors have registered all of their
facilities with the FDA, (B) the Company and the Guarantors have listed their
drug products with the FDA, (C) each drug product marketed by the Company or any
Guarantor is the subject of an application approved by the FDA, (D) all drug
products marketed by the Company or either Guarantor comply with any conditions
of approval and the terms of the application submitted to the FDA, (E) all of
the Company's and the Guarantors' drug
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products are manufactured in compliance with the FDA's good manufacturing
practice regulations, (F) all of the Company's and the Guarantors' products are
labeled and promoted in accordance with the terms of the marketing application
and the provisions of the FDC Act, (G) all adverse events relating to the
Company and the Guarantors that were required to be reported to the FDA have
been reported to the FDA in a timely manner, (H) each of the Company and the
Guarantors is in compliance with the terms of the consent agreement entered into
by the Company with the United States Attorney for the Eastern District of New
York on behalf of the FDA on June 29, 1993, as amended, (I) to the Company's
best knowledge, neither the Company nor any Guarantor is employing or utilizing
the services of any individual who has been debarred under the FDC Act, (J) all
stability studies required to be performed for products distributed by the
Company or a Guarantor have been completed or are ongoing in accordance with the
applicable FDA requirements, (K) none of the Company's or a Guarantor's products
have been exported for sale outside the United States, and (L) each of the
Company and the Guarantors is in compliance with the provisions of the
Prescription Drug Marketing Act, to the extent applicable; except, with respect
to subclauses (iii)(E), (iii)(H), (iii)(G), (iii)(K) and (iii)(L) above, where
any such noncompliance could not reasonably be expected to have a Material
Adverse Effect.
(c) Without limiting the generality of the representations and warranties
made in Section 4.10(a), the Company also represents and warrants that it and
the Guarantors are in compliance with all applicable provisions of the CSA and
that the Company and the Guarantors are in compliance with the following
specific requirements, except where such noncompliance could not reasonably be
expected to have a Material Adverse Effect: (i) the Company and the Guarantors
are registered with the DEA at each facility where controlled substances are
exported, imported, manufactured or distributed; (ii) all controlled substances
are stored and handled pursuant to DEA security requirements; (iii) all records
and inventories of receipt and distributions of controlled substances are
maintained in the manner and form as required by DEA regulations; (iv) all
reports, including, but not limited to, ARCOS, manufacturing quotas, production
quotas, and disposals, have been submitted to the DEA in a timely manner; (v)
all adverse events, including thefts or significant losses of controlled
substances, have been reported to the DEA in a timely manner; (vi) to the
Company's best knowledge, neither the Company nor any Guarantor is employing any
individual, with access to controlled substances, who has previously been
convicted of a felony involving controlled substances; and (vii) any imports or
exports of controlled substances have been conducted in compliance with the CSA
and DEA regulations.
4.11. Sales Representatives; Customers and Key Employees
(a) Except as set forth in Section 4.11 of the Schedule of Exceptions, to
the best knowledge of the Company, no independent sales representatives,
customers, officers or key employees or group of key employees of the Company or
any Guarantor has any intention to terminate his, her or its relationship with
the Company or such Guarantor on or after the Closing or, in the case of
employees, leave the employ of the Company or any of the Guarantors on and after
the Closing, nor has the Company or any of the Guarantors discussed or taken any
steps to terminate the employment of any officer or key employee or group of key
employees. Other than as set forth in Section 4.11 of the Schedule of
Exceptions, all personnel of the Company and any of the Guarantors are employed
on an "at will" basis and may be terminated upon notice of not more than 30
days.
(b) To the Company's best knowledge, no employee of the Company or any of
the Guarantors, or any consultant (including any scientific advisor) with whom
the Company or any of the Guarantors has contracted, is in violation of any term
of any employment contract, proprietary information agreement, licenses, or any
other agreement relating to the right of any such individual to be employed by,
or to contract with, the Company or any of the Guarantors because of the nature
of the business conducted by the Company and the Guarantors; and the continued
employment by the Company or any of the Guarantors of their present employees,
and the performance of the Company's and the Guarantor's contracts with its
independent contractors, will not result in any such violation, except where any
such violation could not reasonably be expected to have a Material Adverse
Effect. None of the Company or any of the Guarantors has received any written,
or to the best knowledge of the Company, oral notice alleging that any such
violation has occurred.
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(c) All of the Company's and any of the Guarantor's consultants (including
scientific advisors), officers and key employees are subject to customary
non-disclosure, non-competition and assignment of invention agreements.
4.12. Copyrights, Trademarks and Patents; Licenses
(a) Section 4.12 of the Schedule of Exceptions sets forth a list of all of
the Company's and any Guarantor's Intellectual Property Rights. The Intellectual
Property Rights are, to the best of the Company's best knowledge, fully valid
and are in full force and effect.
(b) The Company or a Guarantor owns outright all of the Intellectual
Property Rights listed on Section 4.12 of the Schedule of Exceptions attached
hereto free and clear of all liens and encumbrances except for the Permitted
Liens, and does not pay, and is not required to pay, any royalty to anyone under
or with respect to any of them.
(c) Neither the Company nor any Guarantor has licensed anyone to use any of
such Intellectual Property Rights and has no knowledge of, nor has it received
any notice relating to, the infringing use by the Company or any Guarantor of
any Intellectual Property Rights.
(d) The Company has no knowledge, nor has it received any notice (i) of any
conflict with the asserted rights of others with respect to any Intellectual
Property Rights used in, or useful to, the operation of the business conducted
by the Company and the Guarantors or with respect to any license under which the
Company or a Guarantor is licensor or licensee; or (ii) that the Intellectual
Property Rights infringe upon the rights of any third party.
(e) Except as set forth in Section 4.12 of the Schedule of Exceptions,
neither the Company nor any Guarantor is a party to any license agreement
pursuant to which the Company is the licensor or licensee of any Intellectual
Property Rights.
4.13. Inventory
All inventory of the Company and the Subsidiaries consists of a quality and
quantity usable and salable in the ordinary course of business, except for
obsolete items and items of below-standard quality, all of which have been
written off or written down to net realizable value on the consolidated balance
sheet of the Company and its Subsidiaries as of September 30, 2003.
The quantities of each type of inventory (whether raw materials,
work-in-process, or finished goods) are not excessive, but are reasonable and
warranted in the present circumstances of the Company.
4.14. Registration Rights
Except as provided for in this Agreement or as set forth in Section 4.14 of
the Schedule of Exceptions, neither the Company nor any Guarantor is under any
obligation to register any of its currently outstanding securities or any of its
securities which may hereafter be issued under the Securities Act in connection
with any sale thereof.
4.15. No Discrimination; Labor Matters
Neither the Company nor any Guarantor in any manner or form discriminates,
fosters discrimination or permits discrimination against any Person based on
gender or age, or belonging to any minority race or believing in any minority
creed or religion. No charge of discrimination in employment, whether by reason
of age, gender, race, religion or other legally protected category that has been
asserted or is now pending or, to the best knowledge of the Company and the
Guarantors, threatened before the United States Equal Employment Opportunity
Commission or other federal or governmental authorities. The Company and each
Guarantor is in compliance with all applicable Legal Requirements respecting
employment practices, terms and conditions of employment and wages and hours and
is not and has not engaged in any unfair labor practice. The Company and each
Guarantor has withheld and paid to the appropriate governmental authorities or
is holding for payment not yet due to governmental authorities, all amounts
required to be withheld from such employees of the Company or the Guarantors and
is not liable for any arrears of wages, taxes, penalties or
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other sums for failure to comply with any of the foregoing. Except as set forth
in Section 4.15 of the Schedule of Exceptions, in connection with the operation
of the Company's and each Guarantor's business, (a) there is no unfair labor
practice charge or complaint against the Company or any Guarantor pending before
the National Labor Relations Board or any other governmental agency arising out
of the Company's or any Guarantor's activities and the Company has no knowledge,
nor has it received notice of any facts or information that would give rise
thereto; (b) there is no significant labor trouble, labor strike, material
controversy, material unsettled grievance, dispute, request for representation,
slowdown or stoppage actually pending against or affecting the Company or any of
the Guarantors and, to the best knowledge of the Company, none is or has been
threatened; and (c) none of the Company or any of the Guarantors has any
collective bargaining agreements with respect to any personnel nor is the
Company aware of any current attempts to organize or establish any labor union
or employee association with respect to any personnel, nor is there any
certification, interim certifications or voluntary recognition of any such union
with regard to a bargaining unit.
4.16. Environmental Matters
(a) Without limiting the generality of the representations and warranties
given in Section 4.10(a), each of the Company and the Subsidiaries has obtained
all environmental, health and safety permits, licenses and other authorizations
necessary or required for the operation of its business, except where the
failure to possess such franchises, licenses, permits or other authority could
not reasonably be expected to have a Material Adverse Effect, and all such
permits, licenses and other authorizations are in full force and effect and each
of the Company and, except as set forth in Section 4.16 of the Schedule of
Exceptions, the Subsidiaries is in compliance with all terms and conditions of
such permits, except where such noncompliance could not reasonably be expected
to have a Material Adverse Effect.
(b) There is no proceeding pending or, to the best knowledge of the
Company, threatened, which may result in the denial, rescission, termination,
modification or suspension of any environmental or health or safety permits,
licenses or other authorizations necessary for the operation of the business of
the Company and the Subsidiaries.
(c) During the occupancy by the Company or any Subsidiary of any real
property owned or leased by the Company or such Subsidiary, neither the Company
nor any Subsidiary, and to the best knowledge of the Company, no other Person,
has caused or permitted materials to be generated, released, stored, treated,
recycled, disposed of on, under or at such parcels, which materials, if known to
be present, would require cleanup, removal or other remedial or responsive
action under any environmental Legal Requirements. To the best knowledge of the
Company, there are no underground storage tanks and no PCB, PCB contaminated oil
or asbestos on any property leased by the Company or any Subsidiary.
(d) Except as set forth in Section 4.16 of the Schedule of Exceptions,
neither the Company nor any Subsidiary is subject to any judgment, decree, order
or citation related to or arising out of environmental Legal Requirements, or
has received notice that it has been named or listed as a potentially
responsible party by any Person in any matter arising under environmental Legal
Requirements.
(e) To the Company's best knowledge, each of the Company and the
Subsidiaries has disposed of all waste in full compliance with all environmental
Legal Requirements.
4.17. Taxes
The Company and each of the Guarantors have (a) filed all necessary income,
franchise and other material tax returns, domestic and foreign, (b) paid all
taxes shown as due thereunder and (c) withheld and paid to the appropriate tax
authorities all amounts required to be withheld from wages, salaries and other
remuneration to employees. The Company has no knowledge, nor has it received
notice, of any tax deficiency which might be assessed against the Company or any
Guarantor which, if so assessed, could reasonably be expected to have a Material
Adverse Effect.
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4.18. Employee Benefit Plans and Similar Arrangements
(a) Section 4.18 of the Schedule of Exceptions lists all employee benefit
plans and collective bargaining, labor and employment agreements or other
similar arrangements in effect to which the Company, the Guarantors, and any of
their respective ERISA Affiliates are a party or by which the Company, the
Guarantors, and any of respective ERISA Affiliates are bound, legally or
otherwise, including, without limitation, (i) any profit-sharing, deferred
compensation, bonus, stock option, stock purchase, pension, retainer,
consulting, retirement, severance, welfare or incentive plan, agreement or
arrangement; (ii) any plan, agreement or arrangement providing for fringe
benefits or perquisites to employees, officers, directors or agents, including
but not limited to benefits relating to employer-supplied automobiles, clubs,
medical, dental, hospitalization, life insurance and other types of insurance,
retiree medical, retiree life insurance and any other type of benefits for
retired and terminated employees; (iii) any employment agreement; or (iv) any
other "employee benefit plan" (within the meaning of Section 3(3) of ERISA)
(herein referred to individually as "Plan" and collectively as "Plans").
(b) True and complete copies of the following documents with respect to any
Plan of the Company, its Subsidiaries, and each ERISA Affiliate, as applicable,
have been made available to each of the Purchasers: (i) the most recent Plan
document and trust agreement (including any amendments thereto and prior plan
documents, if amended within the last two years), (ii) the last two Form 5500
filings and schedules thereto, (iii) the most recent IRS determination letter,
(iv) all summary plan descriptions, (v) a written description of each material
non-written Plan, (vi) each written communication to employees intended to
describe a Plan or any benefit provided by such Plan, (vii) the most recent
actuarial report, and (viii) all correspondence with the IRS, the Department of
Labor and the PBGC concerning any controversy. Each report described in clause
(vii) accurately reflects the funding status of the Plan to which it relates and
subsequent to the date of such report there has been no adverse change in the
funding status or financial condition of such Plan.
(c) Each Plan is and has been maintained in compliance with applicable
Legal Requirements, including but not limited to ERISA and the Code, and with
any applicable collective bargaining agreements or other contractual
obligations.
(d) With respect to any 412 Plan, there has been no failure to make any
contribution or pay any amount due as required by Section 412 of the Code,
Section 302 of ERISA or the terms of any such Plan, and no funding waiver has
been requested or received from the IRS. The assets of the Company, its
Subsidiaries, or any ERISA Affiliates are not now, nor will they after the
passage of time be, subject to any lien imposed under Section 412(n) of the Code
by reason of a failure of the Company, any Subsidiary, or any ERISA Affiliate to
make timely installments or other payments required under Section 412 of the
Code.
(e) No Plan subject to Title IV of ERISA has any Unfunded Pension
Liability.
(f) Except as shown on Section 4.18 of the Schedule of Exceptions, there
are no pending, or to the best knowledge of the Company, its Subsidiaries, and
ERISA Affiliates, threatened claims, investigations, actions or lawsuits, other
than routine claims for benefits in the ordinary course, asserted or instituted
against (i) any Plan or its assets, (ii) any ERISA Affiliate with respect to any
412 Plan, or (iii) any fiduciary with respect to any Plan for which the Company,
its Subsidiaries, or any ERISA Affiliate may be directly or indirectly liable,
through indemnification obligations or otherwise.
(g) Except as set forth in Section 4.18 of the Schedule of Exceptions, none
of the Company, any Subsidiary, or any ERISA Affiliate has incurred and or
reasonably expects to incur (i) any Withdrawal Liability and no event has
occurred which, with the giving of notice under Section 4219 of ERISA, would
result in Withdrawal Liabilities, or any liability under Section 4063, 4064, or
4243, or (ii) any outstanding liability under Title IV of ERISA with respect to
any 412 Plan.
(h) Except as shown on Section 4.18 of the Schedule of Exceptions, within
the last five years, none of the Company, any Subsidiary or any ERISA Affiliate
has transferred any assets or liabilities of a 412 Plan
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subject to Title IV of ERISA which had, at the date of such transfer, an
Unfunded Pension Liability or has engaged in a transaction which may reasonably
be subject to Section 4212(c) or Section 4069 of ERISA.
(i) None of the Company, any Subsidiary, or any ERISA Affiliate has
engaged, directly or indirectly, in a non-exempt prohibited transaction (as
defined in Section 4975 of the Code or Section 406 of ERISA) in connection with
any Plan.
(j) No "reportable event" (within the meaning of Section 4043 of ERISA) has
occurred with respect to any Plan.
(k) Neither the Company nor any of its Subsidiaries provides, or has
provided, retiree welfare benefits for the benefit of any present or former
employee or director.
(l) Neither the Company nor any of its Subsidiaries has made any commitment
or any formal plan to create any additional Plan or to modify or terminate
(except to the extent required by applicable law) any existing Plan.
(m) Neither the Company nor any of its Subsidiaries is a party to any plan,
agreement or arrangement pursuant to the terms of which the consummation or
announcement of any transaction contemplated by this Agreement will result
(either alone or in connection with the occurrence of any additional or further
acts or events) in any benefit under any Plan being established or becoming
accelerated or immediately vested and payable.
(n) The provisions of Section 280G of the Code will not apply with respect
to any payment made or to be made pursuant to or in connection with any Plan.
4.19. Personal Property
The Company and the Guarantors have good and marketable title to each item
of equipment, machinery, furniture, fixtures, vehicles, structures and other
personal property, tangible and intangible, included as an asset in the
Financial Statements filed as part of the Company Reports, free and clear of any
security interests, options, liens, claims, charges or encumbrances whatsoever,
except as set forth in Section 4.19 of the Schedule of Exceptions and as
disclosed in the Company General Security Agreement and the Guarantors General
Security Agreement. The tangible personal property owned or used by the Company
and each of the Guarantors on the date hereof in the operation of its business
is adequate for the business conducted by the Company and each of the
Guarantors.
4.20. Real Property
(a) The Company and the Guarantors do not own any fee simple interest in
real property other than as set forth in Section 4.20 of the Schedule of
Exceptions (the "Owned Property"). The Company and the Guarantors do not lease
or sublease any real property other than as set forth on Schedule 4.20 (the
"Leased Property"). The Company has previously made available to the Purchasers
a true and complete copy of all Leases. The Company and each Guarantor enjoys a
peaceful and undisturbed possession of the Owned Property and Leased Property.
No Person other than the Company or any Guarantor has any right to use or occupy
any part of the Owned Property and the Leased Property. Except as set forth in
Section 4.20 of the Schedule of Exceptions, the Leases are valid, binding and in
full force and effect, all rent and other sums and charges payable thereunder
are current, no notice of default or termination under any of the Leases is
outstanding, no termination event or condition or uncured default on the part of
the Company or, to the best of the Company's knowledge, on the part of the
landlord, sublandlord, as the case may be, thereunder, exists under the Leases,
and no event has occurred and no condition exists which, with the giving of
notice, or the lapse of time, or both, would constitute such a default or
termination event or condition. There are no subleases, licenses or other
agreements granting to any Person other than the Company or the Guarantors any
right to possession, use, occupancy or enjoyment of the Premises demised by the
Leases. Each Owned Property and Leased Property is used in the conduct of the
Company's or the Guarantors' business.
(b) Without limiting the generality of the representations and warranties
given in Section 4.10(a), all required permits, licenses, franchises, approvals
and authorizations of all governmental authorities having
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jurisdiction over each Leased Property and from all insurance companies and fire
rating and other similar boards and organizations have been issued to the
Company and the Guarantors to enable each Leased Property or Owned Property to
be lawfully occupied and used for all the purposes for which they are currently
occupied and used and have been lawfully issued and are in full force and
effect, except where the failure to possess such permits, licenses, franchises,
approvals and authorizations, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
(c) Neither the Company nor the Guarantors have received any notice nor
have they any knowledge of any pending, threatened or contemplated condemnation
proceeding affecting any Leased Property or the Owned Property or any part
thereof.
4.21. Disclosure
The information heretofore provided and to be provided in connection with
this Agreement, including, without limitation, the Schedule of Exceptions and
the Exhibits hereto, the Transaction Documents and each of the agreements,
documents, certificates and writings previously furnished to the Purchasers or
their representatives, do not and will not contain any untrue statement of a
material fact and do not and will not omit to state a material fact necessary in
order to make the statements and writings contained herein and therein not false
or misleading in the light of the circumstances under which they were made.
There are no facts that (individually or in the aggregate) could reasonably be
expected to have a Material Adverse Effect, which has not been set forth herein
or in the Company Reports.
4.22. Solvency
On the Closing Date (both before and after giving effect to its Guaranty
and the transactions contemplated by the Transaction Documents), the Guarantors
will be Solvent.
4.23. Insurance
(a) Each of the Company and the Guarantors maintains, with financially
sound and reputable insurers, insurance against loss or damage by theft, fire,
explosion and other risks customarily insured against by companies in the line
of business of the Company or the Guarantors, in amounts sufficient to prevent
the Company or the Guarantors from becoming a co-insurer of the property insured
as well as insurance against other hazards and risks and liability to Persons
and property to the extent and in the manner customary for companies in similar
businesses similarly situated or as may be required by law, including, without
limitation, general liability, fire and business interruption insurance, and
product liability insurance as may be required pursuant to any license agreement
to which the Company or the Guarantors is a party or by which it is bound.
(b) The Company maintains D&O Insurance as detailed in Section 4.23(b) of
the Schedule of Exceptions, which D&O Insurance is in full force and effect and
as to which the Company has not received any notice of default, termination,
change in terms, change in coverage or similar notice.
4.24. Non-Competes
Except as set forth in Section 4.24 of the Schedule of Exceptions, and as
contemplated by Section 4.11(c), the Company and its Subsidiaries are not
subject to any non-compete or similar arrangements with any Persons that
restrict or may restrict the Company and its Subsidiaries from carrying on its
business as now conducted and as it is proposed to be conducted.
4.25. Product Warranty
Except as set forth in Section 4.25 of the Schedule of Exceptions, or as
reflected or reserved against in the Financial Statements, (a) to the knowledge
of the Company, each product manufactured by the Company or any Subsidiary has
been in material conformity with all applicable contractual commitments of the
Company or any Subsidiary, and (b) no product currently manufactured by the
Company or any Subsidiary is subject to any guaranty, warranty or indemnity of a
contractual nature other than the applicable standard terms and conditions, if
any, applicable to the sale or delivery of such product.
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4.26. Minute Books
The minute books of the Company and the Subsidiaries furnished to the
Purchasers for review are accurate and complete.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
As a material inducement to the Company to enter into and perform its
obligations under this Agreement, each Purchaser severally (as to itself and not
with respect to any other Purchaser) represents and warrants to the Company as
follows:
5.1. Organization and Good Standing
The Purchaser, if a corporation, partnership, trust or other form of
business entity, is duly organized, validly existing and in good standing under
the laws of the state of its incorporation, formation or organization, as the
case may be, and has, in all material respects, full power, authority and legal
right to own its properties and conduct its business as such properties are
presently owned and such business is presently conducted, and to execute,
deliver and perform its obligations under this Agreement.
5.2. Due Qualification
The Purchaser, if a corporation, partnership, trust or other form of
business entity, is duly qualified to do business and, where necessary, is in
good standing as a foreign corporation or company, as the case may be, (or is
exempt from such requirement) and has obtained all necessary licenses and
approvals in each jurisdiction in which the conduct of its business requires
such qualification except where the failure to so qualify or obtain licenses or
approvals would not have a material adverse effect on its ability to perform its
obligations hereunder.
5.3. Due Authorization
The execution and delivery of this Agreement and the consummation of the
transactions provided for or contemplated by this Agreement have been duly
authorized by Purchaser if a corporation, partnership, trust or other form of
business entity, by all necessary corporate or company (as the case may be)
action on the part of Purchaser.
5.4. Investment Experience; Accredited Investor
(a) The Purchaser must bear the economic risk of investment in the
Debentures for an indefinite period of time, since neither the Debentures nor
the Shares have been registered under the Securities Act or applicable state
securities laws, and, therefore, cannot be resold or otherwise disposed of
unless either they are subsequently registered under the Securities Act and
applicable state securities laws or an exemption from registration is available.
(b) The Purchaser will only have those limited rights to register the
Shares under the Securities Act and applicable state securities laws as are
provided in the Transaction Documents.
(c) There is presently no established public market for the Debentures and
the holders of the Debentures have no registration rights with respect to such
securities.
(d) The Purchaser and his, her or its purchaser representative(s), if any,
have carefully reviewed and understand the risks of and other considerations
relating to a purchase of the Debentures.
(e) The Purchaser and his, her or its purchaser representative(s), if any,
have been afforded the opportunity to obtain any information necessary to verify
the accuracy of any representations or information set forth in the Term Sheet
and this Agreement and have had all of their inquiries to the Company answered
in full, and have been furnished all requested materials relating to the
Company, the offering and sale of the Debentures and any other matter described
in the Term Sheet and this Agreement.
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(f) Neither the Purchaser nor his, her or its purchaser representative(s),
if any, have been furnished any offering literature by the Company or any of its
Affiliates, other than the Term Sheet (including the exhibits and attachments
thereto) and this Agreement (including the exhibits and attachments hereto), and
the Purchaser has not received or heard any print or electronic media
advertising with respect to the offering and sale of the Debentures.
(g) The Purchaser is acquiring the Debentures as principal for its own
investment account, and not (i) with a view to the resale or distribution of all
or any part thereof, or (ii) on behalf of another Person who has not made the
foregoing representations. The Purchaser agrees not to resell or otherwise
dispose of the Debentures or the Shares except as permitted by applicable law,
including, without limitation, any and all provisions of this Agreement and any
applicable regulation under the Securities Act or any state securities laws.
(h) The Purchaser is an "accredited investor," as defined in Rule 501(a) of
Regulation D promulgated pursuant to the Securities Act.
(i) The Purchaser has evaluated the risks of investing in the Company and
has substantial experience in making investment decisions of this type or is
relying on his, her or its professional advisors or purchaser representative(s),
if applicable, in making this investment decision.
(j) The Purchaser understands the fundamental aspects of and risks involved
in an investment in the Company, including (i) the speculative nature of the
investment, (ii) the financial hazards involved, including the risk of losing
the entire investment, (iii) the lack of liquidity and the restrictions on
transferability of the Debentures and Shares, (iv) the limited registration
rights regarding the Shares, and (v) the fact that the Company has a history of
losses and limited capital resources.
(k) The address set forth in the signature page to this Agreement is the
Purchaser's true and correct principal address, and the Purchaser has no present
intention of becoming a resident of any other state or jurisdiction.
(l) The Purchaser, if a corporation, partnership, trust or other form of
business entity, has not been formed for the specific purpose of acquiring the
Debentures.
(m) All of the information that the Purchaser has heretofore furnished to
the Company, or that is set forth herein with respect to itself, its financial
position, and its business and investment experience, is correct and complete as
of the date hereof.
(n) The Purchaser consents to the placement of a legend on any certificate
or other document evidencing the Debentures as well as the Shares stating that
they have not been registered under the Securities Act and setting forth or
referring to the restrictions on transferability and sale thereof. The Purchaser
is aware that the Company will make a notation in its appropriate records with
respect to the restrictions on the transferability of such securities.
(o) The Purchaser acknowledges that the Company will rely upon the
representations made by such Purchaser in this Agreement in connection with the
issuance of the Debentures to be sold hereunder.
ARTICLE VI
CONDITIONS TO CLOSING OF THE PURCHASERS
The obligation of each Purchaser to purchase the Debentures at the Closing
is subject to the fulfillment to such Purchaser's satisfaction on or prior to
the Closing Date of each of the following conditions, unless otherwise waived by
such Purchaser:
6.1. Representations and Warranties Correct; No Default
The representations and warranties of the Company set forth in Article IV
hereof shall be true and correct when made, and shall be true and correct on the
Closing Date with the same force and effect as if they had been made on and as
of the Closing Date. No Event of Default, or any other event which, with the
giving
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of notice, the lapse of time, or both, would constitute an Event of Default,
shall have occurred and be continuing on the date of this Agreement or on the
Closing Date.
6.2. Performance
All covenants, agreements and conditions contained in this Agreement to be
performed or complied with by the Company on or prior to the Closing Date shall
have been performed or complied with by the Company.
6.3. Compliance Certificate
The Company shall have delivered to the Purchaser a certificate of the
Company, executed by the Company's President, dated the Closing Date, certifying
to the fulfillment of the conditions specified in Sections 6.1 and 6.2 of this
Agreement and other matters as the Purchaser shall reasonably request.
6.4. No Impediments
None of the Company, or any of the Guarantors, or any Purchaser shall be
subject to (a) any order, decree or injunction of a court or administrative or
governmental body or agency of competent jurisdiction directing that the
transactions provided for in the Transaction Documents or any material aspect
thereof not be consummated as contemplated by the Transaction Documents or (b)
there shall not be any action, suit, proceeding, complaint, charge, hearing,
inquiry or investigation before or by any court or administrative or
governmental body or agency pending or, to the Company's best knowledge,
threatened, wherein an unfavorable order, decree or injunction would prevent the
performance of any of the Transaction Documents or the consummation of any
material aspect of the transactions or events contemplated thereby, declare
unlawful any aspect of the transactions or events contemplated by the
Transaction Documents, cause any material aspect of the transactions
contemplated by the Transaction Documents to be rescinded or have a Material
Adverse Effect.
6.5. Waivers/Elections of Rights of First Refusal
The Company shall have obtained from each Person other than a Purchaser and
who has any current effective right of first refusal with respect to the
Debentures, a written waiver or election of such right in form and substance
reasonably satisfactory to the Purchasers.
6.6. Watson Documents
The Company shall have obtained and delivered to each Purchaser copies of
(a) the Watson Umbrella Agreement; (b) the amendment to the Watson Term Loan;
(c) the Senior Notes; and (d) the Noteholder Agreement. The initial Purchasers
shall have purchased the amended Senior Notes from Watson on terms acceptable to
them.
6.7. Consent of Holders of Existing Debentures; Agreement to Convert
(a) The Company shall have obtained and delivered to each Purchaser (i) the
Existing Debentureholders Consent; (ii) the Existing Debentureholders Waiver;
(iii) the Debenture and Warrant Dilution Waiver and (iv) the Conversion
Agreement, each fully executed and in form and substance acceptable to the
Purchasers.
6.8. Consent of Galen Entities
The Company shall have obtained from the Galen Entities and delivered to
each Purchaser the Debenture and Warrant Dilution Waiver.
6.9. Other Agreements and Documents
The Company shall have executed and delivered to each Purchaser this
Agreement, issued to such Purchaser all of the Debentures, and the Company and
each of the Guarantors, as applicable, shall have executed and delivered the
following agreements and documents:
(a) the Conversion Agreement;
(b) the Investors Rights Agreement;
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(c) the Voting Agreement;
(d) the amendment to the Registration Rights Agreement;
(e) the Company General Security Agreement;
(f) the Guaranties;
(g) the Guarantors Security Agreement;
(h) the Stock Pledge Agreement;
(i) the Subordination Agreement;
(j) a secretary's certificate of the Company, (i) attaching a
certified copy of the Certificate of Incorporation and current bylaws of
the Company and certifying the same as not having been amended and as being
in being in full force and effect, (ii) attaching and certifying
resolutions by the Board of Directors approving the execution, delivery and
performance of the Transaction Documents and the transactions contemplated
thereby, and (iii) certifying as to the incumbency, and attaching specimen
signatures of, the officers or representatives of the Company signing the
Transaction Documents to which the Company is a party;
(k) a secretary's certificate of each of the Guarantors, (i) attaching
a certified copy of the certificate of incorporation and current bylaws of
such Guarantor and certifying the same as not having been amended and as
being in being in full force and effect, (ii) attaching and certifying
resolutions by the board of directors of such Guarantor approving the
execution, delivery and performance of the Transaction Documents and the
transactions contemplated thereby, and (iii) certifying as to the
incumbency, and attaching specimen signatures of, the officers or
representatives of such Guarantor signing the Transaction Documents to
which such Guarantor is a party;
(l) a Certificate of Good Standing and Tax Status from the state of
incorporation of the Company and each Guarantor and from every state in
which any of them is qualified to do business; and
(m) Financing Statements and Termination Statements on Form UCC-1 (or
the applicable form) with respect to all personal property and assets of
the Company and each Guarantor.
6.10. Consents
In addition to the consents and waivers described in Sections 6.6, 6.7 and
6.8, the Company shall have obtained all necessary consents or waivers, if any,
from all parties governmental and private to any other material agreements to
which the Company is a party or by which it is bound immediately prior to the
Closing in order that the transactions contemplated by the Transaction Documents
may be consummated and the business of the Company may be conducted by the
Company after the Closing without adversely affecting the Company.
6.11. Legal Investment
As of the Closing Date, there shall not have been any change in any Legal
Requirements applicable to any of the Purchasers that would prevent the
performance of this Agreement or any other Transaction Document or the
consummation of any material aspect of the transactions contemplated hereby or
thereby by such Purchaser, in each case to the extent that it would deprive such
Purchaser of the principal benefits of such transactions.
6.12. Proceedings and Other Documents
All corporate and other proceedings taken or required to be taken by the
Company and any Guarantor in connection with the transactions contemplated by
this Agreement and the other Transaction Documents to be consummated prior to
the Closing shall have been taken, except as otherwise provided in Sections 9.7,
9.11, 9.15 and 9.17 of this Agreement, and the Purchasers shall have received
such other documents, in form and substance reasonably satisfactory to the
Purchasers and their counsel, as to such other matters incident to the
transactions contemplated hereby as the Purchasers may reasonably request.
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6.13. Opinion of Counsel
The Purchasers shall have received the opinion of St. John & Wayne, L.L.C.,
counsel to the Company, dated the Closing Date, substantially in the form of
Exhibit C attached hereto.
6.14. Independent Committee of Board of Directors
The Company's independent committee of the Board of Directors (the
"Independent Committee") shall deliver to each of the Purchasers the Independent
Committee's resolutions approving the execution, delivery and performance of the
Transaction Documents to which the Company is a party and the transactions
contemplated thereby, each in form and substance reasonably acceptable to the
Purchasers.
ARTICLE VII
CONDITIONS TO CLOSING OF THE COMPANY
The Company's obligation to sell the Debentures at the Closing is subject
to the fulfillment to its satisfaction on or prior to the Closing Date of each
of the following conditions, unless otherwise waived by the Company:
7.1. Representations and Warranties Correct
The representations and warranties of each of the Purchasers set forth in
Article V of this Agreement shall be true and correct when made, and shall be
true and correct on the Closing Date with the same force and effect as if they
had been made on and as of the Closing Date.
7.2. Legal Investment
As of the Closing Date, there shall not have been any change in any Legal
Requirements applicable to the Company that would prevent the performance of
this Agreement or any other Transaction Document or the consummation of any
material aspect of the transactions contemplated hereby or thereby by the
Company, in each case to the extent that it would deprive the Company of the
principal benefits of such transactions.
7.3. Payment of Purchase Price
The Company shall have received payment in full of the purchase price for
the Debentures.
ARTICLE VIII
PREPAYMENT
Without limiting the Company's conversion rights as provided in Section 3.1
of the Debentures, the Company may not at any time prepay any Debenture, the
Watson Term Loan, the Existing Debentures or any other indebtedness for borrowed
money, in whole or in part, without the prior written consent of the holders of
60% of the then outstanding principal amount of the Debentures.
ARTICLE IX
AFFIRMATIVE COVENANTS
The Company hereby covenants and agrees, so long as any Debentures remain
outstanding, as follows:
9.1. Maintenance of Corporate Existence; Properties and Leases; Taxes;
Insurance
(a) The Company shall, and shall cause each of the Guarantors to, maintain
in full force and effect its corporate existence, rights and franchises and all
terms of licenses and other rights to use licenses, trademarks, trade names,
service marks, copyrights, patents, processes or any other Intellectual Property
Rights owned or possessed by it and necessary to the conduct of its business,
except where failure to maintain such rights, franchises and terms of licenses
and other rights to use such Intellectual Property Rights could not reasonably
be expected to have a Material Adverse Effect.
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(b) The Company shall, and shall cause the Guarantors to, keep each of its
properties necessary to the conduct of its business in good repair, working
order and condition, reasonable wear and tear excepted, and from time to time
make all needful and proper repairs, renewals, replacements, additions and
improvements thereto; and the Company shall, and shall cause the Guarantors to,
at all times comply with each provision of all leases to which it is a party or
under which it occupies property, except where any such noncompliance could not
reasonably be expected to have a Material Adverse Effect.
(c) The Company shall, and shall cause each of the Guarantors to, (i)
promptly pay and discharge, or cause to be paid and discharged when due and
payable, all lawful taxes, assessments and governmental charges or levies
imposed upon the income, profits, assets, property or business of the Company
and the Guarantors, (ii) withhold and promptly pay to the appropriate tax
authorities all amounts required to be withheld from wages, salaries and other
remuneration to employees, and (iii) promptly pay all claims or Indebtedness
(including, without limitation, claims or demands of workmen, materialmen,
vendors, suppliers, mechanics, carriers, warehousemen and landlords) which, if
unpaid might become a lien upon the assets or property of the Company or the
Guarantors; provided, however, that any such tax, lien, assessment, charge or
levy need not be paid if (1) the validity thereof shall be contested timely and
in good faith by appropriate proceedings, (2) the Company or the Guarantors
shall have set aside on its books adequate reserves with respect thereto, and
(3) the failure to pay shall not be prejudicial in any material respect to the
holders of the Debentures, and provided further that the Company or the
Guarantors will pay or cause to be paid any such tax, lien, assessment, charge
or levy forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefore. The Company shall, and shall
cause the Guarantors to, pay or cause to be paid all other Indebtedness incident
to the operations of the Company or the Guarantors.
(d) The Company shall, and shall cause each of the Guarantors to, keep its
assets which are of an insurable character insured by financially sound and
reputable insurers against loss or damage by theft, fire, explosion and other
risks customarily insured against by companies in the line of business of the
Company or the Guarantors, in amounts sufficient to prevent the Company or the
Guarantors from becoming a co-insurer of the property insured; and the Company
shall, and shall cause the Guarantors to, maintain, with financially sound and
reputable insurers, insurance against other hazards and risks and liability to
Persons and property to the extent and in the manner customary for companies in
similar businesses similarly situated or as may be required by law, including,
without limitation, general liability, fire and business interruption insurance,
and product liability insurance as may be required pursuant to any license
agreement to which the Company or the Guarantors is a party or by which it is
bound.
9.2. Basic Financial Information
The Company shall furnish the following reports to each Holder, so long as
such Person is a holder of any Debentures:
(a) within 45 days after the end of each quarterly accounting period
in each fiscal year, a certificate of the Chief Financial Officer of the
Company stating that the Company is in compliance with the terms of this
Agreement and any other material contract or commitment to which the
Company or any of its Subsidiaries is a party or by which any of them is
bound, or if the Company or any of its Subsidiaries is not in compliance,
specifying the nature and period of noncompliance, and what actions the
Company or such Subsidiary has taken and proposes to take with respect
thereto. Notwithstanding the foregoing, the certificate delivered at the
end of each fiscal year of the Company shall be signed by both the Chief
Executive Officer and the Chief Financial Officer of the Company and shall
be delivered within 90 days after the end of the fiscal year; and
(b) with reasonable promptness such other information and financial
data concerning the Company as any Person entitled to receive materials
under this Section 9.2 may reasonably request. Notwithstanding the
foregoing, all confidential information furnished at any time by or on
behalf of the Company or its Subsidiaries to any Holder shall be subject to
the provisions of Section 19.14.
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9.3. Notice of Adverse Change
The Company shall promptly give notice to all Holders of the Debentures
(but in any event within two days) after becoming aware of the existence of any
condition or event which constitutes, or the occurrence of, any of the
following:
(a) any Event of Default or any default that with the passage of time
or the giving of notice would constitute an Event of Default;
(b) the institution or threatening of institution of any action, suit
or proceeding against the Company or any Subsidiary before any court,
administrative agency or arbitrator, including, without limitation, any
action of a foreign government or instrumentality, which, if adversely
decided, could reasonably be expected to have a Material Adverse Effect;
(c) any information relating to the Company or any Subsidiary which
could reasonably be expected to have a Material Adverse Effect; or
(d) any failure by the Company or any of its Subsidiaries to comply
with the provisions of Section 9.4 below.
Any notice given under this Section 9.3 shall specify the nature and period
of existence of the condition, event, information, development or circumstance,
the anticipated effect thereof and what actions the Company or any Guarantor, as
the case may be, has taken and proposes to take with respect thereto.
9.4. Compliance with Agreements; Compliance with Laws
The Company shall, and shall cause its Subsidiaries to, comply with the
terms and conditions of all material agreements, commitments or instruments to
which the Company or any of its Subsidiaries is a party or by which it or they
may be bound. The Company shall, and shall cause each of its Subsidiaries to,
duly comply with any Legal Requirements relating to the conduct of their
respective businesses, properties or assets, including, but not limited to, the
requirements of the FDA Act, the Prescription Drug Marketing Act, the CSA,
ERISA, the Environmental Protection Act, the Occupational Safety and Health Act,
the Foreign Corrupt Practices Act, the Sarbanes-Oxley Act of 2002 and the rules
and regulations of each of the agencies administering such acts, in each case
except for any such noncompliance that could not reasonably be expected to have
a Material Adverse Effect.
9.5. Protection of Licenses
The Company shall, and shall cause its Subsidiaries to, maintain, defend
and protect to the best of their ability licenses and sublicenses (and to the
extent the Company or a Subsidiary is a licensee or sublicensee under any
license or sublicense, as permitted by the license or sublicense agreement),
trademarks, trade names, service marks, patents and applications therefore and
other proprietary information or Intellectual Property Rights owned or used by
it or them and shall keep duplicate copies of any licenses, trademarks, service
marks or patents owned or used by it, if any, at a secure place selected by the
Company.
9.6. Accounts and Records; Inspections
(a) The Company shall keep true records and books of account in which full,
true and correct entries will be made of all dealings or transactions in
relation to the business and affairs of the Company and its Subsidiaries in
accordance with GAAP applied on a consistent basis.
(b) The Company (subject to the terms and conditions contained in Section
19.14) shall permit each Holder of Debentures or any of such Holder's officers,
employees or representatives during regular business hours of the Company, upon
reasonable notice and as often as such Holder may reasonably request, to visit
and inspect the offices and properties of the Company and its Subsidiaries and
to make extracts or copies of the books, accounts and records of the Company or
its Subsidiaries, and to discuss the affairs, finances and accounts of the
Company and its Subsidiaries, with the Company's (or Subsidiary's) directors and
officers, its independent public accountants, consultants and attorneys.
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(c) Nothing contained in this Section 9.6 shall be construed to limit any
rights that a Holder of Debentures may have with respect to the books and
records of the Company and its Subsidiaries, to inspect its properties or to
discuss its affairs, finances and accounts.
(d) The Company will retain an Approved Accounting Firm to audit the
Company's financial statements at the end of each fiscal year. In the event the
services of an Approved Accounting Firm or any firm of independent public
accountants hereafter employed by the Company are terminated, the Company will
promptly thereafter request the firm of independent public accountants whose
services are terminated to deliver to the Holders of the Debentures a letter of
such firm setting forth its understanding as to the reasons for the termination
of their services and whether there were, during the two most recent fiscal
years or such shorter period during which said firm had been retained by the
Company any disagreements between them and the Company on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. In its notice, the Company shall state whether the change of
accountants was recommended or approved by the Board of Directors or any
committee thereof. In the event of such termination, the Company will promptly
thereafter engage another Approved Accounting Firm.
