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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 5, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GELTEX PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 2834 04-3136767
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
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153 SECOND AVENUE
WALTHAM, MASSACHUSETTS 02451
(781) 290-5888
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MARK SKALETSKY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GELTEX PHARMACEUTICALS, INC.
153 SECOND AVENUE
WALTHAM, MASSACHUSETTS 02451
(781) 290-5888
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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LEWIS J. GEFFEN, ESQ. MR. STEFAN BORG JEFFREY R. HARDER, ESQ.
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND PRESIDENT AND CHIEF EXECUTIVE OFFICER ANDREWS & KURTH, L.L.P.
POPEO, P.C. SUNPHARM CORPORATION 2170 BUCKTHORNE PLACE, SUITE 150
ONE FINANCIAL CENTER THE VERANDA, SUITE 301 THE WOODLANDS, TX 77380
BOSTON, MA 02111 814 HIGHWAY A1A (713) 220-4801
(617) 542-6000 PONTE VEDRA BEACH, FLORIDA 32082
(904) 394-2800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time of the merger as described in the Agreement and Plan of Merger
dated as of August 13, 1999, attached as Annex A to the proxy
statement/prospectus forming a part of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PRICE PER UNIT OFFERING PRICE(2) FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value....... 1,198,606 N/A $9,167,895.32 $0.00
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(1) Represents the estimated maximum number of shares of common stock of the
Registrant which may be issued to former stockholders of SunPharm
Corporation ("SunPharm") pursuant to the merger described herein.
(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act, and computed pursuant to
Rule 457(f) based upon the sum of: (a) $9,167,773.10, the market value of
the shares of SunPharm common stock the Registrant will receive in the
merger (determined by multiplying (x) $1.1875 per share, which was the
average of the high and low sales price per share of SunPharm common stock
on The Nasdaq SmallCap Market on October 1, 1999 by (y) 7,720,230 the
maximum number of shares of SunPharm common stock which may be acquired by
the Registrant in the merger, and, because SunPharm has an accumulated
capital deficit and there is no market for the SunPharm Series A preferred
stock or Series B preferred stock that Registrant will receive in the
merger, the sum of (b) $100, which is one-third of (x) $.001, the per share
par value of the SunPharm Series A preferred stock multiplied by (y)
300,000, the total number of shares of SunPharm Series A preferred stock
issued and outstanding as of October 1, 1999 and (c) $22.22, which is
one-third of (x) $.001, the per share par value of the SunPharm Series B
preferred stock multiplied by (y) 66,667, the total number of shares of
SunPharm Series B preferred stock issued and outstanding as of October 1,
1999.
(3) Pursuant to Section 6(b) of the Securities Act, the registration fee payable
hereunder is equal to .0278 of one