9.7. Board Members and Meetings
(a) So long as the Purchasers own any Debentures, the Board of Directors
shall be comprised in accordance with the Voting Agreement. The Company agrees
to hold meetings of its Board of Directors at least four times a year, at no
more than three month intervals. Directors shall be reimbursed for their
reasonable travel and related expenses in attending meetings of the Board of
Directors.
(b) So long as the Purchasers own any Debentures, each of Care Capital and
Essex shall have the right to have a representative join the Company's
Scientific Advisory Board.
9.8. Maintenance of Office
The Company will maintain its principal office at the address of the
Company set forth in Section 19.6 of this Agreement where notices, presentments
and demands in respect of this Agreement and any of the Debentures may be made
upon the Company, until such time as the Company shall notify the Holders of the
Debentures in writing, at least 30 days prior thereto, of any change of location
of such office.
9.9. Use of Proceeds
The Company shall use $4.3 million of the proceeds received from the sale
of the Debentures pursuant to this Agreement to retire approximately $16.4
Million of indebtedness owing by the Company to Watson in the aggregate
principal amount of approximately $21.4 Million pursuant to the Watson Term
Loans, on terms and conditions acceptable to the Purchasers. The Company shall
use the remainder of the proceeds received from the sale of the Debentures
pursuant to this Agreement for general working capital.
9.10. Payment of Debentures
The Company shall pay the principal of and interest on the Debentures in
the time, the manner and the form provided in the Debentures.
9.11. Conversion of Debentures
Upon the Conversion Event, the Company shall take all necessary actions to
convert the Debentures and the Existing Debentures into Preferred Stock, subject
to the terms and conditions in the Conversion Agreement.
9.12. Independent Committee
The review and approval of the Independent Committee shall be required as a
condition to the completion of (a) any transaction between or among the Company
and the Purchasers, and (b) any Liquidation Event.
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9.13. Director and Officer Insurance Coverage
The Company shall maintain with financially sound and reputable insurers
D&O Insurance substantially identical to its existing D&O Insurance (without any
material change thereto, including, without limitation, any decrease in coverage
or additional limitations).
9.14. Further Assurances
From time to time the Company shall execute and deliver to the Purchasers
and the Purchasers shall execute and deliver to the Company such other
instruments, certificates, agreements and documents and take such other action
and do all other things as may be reasonably requested by the other party in
order to implement or effectuate the terms and provisions of this Agreement and
the transactions contemplated hereby and any of the Debentures or Shares.
9.15. Proxy Statement
As promptly as practicable after the execution of this Agreement, the
Company will prepare and file with the SEC a Proxy Statement (the "Proxy
Statement"), which will include for submission to a vote of the stockholders and
Existing Debentureholders of the Company the Charter Amendment. The Purchasers
will provide the Company with any information which may be required in order to
effectuate the preparation and filing of the Proxy Statement pursuant to this
Section 9.15. The Company will promptly respond to any comments from the SEC,
and file amendments or supplements to the Proxy Statement as promptly as
practicable after its receipt of any comments from the SEC. The Company will
notify the Purchasers promptly upon the receipt of any comments from the SEC or
its staff in connection with the filing of the Proxy Statement or any amendments
or supplements thereto. Whenever any event occurs which is required to be set
forth in an amendment or supplement to the Proxy Statement, the Company will
promptly inform the Purchasers of such occurrence and cooperate in filing with
the SEC or its staff, and mailing to the stockholders and Existing
Debentureholders of the Company, such amendment or supplement. The Company will
cooperate and provide to each of Essex, Care Capital and Galen (and their
respective counsel) with an adequate and reasonable opportunity to review,
comment upon and consent to Proxy Statement, including any amendment or
supplement, prior to filing such with the SEC, and will provide such Purchasers
with a copy of all such filings made with the SEC. The Company will cause the
Proxy Statement to be mailed to the stockholders and Existing Debentureholders
of the Company at the earliest practicable time after the definitive Proxy
Statement is filed with the SEC and the SEC does not have any comments to the
Proxy Statement.
9.16. Disclosure
The Company agrees that none of the information in the Proxy Statement
will, (a) at the time the Proxy Statement is filed with the SEC, (b) at the time
the Proxy Statement is mailed to the stockholders and Existing Debentureholders
of the Company, and (c) on the Stockholders Meeting Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. The
Company agrees that the Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act.
9.17. Meeting of Stockholders; Board Recommendation
(a) As promptly as practicable after the execution of this Agreement, the
Company will take all action necessary in accordance with the New York Act and
its Certificate of Incorporation and By-Laws to call, hold and convene the
Stockholders Meeting to be held as promptly as practicable after clearance by
the SEC of the Company's definitive Proxy Statement as filed pursuant to Section
9.15 hereof. The Company will use its best efforts to solicit from its
stockholders and Existing Debentureholders proxies in favor of the Charter
Amendment, and will take all other action necessary or advisable to secure the
vote or consent of its stockholders and Existing Debentureholders required by
the rules of any applicable securities exchange, the New York Act or other Legal
Requirements to obtain such approval. Notwithstanding anything to the contrary
contained in this Agreement, the Company may adjourn or postpone its
Stockholders Meeting to the
G-21
extent necessary to ensure that any necessary supplement or amendment to the
Proxy Statement is provided to its stockholders and Existing Debentureholders in
advance of a vote on the Charter Amendment or, if as of the time for which the
Stockholders Meeting is originally scheduled (as set forth in the Proxy
Statement) there are insufficient shares of the Company's capital stock
represented (either in person or by proxy) to constitute a quorum necessary to
conduct the business of such Stockholders Meeting. The Company will ensure that
its Stockholders Meeting is called, noticed, convened, held and conducted, and
that all proxies solicited by its in connection with the Stockholders Meeting
are solicited in compliance with the New York Act, its Certificate of
Incorporation and By-Laws, the rules of any applicable securities exchange and
other Legal Requirements.
(b) Unless the Board of Directors receives a written opinion of counsel to
the Company stating that its recommendation of the Charter Amendment will
violate the directors' fiduciary duties to the Company's stockholders (a copy of
which written opinion of counsel will promptly be delivered by the Company to
the Purchasers and their respective counsel): (i) the Board of Directors will
recommend that the stockholders and Existing Debentureholders of the Company
vote in favor of the Charter Amendment at its Stockholders Meeting, (ii) the
Proxy Statement will include a statement to the effect that the Board of
Directors has recommended that the Company's stockholders and Existing
Debentureholders vote in favor of the Charter Amendment at the Stockholders
Meeting, and (iii) neither the Board of Directors nor any committee thereof will
withdraw, amend or modify, or propose or resolve to withdraw, amend or modify
the recommendation of its Board of Directors that the stockholders and Existing
Debentureholders of the Company vote in favor of the Charter Amendment.
(c) Notwithstanding anything to the contrary contained in this Agreement,
the obligation of the Company to call, give notice of, convene and hold its
Stockholders Meeting will not be limited or otherwise affected by any change of
recommendation by the Board of Directors or by any other matter.
9.18. SEC Reports
The Company will file, on a timely basis, any SEC Reports and keep all such
SEC Reports and public information current. The Company agrees that none of the
SEC Reports filed by the Company will, at the time of filing, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading.
9.19. Public Disclosure
Without limiting any other provision of this Agreement, the Company will
consult with each of Essex, Care Capital, and Galen before issuing, and will
provide such Purchasers the opportunity to review, comment upon and consent to,
any press release or public statement with respect to this Agreement and the
transactions contemplated hereby, and will not issue any such press release or
make any such public statement prior to such consultation and (to the extent
practicable) agreement, except as may be required by any applicable securities
exchange or Legal Requirements.
ARTICLE X
NEGATIVE COVENANTS
The Company hereby covenants and agrees, so long as any Debentures remain
outstanding, it will not (and not allow any of the Guarantors to), directly or
indirectly, without the prior written consent of the holders of 60% of the then
outstanding principal amount of the Debentures, as follows:
10.1. Stay, Extension and Usury Laws
At any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law wherever enacted,
now or at any time hereinafter in force, which may affect the covenants or the
performance of the Debentures, the Company hereby expressly waiving all benefit
or advantage of any such law, or by resort to any such law, hinder, delay or
impede the execution of any power
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herein granted to the Holders of the Debentures but will suffer and permit the
execution of every such power as though no such law had been enacted.
10.2. Reclassification
Effect any reclassification, combination or reverse stock split of the
Preferred Stock or Common Stock of the Company.
10.3. Liens
Except as otherwise provided in this Agreement or any other Transaction
Document, create, incur, assume or permit to exist any mortgage, pledge, lien,
security interest or encumbrance on any part of its properties or assets, or on
any interest it may have therein, now owned or hereafter acquired, nor acquire
or agree to acquire property or assets under any conditional sale agreement or
title retention contract, except that the foregoing restrictions shall not apply
to:
(a) liens for taxes, assessments and other governmental charges, if
payment thereof shall not at the time be required to be made, and provided
such reserve as shall be required by GAAP consistently applied shall have
been made therefore;
(b) liens of workmen, materialmen, vendors, suppliers, mechanics,
carriers, warehouseman and landlords or other like liens, incurred in the
ordinary course of business for sums not then due or that are being
contested in good faith and provided that an adverse decision in such
contest would not materially affect the business of the Company;
(c) liens securing Indebtedness of the Company or any Subsidiary which
are permitted under Sections 10.4(b) or 10.4(g);
(d) statutory liens of landlords, statutory liens of banks and rights
of set-off, and other liens imposed by law, in each case incurred in the
ordinary course of business (i) for amounts not yet overdue or (ii) for
amounts that are overdue and that are being contested in good faith by
appropriate proceedings, so long as reserves or other appropriate
provisions, if any, as shall be required by GAAP, shall have been made for
any such contested amounts;
(e) liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, trade contracts, performance and return-of-money bonds and other
similar obligations (exclusive of obligations for the payment of borrowed
money);
(f) any attachment or judgment lien not otherwise constituting an
Event of Default, or an event which, with the giving of notice, the lapse
of time, or both, would not otherwise constitute an Event of Default;
(g) easements, rights-of-way, restrictions, encroachments, and other
minor defects or irregularities in title, in each case which do not and
will not interfere with the ordinary conduct of the business of the Company
or any of its Subsidiaries, except where such interference could not
reasonably be expected to have a Material Adverse Effect;
(h) any (i) interest or title of a lessor or sublessor under any
lease, (ii) restriction or encumbrance that the interest or title of such
lessor or sublessor may be subject to, or (iii) subordination of the
interest of the lessee or sublessee under such lease to any restriction or
encumbrance referred to in the preceding clause (ii), so long as the holder
of such restriction or encumbrance agrees to recognize the rights of such
lessee or sublessee under such lease;
(i) liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(j) any zoning or similar law or right reserved to or vested in any
governmental office or agency to control or regulate the use of any real
property;
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(k) liens securing obligations (other than obligations representing
Indebtedness for borrowed money) under operating, reciprocal easement or
similar agreements entered into in the ordinary course of business of the
Company and its Subsidiaries;
(l) the Permitted Liens; and
(m) the replacement, extension or renewal of any lien permitted by
this Section 10.3 upon or in the same property theretofore subject or the
replacement, extension or renewal (without increase in the amount or change
in any direct or contingent obligor) of the Indebtedness secured thereby.
10.4. Indebtedness
Create, incur, assume, suffer, permit to exist, or guarantee, directly or
indirectly, any Indebtedness, excluding:
(a) the endorsement of instruments for the purpose of deposit or
collection in the ordinary course of business;
(b) Indebtedness which may, from time to time be incurred or
guaranteed by the Company which in the aggregate principal amount does not
exceed $500,000 and is subordinate to the Indebtedness under this Agreement
on terms reasonably satisfactory to the Holders of the Debentures;
(c) Indebtedness existing on the date hereof and described in Section
10.4 of the Schedule of Exceptions;
(d) Indebtedness relating to contingent obligations of the Company and
its Subsidiaries under guaranties in the ordinary course of business of the
obligations of suppliers, customers, and licensees of the Company and its
Subsidiaries;
(e) Indebtedness relating to loans from the Company to its
Subsidiaries or Indebtedness owed to any of the Guarantors;
(f) Indebtedness relating to capital leases in an amount not to exceed
$500,000;
(g) Indebtedness relating to a working capital line of credit in an
amount not to exceed $5,000,000;
(h) accounts or notes payable arising out of the purchase of
merchandise or services in the ordinary course of business; or
(i) the Debentures.
10.5. Arm's Length Transactions
Enter into any transaction, contract or commitment or take any action other
than at Arm's Length.
10.6. Immaterial Subsidiaries
Permit any Immaterial Subsidiary to commence any business operations of a
type or scope not currently conducted by them, or permit any Immaterial
Subsidiary to acquire any rights or property not currently owned by it.
10.7. Loans and Advances
Except for loans and advances outstanding as of the Closing Date and set
forth in Section 10.7 of the Schedule of Exceptions, directly or indirectly,
make any advance or loan to, or guarantee any obligation of, any Person, except
for intercompany loans or advances in the ordinary course of business and those
provided for in this Agreement.
10.8. Intercompany Transfers; Transactions with Affiliates; Diversion of
Corporate Opportunities
(a) Make any intercompany transfers of monies or other assets in any single
transaction or series of transactions, except as otherwise permitted in this
Agreement.
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(b) Engage in any transaction with any of the officers, directors,
employees or Affiliates of the Company or of its Subsidiaries, except on terms
no less favorable to the Company or the Subsidiary as could be obtained at Arm's
Length.
(c) Divert (or permit anyone to divert) any business or opportunity of the
Company or any Subsidiary to any other corporate or business entity.
10.9. Investments
Except as contemplated by Section 18.3, make any investments in, or
purchase any stock, option, warrant, or other security or evidence of
Indebtedness of, any Person (exclusive of any Subsidiary), other than
obligations of the United States Government or certificates of deposit or other
instruments maturing within one year from the date of purchase from financial
institutions with capital in excess of $100 million.
10.10. Other Business
Enter into or engage, directly or indirectly, in any business other than
the business currently conducted or proposed to be conducted as disclosed to the
Purchasers prior to the date hereof by the Company or any Subsidiary.
10.11. Employee Benefit Plans and Compensation
Except as contemplated by this Agreement:
(a) enter into or materially amend any agreement to provide for or
otherwise establish any written or unwritten employee benefit plan, program
or other arrangement of any kind, covering current or former employees of
the Company or its Subsidiaries except for any such plan, program or
arrangement expressly permitted under an existing agreement listed in
Section 4.18 the Schedule of Exceptions or as otherwise approved by the
Board of Directors; provided, however, that no such plan, program or
arrangement may be established or implemented if such action would have a
material effect on the terms of employment of the employees of the Company
or its Subsidiaries;
(b) except as otherwise approved by the Board of Directors, provide
for or agree to any material increase in any benefit provided to current or
former employees of the Company or its Subsidiaries over that which is
provided to such individuals pursuant to a plan or arrangement disclosed in
Section 4.18 of the Schedule of Exceptions as of the Closing Date; or
(c) except as otherwise approved by the Board of Directors, provide
for or agree to any increase in the annual compensation of any of the
employees of the Company or its Subsidiaries, except for (i) annual salary
increases in the ordinary cause of business consistent with past practice
(not to exceed a 10% increase over such employee's annual salary
compensation on the date hereof), and (ii) normal and customary annual
bonuses to employees (not to exceed $350,000 in the aggregate in any fiscal
year).
10.12. Capital Expenditures
Other than for capital expenditures contained in any budget approved by the
Board of Directors, make or commit to make, or permit any of its Subsidiaries to
make or commit to make, any capital expenditures in excess of $250,000 in the
aggregate during any fiscal year of the Company.
10.13. Amendments of Certain Documents
Except as otherwise specifically provided for herein or in the Transaction
Documents, amend, modify, change in any manner any term or condition of the
Watson Term Loan, the Existing Debentures or any agreement or other instrument
or document entered into by the Company or any Guarantor in connection therewith
or pursuant thereto, or give any consent, waiver or approval thereunder, waive
any default under or any breach of any term or condition thereof, agree in any
manner to any other amendment, modification or change of any term or condition
thereof or take any other action in connection therewith that would impair the
value of the interest or the rights of any Purchaser under this Agreement or any
other Transaction Document, or permit any of the Guarantors to do any of the
foregoing without the prior written consent of the holders of 60% of the then
outstanding principal amount of Debentures.
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10.14. Formation of Subsidiaries
Organize or invest, or permit any Subsidiary to organize or invest, in any
new corporation, partnership, joint venture, limited liability company, trust or
estate of which (or in which) (a) more than 50% of the issued and outstanding
capital stock having ordinary voting power to elect a majority of the board of
directors of such corporation (irrespective of whether at the time capital stock
of any other class of such corporation shall or might have voting power upon the
occurrence of any contingency), the interest in the capital or profits of such
partnership, joint venture or limited liability company or the beneficial
interest in such trust or estate, is at the time directly or indirectly owned or
controlled by the Company, any of its Subsidiaries or any of their respective
officers or directors, or (b) a material minority investment in any such entity
is directly or indirectly owned or controlled by the Company, any of its
Subsidiaries or any of their respective officers or directors.
10.15. Certain Cash Interest Payments
Make any cash interest payments to the Existing Debentureholders,
notwithstanding anything else to the contrary contained therein or elsewhere,
without the prior written consent of the holders of all of the then outstanding
Debentures (the "2004 Holders"), which consent shall be within their sole and
absolute discretion.
ARTICLE XI
INTENTIONALLY OMITTED
ARTICLE XII
EVENTS OF DEFAULT
12.1. Events of Default
If any of the following events shall occur and be continuing on or before
the Security Interest Termination Date, an "Event of Default" shall be deemed to
have occurred:
(a) if the Company shall default in the payment of (i) any part of the
principal of any Debenture, when the same shall become due and payable,
whether at maturity or at a date fixed for prepayment or by acceleration or
otherwise, or (ii) the interest on any Debenture, when the same shall
become due and payable, and in the case of an interest payment such default
shall have continued without cure for ten days from the scheduled date of
payment of such interest;
(b) the Company shall fail to issue to a Holder the Shares issuable
upon conversion of a Debenture pursuant to the instructions provided by
such Holder and in accordance with the terms of such Debenture;
(c) except as provided in Section 12.1(b), if the Company shall
default in the performance of any of the covenants contained in Articles IX
or X, and, in the case of a default under Sections 9.1 through and
including 9.8 or Section 10.3 (exclusive of Section 10.3(c)), such default
shall have continued without cure for 30 days after written notice (a
"Default Notice") is given to the Company with respect to such covenant by
any holder or holders of the Debentures (and the Company shall give to all
other holders of the Debentures at the time outstanding prompt written
notice of the receipt of such Default Notice, specifying the default
referred to therein); provided, however, that such 30-day grace period
shall not apply in the event the Company fails to promptly give notice as
provided in Section 9.3;
(d) except as provided in Sections 12.1(b) or 12.1(c), if the Company
or any of the Guarantors shall default in the performance of any other
agreement contained in any Transaction Document or in any other agreement
executed in connection with this Agreement and such default shall not have
been remedied to the satisfaction of the holders of 60% of the then
outstanding principal amount of the Debentures, within 35 days after a
Default Notice shall have been given to the Company (and the Company shall
give to all other Holders of the Debentures at the time outstanding prompt
written notice
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of the receipt of such Default Notice, specifying the default referred to
therein); provided, however, that such thirty-five (35) day grace period
shall not apply in the event the Company fails to give notice as provided
in Section 9.3;
(e) if any representation or warranty made by the Company, any
Guarantor or any of their officers in any Transaction Document or in or any
certificate delivered pursuant thereto shall prove to have been incorrect
in any material respect when made;
(f) if (i) any default shall occur under any indenture, mortgage,
agreement, instrument or commitment evidencing, or under which there is at
the time outstanding, any Indebtedness of the Company or a Subsidiary, in
excess of $500,000, or which results in such Indebtedness, in an aggregate
amount (with other defaulted Indebtedness) in excess of $1,000,000 becoming
(or being declared by its holders or, on its behalf, by an agent or trustee
therefore to be) due and payable prior to its due date; (ii) irrespective
of the monetary thresholds specified in subclause (i) above, if any
default, event of default or any other condition shall occur or exist under
the Watson Term Loan or any Existing Debentures (as such term is defined in
the Watson Term Loan and the Existing Debentures, respectively) which shall
be continuing after the respective grace period, if any, specified in the
Watson Term Loan and the Existing Debentures, and the effect of which is to
permit the acceleration of the maturity of the Indebtedness outstanding
thereunder; or (iii) a Change of Control shall have occurred;
(g) if any of the Company or its Subsidiaries shall default in the
observance or performance of any term or provision of an agreement to which
it is a party or by which it is bound which default could reasonably be
expected to have a Material Adverse Effect and such default is not waived
or cured within the applicable grace period;
(h) if a final judgment which, either alone or together with other
outstanding final judgments against the Company and its Subsidiaries,
exceeds an aggregate of $2,000,000 shall be rendered against the Company or
any Subsidiary and such judgment shall have continued undischarged or
unstayed for 60 days after entry thereof;
(i) if the Company or any Subsidiary shall generally not pay its debts
as such debts become due or shall make an assignment for the benefit of
creditors generally, or shall admit in writing its inability to pay its
debts generally; or if any proceeding shall be instituted by or against the
Company or any Subsidiary seeking to adjudicate it as bankrupt or
insolvent, or seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief or composition of it or its debts under any
law relating to bankruptcy, insolvency or the reorganization or relief of
debtors, or seeking entry of an order for relief or the appointment of a
receiver, trustee, custodian or other similar official for it or for any
substantial part of its property and, in the case of such proceeding
instituted against it (but not instituted by it) that is being diligently
contested by it in good faith, either such proceeding shall remain
undismissed or unstayed for a period of 90 days or any of the actions
sought in such proceeding (including, without limitation, the entry of an
order for relief against, or the appointment of a receiver, trustee,
custodian or other similar official for, it or any substantial part of its
property) shall occur; or if any writ of attachment or execution or any
similar process shall be issued or levied against it or any substantial
part of its property which is either not released, stayed, bonded or
vacated within 90 days after its issue or levy or any of the actions sought
or relief sought in any proceeding pursuant to which such writ or similar
process shall be issued or initiated shall occur or be granted; or if the
Company or any Subsidiary takes corporate action in furtherance of any of
the aforesaid purposes or conditions;
(j) if any provision of any Transaction Document shall for any reason
cease to be valid and binding on, or enforceable against, the Company or
any Guarantor, or the Company or any Guarantor shall so assert in writing;
(k) any Transaction Document (or any financing statement) which
purports:
(i) to create, perfect or evidence a lien on or security interest
in any Company Debenture Collateral or Guarantor Debenture Collateral in
favor of the Holders of the Debentures (or their agents and
representatives), or to provide for the priority of any such lien or
security interest over the
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interest of any other party in the same Collateral, shall cease to
create, or to preserve the enforceability, perfection or first priority
(subject to the Subordination Agreement) of, such lien and security
interest; or
(ii) to provide for the priority in right of payment of the
Company's obligations under the Transaction Documents to or in favor of
the Holders of the Debentures (or their agents or representatives) shall
cease to preserve such priority; or
(l) if the Conversion Event (and the conversion of the Debenture and
Existing Debentures into Preferred Stock in connection therewith), shall
not have occurred by November 1, 2004.
12.2. Remedies
(a) Except as provided in Section 12.2(b), upon the occurrence and during
the continuance of an Event of Default, any holder or holders of 60% of the then
outstanding principal amount of the Debentures may at any time (unless all
defaults shall theretofore have been remedied) at its or their option, by
written notice or notices to the Company (i) declare all the Debentures to be
due and payable, whereupon the same shall forthwith mature and become due and
payable, together with interest accrued thereon, without presentment, demand,
protest or notice, all of which are hereby waived by the Company; and (ii)
declare any other amounts payable to the Purchasers under this Agreement or as
contemplated hereby due and payable; provided, however, that in the event of an
actual or deemed entry of an order for relief with respect to the Company under
the U.S. Bankruptcy Code, the Debentures, together with interest accrued
thereon, shall automatically become and be due and payable, without presentment,
demand, protest or notice of any kind, all of which are hereby waived by the
Company.
(b) Notwithstanding anything to the contrary contained in Section 12.2(a),
in the event that at any time after the principal of the Debentures shall so
become due and payable and prior to the date of maturity stated in the
Debentures all arrears of principal of and interest on the Debentures (with
interest at the rate specified in the Debentures on any overdue principal and,
to the extent legally enforceable, on any interest overdue) shall be paid by or
for the account of the Company, then the holder or holders of 60% of the then
outstanding principal amount of the Debentures, by written notice or notices to
the Company, may (but shall not be obligated to) waive such Event of Default and
its consequences and rescind or annul such declaration, but no such waiver shall
extend to or affect any subsequent Event of Default or impair any right
resulting therefrom. If any Holder of the Debentures shall give any notice or
take any other action with respect to a claimed default, the Company, forthwith
upon receipt of such notice or obtaining knowledge of such other action will
give written notice thereof to all other Holders of the Debentures, describing
such notice or other action and the nature of the claimed default.
12.3. Enforcement
In case any one or more Events of Default shall occur and be continuing,
each Holder of the Debentures may proceed to protect and enforce the rights of
such Holder by an action at law, suit in equity or other appropriate proceeding,
whether for the specific performance of any agreement in favor of the Purchasers
which is contained in any of the Transaction Documents or in such Debenture or
for an injunction against a violation of any of the terms hereof or thereof, or
in aid of the exercise of any power granted hereby or thereby or by law
(including, without limitation, the right to enforce the Company Debenture
Collateral, the Guaranties and the Guarantor Debenture Collateral, each in
accordance with its respective terms). Each such Holder agrees that it will give
written notice to the other Holders of the Debentures prior to instituting any
such action. In case of a default in the payment of any principal of or interest
on any Debenture, the Company will pay to the holder thereof such further amount
as shall be sufficient to cover the cost and the expenses of collection,
including, without limitation, reasonable attorney's fees, expenses and
disbursements. No course of dealing and no delay on the part of any Holder of
the Debentures in exercising any rights shall operate as a waiver thereof or
otherwise prejudice such Holder's rights. No right conferred hereby or by any
Debenture upon any holder thereof shall be exclusive of any other right referred
to herein or therein or now available at law or in equity, by statute or
otherwise.
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ARTICLE XIII
INDEMNIFICATION
13.1. Company Indemnification of Purchasers
To the greatest extent permitted by applicable law, the Company agrees to
indemnify each Purchaser, its Affiliates and respective legal counsel, and each
of the officers, directors, partners and stockholders of each, against and hold
it harmless from all Losses arising out of or resulting from: (i) the breach of
any representation or warranty of the Company in any Transaction Document or in
any agreement, certificate or instrument delivered pursuant thereto; (ii) the
breach of any agreement by the Company contained in any Transaction Document or
any agreement, certificate of instrument delivered pursuant thereto; or (iii)
the Purchasers' representation on the Board of Directors and any committees
thereof or as an observer thereon.
13.2. Notice of Claims
Anything in Section 13.1 to the contrary notwithstanding, no claim may be
asserted nor may any action be commenced against the Company for breach of any
representation or warranty contained in this Agreement, unless notice of such
Purchaser's intention to assert any such claim or commence any such action is
received by the Company describing in writing in reasonable detail the facts and
circumstances with respect to the subject matter of such claim or action on or
prior to the date on which the representation or warranty on which such claim or
action is based ceases to survive as set forth in Section 19.3. With respect to
any claim or action as to which such notice shall have been given, the
Purchasers shall be entitled to assert a claim or commence an action for
indemnification with respect thereto at any time after the giving of such
notice, regardless of whether any such claim or action may be asserted or
commenced prior to or after the date on which the representation or warranty on
which such claim or action is based ceases to survive as set forth in Section
19.3.
13.3. Third Party Claims
Each Purchaser agrees to give the Company prompt written notice of any
claim, assertion, event or proceeding by a third party of which it has actual
knowledge concerning any Losses as to which it intends to request
indemnification under this Agreement. The Company shall have the right to
direct, through counsel of the Company's own choosing, the defense or settlement
of any such claim or proceeding at the Company's own expense. If the Company
elects to assume the defense of any such claim or proceeding, such Purchaser may
participate in such defense, but in such case the expenses of such Purchaser
shall be paid by such Purchaser. Such Purchaser shall cooperate with the Company
in the defense or settlement thereof, and the Company shall reimburse such
Purchaser for its reasonable out-of-pocket expenses in connection therewith. If
the Company elects to direct the defense of any such claim or proceeding, such
Purchaser shall not pay, or permit to be paid, any part of any claim or demand
arising from such asserted liability, unless the Company consents in writing to
such payment or unless the Company, subject to the last sentence of this Section
13.3, withdraws from the defense of such asserted liability, or unless a final
judgment from which no appeal may be taken by or on behalf of the Company is
entered against such Purchaser for such liability. If the Company shall fail to
defend any such claim or proceeding, or if, after commencing or undertaking any
defense, fails to prosecute or withdraws from such defense, such Purchaser shall
have the right to undertake the defense or settlement thereof, at the Company's
expense. If such Purchaser assumes the defense of any such claim or proceeding
pursuant to this Section 13.3 and proposes to settle such claim or proceeding
prior to a final judgment thereon or to forego appeal with respect thereto, then
such Purchaser shall give the Company prompt written notice thereof and the
Company shall have the right to participate in the settlement or assume or
reassume the defense of such claim or proceeding.
13.4. Purchaser Indemnification of the Company
Each Purchaser agrees to indemnify and hold harmless the Company, its
Affiliates and respective legal counsel, and each of the officers, directors,
partners and stockholders of each, from and against any Losses arising out of
the breach of any representation or warranty of such Purchaser in Article V of
this Agreement.
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ARTICLE XIV
AMENDMENT AND WAIVER
14.1. Amendment and Waiver
No amendment of any provision of this Agreement, including any amendment of
this Article XIV, shall be valid unless the same shall be in writing and signed
by the Company (and the Independent Committee) and the holders of 60% of the
then outstanding principal amount of the Debentures. No waiver by any party of
any default, misrepresentation, or breach of warranty or covenant hereunder or
under any other Transaction Document, whether intentional or not, shall be
deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or thereunder or affect in any way any
rights arising by virtue of any prior or subsequent such occurrence.
14.2. Binding Effect of Amendment and Waiver
The Company and each Holder shall be bound by any amendment or waiver
effected in accordance with the provisions of this Article XIV, whether or not
such Debenture and Share, respectively, shall have been marked to indicate such
modification, but any Debenture and Share, respectively, issued thereafter shall
bear a notation as to any such modification. Promptly after obtaining the
written consent of the Holders of the Debentures and the holders of Shares,
respectively, herein provided, the Company shall transmit a copy of such
modification to all of the holders of the Debentures and the holders of Shares,
respectively, then outstanding.
ARTICLE XV
EXCHANGE OF DEBENTURES
At any time at the request of any Holder to the Company at its office
provided under Section 19.6, the Company at its expense (except for any transfer
tax or any other tax arising out of the exchange) will issue in exchange
therefore new Debentures, in such denomination or denominations ($100,000 or any
larger multiple of $100,000, plus one Debenture in a lesser denomination, if
required) as such holder may request, in aggregate principal amount equal to the
unpaid principal amount of the Debenture or Debentures surrendered and
substantially in the form thereof, dated as of the date to which interest has
been paid on the Debenture or Debentures surrendered (or, if no interest has yet
been so paid thereon, then dated the date of the Debenture or Debentures so
surrendered) and payable to such Person or Persons or order as may be designated
by such holder.
ARTICLE XVI
TRANSFER OF DEBENTURES
Subject to the next paragraph of this Article XVI, each Holder by
acceptance thereof agrees that it will give the Company ten days written notice
prior to selling or otherwise disposing of such Debenture. No such sale or other
disposition shall be made unless (i) the holder shall have supplied to the
Company an opinion of counsel for the holder reasonably acceptable to the
Company to the effect that no registration under the Securities Act is required
with respect to such sale or other disposition, or (ii) an appropriate
registration statement with respect to such sale or other disposition shall have
been filed by the Company and declared effective by the SEC.
If the Holder has obtained an opinion of counsel reasonably acceptable to
the Company to the effect that the sale of its Debenture may be made without
registration under the Securities Act pursuant to compliance with Rule 144 (or
any successor rule under the Securities Act), the holder need not provide the
Company with the notice required in the first paragraph of this Article XVI.
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ARTICLE XVII
RIGHT OF FIRST REFUSAL; ADDITIONAL INVESTMENT
17.1. Right of First Refusal
Each First Refusal Holder shall be entitled to the following right of first
refusal:
(a) Except in the case of Excluded Securities, the Company shall not
issue, sell or exchange, agree to issue, sell or exchange, or reserve or
set aside for issuance, sale or exchange any Equity Securities unless in
each case, the Company shall have first offered to sell to the First
Refusal Holders the Equity Securities at a price and on such other terms as
shall have been specified by the Company in writing delivered to each of
the First Refusal Holders (the "Offer"), which Offer by its terms shall
remain open and irrevocable for a period of 30 days from the date it is
delivered by the Company to the First Refusal Holders; provided, however,
that such issuance, sale or exchange of Equity Securities shall result in
gross proceeds to the Company (whether at the time of issuance or upon
conversion, exercise, or exchange thereof) of an amount in excess of
$200,000 (the "Minimum Offering Threshold"). For purposes of computing the
Minimum Offering Threshold, all offerings, issuances, sales and exchanges
of Equity Securities during any rolling 12-month period shall be
aggregated.
(b) Each of the First Refusal Holders shall have the right to purchase
up to its pro rata share of the Equity Securities determined at the time of
the consummation of the Company's issuance of Equity Securities. The "pro
rata share" of each First Refusal Holder shall be that amount of the Equity
Securities multiplied by a fraction,
(i) the numerator of which is the sum of (1) the number of shares
of Common Stock underlying a Debenture held by such Person if such
Person is the holder of a Debenture, (2) the number of shares of Common
Stock underlying the 2002 Debentures held by such Person if such Person
is an Existing 2002 Debentureholder, (3) the number of shares of Common
Stock underlying the 1998 Debentures held by such Person if such Person
is an Existing 1998 Debentureholder, and (4) the number of shares of
Common Stock issued to such Old Common Holder upon conversion of a 2002
Existing Debenture or 1998 Existing Debenture (as the case may be) if
such Person is an Old Common Holder and has converted the Debenture, and
(ii) the denominator of which is the sum of (1) the total number of
shares of Common Stock underlying the Debentures issued pursuant to this
Agreement and (2) the total number of shares of Common Stock underlying
the 2002 Debentures and the 1998 Debentures.
(c) Notice of the intention of each First Refusal Holder to accept, in
whole or in part, an Offer shall be evidenced by a writing signed by such
Person, as the case may be and delivered to the Company prior to the end of
the 30-day period commencing with the date of such Offer (or, if later,
within ten days after the delivery or giving of any written notice of a
material change in such Offer), setting forth such portion (specifying
number of shares, principal amount or the like) of the Equity Securities
such Person elects to purchase (the "Notice of Acceptance").
(d) In the event that all First Refusal Holders do not elect to
purchase all of the Equity Securities, the Persons which have provided
notice of their intention to exercise the refusal rights as provided in
Section 17.1(c) shall have the right to purchase, on a pro rata basis, any
unsubscribed portion of the Equity Securities during a period of ten days
following the 30-day period provided in Section 17.1(c). Following such
additional ten-day period, in the event the First Refusal Holders have not
elected to purchase all of the Equity Securities, the Company shall have 90
days from the expiration of the foregoing 40-day period to sell all or any
part of such Equity Securities as to which a Notice of Acceptance has not
been given by any of such Persons (the "Refused Securities") to any other
Person or Persons on the terms provided in the Offer. Upon the closing of
the sale to such other Person or Persons of all the Refused Securities,
which shall include payment of the purchase price to the Company in
accordance with the terms of the Offer, if the First Refusal Holders have
timely submitted a Notice of Acceptance, they shall purchase from the
Company, and the Company shall sell to such Persons, as the
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case may be, the Equity Securities in respect of which a Notice of
Acceptance was delivered to the Company, at the terms specified it the
Offer. The purchase by the First Refusal Holders of any Equity Securities
is subject in all cases to the preparation, execution and delivery by the
Company to such Persons of a purchase agreement and other customary
documentation relating to such Equity Securities as is satisfactory in form
and substance to such Persons and each of their respective counsel.
(e) In each case, any Equity Securities not purchased by the First
Refusal Holders or by a Person or Persons in accordance with Section
17.1(d) may not be sold or otherwise disposed of until they are again
offered to such Persons under the procedures specified in Sections 17.1(a),
17.1(c) and 17.1(d) of this Agreement.
(f) The rights of the First Refusal Holders under this Section 17.1
shall not apply to the following securities (the "Excluded Securities"):
(i) Common Stock or options to purchase such Common Stock, issued
to officers, employees or directors of, or consultants to, the Company,
pursuant to any agreement, plan or arrangement approved by the Board of
Directors;
(ii) Common Stock issued as a stock dividend or upon any stock
split or other subdivision or combination of shares of Common Stock;
(iii) shares issued upon conversion of the Debentures or the
Existing Debentures, exercise of the warrants issued in connection with
the issuance of the Existing Debentures or conversion/exercise of other
convertible securities outstanding on the date hereof;
(iv) any securities issued for consideration other than cash
pursuant to a merger, consolidation, acquisition, strategic alliance or
similar business combination approved by the Board of Directors and at
the Company's Annual Meeting of Stockholders; or
(v) any debentures issued in satisfaction of interest payments
under the Existing Debentures, including debentures instruments issued
in satisfaction of interest payments on those debenture instruments.
(g) Notwithstanding anything to the contrary contained herein, a
holder of a Debenture (other than an initial Purchaser) shall not be
considered a First Refusal Holder for purposes of this Section 17.1 only,
unless such Person then holds Debentures with an outstanding principal
amount of at least $200,000.
ARTICLE XVIII
TRANSFER RESTRICTIONS
18.1. Transfer Restrictions
This Article XVIII shall apply to all Transfers of Restricted Securities.
Notwithstanding any implication to the contrary set forth in this Agreement, no
Transfer shall have any force or effect unless: (a) such a Transfer is made in
accordance with each of the provisions of this Article XVIII, (b) such a
Transfer would not result in the violation of applicable federal or state
securities laws, (c) the transferee in any such Transfer is an Accredited
Investor, and (d) the intended transferee of such Transfer executes the Joinder
Agreement. Any attempt by a Holder to Transfer any Restricted Securities in
violation of any provision of this Agreement will be void and have no force or
effect. The Company will not be required (i) to transfer on its books any
Restricted Securities that have been sold, gifted or otherwise Transferred in
violation of this Agreement or (ii) to treat as the owner of such Restricted
Securities, or to accord the right to vote or pay principal, interest or
dividends to, any purchaser, donee or other transferee to whom such Restricted
Securities may have been so Transferred in violation of this Agreement.
18.2. Notice of Proposed Transfer
Before any Holder may effect any Transfer of any Offered Securities (other
than a Permitted Transfer), such Holder (the "Selling Security Holder") must
give written notice concurrently to the Company and the
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other Holders ("Seller Notice") stating (a) the Selling Security Holder's bona
fide intention to transfer such Offered Securities, (b) the number of the
Offered Securities to be Transferred, (c) the name, address and relationship to
the Selling Security Holder, if any, of each proposed purchaser or other
transferee (the "Proposed Transferee"), (d) the bona fide cash price per Offered
Security (the "Offered Price"); and (e) the anticipated date of the proposed
Transfer, which shall be a date not earlier than 30 days after the date the
Seller Notice is delivered. Upon the request of the Company or a Holder, the
Selling Security Holder will promptly furnish such information to the Company
and to the Holder as may be reasonably requested to establish that the offer and
proposed Transfer are bona fide.
18.3. Purchase Rights
With respect to any Transfer by any Selling Security Holder (other than a
Permitted Transfer), the Company and each Holder shall have the right to
purchase ("Purchase Right") the Offered Securities, exercisable as set forth
below:
(a) The Company shall have the right to purchase all, but not less
than all, of the Offered Securities. If the Company desires to purchase all
of the Offered Securities, the Company must, within the 10 day period (the
"Company Refusal Period") commencing on the date of receipt of the Seller
Notice, give written notice to the Selling Security Holder of the Company's
election to purchase the Offered Securities. In the event that the Company
elects not to purchase all of the Offered Securities, the Offered
Securities may be purchased by the Holders as set forth in Section 18.3(b).
On or before the expiration of the Company Refusal Period, the Company will
give written notice (the "Company Waiver Notice") to the Holders specifying
either (i) that all of the Offered Securities were subscribed by the
Company's exercising its Purchase Right or (ii) that the Company waived its
Purchase Right. Notwithstanding any failure by the Company to deliver a
Company Waiver Notice, a failure by the Company to exercise its Purchase
Right within the Company Refusal Period shall be deemed a waiver of such
right.
(b) In the event the Company does not purchase all of the Offered
Securities, each Holder shall have the opportunity to purchase up to such
Holder's pro rata share of the Offered Securities. For purposes of this
Section 18.3(b), a Holder's pro rata share shall be determined by dividing
the number of shares of Common Stock (inclusive of all Common Stock
underlying the Restricted Securities) held by such Holder by the total
number of shares of Common Stock (inclusive of all Common Stock underlying
the Restricted Securities) held by all Holders purchasing Offered
Securities pursuant to this Section 18.3(b). If any Holder, or its
assignees who are Affiliates of such Holder, desires to purchase the
Offered Securities, such Holder must, within a 5 day period (the "Holder
Refusal Period") commencing on the later date of (i) the Company Waiver
Notice or (ii) the 10th day after the Seller Notice, give written notice
("Holder Notice") to the Selling Security Holder and to the Company of such
Holder's election to purchase such Holder's pro rata share of the remaining
Offered Securities, or such lesser number as may be stated in such Holder's
Holder Notice. The participating Holders also may allocate the right to
purchase the Offered Securities between or among them in any proportion
they choose as reflected in a notice to the Selling Security Holder within
the Holder Refusal Period. In the event that any Holder elects not to
purchase any of the Offered Securities, such Holder shall, prior to the
expiration of the Holder Refusal Period, give written notice ("Holder
Waiver Notice") to the Selling Security Holder that the Holder is waiving
such Holder's right to purchase all such Offered Securities under this
Section 18.3(b). Notwithstanding any failure by a Holder to deliver a
Holder Waiver Notice, a failure by a Holder to exercise such Holder's
Purchase Right within the Holder Refusal Period shall be deemed a waiver of
such right.
(c) The purchase price for the Offered Securities to be purchased by
the Company or the Holders exercising their Purchase Right under this
Agreement will be the Offered Price, and will be payable within 10 days
after the date the Purchase Right is first exercised for all of the Offered
Securities. Payment of the purchase price will be made by the exercising
Company or Holders (as the case may be) by check or wire transfer of
immediately available funds.
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(d) If the Company or Holders exercise their Purchase Right to
purchase all of the Offered Securities, then, upon consummation of such
purchase, the Selling Security Holder will have no further rights as a
holder of the Offered Securities except the right to receive payment for
the Offered Securities in accordance with the terms of this Agreement, and
the Selling Security Holder will promptly cause all certificate(s) or
debentures (as the case may be) evidencing such Offered Securities,
together with such other instruments and documents of transfer as the
Persons acquiring the Offered Securities shall reasonably request, to be
surrendered to the Company for Transfer to the Persons acquiring the
Offered Securities (free and clear of any and all liens, claims and
encumbrances whatsoever except those imposed by this Agreement and
securities laws generally).
(e) If the Company or the Holders have not elected to purchase all of
the Offered Securities, then, subject to the Co-Sale Rights set forth in
Section 18.4, the Selling Security Holder may Transfer the remaining
Offered Securities to the Proposed Transferee, at the Offered Price or at a
higher price, provided that such Transfer (i) is consummated within 90 days
after the date of the Seller Notice and (ii) is in accordance with all the
terms of this Agreement. Any proposed Transfer at a price or on terms and
conditions more favorable than those described in the Seller Notice, as
well as any subsequent proposed Transfer of any of the Offered Securities
by the Selling Security Holder, shall again be subject to this Section 18.3
and shall require full compliance by the Selling Security Holder with the
procedures in this Section 18.3.
18.4. Co-Sale Rights
Notwithstanding Section 18.3(e), no Holder (each, a "Co-Sale Seller") shall
Transfer any of the Offered Securities pursuant to Section 18.3(e) to a Proposed
Transferee until such Co-Sale Seller has given written notice to each of the
Holders of the right (the "Co-Sale Right"), exercisable either within 5 days
after the date of such Person's Holder Waiver Notice or within 15 business days
following receipt of the Seller Notice, whichever is later, to sell to a
Proposed Transferee all or part of such Holder's Portion of the Offered
Securities, on the same terms and conditions as set forth in the Seller Notice,
on an as-converted-to-Common-Stock basis. A Holder may exercise the Co-Sale
Right by delivering to the Co-Sale Seller at the closing of the Transfer of
Offered Securities to the Proposed Transferee one or more certificates or
debentures (as the case may be), properly endorsed for Transfer, representing
such Offered Securities to be Transferred by the Holder. At the closing of the
Transfer of Offered Securities to the Proposed Transferee, such certificates,
debentures or other instruments will be Transferred and delivered to the
Proposed Transferee as set forth in the Seller Notice in consummation of the
Transfer of the Offered Securities pursuant to the terms and conditions
specified in such notice, and the Co-Sale Seller will remit, or will cause the
Proposed Transferee to remit, to the participating Holder at closing that
portion of the proceeds of the Transfer to which the Holder is entitled by
reason of the Holder's participation in such Transfer pursuant to the Co-Sale
Right. If the Offered Securities consist of debentures or more than one series
or class or type of stock and the Proposed Transferee is not willing to purchase
debentures or shares of a class of preferred stock held by the Holders, then the
Holders exercising a Co-Sale Right will have the opportunity to convert such
Existing Debentures, Debentures or shares of Preferred Stock into Common Stock,
and the Company will cooperate to effect such conversion.
ARTICLE XIX
MISCELLANEOUS
19.1. Regulatory Filings; Best Efforts
(a) The Company and the Purchasers (acting severally and not jointly) will
coordinate and cooperate with one another and will each use its respective best
efforts to comply with, and will each refrain from taking any action that would
impede compliance with, all Legal Requirements, and as promptly as practicable
after the date hereof, each of the Company and the Purchasers will make all
filings, notices, petitions, statements, registrations, submissions of
information, application or submission of other documents required by any
governmental entity in connection with this Agreement and the transactions
contemplated hereby, including,
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without limitation: any filing necessary to obtain any consent or approval of
any third party or governmental entity and any filings required under the
Securities Act, the Exchange Act, any applicable state or securities or "blue
sky" laws and the securities laws of any foreign country, any applicable
securities exchange or any other Legal Requirements relating to this Agreement
and the transactions contemplated hereby. In furtherance and not in limitation
of the foregoing, promptly upon receipt of the approval of its stockholders and
Existing Debentureholders of the Charter Amendment, the Company will file the
Charter Amendment with the New York Secretary of State and with any other
applicable governmental entity. Each of the Company and the Purchasers will
cause all documents that it is responsible for filing with any governmental
entity under this Section 19.1(a) to comply in all respects with all applicable
Legal Requirements. The Company and the Purchasers each will promptly supply the
other with any information which may be required in order to effectuate any
filings or application pursuant to this Section 19.1(a).
(b) The Company will notify Essex, Care Capital and Galen promptly upon the
receipt of: (i) any comments from any officials of the SEC or any other
governmental entity in connection with any filings made pursuant to this
Agreement and (ii) any request by any officials of the SEC or any other
governmental entity for amendments or supplements to any filings made pursuant
to, or information provided to comply in all material respects with, any Legal
Requirements. Whenever any event occurs that is required to be set forth in an
amendment or supplement to any filing made pursuant to Section 19.1(a) or
otherwise pursuant to this Agreement, the Company will promptly inform Essex,
Care Capital and Galen of such occurrence and will file with the applicable
governmental entity such amendment or supplement. Before filing any document,
including the Proxy Statement, with the SEC or other governmental entity
pursuant to Section 19.1(a) or otherwise pursuant to this Agreement, the Company
will provide Essex, Care Capital and Galen and their respective counsel with a
copy of the draft document a reasonable time prior to the filing. Essex, Care
Capital and Galen and their respective counsel will have an adequate and
reasonable opportunity to review, comment upon and consent to the document prior
to such document being filed by the Company with the SEC or other governmental
entity.
(c) Each of the parties to this Agreement agrees to use its best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the transactions contemplated by this Agreement, including
using its best efforts to accomplish the following: (i) the taking of its best
efforts necessary to cause the conditions precedent set forth in Articles VI and
VII to be satisfied, (ii) the obtaining of all necessary actions or nonactions,
waivers, consents, approvals, orders and authorizations from governmental
entities and the making of all necessary registrations, declarations and filings
(including registrations, declarations and filings with governmental entities,
if any) and the taking of its best efforts as may be necessary to avoid any
suit, claim, action, investigation or proceeding by any governmental entity,
(iii) the obtaining of all necessary consents, approvals or waivers from third
parties, (iv) the defending of any suits, claims, actions, investigations or
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered by any court or other
governmental entity vacated or reversed, and (v) the execution, delivery and
filing of any additional documents, instruments and certificates necessary to
consummate the transactions contemplated by, and to fully carry out the purposes
of, this Agreement. In connection with and without limiting the foregoing, the
Company and its Board of Directors will, if any takeover statute or similar
Legal Requirement is or becomes applicable to this Agreement or the transactions
contemplated by this Agreement, use its best efforts to ensure that the
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such Legal Requirement on this Agreement and the
transactions contemplated hereby.
19.2. Governing Law
This Agreement and the rights of the parties hereunder shall be governed in
all respects by the laws of the State of New York wherein the terms of this
Agreement were negotiated, excluding to the greatest extent permitted by law any
rule of law that would cause the application of the laws of any jurisdiction
other than the State of New York.
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19.3. Survival of Representations
Subject to the terms of this Agreement, the representations, warranties,
covenants and agreements contained, in the Transaction Documents and in any
agreements, certificates or other instruments delivered pursuant thereto shall
survive (a) any investigation made by or on behalf the Purchasers and (b) the
Closing until the date that is 24 months after the Closing Date.
19.4. Successors and Assigns
Except as otherwise expressly provided herein, the provisions hereof shall
inure to the benefit of, and be binding upon and enforceable by and against, the
parties hereto and their respective successors, assigns, heirs, executors and
administrators. No party may assign any of its rights hereunder without the
prior written consent of the other parties; provided, however, that any
Purchaser may assign any of its rights under any of the Transaction Documents to
(a) any Affiliate of such Purchaser or (b) any Person to whom such Purchaser
shall Transfer any Debentures in accordance with the terms of Article XVIII;
provided further, that notwithstanding anything herein or in the Transaction
Documents to the contrary, no opinion of counsel shall be necessary for a
transfer or assignment of the Debentures or any rights under any of the
Transaction Documents (except for the Watson Warrant) by a Purchaser that is a
partnership, corporation or limited liability company to any general partner,
limited partner, retired partner, stockholder, member, retired member, officer,
director or Affiliates of such Purchaser, or the members or retired members of
the foregoing, as applicable, or the estates, beneficiaries and family members
of any such general partner, limited partners, retired partners, stockholders,
members, retired members, officers, directors and Affiliates and any trusts for
the benefit of any of the foregoing Persons, provided, that in each case the
transferee will be subject to the applicable terms of the Transaction Documents
to the same extent as if such transferee were an original Purchaser hereunder.
19.5. Entire Agreement
This Agreement (including the Exhibits and Schedules hereto), the other
Transaction Documents and any other documents delivered pursuant hereto and
simultaneously herewith constitute the full and entire understanding and
agreement between the parties with regard to the subject matter hereof and
thereof.
19.6. Notices
All notices, demands or other communications given hereunder shall be in
writing and shall be sufficiently given if transmitted by facsimile or delivered
either personally or by a nationally recognized courier service marked for next
business day delivery or sent in a sealed envelope by first class mail, postage
prepaid and either registered or certified, return receipt requested, addressed
as follows:
(a) if to the Company:
Halsey Drug Co., Inc.
695 N. Perryville Road
Rockford, Illinois 61107
Attention: Mr. Andrew D. Reddick
President and Chief Executive Officer
Facsimile: (815) 399-9710
(b) if to a Purchaser, to the address set forth on the signature page
hereto, or to such other address with respect to any party hereto as such
party may from time to time notify (as provided above) the other parties
hereto. Any such notice, demand or communication shall be deemed to have
been given (i) on the date of delivery, if delivered personally, (ii) on
the date of facsimile transmission, receipt confirmed, (iii) one business
day after delivery to a nationally recognized overnight courier service, if
marked for next day delivery, or (iv) five business days after the date of
mailing, if mailed.
(c) Copies of any notice, demand or communication given to the Company
shall also be delivered to St. John & Wayne, L.L.C., Two Penn Plaza East,
Newark, New Jersey, 07105-2249 Attn.: John P. Reilly, Esq., or such other
address as may be directed.
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19.7. Delays, Omissions or Waivers
No delay or omission to exercise any right, power or remedy accruing to any
Holder of the Debentures upon any breach or default of the Company under this
Agreement shall impair any such right, power or remedy of such holder nor shall
it be construed to be a waiver of any such breach or default, or an
acquiescence, therein, or of or in any similar breach or default thereafter
occurring. Any permit, consent or approval of any kind or character on the part
of any holder of any breach or default under this Agreement must be made in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any holder, shall be cumulative and not alternative. Notwithstanding
anything set forth herein or in any Transaction Document, if the consent of or
the waiver by any 2004 Holder is needed or otherwise desirable under any
Transaction Document and the Company, or any Affiliate thereof, pays or other
gives consideration to any 2004 Holder, or an Affiliate thereof, for such
consent or waiver the Company shall offer the same to all other 2004 Holders.
19.8. Independence of Covenants and Representations and Warranties
All covenants hereunder shall be given independent effect so that if a
certain action or condition constitutes a default under a certain covenant, the
fact that such action or condition is permitted by another covenant shall not
affect the occurrence of such default. In addition, all representations and
warranties hereunder shall be given independent effect so that if a particular
representation or warranty proves to be incorrect or is breached, the fact that
another representation or warranty concerning the same or similar subject matter
is correct or is not breached will not affect the incorrectness of or a breach
of a representation and warranty hereunder.
19.9. Rights and Obligations; Severability
Unless otherwise expressly provided herein, each Purchaser's rights and
obligations hereunder are several rights and obligations, not rights and
obligations jointly held with any other Person. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
19.10. Agent's Fees
(a) The Company hereby (i) represents and warrants that the Company has not
retained a finder or broker in connection with the transactions contemplated by
this Agreement and (ii) agrees to indemnify and to hold the Purchasers harmless
of and from any liability for commission or compensation in the nature of an
agent's fee to any broker or other Person, and the costs and expenses of
defending against such liability or asserted liability, including, without
limitation, reasonable attorney's fees, arising from any act by the Company or
any of the Company's employees or representatives.
(b) Each Purchaser (i) severally represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby severally agrees to indemnify and to hold the
Company harmless from any liability for any commission or compensation in the
nature of an agent's or finder's fee to any broker or other Person (and the
costs, including reasonable legal fees, and expenses of defending against such
liability or asserted liability) for which such Purchaser, or any of its
employees or representatives, are responsible.
19.11. Expenses
(a) The Company shall bear its own expenses and legal fees incurred on its
behalf with respect to the negotiation, execution and consummation of the
transactions contemplated by this Agreement, and, subject to Section 19.11(b),
the Company will reimburse the Purchasers for all of the legal fees and expenses
incurred by Baker & McKenzie on behalf of the Purchasers and their Affiliates
with respect to the negotiation, execution and consummation of the transactions
contemplated by this Agreement and the transactions contemplated hereby. In
addition, subject to Section 19.11(b), the Company will reimburse each of Care
Capital and Galen for up to $20,000 for legal fees and expenses which such
Purchasers respectively incur with respect to the negotiation, execution and
consummation of the transactions contemplated by this Agreement and the
transactions contemplated hereby. Counsel for each of Essex, Care Capital and
Galen shall deliver to
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the Company in advance of the Closing an invoice for their respective fees and
expenses. Such reimbursement shall be paid on the Closing Date.
(b) If the transactions contemplated by this Agreement are not consummated,
then each party shall bear its own expenses and legal fees incurred on its
behalf with respect to the negotiation, execution and consummation of the
transactions contemplated by this Agreement.
(c) The Company also agrees to reimburse each Purchaser for all reasonable
legal fees and expenses subsequently incurred by the Purchaser and its
Affiliates in connection with (i) the negotiation, execution and consummation of
any amendment, waiver or consent with respect to any agreement to which the
Company and the Purchaser are parties; provided, that such waiver, amendment or
consent (A) is requested by the Company or (B) is required by the terms of the
agreement or is required as a result of any action or inaction of the Company in
violation of any such agreement, and (ii) the review of and cooperation with
respect to the Proxy Statement and the conversion of the Debentures.
19.12. Jurisdiction
(a) Each of the parties hereto hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of any
New York State court or United States Federal court sitting in New York City,
and any appellate court from any thereof, in any action or proceeding arising
out of or relating to this Agreement or any of the other Transaction Documents
to which it is a party or to whose benefit it is entitled, or for recognition or
enforcement of any judgment, and each of the parties hereto irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such New York State court or, to
the fullest extent permitted by law, in such United States Federal court. Each
of the parties hereto agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the right that any party may otherwise have to bring any action or
proceeding relating to this Agreement or any of the other Transaction Documents
in the courts of any other jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or in relation to this Agreement or any other
Transaction Document to which it is a party in any such New York State or United
States Federal court sitting in New York City. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
19.13. Waiver of Jury Trial
EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT
OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY TRANSACTION DOCUMENT OR THE
ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR
ENFORCEMENT THEREOF.
19.14. Confidentiality
(a) Each of the Purchasers hereby agrees to keep (and to cause its
Affiliates, employees, agents, attorneys, accountants and other professional
advisors to keep) confidential the confidential information provided to it by or
on behalf of the Company or its Subsidiaries pursuant to or in connection with
the Agreement or any other Transaction Document, provided that, such information
may be disclosed (i) solely in connection with the performance of the
transactions contemplated by this Agreement and any other Transaction Document
to (A) its Affiliates, directors, officers and employees who have a need to know
such information and its agents, attorneys, accountants and other professional
advisors or (B) the other Purchasers, (ii) in response to any order of any court
or other governmental or administrative body or agency or as may be required by
any law binding upon any of the Purchasers, (iii) in connection with the
exercise of any remedies under any Transaction Document or the enforcement of
rights hereunder and thereunder, (iv) with the consent of the Company or (v) to
the extent such information (A) is on the date hereof, or at or before the
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time such disclosure becomes, publicly available other than as a result of a
breach by such disclosing Person of the obligation set forth in this Agreement
or (B) at or before the time of such disclosure becomes available to any
Purchaser on a nonconfidential basis from a source other than the Company or its
Subsidiaries, which source is not known to the recipient of such information to
have breached a confidentiality agreement with the Company or its Subsidiaries
in respect of such information.
(b) Each Purchaser hereby agrees that in the event such Purchaser is
requested or required other than by applicable law (by interrogatory, request
for information or documents, subpoena, deposition, civil investigative demand
or other process) to disclose any information pursuant to Section 19.14(a)(ii),
such Purchaser will, except to the extent such notice would cause such Purchaser
to be in violation of law, provide the Company with prompt notice of any such
request or requirement so that the Company may seek an appropriate protective
order or other similar assurance to prevent disclosure of such information or
waive compliance with the provisions of this Section 19.14. Such Purchaser may
not oppose action by the Company to obtain an appropriate protective order or
other reliable assurance that confidential treatment will be accorded such
information, provided that such Purchaser may oppose the Company's action to
obtain an appropriate protective order or other reliable assurance in the event
that, in connection with any action, suit or other legal or equitable proceeding
(including any bankruptcy proceeding), such Purchaser reasonably believes that
the failure to publicly disclose such information would materially and adversely
affect such Purchaser's ability to protect or exercise its rights and remedies
hereunder or under any other Transaction Document.
(c) The Purchasers may also disclose, subject to their compliance with the
requirements of Section 19.14(b), such information to the extent the Purchasers
reasonably believe it is appropriate to in connection with any action, suit or
other legal or equitable proceeding (including any bankruptcy proceeding) to
protect or otherwise exercise their rights and remedies hereunder or under any
other Transaction Document in any legal or equitable proceeding.
(d) In furtherance to the foregoing, each of the Purchasers agrees that its
right to request any information pursuant to Section 9.2(g) or to avail itself
of the provisions of Section 9.6(b) shall be conditioned on its continuing
compliance with the requirements of this Section 19.14.
19.15. Titles and Subtitles
The titles of the articles, sections and subsections of this Agreement are
for convenience of reference only and are not to be considered in construing
this Agreement.
19.16. Counterparts
This Agreement may be executed in any number of counterparts, including by
facsimile copy, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
19.17. Termination of Certain Provisions
Articles VIII, IX, X, XII, XV, XVI, XVII and XVIII of this Agreement shall
terminate and be of no further force or effect immediately upon the conversion
of the Debentures in accordance with their terms into Series A Preferred upon
the Conversion Event.
ARTICLE XX
CERTAIN DEFINED TERMS
For purposes of this Agreement, the following terms have the meanings
indicated (unless otherwise expressly provided herein):
"412 Plan" means a Plan that is subject to Section 412 of the Code.
"1940 Act" means the Investment Company Act of 1940, as amended, and any
applicable rules and regulations thereunder, and any successor to such statute,
rules or regulations. Any reference herein to a
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specific section, rule or regulation of the 1940 Act shall be deemed to include
any corresponding provisions of future law.
"1998 Debentures" means the 5% convertible secured debentures due March 31,
2006 (as such debentures may be supplemented, amended, or otherwise modified
from time to time) issued pursuant to that certain Debenture and Warrant
Purchase Agreement dated March 10, 1998 between the Company and the purchasers
listed on the signature page thereto.
"1999 Debentures" means the 5% convertible secured debentures due March 31,
2006 (as such debentures may be supplemented, amended, or otherwise modified
from time to time) issued pursuant to that certain Debenture and Warrant
Purchase Agreement dated May 26, 1999 between the Company and the purchasers
listed on the signature page thereto.
"2002 Debentures" means the 5% convertible secured debentures due March 31,
2006 (as such debentures may be supplemented, amended, or otherwise modified
from time to time) issued pursuant to that certain Debenture Purchase Agreement
dated December 20, 2002 between the Company and the purchasers listed on the
signature page thereto, other than the 2003 Debentures.
"2003 Debentures" means the 5% convertible secured debentures due March 31,
2006 (as such debentures may be supplemented, amended, or otherwise modified
from time to time) purchased pursuant to that certain Debenture Purchase
Agreement dated December 20, 2002 between the Company and the purchasers listed
on the signature page thereto in accordance with certain Joinder Agreements
dated June 16, 2003, July 1, 2003, July 15, 2003, August 5, 2003, August 19,
2003, September 5, 2003 and October 7, 2003.
"2004 Holders" has the meaning set forth in Section 10.15 of this
Agreement.
"Accredited Investor" has the meaning specified in Rule 501(a) of
Regulation D promulgated pursuant to the Securities Act.
"Additional Investor" has the meaning specified in Section 3.1 of this
Agreement.
"Affiliate" has the meaning specified in Rule 501(b) under the Securities
Act.
"AMEX" means the American Stock Exchange.
"Approved Accounting Firm" means any firm of independent certified public
accountants reasonably acceptable to the Purchasers.
"ARCOS" means the Automation of Reports and Consolidated Orders System
which monitors the flow of DEA controlled substances from their point of
manufacture to point of sale or distribution.
"Arm's Length" means a transaction or negotiation in which each party is
completely independent of the other, seeks to obtain terms which are most
favorable to it and has no economic or other interest in making concessions to
the other party.
"Board of Directors" means the board of directors of the Company.
"Bridge Lenders" means, collectively, Essex, Care Capital and the Galen
Entities pursuant to the Bridge Notes.
"Bridge Lenders' Consent" means the consent of the Bridge Lenders to
surrender and convert the Bridge Notes in exchange for and into Debentures in
form and substance reasonably acceptable to the Purchasers.
"Bridge Notes" means the 2003 Debentures issued by the Company to the
Bridge Lenders thereto in accordance with certain Joinder Agreements dated
November 2, 2003, December 5, 2003 and December 29, 2003.
"Change of Control" means the occurrence of any of the following: (a) the
consummation of any transaction the result of which is that any Person or group
(as such term is used in Section 13(d)(3) of the Exchange Act), other than Galen
or any Affiliate thereof or any group comprised of any of the foregoing, owns,
directly or indirectly, 51% of the Common Equity of the Company, (b) the Company
consolidates with, or merges with or into, another Person (other than a direct
or indirect wholly owned Subsidiary) or sells,
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assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of the Company's assets or the assets of the Company and its
Subsidiaries taken as a whole to any Person, or any Person consolidates with, or
merges with or into, the Company, in any such event pursuant to a transaction in
which the outstanding Voting Stock of the Company, as the case may be, is
converted into or exchanged for cash, securities or other property, other than
any such transaction where the outstanding Voting Stock of the Company, as the
case may be, is converted into or exchanged for Voting Stock of the surviving or
transferee corporation and the beneficial owners of the Voting Stock of the
Company immediately prior to such transaction own, directly or indirectly, not
less than a majority of the Voting Stock of the surviving or transferee
corporation immediately after such transaction, (c) the Company, either
individually or in conjunction with one or more Subsidiaries sells, assigns,
conveys, transfers, leases or otherwise disposes of, or the Subsidiaries sell,
assign, convey, transfer, lease or otherwise dispose of, all or substantially
all of the properties and assets of the Company and its Subsidiaries, taken as a
whole (either in one transaction or a series of related transactions), including
capital stock of the Subsidiaries, to any Person (other than the Company or a
wholly owned Subsidiary of the Company), or (d) during any two year period
commencing subsequent to the date of this Agreement, individuals who at the
beginning of such period constituted the Board of Directors (together with any
new directors whose election by such Board of Directors or whose nomination for
election by the stockholders of the Company was approved by the directors then
still in office) who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved cease for
any reason to constitute a majority of the Board of Directors then in office;
provided, however, that a Person shall not be deemed to have ceased being a
director for such purpose if such Person shall have resigned or died or if the
involuntary removal of such Person was made at the direction of Persons holding
a majority in principal amount of the outstanding Debentures. For purposes of
this definition, (i) the term "Common Equity" of the Company means all capital
stock of the Company that is generally entitled to vote in the election of
members of the Board of Directors and (ii) the term "Voting Stock" of the
Company means securities of any class of capital stock of the Company entitling
the holders thereof to vote in the election of members of the Board of
Directors.
"Charter Amendment" means the amended and restated Certificate of
Incorporation of the Company in the form attached to this Agreement as Exhibit
D.
"Closing" means the closing of the purchase and sale of the Debentures
contemplated by Section 2.1 of this Agreement to take place on the date of this
Agreement. The date and time of the Closing are hereinafter referred to as the
"Closing Date."
"Code" means the Internal Revenue Code of 1986, as amended, and any
applicable rules and regulations thereunder, and any successor to such statute,
rules or regulations. Any reference herein to a specific section, rule or
regulation of the Code shall be deemed to include any corresponding provisions
of future law.
"Common Stock" means the common stock, $0.01 par value, of the Company (now
or hereafter issued).
"Company Debenture Collateral" has the meaning specified in Section 2.2.
"Company General Security Agreement" means that certain Company General
Security Agreement of even date herewith by and between the Company and Galen,
as agent for the Purchasers, a copy of which is attached to this Agreement as
Exhibit E, as such agreement may be supplemented, amended or otherwise modified
from time to time in accordance with its terms.
"Company Refusal Period" has the meaning specified in Section 18.3 of this
Agreement.
"Company Reports" means, collectively, (a) the Company's Annual Reports on
Form 10-K for the fiscal years ended December 31, 2002, and (b) the Company's
Quarterly Report on Form 10-Q for the nine months ended September 30, 2003.
"Company Waiver Period" has the meaning specified in Section 18.3 of this
Agreement.
"Conversion Agreement" means that certain Debenture Conversion Agreement of
even date herewith by and among the Company, Purchasers and the holders of the
Existing Debentures, a copy of which is attached to this Agreement as Exhibit F,
as such agreement may be supplemented, amended or otherwise modified from time
to time in accordance with its terms.
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"Conversion Event" means the conversion of the Existing Debentures and
Debentures into Preferred Stock immediately upon the filing by the Company of
the documents necessary to create the Preferred Stock.
"Co-Sale Right" has the meaning specified in Section 18.4 of this
Agreement.
"Co-Sale Seller" has the meaning specified in Section 18.4 of this
Agreement.
"CSA" means Controlled Substances Act, as amended, and any applicable rules
and regulations thereunder, and any successor to such statute, rules or
regulations. Any reference herein to a specific section, rule or regulation of
the CSA shall be deemed to include any corresponding provisions of future law.
"D&O Insurance" means "directors and officers" insurance.
"DEA" means the United States Drug Enforcement Administration.
"Debentures" has the meaning specified in the Preliminary Statements.
"Debenture and Warrant Dilution Waiver" means the consent of the holders of
the Existing Debentures to the waiver of the anti-dilution provisions contained
in certain Equity Securities held by the holders of the Existing Debentures in
form and substance reasonably acceptable to the Purchasers.
"Default Notice" has the meaning specified in Section 12.1(c) of this
Agreement.
"Designee" means any member of the Board of Directors designated by the
Purchasers as provided in Section 9.7 of this Agreement
"Equity Securities" means, collectively, (a) any shares of Common Stock,
(b) any shares of Preferred Stock, (c) any other equity security of the Company,
(d) any debt security of the Company which by its terms is convertible into or
exchangeable for, with or without consideration, any equity security of the
Company, (e) any security of the Company that is a combination of debt and
equity, or (f) any option, warrant or other right to subscribe for, purchase or
otherwise acquire any equity security or any such debt security of the Company.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended and any applicable rules and regulations thereunder, and any successor
to such statute, rules or regulations. Any reference herein to a specific
section, rule or regulation of ERISA shall be deemed to include any
corresponding provisions of future law.
"ERISA Affiliates" means (a) any corporation which at any time on or before
the Closing Date is or was a member of the same controlled group of corporations
(within the meaning of Section 414(b) of the Code) as the Company, its
Subsidiaries, or any ERISA Affiliate; (b) any partnership, trade or business
(whether or not incorporated) which at any time on or before the Closing Date is
or was under common control (within the meaning of Section 414(c) of the Code)
with the Company, its Subsidiaries, or any ERISA Affiliate; and (c) any entity
which at any time on or before the Closing Date is or was a member of the same
affiliated service group (within the meaning of Section 414(m) of the Code) as
the Company, its Subsidiaries or any ERISA Affiliate, or any corporation
described in clause (a) or any partnership, trade or business described in
clause (b) of this paragraph.
"Event of Default" has the meaning specified in Section 12.1 of this
Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
any applicable rules and regulations thereunder, and any successor to such
statute, rules or regulations. Any reference herein to a specific section, rule
or regulation of the Exchange Act shall be deemed to include any corresponding
provisions of future law.
"Excluded Securities" has the meaning specified in Section 17.1(f) of this
Agreement.
"Existing 1998 Debentureholders" means the holders of the 1998 Debentures.
"Existing 2002 Debentureholders" means the holders of the 2002 Debentures.
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"Existing Debenture Amendments" means amendments to each of the Debenture
and Warrant Purchase Agreements pursuant to which the Existing Debentures were
issued, duly executed by the Company and each holder of the Existing Debentures.
"Existing Debentureholders" means the holders of the Existing Debentures.
"Existing Debentures" means, collectively, the 1998 Debentures, the 1999
Debentures, the 2002 Debentures, and the 2003 Debentures, as such debentures may
be supplemented, amended or otherwise modified from time to time, including,
without limitation, by the Existing Debenture Amendments.
"Existing Debentureholders Consent" means the consent of the Existing
Debentureholders to waive the Indebtedness, lien, registration rights, and
charter amendment restrictions contained in each of the Debenture and Warrant
Purchase Agreements pursuant to which the Existing Debentures were issued.
"Existing Debentureholders Waiver" means the Consent, Waiver and
Forbearance under the Debentureholders Agreement to be signed by each of the
Existing Debentureholders prior to the Closing Date.
"FDA" means the United States Food and Drug Administration.
"FDC Act" means the federal Food, Drug, and Cosmetic Act, as amended, and
any applicable rules and regulations thereunder, and any successor to such
statute, rules or regulations. Any reference herein to a specific section, rule
or regulation of the FDC Act shall be deemed to include any corresponding
provisions of future law.
"First Refusal Holders" means, collectively, (a) the holders of the
Debentures, (b) the Existing 1998 Debentureholders, (c) the Existing 2002
Debentureholders, and (d) the Old Common Holders.
"GAAP" means generally accepted accounting principles in the United States.
"Galen Entities" means, collectively, (a) Galen, (b) Galen Partners
International III, L.P., and (c) Galen Employee Fund III, L.P.
"Guaranties" means the Continuing Unconditional Secured Guaranties of each
of the Guarantors substantially in the form of Exhibit G attached hereto.
"Guarantor Debenture Collateral" has the meaning specified in Section 2.4
of this Agreement.
"Guarantors" means Houba, Inc. and Axiom Pharmaceutical Corporation.
"Guarantors Security Agreement" means that certain Guarantors General
Security Agreement of even date herewith by and among the Guarantors and Galen,
as agent for the Purchasers, a copy of which is attached to this Agreement as
Exhibit H, as such agreement may be supplemented, amended or otherwise modified
from time to time in accordance with its terms.
"Holder Notice" has the meaning specified in Section 18.3 of this
Agreement.
"Holder Refusal Period" has the meaning specified in Section 18.3 of this
Agreement.
"Holder's Portion" means, for purposes of Section 18.4 of this Agreement,
an amount determined by multiplying, (a) in the case of a sale of shares of the
Preferred Stock or Common Stock by the Selling Security Holder, the number of
shares of Preferred Stock or Common Stock equal to the shares of Preferred Stock
or Common Stock proposed to be sold in the Transfer, multiplied by a fraction,
(i) the numerator of which shall be the number of shares of Common Stock owned
by a Holder (inclusive of all Common Stock underlying the Debentures or
Preferred Stock) and (ii) the denominator of which shall be the sum of (1) the
Company's outstanding shares of Common Stock, plus (2) the Common Stock
underlying the Debentures, the Existing Debentures and the Preferred Stock, and
(b) in the case of the proposed sale of Existing Debentures or Debentures by
such Selling Security Holder, the principal amount of the Existing Debentures or
Debentures proposed to be sold in the Transfer multiplied by a fraction, the
numerator of which shall be the aggregate principal amount of the Existing
Debentures and Debentures owned by a Holder and the denominator of which shall
be the aggregate principal amount of the Company's outstanding Existing
Debentures and Debentures.
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"Holders" shall mean the Purchasers or any Person to whom a Purchaser or
transferee of a Purchaser has assigned, transferred or otherwise conveyed any
Debenture.
"Holder Waiver Period" has the meaning specified in Section 18.3 of this
Agreement.
"Immaterial Subsidiary" means The Medi-Gum Corporation.
"Indebtedness" means and includes (a) all items which would be included on
the liability side of a balance sheet (but also shall include any "off-balance
sheet financings") of the Company (or a Subsidiary) as of the date on which
indebtedness is to be determined, excluding capital stock, surplus, capital and
earned surplus reserves, which, in effect, were appropriations of surplus or
offsets to asset values (other than reserves in respect of obligations, the
amount, applicability or validity of which is, at such date, being contested in
good faith by the Company or a Subsidiary, as applicable), deferred credits of
amounts representing capitalization of leases; (b) the full amount of all
indebtedness of others guaranteed or endorsed (otherwise than for the purpose of
collection) by the Company (or a Subsidiary) for which the Company (or a
Subsidiary) is obligated, contingently or otherwise, to purchase or otherwise
acquire, or for the payment or purchase of which the Company (or a Subsidiary)
has agreed, contingently or otherwise, to advance or supply funds, or with
respect to which the Company (or a Subsidiary) is contingently liable,
including, without limitation, indebtedness for borrowed money and indebtedness
guaranteed or supported indirectly by the Company (or a Subsidiary) through an
agreement, contingent or otherwise (i) to purchase the indebtedness, or (ii) to
purchase, sell, transport or lease (as lessee or lessor) property, or to
purchase or sell services at prices or in amounts designed to enable the debtor
to make payment of the indebtedness or to assure the owner of the indebtedness
against loss, or (iii) to supply funds to or in any other manner invest in the
debtor; and (c) indebtedness secured by any mortgage, pledge, security interest
or lien whether or not the indebtedness secured thereby shall have been assumed.
"Indebtedness" will not mean and include any indebtedness (1) in respect to
which monies sufficient to pay and discharge the same in full shall have been
deposited with a depositary, agency or trustee in trust for the payment thereof,
or (2) as to which the Company (or Subsidiary) is in good faith contesting,
provided that an adequate reserve therefore has been set up on the books of the
Company or any of its consolidated Subsidiaries.
"Independent Committee" has the meaning specified in Section 6.14 of this
Agreement.
"Intellectual Property Rights" means any and all patents, patent
applications, trademarks, copyrights, trademark registrations and applications
therefore, patent, trademark or trade name licenses, service marks, domain
names, contracts with employees or others relating in whole or in part to
disclosure, assignment or patenting of any inventions, discoveries,
improvements, processes, formulae or other know-how, and all patent, trademark
or trade names or copyright licenses which are in force.
"Investors Rights Agreement" means that certain Investors Rights Agreement
of even date herewith by and among the Company, Purchasers and the holders of
the Existing Debentures, a copy of which is attached to this Agreement as
Exhibit I, as such agreement may be supplemented, amended or otherwise modified
from time to time in accordance with its terms.
"IRS" means the Internal Revenue Service.
"Joinder Agreement" means a Joinder Agreement in the form attached to this
Agreement as Exhibit J, as such agreement may be supplemented, amended or
otherwise modified from time to time in accordance with its terms.
"Leased Property" has the meaning specified in Section 4.20 of this
Agreement.
"Leases" any lease and sublease agreements, as amended to date, relating to
the Owned Property and the Leased Property.
"Legal Requirements" means any federal, state, local, municipal, foreign or
other law, statute, constitution, principle of common law, resolution,
ordinance, code, order, edict, judgment, decree, rule, regulation, ruling or
requirement issued, enacted, adopted, promulgated, implemented or otherwise put
into effect by or under the authority of any governmental entity.
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"Liquidation Event" has the meaning specified in the Charter Amendment.
"Losses" means any claims, losses, damages, liabilities (or actions in
respect thereof), obligations, penalties, awards, judgments, expenses
(including, without limitation, reasonable fees and expenses of counsel) or
disbursements.
"Material Adverse Effect" means (a) a material adverse effect on, or change
in, the business, prospects, properties, operations, condition (financial or
other) or results of operations of the Company and its Subsidiaries, taken as a
whole, or (b) a material adverse effect on (i) the ability of the Company or any
of the Guarantors to perform its respective obligations or (ii) the rights or
remedies of any Purchaser under any Transaction Document.
"Minimum Offering Threshold" has the meaning specified in Section 17.1(a)
of this Agreement.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"New York Act" means the New York Business Corporation Law, as amended, and
any applicable rules and regulations thereunder, and any successor to such
statute, rules or regulations. Any reference herein to a specific section, rule
or regulation of the New York Act shall be deemed to include any corresponding
provisions of future law.
"Noteholder Agreement" means that certain Noteholder Agreement of even date
herewith by and among the Company and the other parties thereto, as such
agreement may be supplemented, amended or otherwise modified from time to time
in accordance with its terms.
"Notice of Acceptance" has the meaning specified in Section 17.1(c) of this
Agreement.
"Offer" has the meaning specified in Section 17.1(a) of this Agreement.
"Offered Price" has the meaning specified in Section 18.2 of this
Agreement.
"Offered Securities" means the number of Restricted Securities set forth in
a Seller Notice which a Holder proposes to Transfer.
"Old Common Holders" means the holders of shares of Preferred Stock or
Common Stock issued upon the conversion of the Existing 1998 Debentures or
Existing 2002 Debentures (provided any Existing 1998 Debentures and Existing
2002 Debentures remain outstanding and the shares of Preferred Stock or Common
Stock received upon conversion have not been sold, transferred or otherwise
disposed of).
"Owned Property" has the meaning specified in Section 4.20 of this
Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PCB" means polychlorinated biphenyls.
"Permitted Liens" means the liens listed in Section 10.3(l) of the Schedule
of Exceptions.
"Permitted Transfers" means, collectively, (a) any Transfer of Restricted
Securities by a Holder who is an individual to such Holder's spouse, lineal
descendant or antecedent, father, mother, brother or sister of such Holder, the
adopted child or adopted grandchild of such Holder, or the spouse of any child,
adopted child, grandchild or adopted grandchild of such Holder, or to a trust or
trusts or other entity (including family limited partnerships or family limited
liability companies) for the exclusive benefit of or exclusively controlled by
such Holder or such Holder's family members as described in this clause (a), or
Transfers of Restricted Securities by the Holder by devise or descent so long as
such Transfer complies with Section 18.1 of this Agreement; (b) any Transfer of
Restricted Securities by a Holder made pursuant to (i) a merger or consolidation
of the Company with or into another corporation or corporations, or (ii) the
winding up and dissolution of the Company; and (c) any Transfer of Restricted
Securities by a Holder which is an entity to its Affiliates, partners, limited
partners, members or stockholders or any Transfers to a family member or trust
as described in clause (a) above of such partner, limited partner, member or
stockholder so long as such Transfer complies with Section 18.1 of this
Agreement.
G-45
"Person" means any individual, corporation, limited liability company,
partnership, association, trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Plan" has the meaning specified in Section 4.18(a) of this Agreement.
"Preferred Stock" means the Series A Preferred, the Series B Preferred, the
Series C-1 Preferred, the Series C-2 Preferred and the Series C-3 Preferred.
"Proposed Transferee" has the meaning specified in Section 18.2 of this
Agreement.
"Proxy Statement" has the meaning specified in Section 9.15 of this
Agreement.
"Purchase Right" has the meaning specified in Section 18.3 of this
Agreement.
"Refused Securities" has the meaning specified in Section 17.1(d) of this
Agreement.
"Registration Rights Agreement" means that certain Amended and Restated
Registration Rights Agreement dated the date of this Agreement by and among the
Company, Watson, the holders of the 1998 Debentures, the holders of the 1999
Debentures, the holders of the 2002 Debentures, and the other parties listed on
Schedule 1 thereto, as such agreement may be supplemented, amended or otherwise
modified from time to time in accordance with its terms, including, without
limitation, by the amendment to such agreement of even date herewith.
The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"Restricted Securities" means any shares of the Preferred Stock or Common
Stock or any Existing Debentures or Debentures owned by a Holder.
"Schedule of Exceptions" means the Schedule of Exceptions attached to this
Agreement as Exhibit K.
"SEC" means the Securities and Exchange Commission.
"SEC Reports" means any reports, statements, releases or other documents
required to be filed by the Company with the SEC under the Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended, and any
applicable rules and regulations thereunder, and any successor to such statute,
rules or regulations. Any reference herein to a specific section, rule or
regulation of the Securities Act shall be deemed to include any corresponding
provisions of future law.
"Security Interest Termination Date" means the first date on which each of
the following events shall have occurred: (a) the occurrence of the Conversion
Event, and (b) Galen, acting as agent for the Purchasers under the applicable
Transaction Documents, shall have delivered written notification to the Company
and the Guarantors of the satisfaction of the condition in subsection (a) above.
"Seller Notice" has the meaning specified in Section 18.2 of this
Agreement.
"Selling Security Holder" has the meaning specified in Section 18.2 of this
Agreement.
"Senior Notes" means that certain Amended and Restated Note in the
principal amount of $5,000,000 issued by the Company as of the date hereof
pursuant to the Watson Term Loan, and any other promissory notes issued by the
Company pursuant to the Watson Term Loan from time to time.
"Series A Preferred" means the Series A Convertible Preferred Stock, $.01
par value, of the Company (now or hereafter issued).
"Series B Preferred" means the Series B Convertible Preferred Stock, $.01
par value, of the Company (now or hereafter issued).
"Series C-1 Preferred" means the Series C-1 Convertible Preferred Stock,
$.01 par value, of the Company (now or hereafter issued).
G-46
"Series C-2 Preferred" means the Series C-2 Convertible Preferred Stock,
$.01 par value, of the Company (now or hereafter issued).
"Series C-3 Preferred" means the Series C-3 Convertible Preferred Stock,
$.01 par value, of the Company (now or hereafter issued).
"Shares" means the shares of Series A Preferred and Common Stock which may
be issued upon conversion of all or a portion of the principal amount of the
Debentures. The term "Shares" does not include any other shares of Series A
Preferred, Common Stock or other capital stock of the Company.
"Solvent" means, with respect to each Guarantor on a particular date, that
on and as of such date (a) the fair market value of the assets of such Guarantor
is greater than the total amount of liabilities (including, without limitations,
contingent liabilities) of such Guarantor, (b) the present fair saleable value
of the assets of such Guarantor is greater than the amount that will be required
to pay the probable liabilities of such Guarantor on its debts as they become
absolute and matured, (c) such Guarantor is able to realize upon its assets,
through sale, use or borrowing, and is able to pay its debts and other
liabilities, including contingent obligations, as they mature, and (d) such
Guarantor does not have unreasonably small capital.
"Stockholders Meeting" means the special meeting of the Company's
stockholders and Existing Debentureholders to approve the Charter Amendment.
"Stockholders Meeting Date" means the date of the Stockholders Meeting.
"Stock Pledge Agreement" means the Stock Pledge Agreement substantially in
the form attached to this Agreement as Exhibit L hereto, as supplemented,
amended or otherwise modified from time to time in accordance with its terms.
"Subordination Agreement" means that certain Subordination Agreement of
even date herewith by and among the Company, the Purchasers, the holders of the
Existing Debentures and certain other parties signatory thereto, a copy of which
is attached to this Agreement as Exhibit M, as supplemented, amended or
otherwise modified from time to time in accordance with its terms.
"Subsidiary" means any entity in which the Company owns securities having a
majority of the voting power in the election of directors or persons serving
equivalent functions.
"Term Sheet" means that certain Confidential Private Place Term Sheet dated
January 10, 2004 prepared by the Company and delivered to the Purchasers.
"Termination Date" means the earlier of (a) the 120th day following the
date of this Agreement, or (b) the Conversion Event.
"Transaction Documents" means, collectively, (a) this Agreement, (b) the
Debentures, (c) the Conversion Agreement, (d) the Charter Amendment, (e) the
Investors Rights Agreement, (f) the Voting Agreement, (g) the Registration
Rights Agreement; (h) the Subordination Agreement; (i) the Company General
Security Agreement, (j) the Guaranties, (k) the Guarantors Security Agreement,
(l) the Stock Pledge Agreement, (m) the Existing Debentureholder Consent, (n)
the Existing Debentureholder Waiver, (o) the Debenture and Warrant Dilution
Waiver, (p) the Joinder Agreement, (q) the Watson Term Loan, (r) the Senior
Notes, (s) the Noteholder Agreement; (t) the Watson Umbrella Agreement, and (u)
the Bridge Lenders' Consent.
"Transfer" means and includes any sale, assignment, encumbrance,
hypothecation, pledge, conveyance in trust, gift, transfer by bequest, devise or
descent, or other transfer or disposition of any kind, including but not limited
to transfers to receivers, levying creditors, trustees or receivers in
bankruptcy proceedings or general assignees for the benefit of creditors,
whether voluntary or by operation of law, directly or indirectly, including,
without limitation, Permitted Transfers.
"Unfunded Pension Liability" means, as of any determination date, the
amount, if any, by which the present value of all benefit liabilities (as that
term is defined in Section 4001(a)(16) of ERISA) of a plan subject to Title IV
of ERISA exceeds the fair market value of all assets of such plan, all
determined using the
G-47
actuarial assumptions that would be used by the PBGC in the event of a
termination of the plan on such determination date.
"Voting Agreement" means the Voting Agreement in substantially the form
attached to this Agreement as Exhibit I, as such agreement may be supplemented,
amended or otherwise modified from time to time in accordance with its terms.
"Warrant Holders" means the holders of the Company's Common Stock purchase
warrants.
"Watson" means Watson Pharmaceuticals, Inc., a Nevada corporation.
"Watson Umbrella Agreement" means the Umbrella Agreement dated the date of
this Agreement by and among the Company, Watson, Essex, Care Capital, the Galen
Entities and the other signatories thereto, in form and substance reasonably
acceptable to the Purchasers.
"Watson Term Loan" means that certain Term Loan Agreement dated March 29,
2000 by and between the Company and Watson, as such agreement may be
supplemented, amended or otherwise modified from time to time in accordance with
its terms, including, without limitation, by the amendment to the Watson Term
Loan as of the date hereof.
"Withdrawal Liability" has the meaning specified in Section 4201 of ERISA.
[SIGNATURE PAGES TO FOLLOW]
G-48
IN WITNESS WHEREOF, the parties hereto have executed this Debenture and
Share Purchase Agreement as of the date first written above.
HALSEY DRUG CO., INC.
By: /s/ ANDREW REDDICK
------------------------------------
Name: Andrew Reddick
Title: President and Chief
Executive Officer
GALEN PARTNERS III, L.P. CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner By: Care Capital II, LLC, as general
partner
610 Fifth Avenue, 5th Floor 47 Hulfish St., Suite 310
New York, New York 10019 Princeton, NJ 08542
By: /s/ SRINI CONJEEVARAM By: /s/ DAVID R. RAMSEY
----------------------------------------- -----------------------------------------
By: Srini Conjeevaram By: David R. Ramsay
Its: General Partner Title: Authorized Signatory
GALEN PARTNERS ESSEX WOODLANDS HEALTH
INTERNATIONAL, III, L.P. VENTURES V, L.P.
By: Claudius, L.L.C., General Partner 190 South LaSalle Street,
610 Fifth Avenue, 5th Floor Suite 2800
New York, New York 10020 Chicago, IL 60603
By: /s/ SRINI CONJEEVARAM By: /s/ IMMANUEL THANGARAJ
----------------------------------------- -----------------------------------------
By: Srini Conjeevaram By: Immanuel Thangaraj
Its: General Partner Its: Managing Director
GALEN EMPLOYEE FUND III, L.P. DENNIS ADAMS
By: Wesson Enterprises, Inc. 120 Kynlyn Road
610 Fifth Avenue, 5th Floor Radnor, Pennsylvania 19312
New York, New York 10020
By: /s/ BRUCE F. WESSON By: /s/ DENNIS ADAMS
----------------------------------------- -----------------------------------------
By: Bruce F. Wesson
Its: General Partner
MICHAEL WEISBROT SUSAN WEISBROT
1136 Rock Creek Road 1136 Rock Creek Road
Gladwyne, Pennsylvania 19035 Gladwyne, Pennsylvania 19035
/s/ MICHAEL WEISBROT /s/ SUSAN WEISBROT
----------------------------------------- -----------------------------------------
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PETER STIEGLITZ GEORGE E. BOUDREAU
RJ Palmer LLC 222 Elbow Lane
156 West 56th Street, 5th Floor Haverford, PA 19041
New York, New York 10019
/s/ PETER STIEGLITZ /s/ GEORGE E. BOUDREAU
----------------------------------------- -----------------------------------------
JOHN E. HEPPE, JR.
237 W. Montgomery Avenue
Haverford, Pennsylvania 19041
/s/ JOHN E. HEPPE, JR.
-----------------------------------------
G-50
APPENDIX H
FORM OF 2004 DEBENTURE
THIS CONVERTIBLE SENIOR SECURED DEBENTURE AND THE SERIES A CONVERTIBLE PREFERRED
STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") NOR UNDER ANY STATE SECURITIES
LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR OTHERWISE
TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE
UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW OR (2) THE COMPANY
RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR OTHER COUNSEL TO THE HOLDER OF
SUCH DEBENTURE REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH DEBENTURE AND/OR
STOCK MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES
LAWS.
HALSEY DRUG CO., INC.
CONVERTIBLE SENIOR SECURED DEBENTURE
$ NO. N-
FEBRUARY 6, 2004
HALSEY DRUG CO., INC., a corporation organized under the laws of the State
of New York (the "Company"), for value received, hereby promises to pay to
, or registered assigns (the "Payee" or "Holder"), upon due
presentation and surrender of this Debenture, on the Maturity Date, the
principal amount of ($ ) and accrued interest thereon as
hereinafter provided. As used herein, the "Maturity Date" means July 31, 2004;
provided, that (i) the Company may extend the Maturity Date, for a period not to
exceed 90 days, to the extent the effectiveness of the Amendment (as defined
below) is delayed due to the review of the Proxy Statement (as defined below) by
the Securities and Exchange Commission, and (ii) the Holders holding at least
the Approval Threshold (as defined below) may extend the Maturity Date from time
to time in their sole discretion.
This Debenture was issued by the Company pursuant to a certain Debenture
and Share Purchase Agreement dated as of February 6, 2004 among the Company and
certain purchasers identified therein, including the Payee (together with the
Schedules and Exhibits thereto, the "Purchase Agreement") relating to the
purchase and sale of Convertible Senior Secured Debentures (the "Debentures").
The holders from time to time of the Debentures (including the Holder) are
referred to hereinafter as the "Holders". The Holder is entitled to the benefits
of the Purchase Agreement, including, without limitation, the rights upon the
occurrence and during the continuance of an Event of Default and the benefits of
security interests and guaranties referred to below. Reference is made to the
Purchase Agreement and the documents entered into pursuant thereto with respect
to certain additional rights of the Holder and obligations of the Company and
its Subsidiaries not expressly set forth herein. Capitalized terms used herein
but not otherwise defined herein shall have the meaning ascribed thereto in the
Purchase Agreement. All such rights and obligations set forth in the Purchase
Agreement are incorporated herein by reference.
ARTICLE I
PAYMENT OF PRINCIPAL AND INTEREST; METHOD OF PAYMENT
1.1. Payment, if any, of the principal and accrued interest on this
Debenture shall be made in cash, in immediately available funds, in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts. Interest (computed on
the basis of a 360-day year of twelve 30-day months) shall accrue on the unpaid
portion of said principal amount from time to time outstanding at the Stated
Interest Rate (as defined below), and shall be paid by the Company to the
H-1
Payee on the Maturity Date or earlier acceleration hereof (unless this
Debenture, including such accrued interest, is earlier converted pursuant to
Article III below). Both principal hereof and interest hereon are payable at the
Holder's address above or such other address as the Holder shall designate from
time to time by written notice to the Company. The Company will pay or cause to
be paid all sums becoming due hereon for principal and interest by check or wire
transfer, at the Holder's election, and, without any requirement for the
presentation of this Debenture or making any notation thereon, except that the
Holder hereof agrees that payment of the final amount due shall be made only
upon surrender of this Debenture to the Company for cancellation. Prior to any
sale or other disposition of this instrument, the Holder hereof agrees to
endorse hereon the amount of principal paid hereon and the last date to which
interest has been paid hereon and to notify the Company of the name and address
of the transferee. As used herein, the "Stated Interest Rate" means the rate of
(i) 1.62% per annum prior to the Maturity Date or earlier acceleration hereof,
and (ii) fifteen percent (15%) per annum on and after the Maturity Date or
earlier acceleration hereof, in each case subject to the limitations of
applicable law.
1.2. If any payment of principal or interest or both shall remain unpaid
for a period of two (2) business days or more after the Maturity Date or earlier
acceleration hereof a late charge equivalent to five percent (5%) of the unpaid
amount shall be charged. In addition, a late charge equivalent to five percent
(5%) of the outstanding principal amount and accrued interest shall be charged
if this Debenture has not been converted pursuant to Article III before November
1, 2004.
1.3. If this Debenture or any portion hereof becomes due and payable on a
Saturday, Sunday or public holiday under the laws of the State of New York, the
due date hereof shall be extended to the next succeeding full business day and
interest shall be payable at the Stated Rate per annum during such extension.
All payments received by the Holder shall be applied first to the payment of all
accrued interest payable hereunder.
1.4 Notwithstanding anything to the contrary herein, no Debenture may be
prepaid in whole or in part without the prior written consent of Holders holding
at least sixty percent (60%) of the aggregate principal amount of the Debentures
then outstanding (the "Approval Threshold"). Any such prepayment that is so
approved shall be made ratably among the Holders in proportion to the percentage
of the aggregate principal amount of the Debentures held by each such Holder.
ARTICLE II
SECURITY/SUBORDINATION
2.1. The obligations of the Company under this Debenture are secured
pursuant to security interests on and collateral assignments of, assets,
tangible and intangible, of the Company granted by the Company to the Holder and
the other Holders pursuant to a General Security Agreement of even date
herewith, and the collateral assignments referred to in the Purchase Agreement.
In addition, each of Houba, Inc. ("Houba") and Axiom Pharmaceutical Corporation,
each a wholly owned subsidiary of the Company (individually a "Guarantor" and
collectively, the "Guarantors"), has executed and delivered in favor of the
Holder and the other Holders a Continuing Unconditional Guaranty, dated an even
date herewith (each a "Guarantee"), guaranteeing the full and unconditional
payment when due of the amounts payable by the Company to the Holder and the
other Holders pursuant to the terms of their respective Debentures. The
obligations of each Guarantor under its Guaranty are secured (subject to the
Subordination Agreement) pursuant to security interests on and collateral
assignments of, assets, tangible and intangible, of such Guarantor granted by
the Guarantor to the Holder and the other Holders pursuant to a security
agreement of even date herewith, and the collateral assignments referred to in
the Purchase Agreement. The rights of the Holders with respect to the collateral
described in the security agreements and collateral assignments with the Company
and the Guarantors as provided in the Purchase Agreement are subject to the
terms of an Amended and Restated Subordination Agreement dated of even date
herewith by and among the Company, the Holders and the other signatories thereto
(the "Subordination Agreement").
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ARTICLE III
CONVERSION
3.1. At 12:01 a.m. (New York time) on the first day after the
effectiveness of the Amendment (the "Conversion Date"), so long as no Conversion
Default (as defined below) is then existing, the entire principal amount hereof
and all accrued interest hereon (through and including the day prior to the
Conversion Date) shall automatically convert into shares of Series A Convertible
Preferred Stock of the Company at a conversion price equal to $0.6425 per share,
as such conversion price may be adjusted as provided in Section 3.4 hereof (as
so adjusted, the "Conversion Price"). Promptly thereafter the Company shall
deliver a notice to each Holder that shall (i) state the date of the Conversion
Date, (ii) include any disclosures required by law, (iii) include a copy of the
Amendment accepted by the Secretary of State of New York, (iv) specify the exact
amount of principal and accrued interest that was converted in accordance with
this Section 3.1 and the number of shares to be issued in conversion thereof,
(v) state the place where the Debenture shall be delivered for cancellation, and
(vi) include any other instructions that Holders must follow in order to tender
their Debentures in exchange for certificates for Series A Convertible Preferred
Stock. An affidavit of the Secretary or an Assistant Secretary of the Company or
an agent employed by the Company that notice of conversion has been mailed
postage prepaid to the last address of the Holder appearing on the Debenture
registry books kept by the Company shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. On and after the Conversion Date,
except as provided in the next sentence, Holders of the Debentures shall have no
further rights except to receive, upon surrender of the Debentures, a
certificate or certificates for the number of shares of Series A Convertible
Preferred Stock as to which the Debenture shall have been converted. No
fractional shares or scrip representing fractional shares will be issued upon
any conversion, with the calculation of the number of shares of Series A
Convertible Preferred Stock rounded to the nearest whole share. As used herein,
"Conversion Default" means an Event of Default under Section 12.1(e), 12.1(h),
12.1(i) or 12.1(l) of the Purchase Agreement.
3.2. Registration of Transfer; Conversion Procedure. The Company shall
maintain books for the transfer and registration of the Debentures. Upon the
transfer of any Debenture in accordance with the provisions of the Purchase
Agreement, the Company shall issue and register the Debenture in the names of
the new Holders. The Debentures shall be signed manually by the Chairman, Chief
Executive Officer, President or any Vice President and the Secretary or
Assistant Secretary of the Company. Subject to the terms of this Debenture, not
later than three (3) days following the surrender of this Debenture the Company
shall issue and deliver to or upon the written order of the Holder of such
Debenture and in such name or names as such Holder may designate, a certificate
or certificates for the number of full shares of Series A Convertible Preferred
Stock due to such Holder upon the conversion of this Debenture. 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 the Holder of record of such
Shares as of the Conversion Date. The Company will comply with all securities
laws regulating the offer and delivery of the Series A Convertible Preferred
Stock upon conversion of the Debentures.
3.3. Company to Provide Series A Convertible Preferred Stock. In
accordance with the provisions of the Purchase Agreement, the Company covenants
to take certain actions, including to seek the approval of its shareholders and
directors, to amend and restate its Certificate of Incorporation in the form
attached as Exhibit D to the Purchase Agreement (the "Amendment"), including
filing the Proxy Statement described in the Purchase Agreement (the "Proxy
Statement").
3.4. Adjustments to Conversion Price. In order to prevent dilution of the
conversion rights granted hereunder, the Conversion Price shall be subject to
adjustment from time to time in accordance with this Section 3.4.
The Conversion Price in effect at the time of the exercise of conversion
rights hereunder shall be subject to adjustment from time to time as follows:
(a) If the Company shall grant or issue any shares of Common Stock, or
grant or issue any rights or options for the purchase of, or stock or other
securities convertible into, Common Stock (such convertible
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stock or securities being herein collectively referred to as "Convertible
Securities") for a consideration per share which is less than the
Conversion Price in effect immediately prior to such issuance or sale (the
"Applicable Conversion Price"), then the Applicable Conversion Price in
effect immediately prior to such issuance or sale shall, and thereafter,
upon each issuance or sale for a consideration per share which is less than
the Applicable Conversion Price, the Applicable Conversion Price shall,
simultaneously with such issuance or sale, be adjusted, so that such
Applicable Conversion Price shall equal (A) the price per share received by
the Company, in the case of the issuance of Common Stock by the Company, or
(B) the exercise or conversion price of the Convertible Securities issued
by the Company, as applicable.
(b) Anything in this Section 3.4 to the contrary notwithstanding, no
adjustment in the Conversion Price shall be made in connection with:
(i) the grant, issuance or exercise of any Convertible Securities
pursuant to the Company's qualified or non-qualified Employee Stock
Option Plans or any other bona fide employee benefit plan or incentive
arrangement, adopted or approved by the Company's Board of Directors or
approved by the Company's shareholders, as each may be amended from time
to time, or under any other bona fide employee benefit plan hereafter
adopted by the Company's Board of Directors; or
(ii) the grant, issuance or exercise of any Convertible Securities
in connection with the hire or retention of any officer, director or key
employee of the Company, provided such grant is approved by the
Company's Board of Directors; or
(iii) the issuance of any Preferred Stock issued in satisfaction of
interest payments on the Debentures and the Existing Debentures, as
provided in the Debenture Conversion Agreement; or
(iv) the issuance of any Common Stock issued in satisfaction of
interest on the Company's indebtedness for borrowed money, provided the
number of shares of Common Stock issuable is based on the average
closing bid and asked prices for the Common Stock for the twenty (20)
trading days preceding the interest payment; or
(v) the issuance of any shares of Common Stock pursuant to the
grant or exercise of Convertible Securities outstanding as of the date
hereof (exclusive of any subsequent amendments thereto).
(c) For the purpose of Subsections 3.4, the following provisions shall
also be applied:
(i) In case of the issuance or sale of additional shares of Common
Stock for cash, the consideration received by the Company therefor shall
be deemed to be the amount of cash received by the Company for such
shares, before deducting therefrom any commissions, compensation or
other expenses paid or incurred by the Company for any underwriting of,
or otherwise in connection with, the issuance or sale of such shares.
(ii) In the case of the issuance of Convertible Securities, the
consideration received by the Company therefor shall be deemed to be the
amount of cash, if any, received by the Company for the issuance of such
rights or options, plus the minimum amounts of cash and fair value of
other consideration, if any, payable to the Company upon the exercise of
such rights or options or payable to the Company upon conversion of such
Convertible Securities.
(iii) In the case of the issuance of shares of Common Stock or
Convertible Securities for a consideration in whole or in part, other
than cash, the consideration other than cash shall be deemed to be the
fair market value thereof as reasonably determined in good faith by the
Board of Directors of the Company (irrespective of accounting treatment
thereof); provided, however, that if such consideration consists of the
cancellation of debt issued by the Company, the consideration shall be
deemed to be the amount the Company received upon issuance of such debt
(gross proceeds) plus accrued interest and, in the case of original
issue discount or zero coupon indebtedness, accrued value to the date of
such cancellation, but not including any premium or discount at which
the debt may then be trading or which might otherwise be appropriate for
such class of debt.
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(iv) In case of the issuance of additional shares of Common Stock
upon the conversion or exchange of any obligations (other than
Convertible Securities), the amount of the consideration received by the
Company for such Common Stock shall be deemed to be the consideration
received by the Company for such obligations or shares so converted or
exchanged, before deducting from such consideration so received by the
Company any expenses or commissions or compensation incurred or paid by
the Company for any underwriting of, or otherwise in connection with,
the issuance or sale of such obligations or shares, plus any
consideration received by the Company in connection with such conversion
or exchange other than a payment in adjustment of interest and
dividends. If obligations or shares of the same class or series of a
class as the obligations or shares so converted or exchanged have been
originally issued for different amounts of consideration, then the
amount of consideration received by the Company upon the original
issuance of each of the obligations or shares so converted or exchanged
shall be deemed to be the average amount of the consideration received
by the Company upon the original issuance of all such obligations or
shares. The amount of consideration received by the Company upon the
original issuance of the obligations or shares so converted or exchanged
and the amount of the consideration, if any, other than such obligations
or shares, received by the Company upon such conversion or exchange
shall be determined in the same manner as provided in paragraphs (i) and
(ii) above with respect to the consideration received by the Company in
case of the issuance of additional shares of Common Stock or Convertible
Securities.
(v) In the case of the issuance of additional shares of Common
Stock as a dividend, the aggregate number of shares of Common Stock
issued in payment of such dividend shall be deemed to have been issued
at the close of business on the record date fixed for the determination
of stockholders entitled to such dividend and shall be deemed to have
been issued without consideration; provided, however, that if the
Company, after fixing such record date, shall legally abandon its plan
to so issue Common Stock as a dividend, no adjustment of the Applicable
Conversion Price shall be required by reason of the fixing of such
record date.
(d) For purposes of the adjustment provided for in Section 3.4, if at
any time the Company shall issue any Convertible Securities, the Company
shall be deemed to have issued at the time of the issuance of such
Convertible Securities the maximum number of shares of Common Stock
issuable upon conversion of the total amount of such Convertible
Securities.
(e) On the expiration, cancellation or redemption of any Convertible
Securities, the Conversion Price then in effect hereunder shall forthwith
be readjusted to such Conversion Price as would have been obtained (i) had
the adjustments made upon the issuance or sale of such expired, canceled or
redeemed Convertible Securities been made upon the basis of the issuance of
only the number of shares of Common Stock theretofore actually delivered
upon the exercise or conversion of such Convertible Securities (and the
total consideration received therefor) and (ii) had all subsequent
adjustments been made on only the basis of the Conversion Price as
readjusted under this subsection 3.4(e) for all transactions (which would
have affected such adjusted Conversion Price) made after the issuance or
sale of such Convertible Securities.
(f) Anything in this Section 3.4 to the contrary notwithstanding, no
adjustment in the Conversion Price shall be required unless such adjustment
would require an increase or decrease of at least one cent per share in
such Conversion Price; provided, however, that any adjustments which by
reason of this subsection 3.4(f) are not required to be made shall be
carried forward and taken into account in making subsequent adjustments.
All calculations under this Section 3.4 shall be made to the nearest cent.
(g) Upon any adjustment of any Conversion Price, then and in each such
case the Company shall promptly deliver a notice to the registered Holder
of this Debenture, which notice shall state the Conversion Price resulting
from such adjustment, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
3.5. Reorganization of the Company. If the Company is a party to a merger
or other transaction which reclassifies or changes its outstanding Common Stock,
upon consummation of such transaction this Debenture
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shall automatically become convertible into the kind and amount of securities,
cash or other assets which the Holder of this Debenture would have owned
immediately after such transaction if the Holder had converted this Debenture at
the Conversion Price in effect immediately before the effective date of the
transaction. Concurrently with the consummation of such transaction, the person
obligated to issue securities or deliver cash or other assets upon conversion of
this Debenture shall execute and deliver to the Holder a supplemental Debenture
so providing and further providing for adjustments which shall be as nearly
equivalent as may be practical to the adjustments provided in this Article 3.
The successor Company shall mail to the Holder a notice describing the
supplemental Debenture.
ARTICLE IV
MISCELLANEOUS
4.1. Default. Upon the occurrence of any one or more of the Events of
Default specified in the Purchase Agreement all amounts then remaining unpaid on
this Debenture may be declared to be, or automatically become, immediately due
and payable as provided in the Purchase Agreement.
4.2. Collection Costs. In the event that this Debenture shall be placed
in the hands of an attorney for collection by reason of any event of default
hereunder, the undersigned agrees to pay reasonable attorney's fees and
disbursements and other reasonable expenses incurred by the Holder in connection
with the collection of this Debenture.
4.3. Rights Cumulative; Specific Performances. The rights, powers and
remedies given to the Payee under this Debenture shall be in addition to all
rights, powers and remedies given to it by virtue of the Purchase Agreement, any
document or instrument executed in connection therewith, or any statute or rule
of law. Without limiting the generality of the foregoing, the Company and Holder
acknowledge and agree that the transactions contemplated by this Debenture are
unique. Accordingly, the Company acknowledges and agrees that in addition to the
other remedies to which the Holder may be entitled, the Holder shall be entitled
to a decree of a specific performance and injunctive and other equitable relief
to require the Company's compliance with its obligations hereunder.
4.4. No Waivers. Any forbearance, failure or delay by the Payee in
exercising any right, power or remedy under this Debenture, the Purchase
Agreement, any documents or instruments executed in connection therewith or
otherwise available to the Payee shall not be deemed to be a waiver of such
right, power or remedy, nor shall any single or partial exercise of any right,
power or remedy preclude the further exercise thereof.
4.5. Amendments in Writing. Subject to the terms of the Purchase
Agreement, no amendment, modification or waiver of any provision of this
Debenture shall be effective unless it shall be in writing and signed by the
Holders holding at least the Approval Threshold, and any such amendment,
modification or waiver shall apply only in the specific instance for which
given. Each such amendment, modification or waiver that is approved shall apply
to each Debenture.
4.6. Governing Law; Jurisdiction. (a) This Debenture and the rights of
the holders hereof shall be governed by, and construed in accordance with, the
laws of the State of New York wherein the terms of this Debenture were
negotiated, excluding to the greatest extent permitted by law any rule of law
that would cause the application of the laws of any jurisdiction other than the
State of New York.
(b) The undersigned hereby irrevocably and unconditionally submits, for
itself and its property, to the nonexclusive jurisdiction of any New York State
court or United States Federal court sitting in New York City, and any appellate
court from any thereof, in any action or proceeding arising out of or relating
to this Debenture or for recognition or enforcement of any judgment, and each of
the parties hereto irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in any such
New York State court or, to the fullest extent permitted by law, in such United
States Federal court. The undersigned agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or any other manner provided by
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law. Nothing in this Debenture or any other Transaction Document shall affect
any right that any party may otherwise have to bring any action or proceeding
relating to this Debenture or any of the other Transaction Documents in the
courts of any jurisdiction.
(c) The Company irrevocably and unconditionally waives, to the fullest
extent it may legally and effectively do so, any objection that it may now or
hereafter have to the laying of venue of any suit, action or proceeding arising
out of or in relation to this Debenture or any other transaction document to
which it is a party in any such New York State or United States Federal Court.
The Company hereby irrevocably waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of such action or
proceeding in any such court.
4.7. No Counterclaims. The Company waives the right to interpose
counterclaims or set-offs of any kind and description in any litigation arising
hereunder (whether or not arising out of or relating to this Debenture).
4.8. Successors. The term "Payee" and "Holder" as used herein shall be
deemed to include the Holder and its successors, endorsees and assigns.
4.9. Certain Waivers. The Company hereby waives presentment, demand for
payment, protest, notice of protest and notice of non-payment hereof.
4.10. Stamp Tax. The Company will pay any documentary stamp taxes
attributable to the initial issuance of the Series A Convertible Preferred Stock
issuable upon the conversion of this Debenture; provided, however, that the
Company shall not be required to pay any tax or taxes which may be payable in
respect of any transfer involved in the issuance or delivery of any certificates
for such stock in a name other than that of the Holder in respect of which such
stock is issued, and in such case the Company shall not be required to issue or
deliver any certificate for the stock until the person requesting the same has
paid to the Company the amount of such tax or has established to the Company's
reasonable satisfaction that such tax has been paid.
4.11. Mutilated, Lost, Stolen or Destroyed Debentures. In case this
Debenture shall be mutilated, lost, stolen or destroyed, the Company shall issue
and deliver in exchange and substitution for and upon cancellation of the
mutilated Debenture, or in lieu of and substitution for the Debenture,
mutilated, lost, stolen or destroyed, a new Debenture of like tenor and
representing an equivalent right or interest, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and an
indemnity, if requested, also reasonably satisfactory to it (but without
requirement of posting any bond).
4.12. Maintenance of Office. The Company covenants and agrees that so
long as this Debenture shall be outstanding, it will maintain an office or
agency in New York (or such other place as the Company may designate in writing
to the holder of this Debenture) where notices, presentations and demands to or
upon the Company in respect of this Debenture may be given or made.
4.13. WAIVER OF JURY TRIAL. THE COMPANY IRREVOCABLY WAIVES ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON
CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS DEBENTURE OR ANY
OTHER TRANSACTION DOCUMENT TO WHICH IT IS A PARTY IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
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IN WITNESS WHEREOF, Halsey Drug Co., Inc. has caused this Debenture to be
signed by its President and to be dated the day and year first above written.
ATTEST [SEAL] HALSEY DRUG CO., INC.
----------------------------------------- By:
--------------------------------------------------------
Name: Andrew D. Reddick
Title: President Chief Executive Officer
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ATTACHMENT I
ASSIGNMENT
For value received, the undersigned hereby assigns subject to the
provisions of Section of the Purchase Agreement, to $
principal amount of the Convertible Senior Secured Debenture evidenced hereby
and hereby irrevocably appoints attorney to transfer the Debenture on
the books of the within named corporation with full power of substitution in the
premises.
Dated:
In the presence of:
------------------------------------------------------
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APPENDIX I
ASSET PURCHASE AGREEMENT
BY AND AMONG
HALSEY DRUG CO., INC.
AND
AXIOM PHARMACEUTICAL CORPORATION
AS THE SELLER,
AND
IVAX PHARMACEUTICALS NEW YORK LLC
AS THE PURCHASER
DATED AND ENTERED INTO ON THIS THE 19TH DAY OF MARCH, 2004
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TABLE OF CONTENTS
EXHIBITS
Exhibit A................................. Products
Exhibit B................................. Form of Bill of Sale
Exhibit C................................. Halsey Equipment
Exhibit D................................. Excluded Assets
Exhibit E................................. Assignment of Contract of Sale
Exhibit F................................. Par's consent to the assignment of the Brenner Contract
of Sale
Exhibit G................................. Form of Assignment of Service Contract
Exhibit H................................. Use and License Agreement
Exhibit I................................. Agent's Release of Liens
Exhibit J................................. Par-Purchaser Closing Statement
Exhibit K................................. Par Equipment
Exhibit L................................. Seller-Purchaser Closing Statement
Exhibit M................................. Voting Agreement
Exhibit N................................. Acknowledgement terminating the Brenner Drive Lease
Exhibit O................................. Assignment to the Purchaser Halsey's rights as tenant
under Wells Avenue Lease
Exhibit P................................. Consent of Rendahl Corporation to the assignment of
Halsey's rights as tenant under Wells Avenue Lease
Exhibit Q................................. Rendahl Corporation's estoppel letter relating to the
Wells Facility
Exhibit R................................. Halsey's estoppel letter relating to the Wells Facility
Exhibit S................................. Seller's Officer's Certificate
Exhibit T................................. Legal Opinion of Seller's Counsel
Exhibit U................................. Purchaser's Officer's Certificate
Exhibit V................................. Legal Opinion of Purchaser's Counsel
Exhibit W................................. Security Agreement
Exhibit X................................. Form of FDA Transfer Letter
SCHEDULES
Schedule A................................ Seller's Representatives for Knowledge Representations
Schedule B................................ Purchaser's Representatives for Knowledge
Representations
Schedule C................................ Transferred Deposits and Prepaid Expenses
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DISCLOSURE SCHEDULES
Part 2.3(a)(ii)........................... Assumed Contracts
Part 2.4(b)(viii)......................... Terminated Contracts
Part 2.5(c)(xii).......................... Seller's Wire Instructions for the First Closing
Part 2.6(c)(iii).......................... Seller's Wire Instructions for the Second Closing
Part 3.1.................................. Affiliates of Halsey
Part 3.2(d)............................... Halsey Capitalization
Part 3.3(a)............................... Consents and Approvals
Part 3.3(b)............................... Product Registrations
Part 3.6(a)............................... Intellectual Property
Part 3.6(b)............................... Exceptions to Intellectual Property
Part 3.7.................................. Computer Systems
Part 3.8.................................. Contracts
Part 3.9(b)............................... Violations
Part 3.9(c)............................... Government Action
Part 3.10................................. Litigation
Part 3.11................................. Medical Information
Part 3.14(a).............................. Compliance with Environmental Laws
Part 3.14(b).............................. Release of Hazardous Materials at or from the
Facilities
Part 3.14(c).............................. Pending or Threatened Environmental Litigation or
Enforcement
Part 3.15................................. Notices
Part 3.16................................. Reporting and Remediation Obligations
Part 3.18................................. Insurance
Part 3.19(a).............................. Wells Avenue Lease
Part 3.19(b).............................. Brenner Drive Lease
Part 3.19(c).............................. "Contract Of Sale" as Exhibit F to the Brenner Avenue
Lease
Part 3.19(j).............................. Violations of Certain Ordinances
Part 3.19(m).............................. Service Agreements
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is dated and entered into
as of this the 19th day of March, 2004, by and among HALSEY DRUG CO., INC., a
New York corporation with offices at 616 N. North Court, Suite 120, Palatine,
Illinois 60067 ("Halsey"), AXIOM PHARMACEUTICAL CORPORATION, a Delaware
corporation and wholly-owned direct subsidiary of Halsey with offices at 616 N.
North Court, Suite 120, Palatine, Illinois 60067 ("Axiom" and, together with
Halsey, collectively and individually, the "Seller"), and IVAX PHARMACEUTICALS
NEW YORK LLC, a New York limited liability company with offices at 77 Brenner
Drive, Congers, New York 10920 (the "Purchaser") (the Seller and the Purchaser,
collectively, the "Parties", and each individually, a "Party").
PRELIMINARY STATEMENTS
In connection with the assignment to the Purchaser of (i) all the Seller's
rights, title and interests in and to the Brenner Contract of Sale (as defined
herein) relating to the Brenner Facility (as hereinafter defined) and (ii)
Seller's tenant interest in the Wells Avenue Lease relating to the Wells
Facility (as hereinafter defined, collectively together with the Brenner
Facility, the "Facilities", and each individually, a "Facility"), each pursuant
to the transactions, documents and deliveries contemplated by this Agreement,
the Seller also desires to sell, and the Purchaser desires to purchase, subject
to the terms and conditions set forth herein, the Seller's rights in the
Products as well as the Halsey Equipment, Intellectual Property, Product
Registrations, Transferred Documentation and Manufacturing Information (each, as
hereinafter defined).
NOW, THEREFORE, in consideration of the foregoing preliminary statements
and the mutual agreements and covenants set forth herein, the Parties hereby
agree as follows:
SECTION 1
DEFINITIONS AND REFERENCES
1.1. Defined Terms. As used in this Agreement, the following defined
terms shall have the meanings specified below:
"Acquired Assets" shall mean the First Closing Acquired Assets and the
Second Closing Acquired Assets.
"Act" shall mean the federal Food, Drug and Cosmetic Act, as amended, and
the regulations promulgated thereunder.
"Affiliates" shall mean, with respect to any Person, any Persons directly
or indirectly controlling, controlled by, or under common control with, such
Person. For purposes hereof, the term "controlled" (including the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the direct or indirect ability or power to
direct or cause the direction of management policies of such Person or otherwise
direct the affairs of such Person, whether through ownership of voting
securities or otherwise.
"Agent's Release of Liens" shall have the meaning set forth in Section
2.5(b)(vii).
"Allocation Schedule" shall have the meaning set forth in Section 2.2(b).
"ANDA" shall mean an abbreviated new drug application requesting permission
to place a drug on the market in accordance with 21 C.F.R. Part 314 Subpart C,
and all supplements filed pursuant to the requirements of the FDA, including all
documents, data and other information concerning the applicable drug which are
necessary for FDA approval to market the drug in the United States.
"API" shall mean the active pharmaceutical ingredient(s) in a Product.
"Applicable Law" shall mean all federal, regional, state, county, municipal
or local laws, statutes, ordinances, decisional law, rules, regulations, codes,
orders, decrees, directives, judgments and governmental
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policies applicable to, covering or relating to the Business, Seller's conduct
thereof, the Acquired Assets, the Par Equipment or either of the Facilities,
including, without limitation, the Act, the Chemical Diversion and Trafficking
Act of 1988, the Domestic Chemical Diversion Control Act of 1993, the
Comprehensive Methamphetamine Control Act of 1996, the Methamphetamine
Anti-Proliferation Act of 2000, the rules, regulations and policies applicable
under the federal Medicare program and all state Medicaid programs, and
Environmental Laws, as well as the requirements of any local board of fire
underwriters (or other body exercising similar functions).
"Assignment of Contract of Sale" shall have the meaning set forth in
Section 2.5(b)(iv).
"Assignment and Assumption of Tenant's Interest in Lease" shall have the
meaning set forth in Section 2.5(b)(xii).
"Assumed Contracts" shall have the meaning set forth in Section
2.3(a)(iii).
"Assumed Liabilities" shall have the meaning set forth in Section 2.4(a).
"Auditor" shall have the meaning set forth in Section 5.11.
"Bill of Sale" shall mean each Bill of Sale and Assignment of Assets, dated
as of the First Closing Date or Second Closing Date, as the case may be, and
executed by the Seller, in the form attached hereto as Exhibit B.
"Brenner Contract of Sale" shall have the meaning set forth in Section
2.5(b)(iii).
"Brenner Drive Lease" shall have the meaning set forth in Section 3.19(b).
"Brenner Facility" shall mean the land, facilities and equipment leased by
the Seller at 77 Brenner Drive, Congers, New York, being formerly known as Lot
22.02, Block A, Section 128 and being currently known as Lot 12, Block 2,
Section 44.7 on the tax map of the Town of Clarkstown, Rockland County, New
York.
"Business" shall mean the Seller's (a) ownership, operation and use of the
Acquired Assets, (b) operation, use, validation and qualification of the Halsey
Equipment and the Par Equipment, (c) operation, use and approval of each of the
Facilities, (d) operation of the Facilities in the State of New York for
pharmaceutical product manufacturing, packaging, labeling, storage, warehousing
and distribution, including, but not limited to pharmaceutical products
containing controlled substances, and (e) the development, validation,
manufacturing, packaging, use, labeling, storage, warehousing, distribution and
sale of the Products; in each case, on or before the First Closing Date.
"C.F.R." shall mean the United States Code of Federal Regulations.
"Closing" shall mean the First Closing and/or the Second Closing, as the
case may be.
"Closing Asset Shortfall" shall have the meaning set forth in Section 5.11.
"Closing Date" shall mean the First Closing Date and/or the Second Closing
Date, as the case may be.
"Computer Systems" shall have the meaning set forth in Section 3.7.
"Confidential Asset Information" shall have the meaning set forth in
Section 5.3(a).
"Confidential Information" shall have the meaning set forth in Section
5.3(a).
"Confidential Party Information" shall have the meaning set forth in
Section 5.3(a).
"Consent to Assignment of Lease" shall have the meaning set forth in
Section 2.5(b)(xiv).
"Contingent Obligation" means, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto.
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"Contracts" shall have the meaning set forth in Section 3.8.
"Damages" shall mean any and all costs (including amounts paid in
settlement), losses, damages, claims, liabilities, fines, penalties and
expenses, court costs, and reasonable fees and disbursements of counsel,
consultants and expert witnesses.
"DEA" shall mean the United States Drug Enforcement Administration and any
successor agency or entity that may be established hereafter.
"Designated Products" shall mean
Dextromethorphan-Guaifenesin-Pseudoephedrine, Dextromethorphan-Guaifenesin,
Dextromethorphan-Guaifenesin-Pyrilamine, and Pseudoephedrine-Dextromethorphan-
Chlorpheniramine.
"Dextromethorphan-Guaifenesin" shall mean the formulation of
Dextromethorphan HBr and Guaifenesin described on Exhibit A.
"Dextromethorphan-Guaifenesin-Pseudoephedrine" shall mean the formulation
of Dextromethorphan HBr, Guaifenesin and Pseudoephedrine HCl Liquid described on
Exhibit A.
"Dextromethorphan-Guaifenesin-Pyrilamine" shall mean the formulation of
Dextromethorphan HBr, Guaifenesin and Pyrilamine Maleate described on Exhibit A.
"Environment" shall mean air, land, surface soil, subsurface soil,
sediment, surface water, groundwater, wetlands and all flora and fauna present
therein or thereon.
"Environmental Claim" shall mean any and all claims, demands, causes of
action, suits, proceedings, administrative proceedings, orders, losses,
judgments, decrees, debts, investigations, requests or demands for information,
damages (whether to person, property or natural resources), liabilities, court
costs, attorneys' fees and other expenses.
"Environmental Conditions" shall mean any pollution or contamination of, or
the Release of Hazardous Materials into, the Environment.
"Environmental Laws" shall mean all federal, regional, state, county or
local laws, statutes, ordinances, decisional law, rules, regulations, codes,
orders, decrees, directives and judgments relating to public health or safety,
pollution, damage to or protection of the Environment, Environmental Conditions,
Releases or threatened Releases of Hazardous Materials into the Environment or
the use, manufacture, processing, distribution, treatment, storage, generation,
disposal, transport or handling of Hazardous Materials, including but not
limited to: the Federal Water Pollution Control Act, 33 U.S.C.
sec.sec. 1231-1387; the Resource Conservation and Recovery Act, 42 U.S.C.
sec.sec. 6901-6991 ("RCRA"); the Clean Air Act, 42 U.S.C. sec.sec. 7401-7642;
the Comprehensive Environmental Response Compensation and Liability Act, 42
U.S.C. sec.sec. 9601-9675 ("CERCLA"); the Toxic Substances Control Act, 15
U.S.C. sec.sec. 2601-2629; the Federal Occupational Safety and Health Act, 29
U.S.C. sec. 657 et seq. ("OSHA"); Air Pollution Control Act, New York
Environmental Conservation Laws ("NYECL") sec. 19-0101 et seq.; Water Pollution
Control Act, NYECL sec. 17-0101 et seq.; Flood Control Act, NYECL sec. 16-010
sec.; Water Resources Law, NYECL sec. 15-010 et seq.; Fresh Water Wetlands Act,
NYECL sec. 24-010 et seq.; Tidal Wetlands Act, NYECL sec. 25-0101 et seq.;
Hazardous Substances Bulk Storage Act, NYECL sec. 40-010 et seq.; Environmental
Protection Act, NYECL sec. 54-010 et seq.; Bulk Storage of Petroleum Act, NYECL
sec. 17-1001 et seq.; Navigation Law, N.Y. Nav. Law. Art. 12 sec. 176 et. seq.;
Brownfield Cleanup Act, NYECL sec. 15-0101 et seq.; and any and all rules and
regulations promulgated under any of the foregoing.
"Excluded Assets" shall have the meaning set forth in Section 2.3(c).
"Excluded Liabilities" shall have the meaning set forth in Section 2.4(b).
"FDA" shall mean the United States Food and Drug Administration and any
successor agency or entity that may be established hereafter.
"FDA Transfer of Ownership Letter" shall mean the letter submitted by each
of the Parties to the FDA notifying the agency of the change in ownership of an
ANDA in accordance with 21 C.F.R. 314.72.
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"Final Asset Measurement Date" shall have the meaning set forth in Section
5.11.
"First Closing" shall have the meaning set forth in Section 2.5(a).
"First Closing Acquired Assets" shall have the meaning set forth in Section
2.3(a).
"First Closing Date" shall have the meaning set forth in Section 2.5(a).
"First Closing Payment" shall have the meaning set forth in Section
2.2(a)(i).
"Governmental Authority" shall mean any court of competent jurisdiction,
governmental agency, board or commission or other governmental authority or
other instrumentality of the United States, any state, county, city or other
political subdivision within the United States or any other jurisdiction within
the Territory (including, without limitation, the FDA and DEA).
"Guaifenesin-Codeine" shall mean the formulation of Guaifenesin and Codeine
described on Exhibit A.
"Guaifenesin-Hydrocodone" shall mean the formulation of Guaifenesin and
Hydrocodone Bitartrate described on Exhibit A.
"Guaifenesin-Pseudoephedrine-Codeine" shall mean the formulation of
Guaifenesin, Pseudoephedrine HCl and Codeine described on Exhibit A.
"Halsey Equipment" shall mean all machinery, equipment, furniture, vehicles
and other similar tangible assets located at the Facilities, including
manufacturing, packaging and labeling equipment for the production of solid and
liquid products, equipment for various utilities, boilers, compressors and water
systems, tools, laboratory equipment and accessories, including without
limitation, the equipment identified on Exhibit C, except (a) the Par Equipment,
(b) the assets identified on Exhibit D and (c) the Inventory.
"Hazardous Materials" shall mean any substances, materials or wastes,
whether liquid, gaseous or solid, or any pollutant or contaminant, that is
infectious, toxic, hazardous, explosive, corrosive, flammable or radioactive,
including without limitation, petroleum, polychlorinated biphenyls, asbestos and
asbestos containing materials and urea formaldehyde, or that is regulated under,
defined, listed or included in any Environmental Laws, including without
limitation, CERCLA, RCRA and OSHA.
"Homatropine-Hydrocodone" shall mean the formulation of Homatropine
Methylbromide and Hydrocodone Bitartrate described on Exhibit A.
"Indebtedness" of any Person means, without duplication: (1) all
indebtedness for borrowed money, (2) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business), (3) all reimbursement
or payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (4) all obligations evidenced by notes, bonds, debentures
or similar instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses, (5) all
indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (6) all
monetary obligations under any leasing or similar arrangement which, in
connection with generally accepted accounting principles, consistently applied
for the periods covered thereby, is classified as a capital lease, (7) all
indebtedness referred to in clauses (1) through (6) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which
owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (8) all Contingent Obligations in respect of indebtedness
or obligations of others of the kinds referred to in clauses (1) through (7)
above.
"Indemnified Party" shall have the meaning set forth in Section 8.5(a).
"Indemnifying Party" shall have the meaning set forth in Section 8.5(a).
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"Insurance Policies" shall have the meaning set forth in Section 3.18.
"Intellectual Property" shall mean any and all formulae, formulations,
specifications, technologies, inventions, assays, quality control and testing
methods and procedures, manufacturing processes, know-how and trade secrets,
whether or not patentable, relating to the Business, the conduct thereof by the
Seller or otherwise, operation of the Facilities, operation or use of the Par
Equipment, operation or use of the Halsey Equipment, or the Products or the
manufacture, formulation, testing or packaging thereof, including, without
limitation, synthesis, preparation, recovery and purification processes and
techniques, control methods and assays, chemical data, toxicological and
pharmacological data and techniques, clinical data and medical uses.
"Inventory" shall mean any and all (a) finished goods, raw materials, API,
other chemical compounds, excipients, labels, inserts and other product
components and products labeling and packaging materials, and (b) market
research data, customer information, sales information, and all sales or
marketing training materials in whatever medium (e.g., audio, visual, print or
electronic); in each case, owned by the Seller, in the Seller's possession or
located at either of the Facilities as of the First Closing Date.
"Legal Requirement" shall mean any federal, state, local, municipal,
foreign, international, multinational, or other constitution, law, ordinance,
principle of common law, regulation, statute, or treaty.
"Liabilities" means, as to any Person, all debts, adverse claims,
liabilities and obligations, direct, indirect, absolute or contingent of such
Person, whether accrued, vested or otherwise, whether known or unknown, whether
in contract, tort, strict liability or otherwise and whether or not actually
reflected, or required by generally accepted accounting principles to be
reflected, in such Person's balance sheets or other financial books and records.
"Lien" shall mean any lien (statutory or otherwise), claim, charge, option,
security interest, judgment, pledge, mortgage, restriction, financing statement
or similar encumbrance or right of any kind or nature whatsoever, including
without limitation, any conditional sale or other title retention agreement and
any lease having substantially the same effect as any of the foregoing and any
assignment or deposit arrangement in the nature of a security device, or any
statutory mechanics', warehousemen's, materialmen's, contractors', workmen's,
repairmen's and carriers' liens and other similar liens.
"Losses" shall have the meaning set forth in Section 8.3.
"Knowledge" shall mean (i) with respect to the Seller, the actual knowledge
of the representatives of the Seller set forth on Schedule A after due inquiry;
and (ii) with respect to the Purchaser, the actual knowledge of the
representatives of the Purchaser set forth on Schedule B after due inquiry.
"Manufacturing Information" shall mean any and all information, data,
documentation, schedules and procedures relating to manufacturing processes,
process validation, process qualification, equipment validation, equipment
qualification, equipment maintenance, equipment calibration, equipment
installation, equipment control parameters, environmental controls, and
equipment and process operating information, operating manuals and training
materials, in whatever medium (e.g., audio, visual, print or electronic), held
by the Seller or to which the Seller has rights, including, without limitation,
any and all such information, data, documentation, schedules and procedures
required by any Governmental Authority or relating to compliance with good
manufacturing practice or other Applicable Law, including, without limitation,
equipment drawings; in each case to the extent not included in Intellectual
Property.
"Non-Packaging Assets" shall have the meaning assigned to such term in the
Use and License Agreement.
"NYDEC" shall mean the New York State Department of Environmental
Conservation, its divisions, bureaus and subdivisions.
"Other Brenner Real Estate Documents" shall have the meaning set forth in
Section 2.5(b)(ix).
"Other Wells Real Estate Documents" shall have the meaning set forth in
Section 2.5(b)(xvii).
"Outside Meeting Date" shall have the meaning set forth in Section 2.11.
I-8
"Packaging Equipment" shall have the meaning assigned to such term in the
Use and License Agreement.
"Par" shall mean Par Pharmaceutical, Inc.
"Par Consent" shall have the meaning set forth in Section 2.5(b)(v).
"Par Equipment" shall mean the equipment identified on Exhibit K.
"Par-Purchaser Closing Statement" shall have the meaning set forth in
Section 2.5(b)(xix).
"Permitted Liens" shall mean Liens for taxes or assessments which are not
due and payable.
"Person" shall mean a natural person, a corporation, a partnership, a
trust, a joint venture, a limited liability company, any governmental authority
or any other entity or organization.
"Prednisolone Syrup" shall mean the formulation of Prednisolone Syrup
described on Exhibit A.
"Proceeding" shall mean all obligations, liabilities, and commitments in
respect of any claims, action or proceeding, including product liability claims.
"Product Registrations" shall mean the approvals, registrations,
applications, licenses and permits (including but not limited to the ANDAs and
the master batch records) for the Products which have been prepared, fixed
and/or received in order to manufacture, distribute, market or sell same (and
related submissions to and correspondence with the FDA, DEA or other
Governmental Authority), in each case held in the Seller's name on or prior to
the First Closing Date to, from or with the FDA, DEA or other Governmental
Authority.
"Products" shall mean Prednisolone Syrup, Homatropine-Hydrocodone,
Guaifenesin-Codeine, Guaifenesin-Pseudoephedrine-Codeine,
Guaifenesin-Hydrocodone, Dextromethorphan-Guaifenesin-Pseudoephedrine,
Dextromethorphan-Guaifenesin, Dextromethorphan-Guaifenesin-Pyrilamine, and
Pseudoephedrine-Dextromethorphan-Chlorpheniramine.
"Proxy Statement" shall have the meaning set forth in Section 2.10(a).
"Pseudoephedrine-Dextromethorphan-Chlorpheniramine" shall mean the
formulation of Pseudoephedrine HCl, Dextromethorphan HBr and Chlorpheniramine
Maleate described on Exhibit A.
"Purchase Price" shall have the meaning set forth in Section 2.2(a).
"Refundable Amount" shall have the meaning set forth in Section 2.2(a)(i).
"Related Agreements" shall mean the Brenner Contract of Sale, Assignment of
Contract of Sale, Par Consent, Agent's Release of Liens, Use and License
Agreement, Voting Agreement, Other Brenner Real Estate Documents, Other Wells
Real Estate Documents, Termination of Lease, Assignment and Assumption of
Tenant's Interest in Lease, Consent to Assignment of Lease, Wells Landlord
Estoppel Letter, Wells Tenant Estoppel Letter, Par-Purchaser Closing Statement,
Seller-Purchaser Closing Statement, each Bill of Sale entered into by the
Parties, the Security Agreement, the Seller's Officer's Certificates, the
Purchaser's Officer's Certificates and all other documents and agreements
delivered at either Closing.
"Release" shall mean any intentional or unintentional release, discharge,
burial, spill, leaking, pumping, pouring, emitting, emptying, injection,
disposal or dumping into the Environment.
"Remedial Action" means any and all: (i) investigations of Environmental
Conditions of any kind or nature whatsoever, including site assessments, site
investigations, remedial investigations, soil, groundwater, surface water,
sediment sampling or monitoring; or (ii) actions of any kind or nature
whatsoever taken to remove, abate or remediate Environmental Conditions,
including the use, implementation, application, installation, operation or
maintenance of removal actions, in-situ or ex-situ remediation technologies
applied to the surface or subsurface soils, encapsulation or stabilization of
soils, excavation and off-site treatment or disposal of soils, systems for the
recovery and/or treatment of groundwater or free product.
I-9
"Retained Information" shall mean the books and records prepared and
maintained by the Seller containing the laboratory books and batch records for
the Products, in each case the originals or copies of which are required to be
kept by the Seller pursuant to applicable government regulations in connection
with the Seller's conduct of the Business.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"Second Closing" shall have the meaning set forth in Section 2.6(a).
"Second Closing Acquired Assets" shall have the meaning set forth in
Section 2.3(b).
"Second Closing Date" shall have the meaning set forth in Section 2.6(a).
"Second Closing Payment" shall have the meaning set forth in Section
2.2(a)(ii).
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Security Agreement" shall have the meaning set forth in Section
2.5(b)(xxii).
"Seller-Purchaser Closing Statement" shall have the meaning set forth in
Section 2.5(b)(xx).
"Service Agreements" shall have the meaning set forth in Section 3.19(m).
"Shareholder Approval" shall mean the adoption and approval of the
Transactions Requiring Shareholder Approval by the holders of Halsey's Voting
Securities representing two-thirds or greater of the outstanding Voting
Securities of Halsey, such adoption and approval obtained pursuant to the New
York Business Corporation Law, any other applicable laws, Halsey's certificate
of incorporation and bylaws, each as amended to date, and all contracts binding
on Halsey.
"Shareholder Meeting" shall have the meaning set forth in Section 2.11.
"Tax" shall mean any income, gross receipts, license, payroll, employment,
excise, severance, stamp, occupation, premium, property, environmental, windfall
profit, customs, vehicle, airplane, boat, vessel or other title or registration,
capital stock, franchise, employees' income withholding, foreign or domestic
withholding, social security, unemployment, disability, real property, personal
property, sales, use, transfer, value added, alternative, add-on minimum, and
other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever,
and any interest, penalties, additions or additional amounts thereon, imposed,
assessed, collected by or under the authority of any Governmental Authority or
payable under any tax-sharing agreement, any other contract or any of the
Contracts.
"Tax Liabilities" shall have the meaning set forth in Section 2.4(b)(vi).
"Terminated Contracts" shall have the meaning set forth in Section
2.4(b)(viii).
"Termination of Lease" shall have the meaning set forth in Section
2.5(b)(xi).
"Territory" shall mean the fifty (50) states of the United States of
America, the District of Columbia, the Commonwealth of Puerto Rico and all
territories or possessions of the United States.
"Third Party" shall mean any person or entity who or which is neither a
Party nor an Affiliate of a Party.
"Third Party Claim" shall have the meaning set forth in Section 8.5(a).
"Transactions Requiring Shareholder Approval" shall mean only the purchase
and sale of the Second Closing Acquired Assets as contemplated in this Agreement
and no other transaction, right or obligation of any Party, whether or not set
forth in this Agreement or any Related Agreement.
"Transferred Deposits and Prepaid Expenses" shall have the meaning set
forth in Section 2.5(b)(xx).
"Transferred Documentation" shall mean all documentation, whether in
hard-copy or electronic form, which the Seller owns, has rights to or has in its
possession, pertaining to the validation, approval, analysis, manufacture,
marketing or distribution of any of the Products, including, but not limited to,
all of the following with respect to each of the Products, complete: (a)
regulatory filings and supporting documents, correspon-
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dence sent to and from regulatory authorities, warnings and notices from
regulatory authorities, chemistry, manufacturing and controls data and
documentation, preclinical and clinical studies and tests, including, without
limitation, the master batch records, for each Product, analytical test methods
and validation reports, stability data and change controls; (b) supplier and
customer lists; (c) records maintained under record keeping or reporting
requirements of the FDA, DEA, any other Governmental Authority or under
Applicable Law; (d) field alerts, investigational reports, complaint, adverse
event and medical inquiry filings and records with respect to the Products; and
(e) if the Product has an ANDA, a complete copy of such ANDA for such Product.
"Use and License Agreement" shall have the meaning set forth in Section
2.5(b)(vi).
"Voting Agreement" shall have the meaning set forth in Section
2.5(b)(viii).
"Voting Securities" shall mean any and all (a) common stock and other
voting stock of Halsey, and (b) rights, warrants, contract rights, options,
notes, debentures and other securities which are (i) convertible into or
exercisable for common stock or other voting stock of Halsey, or (ii) whose
holders have the right to vote at shareholder meetings of Halsey.
"Wells Avenue Lease" shall have the meaning set forth in Section 3.19(a).
"Wells Facility" shall mean the land and facilities leased by the Seller at
125 Wells Avenue, Congers, New York, being formerly known as Lot 26, Block A,
Section 128 and being currently known as Lot 3, Block 3, Section 44.11 on the
tax maps of the Town of Clarkstown, New York.
"Wells Landlord Estoppel Letter" shall have the meaning set forth in
Section 2.5(b)(xv).
"Wells Tenant Estoppel Letter" shall have the meaning set forth in Section
2.5(b)(xvi).
SECTION 2
SALE AND PURCHASE OF ASSETS
2.1. Purchase and Sale.
(a) First Closing. On the terms and subject to the conditions of this
Agreement, at the First Closing, the Seller shall sell, assign, transfer, convey
and deliver to the Purchaser, and the Purchaser shall purchase, acquire and
accept from the Seller, the First Closing Acquired Assets, free and clear of all
Liens, other than Permitted Liens, and the Purchaser shall pay to Halsey the
First Closing Payment.
(b) Second Closing. On the terms and subject to the conditions of this
Agreement, at the Second Closing, the Seller shall sell, assign, transfer,
convey and deliver to the Purchaser, and the Purchaser shall purchase, acquire
and accept from the Seller, the Second Closing Acquired Assets, free and clear
of all Liens, other than Permitted Liens, and the Purchaser shall pay to Halsey
the Second Closing Payment.
2.2. Purchase Price; Allocation.
(a) Purchase Price. Subject to the other terms and conditions of this
Agreement, including any setoff amounts and any applicable deductions, prorated
amounts and credits, the total payments to be made by the Purchaser to the
Seller under this Agreement and any Related Agreement shall be Two Million Five
Hundred Thousand Dollars ($2,500,000) (the "Purchase Price") and the Purchase
Price shall be payable in the following payments:
(i) The "First Closing Payment" shall mean Two Million Dollars
($2,000,000), all of which (the "Refundable Amount") shall be refundable in
accordance with the terms of Section 9.2.
(ii) The "Second Closing Payment" shall mean Five Hundred Thousand
Dollars ($500,000).
(b) The Purchase Price shall be allocated among the First Closing Acquired
Assets and Second Closing Acquired Assets in accordance with the determination
of a Third Party appraiser selected by the Purchaser, such determination to be
made in the sole discretion of such Third Party appraiser based upon appraisals
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undertaken by it following each Closing, at the Purchaser's cost, (the
"Allocation Schedule"). The Seller and the Purchaser shall sign and submit all
necessary forms to report this transaction for federal, state and foreign income
tax purposes in accordance with the Allocation Schedule as provided in Treasury
Regulations Section 1.1060-1.
2.3. Acquired Assets.
(a) First Closing. The term "First Closing Acquired Assets" shall mean all
of the Seller's rights, title and interest in, to and under the following assets
of the Seller:
(i) all Intellectual Property and Manufacturing Information relating
to the Par Equipment and the Facilities;
(ii) all of the Transferred Deposits and Prepaid Expenses; and
(iii) all rights under the contracts listed on Part 2.3(a)(ii) of the
Disclosure Schedules (collectively, the "Assumed Contracts").
(b) Second Closing. The term "Second Closing Acquired Assets" shall mean
all of the Seller's rights, title and interest in, to and under the following
assets of the Seller:
(i) all of the Halsey Equipment;
(ii) all Intellectual Property and Manufacturing Information relating
to the Halsey Equipment;
(iii) all of the Product Registrations;
(iv) all of the Transferred Documentation; and
(v) all Intellectual Property and Manufacturing Information relating
to the Products.
(c) The Purchaser acknowledges and agrees that it is not acquiring any
rights, title or interest in, to and under any of the following assets (the
"Excluded Assets"):
(i) cash and cash equivalents of the Seller;
(ii) accounts receivable, notes receivable and other indebtedness due
and owed by any Third Party or Affiliate to the Seller arising or held in
connection with the Business;
(iii) the assets listed on Exhibit D attached hereto, and
(iv) the Inventory and any other assets, properties or rights of the
Seller other than the First Closing Acquired Assets and Second Closing
Acquired Assets.
2.4. Assumed Liabilities.
(a) Upon the terms and subject to the conditions of this Agreement, the
Purchaser shall assume, as of the First Closing Date, and the Purchaser shall
pay, perform and discharge when due, all performance obligations of the Seller
under the Assumed Contracts with respect to periods after the First Closing
Date, other than (i) liabilities for amounts owed and other obligations
thereunder by the Seller with respect to periods on or prior to the First
Closing Date and (ii) liabilities and other obligations arising out of any
breach thereof by the Seller, (the "Assumed Liabilities").
(b) Notwithstanding any other provision of this Agreement or any Related
Agreement to the contrary, other than the Assumed Liabilities, the Purchaser
shall not assume or be deemed to have assumed any Liability or other obligation
of the Seller whatsoever (the "Excluded Liabilities"), including, without
limitation, any Liability arising out of, resulting from or relating to:
(i) any accounts payable of the Seller;
(ii) the Business or the Seller's conduct thereof, including, without
limitation, (A) any product liability, breach of warranty or similar causes
of action or claims, whether in tort, contract or otherwise, regardless of
when asserted, which resulted from the use or misuse of any Product
manufactured by or on
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behalf of or sold or distributed by the Seller, (B) any violation of
Applicable Laws, and (C) any Liabilities relating to the pricing of the
Products by the Seller, rebates, chargebacks or other forms of discounts,
allowances or other deductions granted by the Seller, or the marketing of
the Products by the Seller or any Person acting on behalf of the Seller;
(iii) Environmental Claims, Environmental Conditions and natural
resources damages and injuries existing on or prior to the First Closing
Date, or arising from events on or prior to the First Closing Date, in each
case including, but not limited to, (1) Environmental Claims, Environmental
Conditions and natural resources damages or injuries, respecting any of the
Acquired Assets, the Halsey Equipment or the Par Equipment, either of the
Facilities or improvements thereon, the Excluded Assets, the Business as
conducted by the Seller or otherwise, and (2) any and all Losses and events
giving rise to Losses covered by Section 8.3(d);
(iv) employment, payroll, compensation or benefits (including
severance) for the past, present or future employees of the Seller or any
contractor of the Seller, including Liability arising under federal or
state plant shutdown laws such as the Warn Act, arising in connection with
any termination of employment, movement of place of employment, shutdown or
wind down of operations at the Facilities or any other operation of the
Seller, at any time past, present or future;
(v) Seller's past, present or future agreements with labor unions;
(vi) any Liabilities of Seller for Taxes, including (A) any Taxes
arising as a result of the Seller's operation of its business in the past,
present or future, (B) any Taxes arising as a result of the Business, (C)
any Taxes, other than sales taxes, that will arise as a result of the sale
of the Acquired Assets pursuant to this Agreement and (D) any deferred
Taxes of any nature ("Tax Liabilities");
(vii) rebates, chargebacks or other forms of discounts, allowances or
other deductions granted by the Seller with respect to any Product, or with
respect to any returns of any Product sold by the Seller; or
(viii) all contracts, agreements, leases, licenses, commitments, sales
and purchase orders and other instruments of the Seller relating to the
Business or otherwise other than the obligations under the Assumed
Contracts assumed pursuant to Section 2.3(a)(ii), but including without
limitation, those listed as Part 2.4(b)(viii) of the Disclosure Schedules
(collectively, the "Terminated Contracts") which shall be terminated by the
Seller on or prior to the First Closing Date and all sums due thereunder
shall be paid in full by the Seller and all obligations due thereunder
shall be performed by the Seller to completeness.
(c) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT OR ANY RELATED
AGREEMENT TO THE CONTRARY, (I) PURCHASER IS NOT IN ANY WAY A SUCCESSOR OF SELLER
OR ANY OF ITS AFFILIATES UNDER APPLICABLE ENVIRONMENTAL LAWS OR ANY OTHER LAWS,
AND (II) PURCHASER DOES NOT IN ANY WAY ASSUME ANY RESPONSIBILITY OR LIABILITIES
OF THE SELLER FOR ENVIRONMENTAL CONDITIONS EXISTING ON OR RELATING TO THE
FACILITIES OR ENVIRONMENTAL CLAIMS RELATING THERETO.
2.5. First Closing.
(a) First Closing. The simultaneous consummation of the transactions
contemplated in this Section 2.5 (the "First Closing") shall, subject to the
satisfaction or waiver of the conditions set forth in Sections 6.1, 6.2 and 6.3,
take place at 10:00 a.m. on March 19, 2004, at the offices of Reed Smith LLP,
Princeton Forrestal Village, 136 Main Street, Princeton, New Jersey 08543, or at
such other time and place as shall be mutually agreed upon by the Parties. The
date on which the First Closing occurs is referred to in this Agreement as the
"First Closing Date". As promptly as reasonably practicable after the First
Closing Date and in any event within 10 business days after the First Closing
Date, the Seller shall deliver to the Purchaser any information, records and
materials identified in Section 2.3(a) which shall not have been theretofore
delivered. All such information, records and materials provided by the Seller
shall be filed in files at the Facilities or packaged, organized and listed in a
commercially reasonable manner, at the Seller's cost.
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(b) Seller's Obligations at the First Closing. At the First Closing, the
Seller shall undertake, cause to be undertaken, deliver to the Purchaser and/or
cause to be delivered to the Purchaser, as applicable, the following, each duly
undertaken or executed on behalf of the applicable party by an authorized
officer thereof:
(i) The Seller shall deliver to the Purchaser a Bill of Sale executed
by the Seller with respect to the First Closing Acquired Assets in the form
of Exhibit B;
BRENNER PURCHASE OPTION AND AGREEMENT
(ii) Halsey shall exercise the option to purchase the Brenner Facility
in accordance with the Brenner Drive Lease and in connection therewith
shall cause to be paid to Par Two Hundred and Fifty Thousand Dollars
($250,000) in immediately available funds as a deposit on the full purchase
price for the Brenner Facility and the Par Equipment;
(iii) Halsey and Par shall execute and deliver to the Purchaser the
contract of sale for the Brenner Facility in the form attached to the
Brenner Drive Lease pursuant to which Halsey shall purchase from Par, and
Par shall sell to Halsey, the Brenner Facility and the Par Equipment (the
"Brenner Contract of Sale");
(iv) Halsey shall deliver to the Purchaser the Assignment and
Assumption of Contract of Sale executed by Halsey in the form attached
hereto as Exhibit E (the "Assignment of Contract of Sale");
(v) Par shall consent in writing in the form attached hereto as
Exhibit F (the "Par Consent") to the assignment of the Brenner Contract of
Sale as contemplated by the Assignment of Contract of Sale;
USE AND LICENSE; RELEASE OF LIENS AND GRANT OF CONSENT BY THIRD PARTIES
(vi) The Seller shall deliver to the Purchaser the Use and License
Agreement executed by the Seller in the form attached hereto as Exhibit H
(the "Use and License Agreement");
(vii) Galen Partners III, L.P. shall execute and deliver to the Seller
and the Purchaser the Agent's Release of Liens attached hereto as Exhibit I
(the "Agent's Release of Liens");
(viii) The Voting Agreement in the form attached hereto as Exhibit M
(the "Voting Agreement") shall be executed by the parties thereto and
delivered to the Seller and the Purchaser;
BRENNER FACILITY REAL ESTATE CLOSING
(ix) Par shall execute and deliver to the Purchaser the following
relating to the Brenner Facility: Deed, Affidavit of Title, Form 1099, a
Bill of Sale relating to the Par Equipment, and other ancillary
documentation and customary real estate closing deliveries as may be
required by the title company in connection with the transactions relating
to the Brenner Facility (collectively, the "Other Brenner Real Estate
Documents");
(x) Halsey shall, on the earlier of the First Closing Date or March
19, 2004, remove any and all assets, furniture, chemicals and other
materials and documents at the Brenner Facility which are not included in
the Acquired Assets or the Par Equipment, including, without limitation,
the Inventory and the assets set forth on Exhibit D;
(xi) Halsey and Par shall execute and deliver to the Purchaser the
Termination of Lease attached hereto as Exhibit N (the "Termination of
Lease");
WELLS FACILITY LEASE
(xii) Halsey shall provide the Purchaser with the Assignment and
Assumption of Tenant's Interest in Lease executed by Halsey in the form
attached hereto as Exhibit O (the "Assignment and Assumption of Tenant's
Interest in Lease");
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(xiii) Halsey shall, on the earlier of the First Closing Date or March
19, 2004, remove any and all assets, furniture, chemicals and other
materials and documents at the Wells Facility which are not included in the
Acquired Assets or the Par Equipment, including, without limitation, the
Inventory and the assets set forth on Exhibit D;
(xiv) Rendahl Corporation shall provide the Purchaser with the Consent
to Assignment of Lease executed by Rendahl Corporation in form attached
hereto as Exhibit P (the "Consent to Assignment of Lease");
(xv) Rendahl Corporation shall provide the Purchaser with the Landlord
Estoppel Letter executed by Rendahl Corporation in form attached hereto as
Exhibit Q (the "Wells Landlord Estoppel Letter");
(xvi) Halsey shall provide the Purchaser with the Tenant Estoppel
Letter executed by Halsey in the form attached hereto as Exhibit R (the
"Wells Tenant Estoppel Letter");
(xvii) Such other real estate closing deliveries as may be required by
the title company in connection with the transactions relating to the Wells
Facility (the "Other Wells Real Estate Documents");
ASSIGNMENT AND ASSUMPTION OF SERVICE CONTRACTS
(xviii) The Seller shall assign, and the Purchaser shall assume, the
Assumed Contracts pursuant to the form of assignment attached hereto as
Exhibit G or in another form of assignment acceptable to the Purchaser. The
Parties acknowledge that there are no Service Contracts relating to
Computer Systems.
CLOSING STATEMENTS; AIR PERMITS; SECURITY AGREEMENT
(xix) Par shall provide to the Purchaser a closing statement executed
by the Seller in the form attached hereto as Exhibit J (the "Par-Purchaser
Closing Statement");
(xx) The Seller shall provide to the Purchaser a closing statement
executed by the Seller in the form attached hereto as Exhibit L (the
"Seller-Purchaser Closing Statement"), which shall reflect, among other
things, the amounts set forth on Schedule C of the Disclosure Schedules
("Transferred Deposits and Prepaid Expenses");
(xxi) The Seller and Purchaser shall execute and file with appropriate
Governmental Authorities documentation to transfer the air permits for the
Brenner Facility that have been issued as of the First Closing Date;
(xxii) The Seller shall provide the Purchaser with the Security
Agreement executed by the Seller in the form attached hereto as Exhibit W
(the "Security Agreement");
SELLER'S OFFICER'S CERTIFICATE; OPINION OF THE SELLER'S COUNSEL
(xxiii) The Seller shall deliver to the Purchaser the Seller's
Officer's Certificate executed by the Seller in the form of Exhibit S; and
(xxiv) Counsel for the Seller shall deliver a legal opinion to the
Purchaser in the form attached hereto as Exhibit T.
(c) Purchaser's Obligations at the First Closing. At the First Closing,
the Purchaser shall undertake, cause to be undertaken, deliver to the Seller
and/or cause to be delivered to the Seller, as applicable, the following, each
duly undertaken or executed on behalf of the Purchaser by an authorized officer
thereof:
BRENNER PURCHASE OPTION
(i) In connection with Halsey's exercise of the option to purchase the
Brenner Facility in accordance with the Brenner Drive Lease, the Purchaser
shall pay to Par Two Hundred and Fifty
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Thousand Dollars ($250,000) in immediately available funds as a deposit on
the full purchase price for the Brenner Facility and the Par Equipment;
(ii) The Purchaser shall deliver to Halsey the Assignment of Contract
of Sale executed by the Purchaser;
REAL ESTATE CLOSING ON THE BRENNER FACILITY
(iii) Pursuant to the Brenner Contract of Sale that has been assigned
to the Purchaser, the Purchaser shall pay to Par Five Million Dollars
($5,000,000) less (A) the deposit of Two Hundred and Fifty Thousand Dollars
($250,000) delivered by the Purchaser to Par upon exercise of the option to
purchase the Brenner Facility in accordance with the Brenner Drive Lease,
and (B) any other applicable deductions and prorated amounts as set forth
in the Par-Purchaser Closing Statement;
WELLS FACILITY LEASE
(iv) The Purchaser shall deliver to Halsey the Assignment and
Assumption of Tenant's Interest in Lease executed by the Purchaser;
(v) The Purchaser shall exercise the option to renew the Wells Avenue
Lease;
CLOSING STATEMENTS; AIR PERMITS; SECURITY AGREEMENT
(vi) The Purchaser shall provide to Par the Par-Purchaser Closing
Statement executed by the Purchaser;
(vii) The Purchaser shall provide to the Seller the Seller-Purchaser
Closing Statement executed by the Purchaser, which shall reflect, among
other things, the amounts set forth on Schedule C of the Disclosure
Schedules;
(viii) The Seller and Purchaser shall execute and file with
appropriate Governmental Authorities documentation to transfer the air
permits for the Brenner Facility that have been issued as of the First
Closing Date;
(ix) The Purchaser shall deliver to the Seller the Security Agreement
executed by the Purchaser;
PURCHASER'S OFFICER'S CERTIFICATE; OPINION OF PURCHASER'S COUNSEL
(x) The Purchaser shall deliver to the Seller the Purchaser's
Officer's Certificate executed by the Purchaser in the form of Exhibit U;
(xi) Counsel for the Purchaser shall deliver a legal opinion to the
Seller in the form attached hereto as Exhibit V; and
FIRST CLOSING PAYMENT
(xii) Subject to any applicable deductions or credits and prorated
amounts under the Seller-Purchaser Closing Statement, the Purchaser shall
deliver to the Seller cash in the amount of the First Closing Payment by
wire transfer to the account of the Seller listed as Part 2.5(c)(xii) of
the Disclosure Schedules.
2.6. Second Closing.
(a) Second Closing. The simultaneous consummation of the transactions
contemplated in this Section 2.6 (the "Second Closing") shall, subject to the
satisfaction or waiver of the conditions set forth in Sections 6.1, 6.2 and 6.3,
take place at 10:00 a.m. three business days following Halsey receiving
Shareholder Approval, at the offices of Reed Smith LLP, Princeton Forrestal
Village, 136 Main Street, Princeton, New Jersey 08543, or at such other time and
place as shall be mutually agreed upon by the Parties. The date on which the
Second Closing occurs is referred to in this Agreement as the "Second Closing
Date". As promptly
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as reasonably practicable after the Second Closing Date and in any event within
10 business days after the Second Closing Date, the Seller shall deliver to the
Purchaser any information, records and materials identified in Section 2.3(b)
which shall not have been theretofore delivered. All such information, records
and materials provided by the Seller shall be filed in files at the Facilities
or packaged, organized and listed in a commercially reasonable manner, at the
Seller's cost.
(b) Seller's Obligations at the Second Closing. At the Second Closing, the
Seller shall undertake, cause to be undertaken, deliver to the Purchaser and/or
cause to be delivered to the Purchaser, as applicable, the following, each duly
undertaken or executed on behalf of the applicable party by an authorized
officer thereof:
(i) The Seller shall deliver to the Purchaser an executed affidavit
certifying Shareholder Approval given by the Inspector of Election to whom
Halsey's Board of Directors has delegated responsibility with respect to
the voting of the holders of Halsey's Voting Securities at the Shareholder
Meeting;
(ii) The Seller shall deliver to the Purchaser a Bill of Sale executed
by the Seller with respect to the Second Closing Acquired Assets in the
form of Exhibit B;
(iii) If notwithstanding Section 5.10, any Lien exists on any of the
Second Closing Acquired Assets, then the Seller shall cause each such Lien,
and the security interest evidenced thereby, to be terminated, and this
shall include, but not be limited to, filing of UCC-3 termination
statements with respect to such Liens;
(iv) The Parties shall file with the FDA the information required
pursuant to 21 C.F.R. 314.72, or any successor regulation thereto,
regarding the transfer of the ANDAs from the Seller to the Purchaser in the
form attached as Exhibit X;
(v) The Seller shall deliver to the Purchaser the Seller's Officer's
Certificate executed by the Seller in the form of Exhibit S; and
(vi) Counsel for the Seller shall deliver a legal opinion to the
Purchaser in the form attached hereto as Exhibit T.
(c) Purchaser's Obligations at the Second Closing. At the Second Closing,
the Purchaser shall undertake, cause to be undertaken, deliver to the Seller
and/or cause to be delivered to the Seller, as applicable, the following, each
duly undertaken or executed on behalf of the Purchaser by an authorized officer
thereof:
(i) The Parties shall file with the FDA the information required
pursuant to 21 C.F.R. 314.72, or any successor regulation thereto,
regarding the transfer of the ANDAs from the Seller to the Purchaser in the
form attached as Exhibit X;
(ii) The Purchaser shall deliver to the Seller the Purchaser's
Officer's Certificate executed by the Purchaser in the form of Exhibit U;
(iii) Subject to any Losses arising on or before the Second Closing
Date, unpaid amounts owed as the value of the Closing Asset Shortfall under
Section 5.11, or any other unpaid amounts owed by the Seller to the
Purchaser as of the Second Closing Date, which amounts shall be set off
against and deducted from the amount that would otherwise be due at the
Second Closing, thereby reducing the Second Closing Payment otherwise
payable at the Second Closing, the Purchaser shall deliver to the Seller
cash in the amount of the Second Closing Payment by wire transfer to the
account of the Seller listed as Part 2.6(c)(iii) of the Disclosure
Schedules; and
(iv) Counsel for the Purchaser shall deliver a legal opinion to the
Seller in the form attached as Exhibit V.
2.7. License to the Retained Information. The Seller hereby grants to the
Purchaser and its Affiliates, effective immediately upon the Second Closing, an
exclusive, perpetual, fully paid-up and royalty-free, transferable and
sublicensable right and license to use the Retained Information to (i) make,
have made, use,
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offer for sale, sell, import, develop and commercialize the Products, (ii) use
and operate the Facilities, the Par Equipment and the Halsey Equipment for any
purpose, and (iii) utilize for any purpose the Intellectual Property, Product
Registrations, Transferred Documentation and Manufacturing Information relating
to either the Par Equipment or the Halsey Equipment.
2.8. Risk of Loss.
Until the First Closing Date, any loss of or damage to the Acquired Assets
from fire, casualty or any other occurrence shall be the sole responsibility of
the Seller. At the First Closing, title and risk of loss to the First Closing
Acquired Assets shall be transferred to the Purchaser. Title to the Second
Closing Acquired Assets shall be maintained at all times with the Seller until
the Second Closing, however beginning with the First Closing Date and thereafter
until and if this Agreement is terminated, the Purchaser shall bear all risk of
loss associated with the Halsey Equipment and be solely responsible for
procuring adequate insurance to protect such Halsey Equipment against any such
loss to the extent the Purchaser desires in its sole discretion; provided,
however the Parties acknowledge and agree that in the event of any such loss (1)
the Purchaser shall be promptly paid and shall retain any and all insurance and
other payments received by any Party in connection with such loss and the Seller
shall have no claim on any such payments whatsoever, (2) the terms set forth in
Section 4.2(e) of the Use and License Agreement shall apply, and (3) neither
such loss to the Halsey Equipment nor any of the foregoing terms shall prevent
the Second Closing and there shall be no deduction in the Second Closing Payment
due to such loss. At the Second Closing, title and, except as provided above,
risk of loss to the Second Closing Acquired Assets shall be transferred to the
Purchaser.
2.9. Scope of the Parties' Rights.
(a) The Purchaser hereby acknowledges and agrees that it will acquire no
right, title, or interest whatsoever in any property or assets of the Seller
except as set forth in this Agreement and the Related Agreements.
(b) The Seller hereby acknowledges and agrees that the Seller shall not
interfere with, nor have the right to prohibit, the development, manufacture,
sale, or distribution of the Products in the Territory by Purchaser.
2.10. Proxy Statement.
(a) Halsey shall as promptly as is reasonably practicable, but no later
than May 31, 2004, prepare and file with the SEC a preliminary proxy statement
and related soliciting materials under the Securities Exchange Act of 1934, as
amended, such that the holders of Halsey's Voting Securities may consider and
vote upon the adoption of a resolution approving the Transactions Requiring
Shareholder Approval in accordance with the New York Business Corporation Law at
the Shareholder Meeting (the "Proxy Statement"); provided, however, prior to
filing or mailing of the definitive Proxy Statement, any supplement or amendment
thereto, and any correspondence with the SEC, Halsey shall use its best efforts
to respond to the comments of the SEC thereon and shall promptly make any
further filings (including amendments and supplements) in connection therewith
that may be necessary. Halsey shall cause the Proxy Statement, related materials
and all other documents it is filing with the SEC or other regulatory
authorities under this Section 2.10 to comply as to form and substance in all
material respects with applicable law, including without limitation the
Securities Exchange Act. Halsey shall permit the Purchaser to review and comment
on any documents and filings with the SEC, including without limitation, the
Proxy Statement and any related soliciting material provided to holders of
Halsey's Voting Securities in connection with the Transactions Requiring
Shareholder Approval, to the extent such documents and filings contain any
references to the Purchaser, its Affiliates and/or the transactions contemplated
by this Agreement or any Related Agreement.
(b) Halsey shall notify the Purchaser promptly upon receipt of any comments
from the SEC or its staff or any other government officials in connection with
any filing made pursuant to this Section 2.10 and of any request by the SEC or
its staff or any other government officials for amendments, revisions or
supplements to the Proxy Statement of other SEC filings, or for additional
information made pursuant hereto. Halsey shall supply the Purchaser with copies
of all correspondence between the SEC, its staff or any other government
officials, on the one hand, and Halsey or any of its representatives, on the
other hand, with respect to Halsey's
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Proxy Statement, the transactions contemplated by this Agreement and the Related
Agreements or any other filing with the SEC related to the transactions
contemplated by this Agreement and the Related Agreements.
(c) The Proxy Statement and any related soliciting material provided to the
holders of Halsey's Voting Securities in connection with the Transactions
Requiring Stockholder Approval shall not contain any untrue statement of
material fact or omit a fact necessary to make the statements contained therein,
in light of the circumstances in which they were made, not misleading.
2.11. Shareholder Meeting.
Following the First Closing Date, Halsey shall take all action necessary in
accordance with applicable law, Halsey's certificate of incorporation and
bylaws, each as amended to date, and all contracts binding on Halsey to give
timely notice of the annual meeting of its shareholders that first follows the
First Closing Date (the "Shareholder Meeting"). Subject to the fiduciary duty of
Halsey's directors and applicable law, Halsey shall use its reasonable best
efforts to solicit from the holders of Halsey's Voting Securities proxies in
favor of the adoption and approval of the Transactions Requiring Shareholder
Approval, and at the Shareholder Meeting shall do so first before considering
any other proposals, and shall take all other action necessary to secure the
approval of the holders of Halsey's Voting Securities (by vote or consent)
required by applicable law, Halsey's certificate of incorporation and bylaws,
each as amended to date, and all contracts binding on Halsey. The Proxy
Statement shall contain the affirmative recommendation of the board of directors
of Halsey in favor of the adoption of a resolution approving the Transactions
Requiring Shareholder Approval; provided, however, no director or officer of
Halsey shall be required to violate any fiduciary duty or other requirement
imposed by applicable law in connection therewith. In accordance with Halsey's
bylaws and applicable law, Halsey shall as promptly as is reasonably
practicable, but no later than September 30, 2004; provided, however, that, if
Halsey receives comments from the SEC on the Proxy Statement, Halsey may extend
such date to October 31, 2004 (the "Outside Meeting Date"), convene the
Shareholder Meeting. If (a) Halsey does not convene the Shareholder Meeting on
or before by the Outside Meeting Date or (b) Halsey does convene the Shareholder
Meeting by the Outside Meeting Date but does not secure Shareholder Approval by
the Outside Meeting Date or (c) anytime prior to Shareholder Approval, proxies
subject to the Voting Agreement represent less than two-thirds of the issued and
outstanding Voting Securities of Halsey, then the Purchaser may, but shall not
be required to, terminate this Agreement. The effects of such termination shall
be set forth in Section 9.2.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF SELLERS
The Seller hereby represents and warrants to the Purchaser that, except as
may be set forth in the Disclosure Schedules delivered to the Purchaser
simultaneously with the execution of this Agreement:
3.1. Organization.
Halsey is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York. Axiom is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and a wholly owned direct subsidiary of Halsey. The Seller is duly
qualified to do business if required to do so pursuant to the laws of each
jurisdiction in which it does business. The Seller has all requisite power and
authority to own and operate all of the Acquired Assets, to lease each of the
Facilities and the Par Equipment and to carry on the Business as presently and
heretofore conducted. Part 3.1 of the Disclosure Schedules identifies (a) the
name, jurisdiction of formation and principal place of business for each of
Halsey's Affiliates, (b) ownership interests of Halsey in each such Affiliate,
and (c) which, if any, of the Acquired Assets each such Affiliate owns or has
any rights or claims to. Each Affiliate of Halsey is duly organized, validly
existing and in good standing under the laws of its jurisdiction of formation,
and is duly qualified to do business if required to do so pursuant to the laws
of each jurisdiction in which it does business.
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3.2. Authority; Execution and Delivery; Enforceability; Equity
Capitalization.
(a) The Seller has the requisite power and authority to execute and deliver
this Agreement and the Related Agreements and to perform all of its obligations
hereunder and thereunder. The execution and delivery of this Agreement and the
Related Agreements and the performance by the Seller of its obligations
hereunder and thereunder have been authorized by all requisite action on the
part of the Seller. This Agreement has been validly executed and delivered by
the Seller and constitutes, and each Related Agreement that is to be executed
and delivered by the Seller will, when executed and delivered by the Seller,
constitute, a legal, valid and binding obligation of such the Seller,
enforceable against the Seller in accordance with its terms, subject, as to
enforcement, to applicable bankruptcy, insolvency, fraudulent transfer,
moratorium, reorganization or similar laws affecting creditors' rights generally
and to general equitable principles.
(b) The Seller has furnished or made available to the Purchaser true,
correct and complete copies of the Seller's Certificate of Incorporation, as
amended and as in effect on the date hereof, and the Seller's bylaws, as amended
and as in effect on the date hereof, and the terms of all securities convertible
into, or exercisable or exchangeable for, common stock of Halsey and the
material rights of the holders thereof in respect thereto.
(c) Except with respect to the Transactions Requiring Shareholder Approval
at the Shareholder Meeting, Halsey is not required under the New York Business
Corporation Law, Securities Exchange Act, any stock exchange rules or any other
applicable law to obtain the approval of its shareholders in order for it to
enter into any transaction, right or obligation contemplated by this Agreement
or any of the Related Agreements, including without limitation the transactions,
rights and obligations of the Parties relating to the First Closing, the Use and
License Agreement, the Brenner Facility Transactions and the Wells Facility
Transactions.
(d) As of the First Closing Date, the authorized capital stock of Halsey is
as set forth on Part 3.2(d) of the Disclosure Schedules. In addition, as of the
First Closing Date, the Voting Securities of Halsey is as set forth on Part
3.2(d) of the Disclosure Schedules. All of such outstanding shares of common
stock have been, or upon issuance will be, validly issued and fully paid and
nonassessable. Except as set forth on Part 3.2(d) of the Disclosure Schedules:
(A) no shares of the Seller's capital stock are subject to preemptive rights or
any other similar rights or any liens or encumbrances suffered or permitted by
the Seller; (B) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
shares of capital stock of the Seller or any of its Affiliates, or contracts,
commitments, understandings or arrangements by which the Seller or any of its
Affiliates is or may become bound to issue additional shares of capital stock of
the Seller or any of its Affiliates or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
shares of capital stock of the Seller or any of its Affiliates; (C) there are no
outstanding debt securities, notes, credit agreements, credit facilities or
other agreements, documents or instruments evidencing Indebtedness of the Seller
or any of its Affiliates or by which the Seller or any of its Affiliates is or
may become bound; (D) there are no agreements or arrangements under which the
Seller or any of its Affiliates is obligated to register the sale of any of
their securities under the Securities Act; (E) there are no outstanding
securities or instruments of the Seller or any of its Affiliates which contain
any redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Seller or any of its Affiliates is
or may become bound to redeem a security of the Seller or any of its Affiliates;
(F) there are no securities or instruments containing anti-dilution or similar
provisions; and (G) the Seller does not have any stock appreciation rights or
"phantom stock" plans or agreements or any similar plan or agreement.
(e) The Voting Agreement is irrevocable and such Voting Agreement, and
proxies contained therein, confer the requisite number of votes of the debenture
holders option holders, stockholders, and/or holders of any other voting rights
of Halsey, as of the date hereof, on a non-diluted basis, and, assuming all
Persons who have been designated by the Parties as signatories to the Voting
Agreement execute and deliver the Voting Agreement, on a fully-diluted basis as
if all securities providing for conversion rights were converted, necessary
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to approve the obligation to transfer the Acquired Assets to the Purchaser. The
Voting Agreement confers rights to the Purchaser as a third-party beneficiary.
3.3. Consents and Approvals; No Violations.
(a) Except as set forth in Part 3.3(a) of the Disclosure Schedules, neither
the execution and delivery of this Agreement nor the Related Agreements by the
Seller, nor the performance by the Seller of their obligations hereunder or
thereunder will: (i) violate the organizational documents of the Seller; (ii)
conflict with or result in a violation or breach of, or constitute a default
under, any contract, agreement or instrument to which the Seller is a party or
by which the Acquired Assets are bound (including, without limitation, any
Assumed Contract), or result in the creation or imposition of any Lien upon any
of the Acquired Assets; or (iii) violate or conflict with any law, rule,
regulation, judgment, order or decree of any court.
(b) Except with respect to the Transactions Requiring Shareholder Approval
which require approval only by the Persons holding two-thirds of Halsey's Voting
Securities, no filing with, and no permit, authorization, consent or approval
of, any Governmental Authority or any other Person is necessary for the
consummation by the Seller of the transactions contemplated by this Agreement.
Except as set forth on Part 3.3(b) of the Disclosure Schedules, there are no
Product Registrations for the Products.
3.4. Equipment.
(a) All of the Par Equipment is currently present at the Brenner Facility.
(b) All of the Halsey Equipment is currently present at either the Brenner
Facility or the Wells Facility.
(c) All of the Par Equipment and the Halsey Equipment was, when last used
by the Seller, in working order, normal wear and tear excepted.
(d) Since February 29, 2004, no material changes have been made to or
occurred with respect to the Facilities, the Par Equipment or the Halsey
Equipment, except that Seller has discontinued manufacturing, labeling and
packaging operations at the Facilities and terminated substantially all of its
employees at the Facilities.
(e) EXCEPT AS SET FORTH IN THIS AGREEMENT OR IN ANY RELATED AGREEMENT, (1)
THE SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH
RESPECT TO THE ACQUIRED ASSETS, THE FACILITIES OR THE PAR EQUIPMENT (2) THE
PURCHASER IS PURCHASING THE ACQUIRED ASSETS "AS IS", AND (3) THE SELLER HEREBY
DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
3.5. Title to Assets.
The Seller has good and marketable title to all the Acquired Assets. As of
the First Closing Date, the Purchaser shall acquire good and marketable title
to, and all right, title and interest of the Seller in and to, the First Closing
Acquired Assets, free and clear of all Liens and Environmental Claims, other
than Permitted Liens. As of the Second Closing Date, the Purchaser shall acquire
good and marketable title to, and all right, title and interest of the Seller in
and to, the Second Closing Acquired Assets, free and clear of all Liens and
Environmental Claims, other than Permitted Liens. As of the First Closing Date
there are no Liens, other than Permitted Liens, on any of the First Closing
Acquired Assets or the Second Closing Acquired Assets. The Seller owns and is
transferring to the Purchaser the formulas, master batch records, analytical
testing methods, other Intellectual Property and Transferred Documents with
respect to the Products. Subject to necessary regulatory approvals, the Seller
has all rights to manufacture, distribute, market and sell the Products in the
Territory and, in accordance with the terms of this Agreement and the Related
Agreements, the Seller is transferring all such rights to the Purchaser. While
the Seller owns the formulas, master batch records, analytical testing methods,
other Intellectual Property and Transferred Documents relating to the Designated
Products, to date, the Seller has not sold the Designated Products under the
Seller's name in the Territory and the Seller has engaged in contract
manufacturing of the Designated Products under which
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Designated Products have been sold to Deliz Pharmaceutical Corp. for
distribution, marketing and sale in Puerto Rico by Deliz Pharmaceutical Corp.
under trademarks owned by Deliz Pharmaceutical Corp. Other than
Homatropine-Hydrocodone, the Products were made by the Seller at the Facilities
utilizing only the improvements at the Facilities, the Par Equipment and the
Acquired Assets. The Seller has not received regulatory approvals to market and
sell the Designated Products in the Territory.
3.6. Intellectual Property.
(a) Part 3.6(a) of the Disclosure Schedules sets forth a list of the
Intellectual Property and all licenses or similar agreements or arrangements to
which the Seller is a party, either as licensee or licensor, relating to the
Intellectual Property.
(b) Except as set forth on Part 3.6(b) of the Disclosure Schedules:
(i) the Seller is the sole owner of all rights, title and interest in
and to the Intellectual Property;
(ii) the Seller has not assigned, transferred, terminated, licensed,
pledged, or otherwise encumbered or disposed of any of the Intellectual
Property;
(iii) to the Seller's Knowledge, no Third Party has a superior right
to the Seller to use any of the Intellectual Property relating to the
Products;
(iv) to the Seller's Knowledge, no Third Party has questioned or
challenged the scope or validity of the Intellectual Property;
(v) the Seller has not received notice from any Third Party and has no
Knowledge that the use of the Intellectual Property infringes, has
infringed or has misappropriated, or will infringe the intellectual
property rights of any Third Party or has constituted or does or will
constitute unfair competition or unfair trade practices under the laws of
any jurisdiction; and
(vi) none of the Intellectual Property is subject to any contractual
obligation restricting the Seller's use or transfer thereof within the
Territory or entitling others to use the same or in any way obligating the
Seller to make payments to others.
(c) The Intellectual Property included in the Acquired Assets constitutes
all of the rights to patents, trade secrets, know-how, proprietary information
and other intellectual property rights that were used in the Business.
3.7. Computer Systems.
Part 3.7 of the Disclosure Schedules identifies (i) all of the electronic
data processing systems, information systems, computer software programs,
program specifications, charts, procedures, routines, report layouts and
formats, record file layouts, computer databases and related material
(collectively, the "Computer Systems") that are needed in the conduct of the
Business, (ii) whether such Computer Systems are owned or licensed to the Seller
and, (iii) if licensed, the name of such licensor. The Seller has, and except as
set forth on Part 3.7 of the Disclosure Schedules, the Purchaser shall have
following the Second Closing, all ownership, right and title to such Computer
Systems. Regardless of whether such Computer Systems are owned by, or licensed
to the Seller, the Purchaser shall have following the Second Closing the legal
right to use the Computer Systems as they are currently being used by the
Seller, including, but not limited to, the right to create derivative works and
to grant further sublicenses under such Computer Systems (to the extent Computer
Systems licensed to the Seller currently permit such rights). The Computer
Systems owned by the Seller, and, to the Knowledge of the Seller, the Computer
Systems licensed to the Seller, do not infringe upon the rights of any other
person or entity, nor has the Seller received any notice of a claim of such
infringement. Except as set forth in Part 3.7 of the Disclosure Schedules, there
are no sublicenses or other agreements relating to the use of the Computer
Systems by Third Parties.
3.8. Contracts.
The contracts listed in Part 3.8 of the Disclosure Schedules constitute all
of the material contracts relating to the Business, the Acquired Assets, the
Halsey Equipment or the Par Equipment or either of the
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Facilities to which the Seller is a party (the "Contracts"). Except as set forth
on Part 3.8 of the Disclosure Schedules, each of the Contracts is in full force
and effect and enforceable in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium, or other laws of general application
affecting the rights and remedies of creditors, and general principles of
equity. Neither the Seller nor, to the Seller's Knowledge, any other party to
any Contract is in default thereof, and no condition or set of facts exists
which, with notice, lapse of time or both would constitute a default thereunder
on the part of the Seller or, to the Seller's Knowledge, on the part of any
other party thereto. Except as contemplated by this Agreement, the Seller has
not assigned any of its interest in any Contract listed as Part 3.8 of the
Disclosure Schedules. The Seller shall have terminated each of the Terminated
Contracts on or prior to the First Closing Date and all sums due thereunder
shall be paid in full by the Seller and all obligations due thereunder shall be
performed by the Seller to completeness. Except for the consents to assignment
required for assignment of the Assumed Contracts to the Purchaser as set forth
in Part 2.3(a)(ii) of the Disclosure Schedules, no filing with or notice to, or
consent or approval of, any Person is required for the Seller's valid assignment
pursuant to an Assumption Agreement of the Assumed Contracts to the Purchaser in
accordance with the terms of such Assumed Contracts and applicable law. Subject
to the receipt of the consents to assignment set forth in Part 2.3(a)(ii) of the
Disclosure Schedules, upon assignment of each Assumed Contract to the Purchaser
pursuant to the Assumption Agreement, such Assumed Contract will be in full
force and effect as a contract between the Purchaser and the other parties
thereto, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium, or other laws of general application
affecting the rights and remedies of creditors, and general principles of
equity.
3.9. Compliance with Law.
(a) The application numbers of the ANDAs for the applicable Products are as
set forth on Exhibit A.
(b) Except as provided on Part 3.9(b) of the Disclosure Schedules, the
Seller has no Knowledge that: (i) its conduct of the Business on or prior to the
First Closing Date was in violation of any Applicable Law or any private
limitation, restriction, covenant or condition; (ii) with respect to any
Product, the Seller was in violation of any Applicable Law as to the timely
filing with the FDA all required notices, supplemental applications and annual
or other reports or documents, including adverse experience reports; or (iii)
any manufacturing, testing, distributing and/or marketing of the Products on or
prior to the First Closing Date was in violation of any Applicable Law,
including those relating to investigational use, premarket clearance,
manufacturing in accordance with product specifications, good manufacturing
practices, labeling, advertising, record keeping, filing of reports and
security.
(c) Except as set forth on Part 3.9(c) to the Disclosure Schedules, no
Governmental Authority has commenced, or, to the Knowledge of the Seller
threatened to initiate, any action to withdraw its approval or request the
recall of any Product, or commenced or, to the Knowledge of the Seller,
threatened to initiate any action to enjoin production of any Product at any
facility.
(d) The Seller has made available to the Purchaser copies of all (i) ANDA
filings relating to the Products, including without limitation any analytical,
sterility and biologic tests; (ii) reports of inspection observations relating
to the Products; (iii) establishment inspection reports relating to the
Products; and (iv) warning letters as well as any other documents received by
the Seller or any other Person from the FDA, DEA or any other Governmental
Authority relating to any Product, either of the Facilities, the Halsey
Equipment or the Par Equipment and/or arising out of the conduct of the
Business.
(e) None of the Seller or its officers, employees, or agents, nor to the
Seller's Knowledge any current or predecessor holder of any Product
Registrations nor any of their respective officers, employees or agents, has
made an untrue statement of material fact or fraudulent statement to FDA, DEA or
any other Governmental Authority, failed to disclose a material fact required to
be disclosed to the FDA, DEA or any other Governmental Authority, or committed
an act, made a statement, or failed to make a statement that could reasonably be
expected to provide a basis for the FDA to invoke its policy respecting "Fraud,
Untrue Statements of Material Facts, Bribery, and Illegal Gratuities", set forth
in 56 Fed. Reg. 46191 (September 10, 1991) and any amendments thereto with
respect to any Product.
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3.10. Litigation.
Except as set forth on Part 3.10 of the Disclosure Schedules, there are no
Proceedings pending or, to Knowledge of the Seller, threatened against or
affecting the Seller, any Product, either of the Facilities, the Halsey
Equipment or the Par Equipment, the Business or any of the Acquired Assets.
3.11. Medical Information.
The Seller has delivered to the Purchaser copies of all serious adverse
event reports and periodic adverse event reports with respect to the Products
that have been filed with the FDA, including any correspondence or other
documents relating thereto. Part 3.11 of the Disclosure Schedules contains (i) a
schedule of all payouts made by or on behalf of the Seller (including, without
limitation, by any insurer) to any Person in respect of claims relating to any
Product, and (ii) a schedule of all actual or, to the Seller's Knowledge,
threatened claims made by any Person with respect to any Product against the
Seller or any prior owner of rights in the Product.
3.12. Brokers or Finders.
The Seller has had no dealings, negotiations or communications, whether in
writing or otherwise, with any broker(s), other intermediaries or other person
acting pursuant to the Seller's authority who will be entitled to make any claim
against the Purchaser for any commission, finder's fee or other fee may, in any
circumstance or event, be payable in connection with the transactions
contemplated by this Agreement, including without limitation the assignments of
the Wells Avenue Lease and the Brenner Contract of Sale Agreement.
3.13. Absence of Changes to the Acquired Assets.
Between the First Closing Date and the Second Closing Date, the Seller has
not sold, assigned, conveyed, transferred, pledged, permitted a Lien to be
placed upon, licensed or disposed any of the Acquired Assets other than as
contemplated in a transaction with the Purchaser as contemplated by this
Agreement or a Related Agreement.
3.14. Environmental Laws and Compliance.
(a) Except as set forth on Part 3.14(a) of the Disclosure Schedules, to
Seller's Knowledge, the Seller's Business is, and at all times has been, in
material compliance with all Environmental Laws applicable to the Business, the
Acquired Assets, the Halsey Equipment or the Par Equipment, either of the
Facilities, making of the Products, or the storage and disposal of Hazardous
Materials.
(b) Except as set forth on Part 3.14(b) of the Disclosure Schedules, to
Seller's Knowledge, no Release of Hazardous Materials has ever occurred at or
from the Facilities.
(c) Except as set forth on Part 3.14(c) of the Disclosure Schedules, to
Seller's Knowledge, neither Seller nor any owner of the Facilities has received
any notice whatsoever of pending or threatened litigation or enforcement
compliance actions under Environmental Laws.
(d) At no time after December 31, 2002 were any chlorinated solvents used
in any manner whatsoever (other than storage) at either of the Facilities,
including in connection with any manufacturing or other activity taking place at
either of the Facilities.
(e) At no time after September 30, 2003 were any chlorinated solvents
stored in any manner whatsoever at either of the Facilities, including in
connection with any manufacturing or other activity taking place at either of
the Facilities.
(f) To Seller's Knowledge, at no time during Seller's occupation of the
Facilities were any chlorinated solvents ever Released in any manner whatsoever
at or from either of the Facilities, including in connection with any
manufacturing or other activity taking place at either of the Facilities.
3.15. Notices. Except as set forth on Part 3.15 of the Disclosure
Schedules, Seller has not received any written notice that the Seller, the
Business or the conduct thereof by Seller or otherwise or either of the
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Facilities: (i) is in violation of the requirements of any Environmental Laws;
(ii) is the subject of any Environmental Claim; or (iii) has actual or potential
liability under any Environmental Laws.
3.16. No Reporting or Remediation Obligations. Except as set forth on
Schedule 3.16, to the Seller's Knowledge, there are no Environmental Conditions
or other facts, circumstances or activities arising out of or relating to the
Business, the conduct thereof by Seller or otherwise, or the use, operation or
occupancy by the Seller of the Facilities, that result or reasonably could be
expected to result in (i) any obligation of the Seller to file any report or
notice, to conduct any investigation, sampling or monitoring or to effect any
Remedial Action under Environmental Laws; or (ii) liability, either to the NYDEC
or other Governmental Authority or Third Parties, for any Environmental Claim.
3.17. Taxes. The Seller has filed in compliance with all applicable Legal
Requirements all Tax returns and has paid all Taxes required to be paid as shown
to be due thereby and has duly paid all Tax Liabilities when due, in each case,
including, without limitation, interest and penalties. The Seller has taken no
action or failed to take action with respect to any Tax or Tax Liabilities
relating to the Acquired Assets, its business, operations, products or sales,
which would give rise to a Lien on any of the Acquired Assets. The Seller is not
required to collect or remit to New York State sales tax in the ordinary course
of the Seller's business.
3.18. Insurance. The Seller has previously delivered to the Purchaser the
various policies of general liability and other forms of insurance under which
the assets, properties and operations of the Seller are insured together with
the name of the insurance company, the type of coverage, the policy number,
coverage limits, information regarding all outstanding claims, whether or not
the policy is in full force and effect, and the expiration dates of the policy,
with respect to each such policy (the "Insurance Policies").
3.19. Real Estate.
(a) The copy of the Lease entered into by Halsey and Rendahl Corporation on
July 1, 2000, as amended by the First Amendment to Agreement of Lease entered
into on January 27, 2004 and the Second Amendment to Agreement of Lease entered
into on March 8, 2004, collectively attached hereto as Part 3.19(a) of the
Disclosure Schedules (the "Wells Avenue Lease") is a true, correct and complete
copy of such Wells Avenue Lease and there has been no assignment, amendment,
modification, extension, renewal or supplement thereto of any kind or nature.
(b) The copy of the Agreement of Lease entered into by Halsey and Par as of
March 17, 1999, as amended by the First Amendment to Agreement of Lease entered
into on January 14, 2004, the Second Amendment to Agreement of Lease entered
into on February 17, 2004, and the Third Amendment to Agreement of Lease entered
into on March 5, 2004, collectively attached hereto as Part 3.19(b) of the
Disclosure Schedules (the "Brenner Drive Lease") is a true, correct and complete
copy of such Brenner Drive Lease and there has been no assignment, amendment,
modification, extension, renewal or supplement thereto of any kind or nature.
(c) The copy of the Brenner Contract of Sale attached hereto as Part
3.19(c) of the Disclosure Schedules and entitled "Contract of Sale" as Exhibit F
to the Brenner Avenue Lease is a true, correct and complete copy of the Brenner
Contract of Sale and there has been no assignment, amendment, modification,
extension, renewal or supplement thereto of any kind or nature.
(d) The Wells Avenue Lease represents the entire agreement between Seller
and Rendahl Corporation with respect to the leasing of the Wells Facility.
(e) The Wells Avenue Lease is in full force and effect and is a valid,
binding and enforceable agreement between Halsey and Rendahl Corporation.
(f) Halsey entered into possession and occupancy of the Wells Facility on
or about July 1, 2000 and is in possession of and occupies the Wells Facility
for the purposes permitted under the Wells Avenue Lease.
(g) The term of the Wells Avenue Lease shall expire on June 30, 2004; the
rent due under the Wells Avenue Lease is paid by the Seller through March 31,
2004; the Landlord has no special right to terminate the Wells Avenue Lease
prior to such date, and, by the terms of paragraph 61 the Wells Avenue Lease,
Halsey
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has the contractual right to renew or extend the term of such Lease or extend
its rights under the Wells Avenue Lease.
(h) There are no uncured defaults by Rendahl Corporation or Halsey under
the Wells Avenue Lease, and Halsey has no Knowledge of any event or condition
which, with the passage of time or the giving of notice, or both, would
constitute a default by Rendahl Corporation or Halsey under the Wells Avenue
Lease. In addition, there are no existing defenses or offsets against the
enforcement of the Wells Avenue Lease by the tenant thereunder, whether when
such tenant was Halsey or, after giving effect to the transactions contemplated
hereby, when such tenant becomes and is the Purchaser.
(i) Halsey has not exercised nor waived the right to extend the term of the
Wells Avenue Lease for the additional three (3) year term as is contemplated by
Section 61 of the Wells Avenue Lease.
(j) Seller has not received, nor been informed of, the issuance of any
notice from any governmental authority, agency or body of a violation of the
zoning, safety, fire, health or other ordinances affecting the Wells Facility or
the Brenner Facility, or their respective occupancies or uses, other than as set
forth on Part 3.19(j) of the Disclosure Schedules.
(k) Halsey has not assigned, mortgaged, licensed or pledged all or any part
of its leasehold interests and estate under the Wells Avenue Lease nor under the
Brenner Contract of Sale.
(l) Halsey has not sublet all or any part of the Wells Facility or the
Brenner Facility, and possesses the full and unrestricted right and power to
make the representations set forth herein, to assign the Wells Avenue Lease and
the Brenner Contract of Sale pursuant to the respective Assignments thereof, and
both of such assignments are made free and clear of all liens, encumbrances,
security interests, equities, claims, restrictions or agreements.
(m) There are no management, services, equipment, supply, security,
maintenance, construction, concession or other agreements with respect to or
affecting either of the Facilities, except for the Agreements listed on Part
3.19(m) of the Disclosure Schedules (collectively, the "Service Agreements").
Neither Seller nor any other party to any of the Service Agreements is in
default thereunder and no event or omission has occurred which with the giving
notice or lapse of time, or both, would constitute a default or breach under the
Service Agreements; each of the Service Agreements which are included in the
Assumed Contracts is assignable by Halsey with, in some cases, the consent of
the other party thereto and will not be invalidated, violated or otherwise
adversely affected by the assignment thereof or the assignment of the Wells
Avenue Lease or the purchase and sale of the Brenner Facility pursuant to the
Brenner Contract of Sale, each as contemplated by this Agreement; the copies of
the Service Agreements previously delivered by the Seller to the Purchaser are
true and complete copies thereof, and the same have not been further amended,
modified or supplemented; and each of the Services Agreements included in the
Terminated Contracts shall be terminated by Halsey on or prior to the First
Closing Date and all sums due thereunder shall be paid in full by Halsey.
(n) As of the First Closing Date: all buildings and improvements (including
all roads, parking areas, curbs, sidewalks, sewers and other utilities) made by
the Seller and included within either Facility have been completed and installed
in accordance with the plans and specifications therefore as approved by the
governmental authorities having jurisdiction therefore. To Seller's Knowledge,
no governmental authority has ordered any improvements be made to the
Facilities. To Seller's Knowledge, all street paving, curbing, sanitary sewers,
storm sewers or other municipal or other governmental approvals which have been
constructed or installed have been paid for and will not hereafter be assessed,
and all assessments heretofore made have been paid in full. To Seller's
Knowledge, there are no private contractual obligations relating to the
installation or connection to any sanitary sewers or storm sewers affecting
either Facility.
(o) As of the First Closing Date: to Seller's Knowledge, all permanent
certificates of occupancy and all of the licenses, permits, authorizations,
consents, certificates and approvals required by all governmental authorities
having jurisdiction thereof and the requisite certificates of the local board of
underwriters (or other body exercising similar functions) have been issued for
each Facility and have been paid for and are in full force and effect. To
Seller's Knowledge, the construction, operation and use by the Seller of the
buildings and other improvements located on both Facilities do not violate any
zoning, subdivision, building or similar law,
I-26
ordinance, order, regulation or recorded plat or any certificate of occupancy
issued for either Facility. Furthermore, Halsey has not received any written
notice of any pending or intended actions relating to rezoning of any of the
Facilities, or relating to the imposition of any special taxes or assessments,
or payments in lieu thereof, against any of the Facilities, or relating to an
increase or proposed increase in the tax assessment or rate against any
Facility.
(p) To Seller's Knowledge, no portion of either Facility and no method of
operation of either Facility is in material violation of any Applicable Law or
provisions of either the Wells Avenue Lease or the Brenner Drive Lease, or the
Service Agreements, and there are presently no outstanding or uncured notices of
any such violations.
(q) There is, to the Knowledge of Seller, no action, suit or proceeding
pending or threatened against or affecting Seller, either Facility or the owners
of either Facility, relating to or arising out of the ownership, management or
operation of either property, in any court or before or by any federal, state,
county or municipal department, commissions, board, bureau or agency or other
Governmental Authority.
(r) Seller has no Knowledge of any defective condition, structural or
otherwise, with respect to either Facility arising after February 29, 2004 but
on or before the First Closing Date, including, without limitation, with respect
to the heating, ventilation and air conditioning, plumbing, sprinkler,
electrical drainage systems, or roofs, or any other fixtures, equipment or
systems at or serving the respective Facilities.
(s) Water, sanitary sewer, storm sewer, drainage, electric, telephone, gas
and other public utility systems and lines serve both Facilities with capacity
and in a manner adequate to support similar activities and similar volume and
character of activities as had been previously conducted by the Seller in the
conduct of its Business at the Facilities on or prior to the First Closing Date
during active operations of the Facilities by the Seller, and such systems and
lines are directly connected to the lines and/or other facilities of the
respective public authorities or other utility companies providing such services
or accepting such discharge.
(t) Seller has not received any written notice of any condemnation
proceeding or other proceedings in the nature of eminent domain takings in
connection with either Facility, and to Seller's Knowledge, no such taking has
been threatened.
(u) The "M&S Agreement" referred to in Section 2.3 of the Brenner Drive
Lease has been terminated, is no longer in force and has no continuing legal
effect, all payments due thereunder have been paid in full, and all other
obligations one party to the other party have been fulfilled, and neither Par
nor Seller owe any remaining payments to one another with respect thereto.
(v) The entire $250,000.00 "Option Payment" (as such term is defined in the
Brenner Drive Lease) has been previously paid in full to Par by Halsey separate
and apart from any payment contemplated to be made under this Agreement, and no
other amount is due and payable by Seller to Par in connection therewith or as a
precondition to the exercise of the "Purchase Option" (as such term is defined
in the Brenner Drive Lease).
3.20. Disclosure. Neither this Agreement, nor any of the schedules,
attachments or exhibits hereto, contain any untrue statement of material fact or
omit a fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they were made, not misleading. There is no
fact which has not been disclosed to the Purchaser of which the Seller is aware
and which materially affects the Business, the Acquired Assets, the Halsey
Equipment or the Par Equipment or either of the Facilities or the value of any
of the foregoing.
3.21. Due Diligence. The representations, warranties, covenants and
agreements of the Seller set forth in this Agreement, in the Related Agreements
and in the documents, schedules, certificates and agreements delivered pursuant
hereto shall not be affected or diminished in any way by any investigation or
failure to investigate at any time by or on behalf of the Purchaser or by the
Purchaser's knowledge.
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SECTION 4
REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser hereby represents and warrants to the Seller that:
4.1. Organization.
The Purchaser is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of New York. The
Purchaser has all requisite power and authority to own, lease and operate its
properties and to conduct its business as now being conducted.
4.2. Authority; Execution and Delivery; Enforceability.
The Purchaser has the requisite power and authority to execute and deliver
this Agreement and the Related Agreements and to perform all of its obligations
hereunder and thereunder. The execution and delivery of this Agreement and the
Related Agreements and the performance by the Purchaser of its obligations
hereunder and thereunder have been authorized by all requisite action on the
part of the Purchaser. This Agreement has been validly executed and delivered by
the Purchaser and constitutes, and each Related Agreement that is to be executed
and delivered by the Purchaser will, when executed and delivered by the
Purchaser, constitute, a legal, valid and binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its terms, subject, as to
enforcement, to applicable bankruptcy, insolvency, fraudulent transfer,
moratorium, reorganization or similar laws affecting creditors' rights generally
and to general equitable principles.
4.3. Consents and Approvals; No Violations.
(a) Neither the execution and delivery of this Agreement nor any Related
Agreement by the Purchaser nor the performance by the Purchaser of its
obligations hereunder or thereunder will: (i) violate the certificate of
formation, operating agreement or other organizational document of the
Purchaser; (ii) conflict with or result in a violation or breach of, or
constitute a default under, any contract, agreement or instrument to which the
Purchaser or any of its Affiliates is a party or by which any of its or their
properties or assets are bound; or (iii) violate or conflict with any law, rule,
regulation, judgment, order or decree.
(b) No filing with, and no permit, authorization, consent or approval of,
any Governmental Authority is necessary for the consummation by the Purchaser of
the transactions contemplated by this Agreement.
4.4. No Proceedings.
There is no Proceeding pending or, to the Knowledge of the Purchaser,
threatened against or affecting the Purchaser which would affect the Purchaser's
ability to consummate the transactions contemplated by this Agreement and each
Related Agreement.
4.5. Brokers or Finders.
The Purchaser has had no dealings, negotiations or communications, whether
in writing or otherwise, with any broker(s), other intermediaries or other
person acting pursuant to the Purchaser's authority will be entitled to make any
claim against the Seller for any commission, finder's fee or other fee may, in
any circumstance or event, be payable in connection with the transactions
contemplated by this Agreement, including without limitation the assignments of
the Wells Avenue Lease and the Brenner Contract of Sale Agreement
SECTION 5
COVENANTS
5.1. Transfer of Regulatory Filings; Responsibility for the Product.
(a) Promptly after the First Closing Date, the Parties shall file with the
FDA such information required to notify the FDA that each of the Products is no
longer being made or sold by the Seller under the applicable
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Product Registrations. After the First Closing Date, promptly following the
request of the Purchaser, the Parties shall notify the FDA that each of the
Products which are the subject of the Purchaser's request will be made by the
Purchaser pursuant to a license under the applicable Product Registrations. The
Seller shall use its best commercial efforts to take any and all other actions
required by the FDA, DEA or other necessary governmental agencies, if any, to
give effect to the rights of the Purchaser to the Second Closing Acquired Assets
under the Use and License Agreement, including, without limitation, diligently
fulfilling all of the Seller's obligations under this Section 5.1.
(b) Until the Second Closing, the Seller shall have all responsibility for
any and all fees assessed with respect to the Products under the Prescription
User Drug Fee Act, as amended.
(c) Until the Second Closing, the Purchaser shall notify the Seller of any
and all complaints or inquiries received by the Purchaser concerning the
Products by sending written communications to the Seller to Kelly Robbins,
Manager of Quality Assurance and DEA Compliance, at krobbins@axiompharm.com, or
such other person or persons as the Seller may specify from time to time by
written notice to the Purchaser.
(d) Promptly after the Second Closing, the Seller shall file with the FDA
and other applicable Governmental Authorities all information required of a
former owner of the Products. The Parties also agree to use their best efforts
to take any and all other actions required by the FDA, DEA or other necessary
governmental agencies, if any, to effect the transfer of the ANDAs for the
Products from the Seller to the Purchaser. The Seller may retain and have access
to an archival copy of the ANDAs, including supplements and records that are
required to be kept under applicable law, and the Seller shall treat such
archived copies as Confidential Information of the Purchaser. With respect to
any Products sold or manufactured by the Seller at any time, whether before or
after any Closing, the Seller shall, at its expense, diligently conduct all
investigations relating to product quality complaints, adverse drug events and
all other issues necessitating such investigations, and with respect to ANDA
Products, the Seller shall be responsible for FDA reporting regarding the
foregoing for as long as the ANDAs are in its name. The Seller shall, at its
expense, promptly provide the Purchaser with all such information and reports
necessary or useful in connection with the Products to enable the Purchaser to
file all reports required to be filed by it and to comply with applicable law.
(e) Promptly after the Second Closing, the Purchaser and the Seller shall
take all actions necessary or required under applicable laws, rules, and
regulations, to reflect that the Second Closing Acquired Assets are owned by the
Purchaser.
(f) After the Second Closing, the Seller shall notify the Purchaser of any
and all complaints or inquiries concerning the Products by sending written
communications to the Purchaser to the attention of Adel Kheir-Eldin by email to
Adel Kleir-Eldin@ivax.com, with a copy by fax to (305) 575-4183, or such other
person or persons as the Purchaser may specify from time to time by written
notice to the Seller, within 48 hours of receiving such complaints or inquiries.
After the Second Closing, the Purchaser shall notify the Seller of any and all
complaints or inquiries of which it receives notice concerning the Products
manufactured or sold by the Seller by sending written communications to the
Seller to the attention of Kelly Robbins, Manager of Quality Assurance and DEA
Compliance, at krobbins@axiompharm.com, or such other person or persons as the
Seller may specify from time to time by written notice to the Purchaser, within
48 hours of receiving such complaints or inquiries.
(g) The Seller shall continue to conduct stability testing on the Products
manufactured by the Seller from the date of this Agreement through the
expiration date of the last lot of Product manufactured at the Facilities by the
Seller.
(h) Seller shall complete the Prednisolone Syrup annual reports for May
2002 through April 2003 within 30 days after the First Closing Date. No later
than by May 31, 2004, Seller shall complete the Prednisolone Syrup annual report
for the period May 2003 through April 2004. No later than by May 31, 2004,
Seller shall complete all other Product annual reports required by the FDA which
have been due since 12/1/2000 or cover the period ending April 2004 and until
the Second Closing Date. From the First Closing Date continuing until the
Seller's obligations under this Section 5.1(h) are satisfied, the Purchaser
shall permit the Seller and its representatives and agents to have reasonable
access during normal business hours to the Transferred
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Documentation necessary in connection with the Seller's performance of its
obligations under this Section 5.1(h) and the Seller shall reimburse the
Purchaser for its reasonable out of pocket costs for having such information
copied for the Seller.
(i) With respect to annual reports for Products required by the FDA which
are due on or before the Second Closing Date, the Seller shall prepare, complete
and timely file such reports. Subject to Section 5.1(h), with respect to annual
reports for Products required by the FDA which are due after the Second Closing
Date, the Purchaser shall prepare, complete and timely file such reports. The
Seller shall provide the Purchaser with all stability data relating to the
stability studies conducted by it pursuant to Section 5.1(g) and all other
information reasonably necessary or useful in the Purchaser's preparation,
completion and filing of any annual reports relating to the Products under this
Section 5.1(h) or (i). The Purchaser shall provide the Seller with all
information relating to any Products manufactured or sold by the Purchaser under
the Product Registrations prior to the Second Closing to which the Purchaser has
rights under this Agreement and the Use and License Agreement, reasonably
necessary or useful in the Seller's preparation, completion and filing of any
annual reports relating to the Products under this Section 5.1(i).
(j) To the extent the Seller does not fully and timely complete any of
reports required under this Section 5.1, the Purchaser may, but shall not be
obligated to, take such actions as necessary or useful to prepare, complete and
file such reports and the Seller shall reimburse the Purchaser for its fully
burdened costs of doing so.
5.2. Access to Information.
(a) From the First Closing Date continuing until 2 (two) years after the
Second Closing Date, the Seller shall permit the Purchaser and its
representatives and agents to have reasonable access during normal business
hours to the Seller's books and records and personnel primarily relating to the
Acquired Assets, the Halsey Equipment or the Par Equipment, either of the
Facilities or the Business, and the Seller shall furnish promptly to the
Purchaser such available information concerning the Acquired Assets, the Halsey
Equipment and Par Equipment, either of the Facilities and the Business as the
Purchaser may reasonably request; provided the Purchaser shall reimburse the
Seller for its reasonable out of pocket costs for having such information copied
for the Purchaser to the extent such information is not included in any
information which was required to be delivered to the Purchaser at either
Closing or any other time at the Seller's expense.
(b) In addition, at any time prior to, on or after the First Closing Date:
(i) from the First Closing Date continuing until 2 years after the Second
Closing Date, unless a longer period is required by law, the Seller shall grant
the Purchaser and its employees, attorneys, accountants, officers,
representatives and agents, during normal business hours and upon reasonable
advance written notice, reasonable access to the Retained Information, for
review and photocopying by the Purchaser, at the Purchaser's expense, at the
reasonable request of the Purchaser; and (ii) the Seller shall cause its
employees, agents, auditors, Affiliates and representatives to cooperate with
the Purchaser to ensure the orderly transition of the Business from the Seller
to the Purchaser as of the First Closing Date and to minimize any disruption to
the Business and the other respective businesses of the Parties that might
result from the transactions contemplated hereby. Retained Information will be
subject to the confidentiality obligations contained in Section 5.3. Any
Retained Information to be delivered or disclosed to the Purchaser in accordance
with this Section 5.2(b) may be redacted or withheld by the Seller to the extent
such Retained Information relates to products (other than the Products) and
businesses (other than the Business) owned or operated by the Seller.
(c) Nothing in this Section 5.2 or otherwise in this Agreement shall
require the disclosure or access by any Party of any documents or information
that would cause such Party to forfeit or waive attorney-client privilege
accorded it under applicable law.
5.3. Confidentiality.
(a) As used herein, the term "Confidential Information" shall mean (i) any
information that relates exclusively to the Products or their development,
manufacture, testing or FDA approval, or manufacturing procedures, manufacturing
processes, manufacturing equipment, plant layouts, quality control procedures,
and quality control standards, and any other information included in or related
to the Acquired Assets, the Halsey
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Equipment or the Par Equipment, or either of the Facilities ("Confidential Asset
Information"); and (ii) any information regarding the other business, other
operations or other products of the Seller or the Purchaser, as the case may be,
that has been disclosed to the other Party in connection with the transactions
contemplated by this Agreement or the Related Agreements, as the case may be
("Confidential Party Information").
(b) Each Party shall retain Confidential Party Information of the other
Party and the Seller retain the Confidential Asset Information, in each case in
strict confidence and shall not, directly or indirectly, publish or disclose it
to any Third Party, or use such Confidential Information for any purpose other
than for the purposes of this Agreement or the Related Agreements without the
prior written consent of the other Party. Each Party agrees that it shall not
communicate such Confidential Information except to its employees, advisors,
representatives and contractors who have a need to know it. Each Party shall
ensure that any employees, advisors, representatives or contractors who are
placed in a position to learn such Confidential Information will have been
previously made aware of the terms of this Agreement, have employment agreements
or other agreements obligating them to keep such information confidential
consistent with the terms of this Agreement and each Party shall indemnify the
other Party against the misuse of such Confidential Information by its
employees, advisors, representatives or contractors. For the avoidance of doubt,
the Purchaser shall be under no obligation to maintain the confidentiality of
any of the Confidential Asset Information and it may use and disclose the
Confidential Asset Information in any manner it chooses in its sole discretion.
(c) The obligations of confidentiality and nondisclosure shall not apply to
Confidential Information which:
(i) at the time of disclosure is in the public domain;
(ii) after disclosure becomes part of the public domain through no act
or omission by the receiving Party; or
(iii) a Party hereto is compelled to disclose by a court or other
tribunal of competent jurisdiction. In this case, the compelled Party shall
give the disclosing Party prompt notice so that the disclosing Party can
seek a protective order, and shall exercise reasonable efforts to ensure
that the information is accorded confidential treatment by the court or
other tribunal.
(d) The obligations of confidentiality and nondisclosure shall not apply to
Confidential Party Information which:
(i) as shown by written records or other competent proof was in the
possession of the receiving Party prior to disclosure or development under
this Agreement;
(ii) is rightly received by the receiving Party, without obligation of
secrecy, from a Third Party who was entitled to receive and transfer such;
or
(iii) as shown by written records or other competent proof is
independently developed by employees of the receiving Party who did not
have access to Confidential Information.
(e) A Party shall also be entitled to disclose Confidential Asset
Information or the other Party's Confidential Party Information, as the case may
be (i) that is required to be disclosed in compliance with applicable laws or by
order of any governmental body or a court of competent jurisdiction; (ii) as may
be necessary or appropriate in connection with the enforcement of this
Agreement; (iii) as required in furtherance of a Party's obligations under this
Agreement or the Related Agreements; (iv) as necessary or appropriate in
connection with disclosures or filings made with the FDA or other Governmental
Authorities relating to the Business or the Purchaser's ownership of the
Acquired Assets, manufacture of the Products, operation and use of the
Facilities, the Halsey Equipment or the Par Equipment (in each case, including,
without limitation, with respect to any Retained Information); (v) as may be
necessary to Third Parties in connection with business transactions with the
Parties, provided, that such Third Parties shall be bound by a confidentiality
agreement obligating them to keep such information confidential consistent with
the terms of this Agreement; and (vi) as may be required otherwise provided that
a Party give the other Party an outline of the material to be disclosed and such
other Party shall consent to such disclosure; provided, that the Party required
to disclose such information shall use commercially reasonable efforts to obtain
confidential
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treatment of such information by the agency or court or other disclosee to the
maximum permitted extent under law, and that, in the case of disclosure under
(i) shall provide the other Party with a copy of the proposed disclosure in
sufficient time to allow reasonable opportunity to comment thereon.
(f) Each Party shall be entitled, in addition to any other right or remedy
it may have, at law or in equity, to an injunction, without the posting of any
bond or other security, enjoining or restraining any other Party from any
violation or threatened violation of this Section 5.3.
5.4. Taxes.
The Seller shall pay in a timely manner, no later than within 20 days of
the First Closing Date, all Taxes, other than sales taxes, resulting from or
payable in connection with the First Closing pursuant to this Agreement,
regardless of the Person on whom such Taxes are imposed by Legal Requirements.
The Seller shall pay in a timely manner, no later than within 20 days of the
Second Closing Date, all Taxes, other than sales taxes, resulting from or
payable in connection with the Second Closing pursuant to this Agreement,
regardless of the Person on whom such Taxes are imposed by Legal Requirements.
In each case, the Seller shall promptly provide to the Purchaser evidence of the
Seller having made such payments. Furthermore, with respect to any such payments
to be made with respect to the First Closing which have not been made by the
Second Closing Date and to the extent of any breach of Section 3.17, the
Purchaser shall be entitled to set off against the amounts that would otherwise
by due to the Seller at the Second Closing such payment amounts and tax
liabilities, as the case may be.
5.5. Publicity.
Except as otherwise contemplated by this Agreement or required by law or
applicable SEC or stock exchange requirements, neither the Purchaser nor the
Seller shall, and each of them shall cause their respective Affiliates,
representatives and agents not to, issue or cause the publication of any press
release or public announcement with respect to the transactions contemplated by
this Agreement. The content of the initial press release for each Party
announcing the execution of this Agreement shall be mutually agreed upon by the
Purchaser and the Seller. Unless disclosure is required by applicable law, no
Party shall disclose the Purchase Price or any payment thereof.
5.6. Further Assurances.
Each Party shall from time to time after the First Closing, without
additional consideration, execute and deliver such further instruments and take
such other action as may be reasonably requested by the other Party to make
effective the transactions contemplated by this Agreement and each Related
Agreement.
5.7. Security Interest of the Purchaser.
On the First Closing Date, the Seller consents to the Purchaser filing
UCC-1 financing statements on the Second Closing Acquired Assets to help secure
the Purchaser's first priority security interest in the Second Closing Acquired
Assets as contemplated by the Security Agreement. The Seller shall execute and
deliver all such additional documents and filings, and provide all cooperation
to the Purchaser, necessary or useful in completing the filings and granting of
the first priority security the interest contemplated by this Section 5.7.
5.8. Non-Solicitation.
From the First Closing Date and continuing for a period of one (1) year
after the Second Closing Date, the Seller shall not directly or indirectly
solicit, divert or take away any employees of the Purchaser, notwithstanding
that such employees may have been originally obtained or recruited through the
efforts of the Seller.
5.9. Additional Registration Statements; Subsequent Placements;
Redemption.
Halsey hereby covenants and agrees that Halsey shall not, by amendment of
its certificate of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Agreement, and will at all times in good faith carry
out all the provisions of this Agreement.
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Without limiting the generality of the foregoing, from the First Closing Date
until Shareholder Approval: (a) Halsey shall not file a registration statement
under the Securities Act other than (i) an amendment to a Form S-8 that has been
filed as of the First Closing Date, and (ii) pursuant to demand registration
rights held by a Third Party on or prior to the First Closing Date; (b) Halsey
shall not, directly or indirectly, offer, sell, grant any option to purchase, or
otherwise dispose of (or announce any offer, sale, grant or any option to
purchase or other disposition of ) any of its or its Affiliates equity or equity
equivalent securities, including without limitation any debt, preferred stock or
other instrument or security that is, at any time during its life and under any
circumstances, convertible into or exchangeable or exercisable for the common
stock of Halsey or Voting Securities if such securities have voting rights; (c)
Halsey shall issue, if at all, no more than 10,500,000 of its authorized,
reserved shares of common stock to any of its existing shareholders, option
holders and warrant holders listed, and in any case shall issue no more than its
currently authorized 80,000,000 shares of common stock until after Shareholder
Approval; and (d) Halsey shall not subdivide (by any stock split, stock
dividend, recapitalization or otherwise) any outstanding shares of its common
stock into a greater number of shares. Furthermore, prior to the Stockholder
Meeting, Halsey shall not redeem, call, cancel or take any other similar action
relating to, nor approve any action by any Third Party to redeem, call, cancel
or take any other similar action relating to, any debentures of Halsey which are
outstanding as of the First Closing Date.
5.10. No Additional Liens.
Subject to Section 5.7, after the First Closing Date the Seller (a) shall
not, and shall not permit or authorize any Affiliate or Third Party to, sell,
assign, convey, transfer, pledge, create or permit a Lien to be placed upon,
license or dispose any of the Acquired Assets, and (b) shall use its best
efforts to immediately remove any Lien that is placed on any of the Acquired
Assets. Except for transfers to the Purchaser contemplated by this Agreement or
in any Related Agreement, the Seller shall not sell, transfer, lease or
otherwise dispose of any Acquired Assets or authorize or create any obligation
to do so.
5.11. Inspection.
The Purchaser shall notify the Seller of the date on which the Purchaser
shall take a final physical asset count of the Halsey Equipment and the Par
Equipment (the "Final Asset Measurement Date"), which date shall be within 30
days following the First Closing Date. The Seller shall have the right (but not
the obligation) to observe and jointly perform such count together with the
Purchaser. On the Final Asset Measurement Date, with or without the Seller, a
physical asset count shall be conducted by the Purchaser in order to determine
the amount of asset shortfall, if any, in the Halsey Equipment and the Par
Equipment as of the Final Asset Measurement Date (the "Closing Asset
Shortfall"). Promptly upon completion of the final physical asset count, the
Purchaser shall determine if any items are missing from the Halsey Equipment or
the Par Equipment which are listed on Exhibit C and Exhibit K, respectively, and
if there are missing items, then the Purchaser and the Seller shall jointly
determine in good faith the value of the Closing Asset Shortfall.
In the event the Purchaser and the Seller agree on the Closing Asset
Shortfall and the value thereof, the Closing Asset Shortfall shall be final and
the Seller shall promptly pay to the Purchaser the full amount of the value of
the Closing Asset Shortfall. In the event the Purchaser and the Seller can not
agree on the Closing Asset Shortfall and the value thereof within 30 days
following the Final Asset Measurement Date or such later time as mutually agreed
by the Parties, then the Purchaser and the Seller hereby agree to submit such
dispute to a internationally recognized independent auditing firm or mutually
agreeable appraiser that is not then engaged by either Party for assurance
services (the "Auditor"), and the Auditor shall promptly (but in any event no
later than by the Second Closing) determine the aspects of the Closing Asset
Shortfall and the value thereof which have not been agreed to based upon
evidence on the presence or absence of such items and the fair market value
thereof, and such determination shall be binding and final, and the Seller shall
promptly pay to the Purchaser the full amount of the value of the Closing Asset
Shortfall.
5.12. Insurance.
The Seller shall maintain, at its expense, products liability and general
liability "tail coverage" naming the Purchaser as additional insured, having a
limit of not less than Five Million Dollars ($5,000,000) in the
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aggregate, for a period from the date hereof until three (3) years from the
Second Closing Date, covering the Products manufactured or sold by the Seller on
or prior to the First Closing. The Seller shall provide to the Purchaser 30 days
prior written notice of any cancellation or change in the foregoing coverage.
Upon request of the Purchaser, the Seller shall provide to the Purchaser
certificates of insurance evidencing the foregoing coverage.
5.13. Removal of Inventory.
If on or prior to the First Closing Date Halsey fails to remove any assets,
furniture, chemicals and other materials or documents at either Facility which
are not included in the Acquired Assets or the Par Equipment, including, without
limitation, the Inventory, then the Purchaser may, at its option and in its sole
discretion, (a) require Halsey to complete the removal of such assets,
furniture, chemicals and other materials and documents, or (b) remove such
assets, furniture, chemicals and other materials and documents itself and Halsey
shall immediately pay the Purchaser its fully burden cost of having such items
removed from the Facilities and properly disposed of, and if such payment is not
received prior to the Second Closing, then set off against and reduce the Second
Closing Payment such amounts which are due under this Section 5.13.
SECTION 6
CONDITIONS
6.1. Conditions to Each Party's Obligations.
The respective obligations of each Party to effect the transactions
contemplated by this Agreement shall be subject to the satisfaction or waiver at
or prior to either Closing that there shall not be in effect any statute,
regulation, order, decree or judgment of any Governmental Authority which makes
illegal or enjoins or prevents the consummation of the transactions contemplated
by this Agreement.
6.2. Conditions to Obligations of the Purchaser.
The obligation of the Purchaser to effect each Closing shall be further
subject to the satisfaction or waiver by the Purchaser at or prior to the
applicable Closing of the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Seller made in this Agreement and the Related Agreements
shall be true and correct in all material respects as of the applicable
Closing Date as though made on such Closing Date, except to the extent such
representations and warranties expressly relate to an earlier date (in
which case such representations and warranties shall be true and correct in
all material respects on and as of such earlier date).
(b) Obligations and Covenants. The Seller shall have performed in all
material respects all obligations and covenants required to be performed or
complied with by the Seller under this Agreement by the time of the
applicable Closing.
(c) Liens on the Brenner Facility and the Par Equipment. With regard
to the First Closing, as of the First Closing Date the Brenner Facility and
the Par Equipment shall be free and clear of all Liens and encumbrances,
other than the Permitted Exceptions (as such term is defined in the Brenner
Contract of Sale).
(d) Actions and Documents. For the First Closing, the Seller shall
have undertaken, caused to be undertaken, delivered to the Purchaser and/or
caused to be delivered to the Purchaser, as applicable, each of the
actions, documents and instruments, as the case may be, set forth in
Section 2.5(b). For the Second Closing, the Seller shall have undertaken,
caused to be undertaken, delivered to the Purchaser and/or caused to be
delivered to the Purchaser, as applicable, each of the actions, documents
and instruments, as the case may be, set forth in Section 2.6(b).
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6.3. Conditions to Obligations of the Seller.
The obligation of the Seller to effect each Closing shall be further
subject to the satisfaction or waiver by the Seller at or prior to the
applicable Closing of the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Purchaser made in this Agreement and the Related
Agreements shall be true and correct in all material respects as of the
applicable Closing Date as though made on the applicable Closing Date,
except to the extent such representations and warranties expressly related
to an earlier date (in which case such representations and warranties shall
be true and correct in all material respects on and as of such earlier
date).
(b) Obligations and Covenants. The Purchaser shall have performed in
all material respects all obligations and covenants required to be
performed or complied with by the Purchaser under this Agreement by the
time of the applicable Closing.
(c) Actions and Documents. For the First Closing, the Purchaser shall
have undertaken, caused to be undertaken, delivered to the Seller and/or
caused to be delivered to the Seller, as applicable, each of the actions,
documents and instruments, as the case may be, set forth in Section 2.5(c).
For the Second Closing, the Purchaser shall have undertaken, caused to be
undertaken, delivered to the Seller and/or caused to be delivered to the
Seller, as applicable, each of the actions, documents and instruments, as
the case may be, set forth in Section 2.6(c).
SECTION 7
AMENDMENTS
7.1. Amendments.
This Agreement may not be amended except by an instrument in writing signed
on behalf of each of the Parties hereto. No delay or failure on the part of any
Party hereto in exercising any right, power or privilege under this Agreement or
under any Related Agreement shall impair any such right, power or privilege or
be construed as a waiver of any default or any acquiescence therein. No single
or partial exercise of any such right, power or privilege shall preclude the
further exercise of such right, power or privilege, or the exercise of any other
right, power or privilege.
SECTION 8
SURVIVAL; INDEMNIFICATION
8.1. Survival of Representations.
The representations and warranties contained in this Agreement (including
in Sections 3 and 4 as well as in the Exhibits, Schedules and Disclosure
Schedules attached hereto), in any Related Agreement, the Seller's Officer's
Certificate, the Purchaser's Officer's Certificate and in any other document
delivered in connection herewith or therewith, together with the related
obligations to indemnify and hold harmless under Section 8.3(a) and Section
8.4(a), shall survive each Closing and shall terminate at the close of business
on the third (3rd) anniversary of the Second Closing Date; provided, however,
that such representations and warranties, together with the related obligations
to indemnify and hold harmless under Section 8.3(a), shall not terminate with
respect to:
(a) Representations and warranties made by Seller in Sections 3.5,
3.14, 3.15, 3.16 and 3.17 and Seller's related obligation to indemnify and
hold harmless the Purchaser under Section 8.3(a) with respect to such
representations and warranties as well as Seller's related obligation to
indemnify and hold harmless the Purchaser for Losses covered by Sections
8.2(a) or (b), which representations and warranties and obligations to
indemnify and hold harmless shall survive each Closing and any termination
of this Agreement forever; and
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(b) Any item as to which the Person to be indemnified shall have made
a claim by delivering a notice of such claim before the expiration of the
applicable period for indemnification (stating in reasonable detail the
basis of such claim) pursuant to Section 8.4 to the Party to be providing
the indemnification.
8.2. Survival of Other Provisions.
(a) Sections 2, 5 (other than Section 5.3) and 8 (except as set forth in
Section 8.1) shall survive both the First Closing and the Second Closing, and
subject to Section 9, shall continue forever. Sections 10.7, 10.12, 10.13,
10.14, 10.15 and 10.16 shall survive both the First Closing and the Second
Closing and shall continue forever.
(b) Section 5.3, together with any liability and obligation to indemnify
and hold harmless relating to any breach of Section 5.3, shall survive for 7
years following the Second Closing Date or the termination of this Agreement,
whichever is longer.
8.3. Indemnification by the Seller.
The Seller shall indemnify the Purchaser, its Affiliates, and its and their
respective officers, directors, employees, shareholders, agents and
representatives against, and hold them harmless from, any loss, liability,
obligation, claim, damage or expense (including reasonable legal fees and
expenses and consultants' fees and natural resource damages where applicable)
("Losses"), as incurred (payable promptly upon written request), to the extent
arising from or in connection with or otherwise with respect to:
(a) any breach of any representation or warranty of the Seller which
is contained in this Agreement (including in Section 3 as well as in the
Exhibits, Schedules and Disclosure Schedules attached hereto), in any
Related Agreement, the Seller's Officer's Certificate and in any other
document delivered in connection herewith or therewith;
(b) any breach of any covenant or agreement of the Seller or breach of
any license rights granted by the Seller to the Purchaser contained in this
Agreement or any Related Agreement;
(c) the failure by the Seller to assume, pay, perform and discharge
any Excluded Liabilities;
(d) directly or indirectly,
(i) any Environmental Conditions on, at, under or emanating from
the Facilities occurring or existing on or before the First Closing
Date;
(ii) any violation or non-compliance by the Seller, the Business,
or the conduct of the Business by the Seller or otherwise at any time
with any Environmental Laws;
(iii) failure by Seller or its agents, employees, consultants or
contractors to comply with Environmental Laws applicable to the
Business, the Acquired Assets, the Halsey Equipment or the Par
Equipment, or either of the Facilities on or prior to the First Closing
Date;
(iv) treatment, storage, disposal or Release at any location of
Hazardous Materials used, generated, handled, stored, manufactured,
originating at or transported from any of the Facilities or in
connection with the Business on or prior to the First Closing Date;
(v) Environmental Claims, including without limitation the NYDEC,
other Governmental Entities and any other Third Party, alleging a
Environmental Conditions on, at, under or emanating from the Facilities
or damages arising from personal injury, property damage or damage to
natural resources arising from or related in any way to Environmental
Conditions on, at, under or emanating from the Facilities or the conduct
of the Business on or before the First Closing Date;
(vi) breach of any of the representations or warranties set forth
in Section 3.14, 3.15 or 3.16; or
(vii) any Environmental Conditions on, at, under or emanating from
any of the Facilities after the First Closing Date arising from a
Release taking place on or before the First Closing Date.
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(e) any challenge, suit, action or investigation relating to the
Shareholder Approval, the Shareholder Meeting, the Proxy Statement, the
Voting Agreement or any of the transactions contemplated by this Agreement
or any Related Agreement;
(f) except as otherwise expressly provided herein, any Liabilities
(other than Assumed Liabilities) arising out of or resulting from the
Seller's ownership of the Acquired Assets, use of the Halsey Equipment or
the Par Equipment, operation of either of the Facilities or conduct of the
Business, including, without limitation, any product liability, breach of
warranty or similar causes of action or claims, whether in tort, contract
or otherwise, regardless of when asserted, which resulted from the use or
misuse of any Product sold by the Seller; and
(g) any fees, expenses or other payments incurred or owed by the
Seller to any brokers, financial advisors or comparable other Persons
retained or employed by it in connection with the transactions contemplated
by this Agreement.
8.4. Indemnification by the Purchaser.
The Purchaser shall indemnify the Seller, its Affiliates, and its and their
respective officers, directors, employees, shareholders, agents and
representatives against, and agrees to hold them harmless from, any Losses, as
incurred (payable promptly upon written request), to the extent arising from or
in connection with or otherwise with respect to:
(a) any breach of any representation or warranty of the Purchaser
which is contained in this Agreement, in any Related Agreement, the
Purchaser's Officer's Certificate and in any other document delivered in
connection herewith or therewith;
(b) any failure of the Purchaser to pay or perform any Assumed
Liabilities; or
(c) except as otherwise expressly provided herein, any Liabilities
(other than Excluded Liabilities) arising out of or resulting from any
product liability, breach of warranty or similar causes of action or
claims, whether in tort, contract or otherwise, regardless of when
asserted, which resulted from the use or misuse of any Product sold by the
Purchaser.
8.5. Procedures.
(a) In order for a Party (the "Indemnified Party") to be entitled to the
indemnification provided for under this Agreement in respect of, arising out of
or involving a claim made by any Person against the Indemnified Party (a "Third
Party Claim"), such Indemnified Party must notify the indemnifying Party (the
"Indemnifying Party") in writing (and in reasonable detail) of the Third Party
Claim promptly, and in any event within 10 business days after receipt by such
Indemnified Party of notice of the Third Party Claim; provided, however, that
failure to give such notification shall not affect the indemnification provided
hereunder except to the extent the Indemnifying Party shall have been actually
prejudiced as a result of such failure. Thereafter, the Indemnified Party shall
deliver to the Indemnifying Party, within 10 business days' after the
Indemnified Party's receipt thereof, copies of all notices and documents
(including court papers) received by the Indemnified Party relating to the Third
Party Claim.
(b) If a Third Party Claim is made against an Indemnified Party, the
Indemnifying Party shall be entitled to participate in the defense thereof and,
if it so elects by giving written notice of such election to the Indemnified
Party within 10 business days of its receipt of the Indemnified Party's
notification of the Third Party Claim, to assume the defense thereof with
counsel reasonably acceptable to the Indemnifying Party; provided, that no
Indemnifying Party may so assume such defense unless it also acknowledges to the
Indemnified Party in writing that it is obligated to indemnify the Indemnified
Party against any Losses arising from such Third Party Claim as provided herein.
Should the Indemnifying Party so elect to assume the defense of a Third Party
Claim, the so long as the Indemnifying Party diligently conducts such defense it
shall not be liable to the Indemnified Party for any legal expenses subsequently
incurred by the Indemnified Party in connection with the defense thereof. If the
Indemnifying Party assumes such defense, the Indemnified Party shall have the
right to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by the Indemnifying Party, it being
understood that the Indemnifying
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Party shall control such defense. The Indemnifying Party shall be liable for the
fees and expenses of counsel employed by the Indemnified Party for any period
during which the Indemnifying Party has not assumed the defense thereof (other
than during any period in which the Indemnified Party shall have failed to give
notice of the Third Party Claim as provided above). Whether or not the
Indemnifying Party chooses to defend a Third Party Claim, all Parties shall
cooperate in the defense thereof. Such cooperation shall include the retention
and (upon the request of the Party defending the Third Party Claim) the
provision to the Party defending the Third Party Claim of records and
information that are reasonably relevant to such Third Party Claim, and making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. If the
Indemnifying Party assumes the defense of a Third Party Claim, the Indemnified
Party shall not admit any liability with respect to, or settle, compromise or
discharge, such Third Party Claim without the Indemnifying Party's prior written
consent (which consent shall not be unreasonably withheld). If the Indemnifying
Party does not assume the defense of a Third Party Claim, the Indemnified Party
may settle, compromise or discharge, such Third Party Claim without the
Indemnifying Party's prior written consent, and the Indemnifying Party shall be
obligated to indemnify the Indemnified Party for any Losses (including amounts
paid in settlement) incurred by the Indemnified Party which result from such
Third Party Claim to the extent such Losses are covered by the terms of the
indemnities contained in Sections 8.3 or 8.4 (as applicable) If the Indemnifying
Party assumes the defense of a Third Party Claim, the Indemnified Party shall
agree to any settlement, compromise or discharge of a Third Party Claim that the
Indemnifying Party may recommend and that by its terms obligates the
Indemnifying Party to pay the full amount of the liability in connection with
such Third Party Claim, which releases the Indemnified Party completely in
connection with such Third Party Claim and that would not otherwise adversely
affect the Indemnified Party.
(c) In the event any Indemnified Party should have a claim against any
Indemnifying Party under Sections 8.3 or 8.4 that does not involve a Third Party
Claim being asserted against or sought to be collected from such Indemnified
Party, the Indemnified Party shall deliver notice of such claim with reasonable
promptness to the Indemnifying Party. The failure by any Indemnified Party to
notify the Indemnifying Party shall not relieve the Indemnifying Party from any
liability that it may have to such Indemnified Party under Sections 8.3 or 8.4,
except to the extent that the Indemnifying Party demonstrates that it has been
prejudiced by such failure. If the Indemnifying Party disputes its liability
with respect to such claim, the Indemnifying Party and the Indemnified Party
shall proceed in good faith to negotiate a resolution of such dispute and, if
not resolved through negotiations, such dispute shall be resolved by litigation
in an appropriate court of competent jurisdiction.
8.6. Limitation; Exclusions from Limitation.
Notwithstanding anything to the contrary contained herein, but except as
provided below in this Section 8.6, the Seller's aggregate liability to the
Purchaser for Losses under Section 8.3(a) will in no event exceed Two Million
Five Hundred Thousand Dollars ($2,500,000). The foregoing limitation on the
Seller's liability shall not apply to, and the calculation of the Seller's
aggregate liability under such limitation shall not include, any Losses
resulting from a breach of the representations and warranties made by Seller
under (i) Section 3.17, or (ii) Sections 3.14, 3.15 or 3.16.
SECTION 9
TERMINATION
9.1. Termination prior to Second Closing Date.
This Agreement may be terminated at any time prior to the Second Closing
Date:
(a) by mutual written consent of the Parties;
(b) by either Party sending notice to the other Party if a
Governmental Authority shall have issued an injunction, order, decree or
ruling or taken any other action that permanently restrains, enjoins, or
otherwise prohibits the transactions contemplated by this Agreement and
such injunction, order, decree,
I-38
ruling or other actions shall have become final and nonappealable; provided
that the Party seeking to terminate this Agreement pursuant to this Section
9.1(b) shall not have taken any action, or failed to take any action, that
would cause it to be in breach of any of its agreements, representations,
warranties or covenants set forth in this Agreement;
(c) by the Purchaser in the event the Second Closing Date does not
occur on or before 10 business days following the date of Shareholder
Approval, if and when the Purchaser so elects in its sole discretion by
sending notice to the Seller of such election; provided, however, that the
Purchaser will have no right to terminate this Agreement pursuant to this
Section 9.1(c) if, as of the close of the 10th business day following the
date of Stockholder Approval, the Seller has fulfilled all of its
obligations under this Agreement and is not then in breach of any
obligation under the Agreement, including, without limitation, taking or
causing to be taken all actions required under Section 2.6(b), delivery of
all documents and agreements required under Section 2.6(b), complete
performance of all covenants pursuant to Section 5, and all conditions to
the obligations of the Purchaser set forth in Section 6.2 with respect to
the Second Closing shall have been satisfied; or
(d) by either Party by sending notice to the other Party on or after
January 1, 2005 in the event that (i) by January 1, 2005 Shareholder
Approval has not been obtained and (ii) a meeting of Halsey's shareholders
has been held during which Shareholder Approval of the Transactions
Requiring Shareholder Approval was considered.
9.2. Effectiveness and Effects of Termination. The termination of this
Agreement in accordance with Sections 2.11 or 9.1 shall be effective upon notice
of such termination being given the by the terminating Party to the other Party.
Within one (1) business day following notice of such termination being given the
by the terminating Party to the other Party, the Seller shall pay to the
Purchaser the full amount of the Refundable Amount as well as any other amounts
which are then due and payable by the Seller to the Purchaser under this
Agreement or any Related Agreement. The Use and License Agreement may not be
terminated by the Seller with respect to the Non-Packaging Assets unless and
until this Agreement is terminated in accordance with this Section 9 and the
Seller pays to the Purchaser the full amount of the Refundable Amount as well as
any other amounts which are then due and payable by the Seller to the Purchaser
under this Agreement or any Related Agreement. Notwithstanding the foregoing,
with respect to the Packaging Equipment, the Use and License Agreement shall
survive any such termination of this Agreement. Furthermore, following such
termination of this Agreement:
(a) The Parties shall have no further liability hereunder with respect
to the Second Closing except that each Party shall remain liable to the
other for any breach by it of this Agreement or, for the applicable time
periods set forth in Section 8, of any representation, warranty or covenant
contained herein occurring before the date of such termination;
(b) The transactions contemplated by the First Closing shall remain
unaffected and shall not be terminated or revoked in any way, other than
the return to the Purchaser of the Refundable Amount;
(c) Notwithstanding Section 8.2(a), Sections 2.1(b), 2.6, 2.9(b), 2.10
and 2.11 shall not survive such termination. Notwithstanding Section
8.2(a), Section 5 shall not survive such termination other than Sections
5.2 (for 2 years following such termination), 5.3, 5.4 and 5.6, 5.12 and
5.13, each of which shall survive any such termination of this Agreement,
and 5.7 and 5.10, each of which shall survive any such termination of this
Agreement until all amounts owed and obligations secured by the Security
Agreement have been paid in full to the Purchaser by the Seller. Sections
9.3, 10.7, 10.12, 10.13, 10.14, 10.15 and 10.16 shall survive any such
termination; and
(d) Termination, relinquishment or expiration of this Agreement for
any reason shall be without prejudice to any rights, claims or amounts owed
that shall have accrued to the benefit of either Party prior to such
termination, relinquishment or expiration. Such termination, relinquishment
or expiration shall not relieve either Party from obligations that are
expressly indicated to survive termination or expiration of this Agreement.
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9.3. Limitation on the Purchaser's Liability. In no event shall the
Purchaser or its Affiliates have any liability to the Seller, if any at all, in
excess of the Purchase Price. In no event shall the Purchaser have any liability
to the Seller for any other actual, special, consequential or punitive damages,
and any claim, right, cause of action or liability for any damages that are
special, consequential or punitive or for specific performance of this Agreement
is hereby fully released and forever discharged. Without limiting the generality
of the foregoing, the Seller shall not have a right to specific performance
following a termination of this Agreement by the Purchaser.
SECTION 10
MISCELLANEOUS
10.1. Notices.
All notices and other communications required or permitted to be given
under this Agreement shall be in writing and shall be delivered personally or
sent by (a) registered or certified mail, return receipt requested; (b)
overnight via a nationally recognized courier service guaranteeing next-day
delivery, charges prepaid; or (c) facsimile (with original promptly sent by any
of the foregoing manners). Any such notices shall be addressed to the receiving
Party at such Party's address set forth below, or at such other address as may
from time to time be furnished by similar notice by either Party:
(a) if to the Seller, to:
Halsey Drug Co., Inc.
616 N. North Court, Suite 120
Palatine, Illinois 60067
Fax: (847) 705-5399
Telephone: (847) 705-7709
Attention: President and CEO
with a copy to:
St. John & Wayne, L.L.C.
Two Penn Plaza East
Newark, New Jersey 07105
Fax: (973) 491-3555
Telephone: (973) 491-3600
Attention: William P. Oberdorf, Esq.
(b) if to the Purchaser, to:
IVAX Pharmaceuticals New York LLC
4400 Biscayne Boulevard
Miami, Florida 33137
Telephone: (305) 575-4101
Facsimile: (305) 575-4105
Attention: Rafick Henein
with a copy to:
IVAX Corporation
4400 Biscayne Boulevard
Miami, Florida 33137
Telephone: (305) 575-6000
Facsimile: (305) 575-6049
Attention: General Counsel
I-40
with a copy to:
Reed Smith LLP
599 Lexington Avenue
New York, New York 10022-7650
Telephone: (212) 549-0238
Facsimile: (212) 521-5450
Attention: William R. Griffith, Esq.
All notices shall be effective upon such personal delivery or upon transmission
by facsimile, or next business day following delivery to such courier service,
or three calendar days after it is sent by such registered or certified mail, as
the case may be. Copies shall be sent in the same manner as originals.
10.2. Descriptive Headings.
The descriptive headings in this Agreement are inserted for convenience
only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
10.3. Counterparts.
This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement, and shall become effective when
one or more such counterparts have been signed by each of the Parties and
delivered to the other Party.
10.4. Entire Agreement.
This Agreement, the Related Agreements and the Schedules and Exhibits
hereto and thereto, contain the entire agreement and understanding between the
Parties hereto with respect to the subject matter hereof and supersede all prior
agreements and understandings relating to such subject matter. Neither Party
shall be liable or bound to any other Party in any manner by any
representations, warranties or covenants relating to such subject matter except
as specifically set forth herein or in the Related Agreements.
10.5. Fees and Expenses.
Regardless of whether or not the transactions contemplated by this
Agreement are consummated, except as otherwise provided herein each Party shall
bear its own fees and expenses incurred in connection with the transactions
contemplated by this Agreement.
10.6. Independent Contractors.
Nothing contained in this Agreement shall be deemed to constitute a
partnership or joint venture between the Seller and the Purchaser, or to
constitute one as the agent of the other. The Seller and the Purchaser shall act
solely as independent contractors, and nothing in this Agreement shall be
construed to give either Party the power or authority, express or implied, to
act for, bind, or commit the other Party.
10.7. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Florida, without regard to any applicable principles of
conflicts of law.
10.8. Specific Performance.
The Parties hereto agree that if any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached, irreparable damage would occur, no adequate remedy at law would exist
and damages would be difficult to determine, and that the Parties shall be
entitled to specific performance of the terms of this Agreement, in addition to
any other remedy at law or equity.
10.9. Assignment.
This Agreement may not be assigned by any Party hereto without the prior
written consent of the other Party, provided, however, that the Purchaser may
assign its rights under this Agreement to an Affiliate without
I-41
the consent of the Seller; provided, that such assignment shall not be deemed to
release the Purchaser from its obligations hereunder. Any attempted assignment
in violation of this Section 10.9 shall be void.
10.10. Successors and Assigns.
This Agreement shall be binding upon and inure solely to the benefit of the
Parties hereto, their successors and permitted assigns, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person or persons any rights, benefits or remedies of any nature whatsoever
under or by reason of this Agreement.
10.11. Severability.
In the event that any one or more of the provisions contained in this
Agreement, or the application thereof in any circumstances, is held invalid,
illegal or unenforceable in any respect for any reason, the Parties shall
negotiate in good faith with a view to the substitution therefor of a suitable
and equitable solution in order to carry out, so far as may be valid and
enforceable, the intent and purpose of such invalid provision; provided,
however, that the validity, legality and enforceability of any such provision in
every other respect and of the remaining provisions contained in this Agreement
shall not be in any way impaired thereby, it being intended that all of the
rights and privileges of the Parties hereto shall be enforceable to the fullest
extent permitted by law.
10.12. Consent to Jurisdiction.
Each of the Purchaser and the Seller irrevocably submits to the exclusive
jurisdiction of the U.S. District Court for the Southern District of Florida,
for the purposes of any suit, action or other proceeding arising out of this
Agreement, any Related Agreement or any transaction contemplated hereby or
thereby. Each of the Purchaser and the Seller agrees to commence any such
action, suit or proceeding either in the U.S. District Court for the Southern
District of Florida or if such suit, action or other proceeding may not be
brought in such court for jurisdictional reasons, in the Courts of the State of
Florida. Each of the Purchaser and the Seller further agrees that service of any
process, summons, notice or document by U.S. registered mail to such Party's
respective address set forth above shall be effective service of process for any
action, suit or proceeding in Florida with respect to any matters to which it
has submitted to jurisdiction in this Section 10.12. Each of the Purchaser and
the Seller irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement, any
Related Agreement or the transactions contemplated hereby and thereby in the
U.S. District Court for the Southern District of Florida, and hereby and thereby
further irrevocably and unconditionally waives and agrees not to plead or claim
in any such court that any such action, suit or proceeding brought in any such
court has been brought in an inconvenient forum.
10.13. Waiver of Jury Trial.
EACH PARTY HERETO HEREBY WAIVES TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT OR ANY RELATED INSTRUMENT. EACH PARTY HERETO (A) CERTIFIES THAT
NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THAT FOREGOING WAIVER; AND (B) ACKNOWLEDGES THAT IT
AND THE OTHER PARTY HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND
THE RELATED AGREEMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.13.
10.14. Attorney Fees.
A Party in breach of this Agreement shall, on demand, indemnify and hold
harmless the other Party for and against all reasonable out-of-pocket expenses,
including legal fees, incurred by such other Party by reason of the enforcement
and protection of its rights under this Agreement. The payment of such expenses
is in addition to any other relief to which such other Party may be entitled.
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10.15. Interpretation.
(a) In the event an ambiguity or a question of intent or interpretation
arises, this Agreement shall be construed as if drafted jointly by the Parties
and no presumption or burden of proof shall arise favoring or disfavoring any
Party by virtue of the authorship of any provisions of this Agreement.
(b) The definitions of the terms herein shall apply equally to the singular
and plural forms of the terms defined. Whenever the context may require, any
pronoun shall include the corresponding masculine, feminine and neuter forms.
The words "include", "includes" and "including" shall be deemed to be followed
by the phrase "without limitation". The word "will" shall be construed to have
the same meaning and effect as the word "shall". Unless the context requires
otherwise, (A) any definition of or reference to any agreement, instrument or
other document herein shall be construed as referring to such agreement,
instrument or other document as from time to time amended, supplemented or
otherwise modified (subject to any restrictions on such amendments, supplements
or modifications set forth herein or therein); (B) any reference to any Laws
herein shall be construed as referring to such Laws as from time to time
enacted, repealed or amended; (C) any reference herein to any Person shall be
construed to include the Person's successors and assigns; (D) the words
"herein", "hereof" and "hereunder", and words of similar import, shall be
construed to refer to this Agreement in its entirety and not to any particular
provision hereof; and (E) all references herein to Sections, Exhibits or
Schedules shall be construed to refer to Sections, Exhibits and Schedules of
this Agreement.
10.16. Joint and Several Obligations; Interpretation of "Seller".
Halsey and Axiom shall be jointly and severally liable for the obligations
of the Seller and of each other under this Agreement and all of the Related
Agreements. Each reference to the phrase "the Seller" or "Seller" in this
Agreement or any Related Agreement to which Halsey and Axiom are both parties
shall be deemed to read as meaning "Halsey" as well as "Axiom".
[THE NEXT PAGE IS THE SIGNATURE PAGE.]
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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
HALSEY DRUG CO., INC.
By: /s/ ANDREW D. REDDICK
------------------------------------
Name: Andrew D. Reddick
Title: President and CEO
AXIOM PHARMACEUTICAL CORPORATION
By: /s/ ANDREW D. REDDICK
------------------------------------
Name: Andrew D. Reddick
Title: President and CEO
IVAX PHARMACEUTICALS NEW YORK LLC
By: /s/ JORDAN SIEGEL
------------------------------------
Name: Jordan Siegel
Title: Vice President
I-44
EXHIBIT A
PRODUCTS
FDA APPLICATION/
PRODUCTS LISTED BY ACTIVE STRENGTH OF ACTIVE PRODUCT REGISTRATION
PHARMACEUTICAL INGREDIENT(S) PHARMACEUTICAL INGREDIENTS NUMBERS
---------------------------- -------------------------- --------------------
Prednisolone Syrup.................................. 15MG per 5ML 040287
Homatropine Methylbromide and Hydrocodone Bitartrate
Syrup*............................................ 1.5/5MG per 5ML 040285
Guaifenesin and Codeine Liquid...................... 100/10MG per 5ML Not applicable
Guaifenesin, Pseudoephedrine HCl and Codeine
Liquid............................................ 100/30/10MG per 5ML Not applicable
Guaifenesin and Hydrocodone Bitartrate Liquid....... 100/5MG per 5ML Not applicable
Dextromethorphan HBr, Guaifenesin and
Pseudoephedrine HCl Liquid**...................... 10/25/30 MG per 5ML Not applicable
Dextromethorphan HBr and Guaifenesin**.............. 10/30 MG per 5 ML Not applicable
Dextromethorphan HBr, Guaifenesin And Pyrilamine
Maleate**......................................... 10/25/10 MG per 5ML Not applicable
Pseudoephedrine HCl, Dextromethorphan HBr and
Chlorpheniramine Maleate**........................ 30/20/2 MG per 5ML Not applicable
---------------
* The manufacturing site transfer for this Product from Brooklyn, New York to
the Facilities was not completed.
** The trademarks "Trispec PE", "Trispec DM", "Trispec SF" and "Deltuss" are
owned by Deliz Pharmaceutical Corp. ("Deliz"). These Products have been
distributed by Deliz in Puerto Rico under the "Trispec PE", "Trispec DM",
"Trispec SF" and "Deltuss" trademarks.
I-45
APPENDIX J
EXECUTION COPY
AMENDED AND RESTATED VOTING AGREEMENT
This AMENDED AND RESTATED VOTING AGREEMENT(this "Agreement") dated as of
February 6, 2004, among the Parties signatory hereto (the "Parties").
Capitalized terms used herein and not otherwise defined shall have the meaning
provided in the Purchase Agreement (as defined below).
WHEREAS, Halsey Drug Co., Inc., a New York corporation (the "Company"), has
entered into the Debenture and Share Purchase Agreement dated of even date
herewith (the "Purchase Agreement"), by and among the Company, Care Capital
Investments II, LP ("Care Capital"), Essex Woodlands Health Ventures V, L.P.
("Essex"), Galen Partners III, LP ("Galen") and other signatories thereto,
providing for the issuance by the Company of Convertible Senior Secured
Debentures (the "2004 Debentures") in the aggregate principal amount of up to
$14 million; and
WHEREAS, the 2004 Debentures are convertible into Series A Preferred in
accordance with the terms of the Purchase Agreement; and
WHEREAS, the Company has entered into the Debenture Conversion Agreement
dated of even date herewith (the "Conversion Agreement") by and among the
Company, Care Capital, Essex, Galen and the other holders of the Company's 5%
Convertible Senior Secured Debentures due March 31, 2006 (the "Outstanding
Debentures"), providing for the conversion of all Outstanding Debentures into
classes of Series B Preferred and/or Series C Preferred; and
WHEREAS, the Company's Certificate of Incorporation currently does not have
authorized the Series A Preferred, Series B Preferred or Series C Preferred
(collectively, the "Preferred Shares") for issuance upon conversion of the 2004
Debentures and the Outstanding Debentures pursuant to the terms of the Purchase
Agreement and the Conversion Agreement, respectively; and
WHEREAS, the Preferred Shares are to be convertible into the Company's
Common Stock, $.01 par value per share, (the "Common Stock") as provided in the
Purchase Agreement and the Conversion Agreement; and
WHEREAS, the Company does not have enough authorized and unreserved shares
of its Common Stock available for issuance upon the conversion of the Preferred
Shares; and
WHEREAS, the Parties contemplate that upon the conversion of the 2004
Debentures into Series A Preferred and the exchange of the Outstanding
Debentures for Series B Preferred and/or Series C Preferred, the holders of such
Preferred Shares shall have the right to vote as part of the single class with
all holders of the Company's Common Stock and other voting security holders on
an as converted basis; and
WHEREAS, the Company desires to amend and restate its Certificate of
Incorporation to provide for (a) the authorization and creation of each of the
class of Series A Preferred, Series B Preferred and Series C Preferred having
the rights and preferences provided in the Company's Amended and Restated
Certificate of Incorporation appended as an Exhibit to each of the Purchase
Agreement and the Conversion Agreement and (b) the increase in the number of
shares of Common Stock in order to reserve a sufficient number of shares for
issuance upon the conversion of the Preferred Shares; and
WHEREAS, as additional consideration for the investment by Care Capital,
Essex and Galen in the Debentures, the Parties intend that so long as each such
party shall remain a holder of the Minimum Threshold (as hereinafter defined) of
Series A Preferred, the Parties desire to vote their Securities (as defined
below) in such a manner so as to elect a Care Capital nominee, an Essex nominee,
a Galen nominee and a collective nominee of each of Care Capital, Essex and
Galen, to the Board of Directors of the Company.
J-1
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
herein contained, the Parties hereto agree as follows:
1. Amendment to Company's Certificate of Incorporation. At the Company's
next upcoming meeting of Shareholders, each Party hereto will vote all (x)
shares of Common Stock, (y) 5% Convertible Senior Secured Debentures issued
pursuant to that certain Debenture and Warrant Purchase Agreement dated March
10, 1998 between the Company and the purchasers listed on the signature page
thereto, as amended (the "1998 Debentures"), and (z) 5% Convertible Senior
Secured Debentures issued pursuant to that certain Debenture and Warrant
Purchase Agreement dated May 26, 1999 between the Company and the purchasers
listed on the signature page thereto, as amended (the "1999 Debentures"), then
owned by such Party in favor of the following proposed amendments to the
Company's Certificate of Incorporation:
(a) Increasing the number of shares of the Company's Common Stock
authorized for issuance from 80,000,000 to 650,000,000 shares;
(b) Providing authorization to issue up to 45,000,000 shares of Series
A Preferred having the rights and preferences provided in the Amended and
Restated Certificate of Incorporation attached as Exhibit D to the Purchase
Agreement;
(c) Providing authorization to issue up to 25,000,000 shares of Series
B Preferred having the rights and preferences provided in the Amended and
Restated Certificate of Incorporation attached as Exhibit A to the
Conversion Agreement; and
(d) Providing authorization to issue up to 220,000,000 shares of
Series C Preferred (consisting of up to 70,000,000 shares of Series C-1
Preferred, 50,000,000 shares of Series C-2 Preferred and 100,000,000 shares
of Series C-3 Preferred) having the rights and preferences provided in the
Amended and Restated Certificate of Incorporation attached as Exhibit A to
the Conversion Agreement.
2. Election of Director Nominees. Commencing upon the Company's next
upcoming meeting of shareholders, each Party and Care Capital, Essex and Galen
(each of Care Capital, Essex and Galen being referred to herein as a
"Designating Party") agree as follows:
(a) Each Party holding Common Stock, 1998 Debentures, 1999 Debentures,
Series A Preferred, Series B Preferred and Series C Preferred
(collectively, the "Securities") shall vote its Securities, and take or
cause to be taken such other actions, as may be required from time to time
to (i) ensure that the Board of Directors consists of no more than seven
directors, and (ii) elect to the Board of Directors of the Company (A) one
person designated by each Designating Party, (B) one person designated
collectively by Care Capital, Essex and Galen by consent of at least two
(2) of such three (3) entities (the "Group Designating Party") (C) one
person who shall be the Chief Executive Officer of the Company, and (D) two
persons who shall be independent directors (as defined in Rule 4200(a)(15)
of the National Association of Securities' Dealers Listing Standards, as
may be modified or supplemented) nominated and elected to the Board of
Directors by the then current directors. Without limiting the generality of
the foregoing, at each annual meeting of the shareholders of the Company,
and at each special meeting of the shareholders and debentureholders of the
Company called for the purpose of electing directors of the Company, and at
any time at which the shareholders and debentureholders of the Company have
the right to elect directors of the Company, in each such event, each Party
shall vote all Securities owned by them (or shall consent in writing in
lieu of a meeting of shareholders and debentureholders of the Company, as
the case may be), or take such other actions as shall be necessary, to
elect the Designating Party's designee and the Group Designating Party's
designee as a director of the Company in accordance with the preceding
provisions of this Section 2(a);
(b) Each Party shall take all actions necessary to remove forthwith
the director designated by a Designating Party or the Group Designating
Party when such removal is requested for any reason, with or without cause,
by such Designating Party or the Group Designating Party. In the case of
the death, resignation or removal as herein provided of a Designating
Party's designee or the Group Designating Party's designee, each Party
shall vote all Securities held by it to elect another person designated by
such Designating Party or the Group Designating Party pursuant to Section
2(a);
J-2
(c) Each Party hereby agrees that it will not vote any of its
Securities in favor of the removal of any director that shall have been
designated by a Designating Party or the Group Designating Party, unless
the Designating Party or the Group Designating Party that has designated
such director shall have consented to such removal in writing.
In the event that any Party shall fail to vote the Securities held by
it in accordance with Section 2(a) and (b), such Party shall, upon such
failure to so vote, be deemed immediately to have granted to each
Designating Party or the Group Designating Party, as applicable, a proxy to
vote its Securities solely for the election of the nominee of such
Designating Party or the Group Designating Party, as applicable, or the
removal of such Designating Party's or the Group Designating Party's
designated director, as the case may be. Such Party acknowledges that each
such proxy granted hereby, including any successive proxy, if necessary, is
being given to secure the performance of an obligation hereunder, is
coupled with an interest, and shall be irrevocable until such obligation is
performed;
(d) No Party shall grant any proxy or enter into or agree to be bound
by any voting trust with respect to the Securities held by such Party, or
enter into any shareholder agreement or arrangement of any kind with any
person with respect to the Securities held by such person that is, in
either case, inconsistent with the terms of this Agreement (whether or not
such agreement and arrangement was or is with other shareholders of the
Company that are or are not parties to this Agreement);
(e) The Company shall take, or cause to be taken, such actions as may
be required from time to time to establish and maintain executive, audit
and compensation committees of the Board of Directors, as well as such
other committees of the boards of directors of the Company as the Board of
Directors shall determine, having such duties and responsibilities as are
customary for such committees. The designees of each Designating Party and
the Group Designating Party shall be, if so requested by such Designating
Party or the Group Designating Party, in its sole discretion, a member of
each such committee; and
(f) The rights and obligations provided in this Section 2 shall be
applied separately for each Designating Party and for the Group Designating
Party. The rights of a Designating Party shall terminate on the date such
Designating Party ceases to be a holder of the Minimum Threshold (but only
after the conversion of the 2004 Debentures). The right of a Designating
Party to be a member of the Group Designating Party shall terminate on the
date such Designating Party ceases to be a holder of the Minimum Threshold
(but only after the conversion of the 2004 Debentures). For purposes
hereof, "Minimum Threshold" shall mean at least 50% of the shares of Series
A Preferred issued to such Designating Party upon conversion of its 2004
Debentures (or at least 50% of the shares of Common Stock issued upon
conversion thereof).
3. Liability. No Party who shall vote or consent or withhold consent or
make a request with respect to any Securities subject to this Agreement on, to
or from any matter in compliance with the terms hereof that shall, as a result
of any such vote or consent or withholding of consent or making of a request,
have any obligation or liability to any other Party (whether such other Party
shall also vote or consent or withhold consent or make a request with respect to
any Securities, then subject to this Agreement).
4. Certain Remedies. Without intending to limit the remedies available to
any of the Parties, each Party agrees that damages at law will be an
insufficient remedy in the event such Party violates the terms hereof or the
powers granted hereunder and each of the Parties hereto further agrees that each
of the other Parties hereto may apply for and have injunctive or other equitable
relief in any court of competent jurisdiction to restrain the breach or
threatened breach of, or otherwise specifically to enforce, any of such Party's
agreements or the powers granted hereunder set forth herein.
5. Representations. Each Party represents and warrants to each other
Party that this Agreement is its legal, valid and binding obligation,
enforceable against such Party in accordance with its terms, and will not result
in any (a) violation or breach of, or be in conflict with, each Party's
respective organizational documents or material contracts, or (b) violation of
any statutes, laws, rules, regulations, orders or judgments applicable to such
Party.
J-3
6. Transfer of Securities. Except as otherwise set forth in the
Transaction Documents (as defined in the Purchase Agreement), nothing shall
prohibit or in any manner restrict any Party's ability to freely transfer,
assign, convey, or otherwise dispose of or convert its Securities; provided,
that upon the transfer, assignment, conveyance or disposition of any Securities
by a Party, such transferring Party shall cause the transferee to which the
Securities are transferred, assigned, conveyed or otherwise disposed to agree to
be bound by the terms hereof (unless such transfer is made pursuant to an
effective registration agreement under the Securities Act or through a broker
pursuant to Rule 144).
7. Term. Except as provided in Sections 2(f) and 6 hereof, this Agreement
and the Parties' obligations hereunder shall continue in effect for so long as
any of Care Capital, Essex or Galen owns the Minimum Threshold.
8. Amendment. Any term of this Agreement or the powers granted hereunder
may be amended and the observance of any such term or power may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only with the written consent of a majority of the Securities
then subject to this Agreement, which majority must include each of Care
Capital, Essex and Galen so long as it owns the Minimum Threshold.
9. Binding Effect. (a) This Agreement and the powers granted hereunder
shall be binding upon, and shall inure to the benefit of, Care Capital, Essex
and Galen and the Parties.
(b) Nothing in this Agreement or the powers granted hereunder shall
obligate any Party hereto, in his or her capacity as an employee, officer or
director of the Company or any of its subsidiaries, to take or refrain from
taking any action in any such capacity or shall otherwise affect the rights or
obligations of any such party in any such capacity.
10. Notices. All notices, demands or other communications given hereunder
shall be in writing and shall be sufficiently given if transmitted by facsimile
or delivered either personally or by a nationally recognized courier service
marked for next business day delivery or sent in a sealed envelope by first
class mail, postage prepaid and either registered or certified, return receipt
requested, to the address for each Party as provided on the signature pages
hereto, or to such other address as any such Party shall designate in writing.
Any such notice, demand or communication shall be deemed to have been given (a)
on the date of delivery, if delivered personally, (b) on the date of facsimile
transmission, receipt confirmed, (c) one business day after delivery to a
nationally recognized overnight courier service, if marked for next day delivery
or (d) five business days after the date of mailing, if mailed.
11. Miscellaneous. The section headings herein are inserted for
convenience of reference only and shall not affect the meaning or interpretation
hereof. This Agreement and the powers granted hereunder contain the entire
agreement among the Parties hereto with respect to the matters contemplated
herein. If for any reason any provision hereof shall be invalid, unenforceable
or inoperative, the validity and effect of the other provisions hereof shall not
be affected herein. This Agreement may be executed in one or more counterparts,
and by the Parties hereto in separate counterparts, each of which, when so
executed and delivered, shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement. This Agreement shall
become effective as to each signatory hereto upon the execution and delivery
hereof by such signatory. This Agreement and the powers granted hereunder shall
be governed in all respects by the laws of the State of New York wherein the
terms of this Agreement were negotiated, excluding to the greatest extent
permitted by law any rule of law that would cause the application of the laws of
any jurisdiction other than the State of New York.
12. Board Observers. So long as Galen has the right to designate a
director pursuant to Section 2(a) hereof, the Company will permit one observer
selected by Galen to attend all meetings of the Board of Directors of the
Company, and shall provide such observer with such notice and other information
with respect to such meetings as are delivered to the directors of the Company;
provided, that such observer shall not be permitted to attend any meeting or
portion thereof or have access to such other information if, in the judgment of
the Company under advice of counsel, such observer's presence or receipt of such
information would adversely affect attorney-client privilege with respect to
such meeting or information.
J-4
13. Termination of Original Agreement. The Parties acknowledge and agree
that this Agreement is entered into in replacement of that certain Voting
Agreement dated December 20, 2002 between the Company and the other Parties that
are party thereto (the "Original Agreement"), and that upon effectiveness of
this Agreement, the Original Agreement shall be terminated and no further legal
force or effect.
[SIGNATURE PAGES FOLLOW]
J-5
IN WITNESS WHEREOF, each of the Parties hereto has executed this Agreement
on the date first above written.
HALSEY DRUG CO., INC.
By: /s/ ANDREW REDDICK
------------------------------------
Name: Andrew Reddick
Title: President and Chief
Executive Officer
GALEN PARTNERS III, L.P. ORACLE STRATEGIC PARTNERS, L.P.
By: Claudius, L.L.C., General Partner By: Oracle Strategic Capital L.L.C.,
610 Fifth Avenue, 5th Fl General Partner
New York, New York 10019 200 Greenwich Avenue
3rd Floor
Greenwich, Connecticut 06830
/s/ SRINI CONJEEVARAM /s/ JOEL LIFFMANN
----------------------------------------- -----------------------------------------
By: Srini Conjeevaram By: Joel Liffmann
Its: General Partner Its: Authorized Agent
GALEN PARTNERS CARE CAPITAL INVESTMENTS II, LP
INTERNATIONAL, III, L.P. By: Care Capital II, LLC, as general
By: Claudius, L.L.C., General Partner partner
610 Fifth Avenue, 5th Floor 47 Hulfish St., Suite 310
New York, New York 10020 Princeton, NJ 08542
/s/ SRINI CONJEEVARAM By: /s/ DAVID R. RAMSAY
----------------------------------------- -----------------------------------------
By: Srini Conjeevaram Name: David R. Ramsay
Its: General Partner Title: Authorized Signatory
GALEN EMPLOYEE FUND III, L.P. ESSEX WOODLANDS HEALTH VENTURES V, L.P.
By: Wesson Enterprises, Inc. 190 South LaSalle Street, Suite 2800
610 Fifth Avenue, 5th Floor Chicago, IL 60603
New York, New York 10020
/s/ BRUCE F. WESSON /s/ IMMANUEL THANGARAJ
----------------------------------------- -----------------------------------------
By: Bruce F. Wesson By: Immanuel Thangaraj
Its: General Partner Its: Managing Director
ALAN SMITH PATRICK COYNE
21 Bedlow Avenue 800 Merion Square Road
Newport, Rhode Island 02840 Gladwyne, Pennsylvania 19035
/s/ ALAN SMITH /s/ PATRICK COYNE
----------------------------------------- -----------------------------------------
J-6
MICHAEL WEISBROT SUSAN WEISBROT
1136 Rock Creek Road 1136 Rock Creek Road
Gladwyne, Pennsylvania 19035 Gladwyne, Pennsylvania 19035
/s/ MICHAEL WEISBROT /s/ SUSAN WEISBROT
----------------------------------------- -----------------------------------------
GREG WOOD DENNIS ADAMS
1263 East Calavera Street 120 Kynlyn Road
Altadena, CA 91001 Radnor, Pennsylvania 19312
/s/ GREG WOOD /s/ DENNIS ADAMS
----------------------------------------- -----------------------------------------
STEFANIE HEITMEYER BERNARD SELZ
17759 Road, Route 66 600 Fifth Avenue, 25th Floor
Fort Jennings, Ohio 45844 New York, New York 10020
/s/ STEFANIE HEITMEYER /s/ BERNARD SELZ
----------------------------------------- -----------------------------------------
PETER CLEMENS ROGER GRIGGS
c/o Halsey Drug Co., Inc. c/o Tom Jennings
695 North Perryville Rd. 7300 Turfway Road
Crimson Building #2 Suite 300
Rockford, Illinois 61107 Florence, KY 41042
/s/ PETER CLEMENS /s/ ROGER GRIGGS
----------------------------------------- -----------------------------------------
VARSHA H. SHAH HEMANT K. SHAH
29 Chrissy Drive 29 Chrissy Drive
Warren, New Jersey 07059 Warren, New Jersey 07059
/s/ VARSHA H. SHAH /s/ HEMANT K. SHAH
----------------------------------------- -----------------------------------------
VARSHA H. SHAH AS CUSTODIAN VARSHA H. SHAH AS CUSTODIAN
FOR SACHIN H. SHAH FOR SUMEET H. SHAH
29 Chrissy Drive 29 Chrissy Drive
Warren, New Jersey 07059 Warren, New Jersey 07059
/s/ VARSHA H. SHAH /s/ VARSHA H. SHAH
----------------------------------------- -----------------------------------------
By: Varsha H. Shah By: Varsha H. Shah
Its: Custodian Its: Custodian
MICHAEL RAINISCH ILENE RAINISCH
c/o Alvin Rainisch c/o Alvin Rainisch
300 Flower Lane 300 Flower Lane
Morganville, New Jersey 07751 Morganville, New Jersey 07751
/s/ MICHAEL RAINISCH /s/ ILENE RAINISCH
----------------------------------------- -----------------------------------------
J-7
KENNETH GIMBEL, IRA ACCOUNT KENNETH GIMBEL
FBO KENNETH GIMBEL 2455 Montgomery Avenue
2455 Montgomery Avenue Highland Park, Illinois 60035
Highland Park, Illinois 60035
/s/ KENNETH GIMBEL /s/ KENNETH GIMBEL
----------------------------------------- -----------------------------------------
By:
Its: Trustee
JESSICA K. CLEMENS JAKE P. CLEMENS
c/o Halsey Drug Co., Inc. c/o Halsey Drug Co., Inc.
695 North Perryville Rd. 695 North Perryville Rd.
Crimson Building #2 Crimson Building #2
Rockford, Illinois 61107 Rockford, Illinois 61107
/s/ JESSICA K. CLEMENS /s/ JAKE P. CLEMENS
----------------------------------------- -----------------------------------------
MICHAEL REICHER TRUST
c/o Halsey Drug Co., Inc.
695 North Perryville Rd.
Crimson Building #2
Rockford, Illinois 61107
/s/ MICHAEL K. REICHER
-----------------------------------------
By: Michael K. Reicher
Its: Trustee
PETER STIEGLITZ GEORGE E. BOUDREAU
RJ Palmer LLC 222 Elbow Lane
156 West 56th Street, 5th Floor Haverford, PA 19041
New York, New York 10019
/s/ PETER STIEGLITZ /s/ GEORGE E. BOUDREAU
----------------------------------------- -----------------------------------------
JOHN E. HEPPE, JR.
237 W. Montgomery Avenue
Haverford, Pennsylvania 19041
/s/ JOHN E. HEPPE, JR.
-----------------------------------------
J-8
APPENDIX K
VOTING AGREEMENT
This VOTING AGREEMENT (this "Agreement") is dated March 19, 2004, and is
among HALSEY DRUG CO., INC., a New York corporation (the "Company"), IVAX
PHARMACEUTICALS NEW YORK LLC, a New York limited liability company (the
"Purchaser"), and each signatory listed on Exhibit A attached hereto (each such
signatory a "Holder" and, collectively, the "Holders").
WHEREAS, the Company and the Purchaser are parties to that certain Asset
Purchase Agreement dated as of March 19, 2004 (the "Asset Purchase Agreement"),
substantially in the form attached hereto as Exhibit B and as finally entered
into by the Purchaser pursuant to which the Purchaser is purchasing certain of
the Company's assets used in connection with the Company's operations located in
Congers, New York, on such terms and conditions as determined by the Company's
Board of Directors and the Purchaser (the "Proposed Transaction"); and
WHEREAS, to induce the Purchaser to enter into the Asset Purchase Agreement
which it would not do but for the agreement of the Holders to enter into this
Agreement; and
WHEREAS, the closing of the Proposed Transaction is conditioned upon
security holders of the Company, who, collectively, represent no less than
two-thirds of the Company's issued and outstanding common stock or right to vote
as if they owned such common stock, entering into this Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Representations and Warranties. Each Holder hereby represents,
warrants and covenants to the Purchaser as follows:
(a) Title. As of the date hereof, each Holder is the sole beneficial
owner of record of the number of shares of each class of security of the
Company set forth on Exhibit A hereto (the "Shares"). The term "beneficial
owner" and all correlate expressions are used in this Agreement as defined
in Rules 13d-3 and 16a-1 under the Securities Exchange Act of 1934, as
amended; provided, however, that for the avoidance of doubt, each Holder
will not be deemed the beneficial owner of any shares of capital stock of
the Company that a Holder has the right to acquire, such as shares issuable
to a Holder upon the exercise of an option or warrant, unless and until
such shares are actually acquired by a Holder at which time such shares
shall be treated as Additional Shares pursuant to Section 5 below; and
further provided that notwithstanding the proviso stated above, certain of
the Holders have the right to vote their Shares.
(b) Right to Vote. As of the date hereof, except for this Agreement
or as otherwise permitted by this Agreement, each Holder has full legal
power, authority and right to vote all of the Shares then owned of record
or beneficially by it, in favor of the approval and authorization of the
Proposed Transaction without the consent or approval of, or any other
action on the part of, any other Person. Without limiting the generality of
the foregoing, each Holder has not entered into any voting agreement (other
than this Agreement) with any Person with respect to any of the Shares,
granted any Person any proxy (revocable or irrevocable) or power of
attorney with respect to any of the Shares, deposited any of the Shares in
a voting trust or entered into any arrangement or agreement with any Person
limiting or affecting such Holder's legal power, authority or right to vote
the Shares on any matter, except for the Voting Agreement dated February 6,
2004, concerning the election of directors and the amendment to the
certificate of incorporation to increase the authorized common stock of the
Company and authorize the creation of preferred stock. From and after the
date hereof, except as otherwise permitted by this Agreement, each Holder
will not commit any act that could restrict or otherwise affect such
Holder's legal power, authority and right to vote all of the Shares then
owned of record or beneficially by such Holder. Without limiting the
generality of the foregoing, except for this Agreement and as otherwise
permitted by this Agreement, from and after the date hereof, each Holder
shall not enter into any voting agreement with any Person with respect to
any of the Shares, grant any Person any proxy (revocable or irrevocable) or
power of attorney with respect to any of the Shares, deposit any of the
Shares in a voting
K-1
trust or otherwise enter into any agreement or arrangement of any kind with
any Person limiting or affecting such Holder's legal power, authority or
right to vote the Shares in favor of the approval of the Proposed
Transaction.
(c) Authority. Each Holder has full legal power, authority and right
to execute and deliver and to perform its obligations under this Agreement.
This Agreement has been duly and validly executed and delivered by each
Holder and constitutes a legal, valid and binding agreement of each Holder
enforceable against it in accordance with its terms.
(d) Conflicting Instruments. The execution and delivery of this
Agreement and the performance by each Holder of its obligations hereunder
will not result in any: (i) violation or breach of, or be in conflict with,
such Holder's respective organizational documents or material contracts, as
applicable or (ii) violation of any statutes, laws, rules, regulations,
orders or judgments applicable to such Holder, as applicable, except for
any such breach, violation, conflict or default which, individually or in
the aggregate, would not impair or adversely affect such Holder's ability
to perform its obligations under this Agreement or render inaccurate any of
the representations made by such Holder herein.
2. Covenants. Until the termination of this Agreement in accordance with
Section 4, each Holder hereby agrees as follows:
(a) Restrictions on Transfer. Each Holder shall not, directly or
indirectly, assign, sell, pledge, encumber, transfer (including transfers
by testamentary or intestate succession or otherwise by operation of law)
or otherwise dispose of (collectively, "Transfer"), or agree to or allow
the Transfer, any of the Shares owned of record or beneficially by such
Holder or any right, title or interest in any Additional Shares (or any
right, title or interest therein, including but not limited to any right or
power to vote to which the holder thereof may be entitled, whether such
right or power is granted by proxy or otherwise); provided, however, that
notwithstanding anything to the contrary contained in this Agreement, a
Holder may Transfer Shares or any right, title or interest in any
Additional Shares to a transferee if such transferee executes and delivers
to the Company and the Purchaser a joinder to this Agreement satisfactory
in form and substance to the Company and the Purchaser, stating that such
transferee agrees to be fully bound by the terms of this Agreement.
(b) Agreement to Vote. Each Holder hereby agrees to vote or to cause
to be voted all of the Shares and Additional Shares owned of record or
beneficially by such Holder as of the record date for such meeting or
written consent, at the Company's upcoming meeting of Shareholders and at
any other annual or special meeting of stockholders of the Company where
any such proposal is submitted, and in connection with any written consent
of stockholders: (A) in favor of the Proposed Transaction; and (B) against
any action that may reasonably be expected to (i) impede, interfere with,
delay, postpone or attempt to discourage the consummation of the
transactions contemplated by the Asset Purchase Agreement or (ii) result in
a breach of any of the covenants, representations, warranties or other
obligations or agreements of the Company under the Asset Purchase Agreement
which would materially and adversely affect the Company or the Purchaser or
their respective abilities to consummate the transactions contemplated by
the Asset Purchase Agreement.
(c) Granting of Proxy. In furtherance of the terms and provisions of
this Agreement, and to secure the performance of obligations hereunder,
each Holder hereby grants an irrevocable proxy, coupled with an interest,
to the Purchaser and any authorized representative or agent of the
Purchaser to vote all of the Shares beneficially owned now or during the
term of the Asset Purchase Agreement by the Holder in favor of the Proposed
Transaction and in accordance with the provisions of Section 2(b) and this
Section 2(c). Each Holder hereby ratifies and approves of each and every
action taken by the Purchaser and any authorized representative or agent of
the Purchaser pursuant to the foregoing proxy. Notwithstanding the
foregoing, if requested by the Purchaser, each Holder shall execute and
deliver applicable proxy materials in furtherance of the provisions of
Section 2(b) and this Section 2(c).
(d) Appointing New Agent. Each Holder hereby covenants that if for
any reason, Galen Partners III, L.P. is no longer acting as the agent for
the Holders, pursuant to a certain Agency Letter Agreement
K-2
dated February 6, 2004, the Holders shall appoint a replacement agent and
the Holders shall cause such replacement agent to sign an Agent's Release
of Liens form in the same form signed by Galen Partners III, L.P. on this
date.
(e) Each Holder consents to the Company's granting of a first lien
and security interest in and to the Purchaser in the Acquired Assets to
secure the repayment of the First Closing Payment and no Holder will
consent to the granting of any other lien by it or by any Third-Party on
the Acquired Assets.
3. Action in Holder Capacity Only. Each Holder makes no agreement or
understanding herein as director, officer or employee of the Company. Each
Holder signs solely in such Holder's capacity as a record holder and beneficial
owner of the Shares, and nothing herein shall limit or affect any actions taken
in its capacity as an officer, director or employee of the Company.
4. Amendments; Termination; Modification.
(a) Except as otherwise provided herein, this Agreement may not be
amended except by an instrument in writing signed on behalf of all parties.
(b) This Agreement will terminate upon the earlier to occur of (i)
the date and time at which the Company's stockholder approval approving the
Proposed Transaction is obtained, and (ii) the termination of the Purchase
Agreement in accordance with its terms.
5. Additional Shares. If, after the date hereof, a Holder acquires
beneficial or record ownership of any additional shares of capital stock of the
Company (any such shares, "Additional Shares"), including, without limitation,
upon exercise of any option, warrant or right to acquire shares of capital stock
of the Company or through any stock dividend or stock split, the provisions of
this Agreement applicable to the Shares will thereafter be applicable to such
Additional Shares as if such Additional Shares had been Shares as of the date
hereof. The provisions of the immediately preceding sentence will be effective
with respect to Additional Shares without action by any person or entity
immediately upon the acquisition by such Holder of beneficial ownership of such
Additional Shares.
6. Certain Remedies. Without intending to limit the remedies available to
any of the parties, each party agrees that damages at law will be an
insufficient remedy in the event such party violates the terms hereof or the
powers granted hereunder. Each party agrees that each of the other parties
hereto may apply for and have injunctive or other equitable relief in any court
of competent jurisdiction to restrain the breach or threatened breach of, or
otherwise specifically to enforce, any of such party's rights or powers granted
hereunder.
7. Binding Effect. This Agreement and the powers granted hereunder will
be binding upon, and inure to the benefit of, the parties hereto, their
successors and permitted assigns.
8. Notices. All notices, demands or other communications given hereunder
must be in writing and transmitted by facsimile or delivered either personally
or by a nationally recognized courier service marked for next business day
delivery or sent in a sealed envelope by first class mail, postage prepaid and
either registered or certified, return receipt requested, to the address for
each party as provided on the signature pages hereto, and in the case of the
Purchaser with a copy to the General Counsel or to such other address as any
such party may designate in writing. Any such notice, demand or communication
will be deemed to have been given (a) on the date of delivery, if delivered
personally, (b) on the date of facsimile transmission, receipt confirmed, (c)
one business day after delivery to a nationally recognized overnight courier
service, if marked for next day delivery or (d) five business days after the
date of mailing, if mailed.
9. Miscellaneous. The section headings herein are inserted for
convenience of reference only and do not affect the meaning or interpretation
hereof. Any capitalized term used in this Agreement which is not defined herein
shall have the meaning assigned to it in the Asset Purchase Agreement. This
Agreement constitutes the entire agreement of the parties pertaining to the
subject matter of this Agreement. It supersedes all prior agreements of the
parties, whether oral or written, pertaining to the subject matter of this
Agreement. If any provision of this Agreement is held unenforceable by a court
of competent jurisdiction, all other provisions of this Agreement will remain
effective. If any provision of this Agreement is held to be
K-3
unenforceable only in part or degree, it will remain effective to the extent not
held unenforceable. This Agreement may be executed in counterparts, each of
which is an original and all of which together constitute one and the same
instrument. This Agreement is governed by the laws of the State of New York
without giving effect to principles of conflict of laws.
[Remainder of page left blank intentionally]
K-4
The undersigned are executing this Agreement on the date stated in the
introductory clause.
HALSEY DRUG CO., INC. IVAX PHARMACEUTICALS
616 N. North Court NEW YORK LLC
Palatine, Illinois 60067 By: IVAX Corporation
4400 Biscayne Boulevard
Miami, Florida 33137
Attn: Rafick Henein
/s/ ANDREW D. REDDICK /s/ JORDON SIEGEL
----------------------------------------- -----------------------------------------
By: Andrew D. Reddick By: Jordon Siegel
Its: President and CEO Its: Vice President
GALEN PARTNERS III, L.P. ORACLE STRATEGIC PARTNERS, L.P.
By: Claudius, L.L.C., General Partner By: Oracle Strategic Capital L.L.C.,
610 Fifth Avenue, 5th Fl General Partner
New York, New York 10019 200 Greenwich Avenue, 3rd Floor
Greenwich, Connecticut 06830
/s/ SRINI CONJEEVARAM /s/ JOEL LIFFMANN
----------------------------------------- -----------------------------------------
By: Srini Conjeevaram By: Joel Liffmann
Its: General Partner Its: Authorized Agent
GALEN PARTNERS CARE CAPITAL INVESTMENTS II, LP
INTERNATIONAL, III, L.P. By: Care Capital II, LLC, as general
By: Claudius, L.L.C., General Partner partner
610 Fifth Avenue, 5th Floor 47 Hulfish St., Suite 310
New York, New York 10020 Princeton, NJ 08542
/s/ SRINI CONJEEVARAM By: /s/ DAVID R. RAMSAY
----------------------------------------- -----------------------------------------
By: Srini Conjeevaram Name: David R. Ramsay
Its: General Partner Title: Authorized Signatory
GALEN EMPLOYEE FUND III, L.P. ESSEX WOODLANDS HEALTH VENTURES V, L.P.
By: Wesson Enterprises, Inc. 190 South LaSalle Street, Suite 2800
610 Fifth Avenue, 5th Floor Chicago, IL 60603
New York, New York 10020
/s/ BRUCE F. WESSON /s/ IMMANUEL THANGARAJ
----------------------------------------- -----------------------------------------
By: Bruce F. Wesson By: Immanuel Thangaraj
Its: General Partner Its: Managing Director
ALAN SMITH PATRICK COYNE
21 Bedlow Avenue 800 Merion Square Road
Newport, Rhode Island 02840 Gladwyne, Pennsylvania 19035
/s/ ALAN SMITH /s/ PATRICK COYNE
----------------------------------------- -----------------------------------------
MICHAEL WEISBROT SUSAN WEISBROT
1136 Rock Creek Road 1136 Rock Creek Road
Gladwyne, Pennsylvania 19035 Gladwyne, Pennsylvania 19035
/s/ MICHAEL WEISBROT /s/ SUSAN WEISBROT
----------------------------------------- -----------------------------------------
K-5
GREG WOOD DENNIS ADAMS
1263 East Calavera Street 120 Kynlyn Road
Altadena, CA 91001 Radnor, Pennsylvania 19312
/s/ GREG WOOD /s/ DENNIS ADAMS
----------------------------------------- -----------------------------------------
STEFANIE HEITMEYER BERNARD SELZ
17759 Road, Route 66 600 Fifth Avenue, 25th Floor
Fort Jennings, Ohio 45844 New York, New York 10020
/s/ STEFANIE HEITMEYER /s/ BERNARD SELZ
----------------------------------------- -----------------------------------------
PETER CLEMENS ROGER GRIGGS
c/o Halsey Drug Co., Inc. c/o Tom Jennings
616 N. North Court 7300 Turfway Road
Palatine, Illinois 60067 Suite 300
Florence, KY 41042
/s/ PETER CLEMENS /s/ ROGER GRIGGS
----------------------------------------- -----------------------------------------
VARSHA H. SHAH HEMANT K. SHAH
29 Chrissy Drive 29 Chrissy Drive
Warren, New Jersey 07059 Warren, New Jersey 07059
/s/ VARSHA H. SHAH /s/ HEMANT K. SHAH
----------------------------------------- -----------------------------------------
VARSHA H. SHAH AS CUSTODIAN VARSHA H. SHAH AS CUSTODIAN
FOR SACHIN H. SHAH FOR SUMEET H. SHAH
29 Chrissy Drive 29 Chrissy Drive
Warren, New Jersey 07059 Warren, New Jersey 07059
/s/ VARSHA H. SHAH /s/ VARSHA H. SHAH
----------------------------------------- -----------------------------------------
By: Varsha H. Shah By: Varsha H. Shah
Its: Custodian Its: Custodian
MICHAEL RAINISCH ILENE RAINISCH
c/o Alvin Rainisch c/o Alvin Rainisch
300 Flower Lane 300 Flower Lane
Morganville, New Jersey 07751 Morganville, New Jersey 07751
/s/ MICHAEL RAINISCH /s/ ILENE RAINISCH
----------------------------------------- -----------------------------------------
KENNETH GIMBEL, IRA ACCOUNT KENNETH GIMBEL
FBO KENNETH GIMBEL 2455 Montgomery Avenue
2455 Montgomery Avenue Highland Park, Illinois 60035
Highland Park, Illinois 60035
/s/ KENNETH GIMBEL /s/ KENNETH GIMBEL
----------------------------------------- -----------------------------------------
By:
Its: Trustee
K-6
JESSICA K. CLEMENS JAKE P. CLEMENS
c/o Halsey Drug Co., Inc. c/o Halsey Drug Co., Inc.
616 N. North Court Palatine, Illinois 60067
Palatine, Illinois 60067
/s/ JESSICA K. CLEMENS /s/ JAKE P. CLEMENS
----------------------------------------- -----------------------------------------
MICHAEL REICHER TRUST ANDREW D. REDDICK
c/o Halsey Drug Co., Inc. c/o Halsey Drug Co., Inc.
616 N. North Court 616 N. North Court
Palatine, Illinois 60067 Palatine, Illinois 60067
/s/ MICHAEL K. REICHER /s/ ANDREW D. REDDICK
----------------------------------------- -----------------------------------------
By: Michael K. Reicher
Its: Trustee
PETER STIEGLITZ GEORGE E. BOUDREAU
RJ Palmer LLC 222 Elbow Lane
156 West 56th Street, 5th Floor Haverford, PA 19041
New York, New York 10019
/s/ PETER STIEGLITZ /s/ GEORGE E. BOUDREAU
----------------------------------------- -----------------------------------------
JOHN E. HEPPE, JR. JAMES F. EMIGH
237 W. Montgomery Avenue c/o Halsey Drug Co., Inc.
Haverford, Pennsylvania 19041 616 N. North Court
Palatine, Illinois 60067
/s/ JOHN E. HEPPE, JR. /s/ JAMES F. EMIGH
----------------------------------------- -----------------------------------------
WILLIAM G. SKELLY
c/o Central Biomedia, Inc.
9900 Pflumm Road - Suite 63
Lenexa, KS 66215
/s/ WILLIAM G. SKELLY
-----------------------------------------
K-7
FOLD AND DETACH HERE AND READ THE REVERSE SIDE
.................................................................................
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
HALSEY DRUG CO., INC.
The undersigned appoints Jerry Karabelas and Andrew Reddick, and each
of them, as proxies, each with the power to appoint his substitute, and
authorizes each of them to represent and to vote, as designated on the reverse
hereof, the number of shares of common stock of Halsey Drug Co., Inc. that the
undersigned would be entitled to vote, and with all the power the undersigned
would possess, if personally present, at the 2004 Annual Meeting of Shareholders
of Halsey Drug Co., Inc. to be held at the Wyndham Newark Airport Hotel, 1000
Spring Street, Elizabeth, New Jersey 07201 on August 12, 2004 at 11:00 a.m.,
Eastern Time or at any adjournment thereof.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
FOLD AND DETACH HERE AND READ THE REVERSE SIDE
.................................................................................
PROXY
[X]
PLEASE MARK
YOUR VOTES LIKE THIS
THE PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED, WILL BE
VOTED "FOR" THE PROPOSALS. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS. THIS PROXY DOES NOT GRANT AUTHORITY TO VOTE ON MATTERS REGARDING THE
ADJOURNMENT OR POSTPONEMENT OF THE SHAREHOLDERS MEETING FOR THE PURPOSE OF
SOLICITING ADDITIONAL VOTES ON THE PROPOSALS PROVIDED IN THIS PROXY.
FOR WITHHOLD FOR AGAINST ABSTAIN
1. ELECTION OF DIRECTORS: [ ] [ ] 2. PROPOSAL TO RESTATE THE COMPANY'S [ ] [ ] [ ]
CERTIFICATE OF INCORPORATION TO INCREASE ITS
AUTHORIZED CAPITAL STOCK
FOR AGAINST ABSTAIN
(TO WITHHOLD AUTHORITY TO VOTE FOR ANY 3. PROPOSAL TO APPROVE THE AMENDMENT TO THE [ ] [ ] [ ]
INDIVIDUAL NOMINEE, STRIKE A LINE COMPANY'S CERTIFICATE OF INCORPORATION TO
THROUGH THAT NOMINEE'S NAME IN THE LIST BELOW) CHANGE THE NAME OF THE COMPANY
FOR AGAINST ABSTAIN
NOMINEES' NAME HERE 4. PROPOSAL TO APPROVE THE SALE OF [ ] [ ] [ ]
SUBSTANTIALLY ALL OF THE ASSETS USED IN
MANUFACTURE AND SALE OF FINISHED DOSAGE
PHARMACEUTICAL PRODUCTS AT THE COMPANY'S
FORMER CONGERS, NEW YORK LOCATIONS
FOR AGAINST ABSTAIN
Jerry Karabelas; Immanuel Thangaraj; Bruce F. 5. PROPOSAL TO APPROVE THE AMENDMENT TO [ ] [ ] [ ]
Wesson; Andrew D. Reddick; William A. Sumner; THE COMPANY'S 1998 STOCK OPTION PLAN
and William Skelly.
FOR AGAINST ABSTAIN
6. PROPOSAL TO RATIFY THE COMPANY'S [ ] [ ] [ ]
INDEPENDENT ACCOUNTANTS FOR THE CURRENT
FISCAL YEAR.
7. In their discretion, the proxies are
authorized to vote upon such other
business as may properly come before the
meeting.
COMPANY ID:
PROXY NUMBER:
ACCOUNT NUMBER:
Signature Signature Date
----------------------------------- ------------------------------------ -------------
NOTE: Please sign exactly as name appears hereon. When shares are held by joint
owners, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. If a partnership name
by authorized person.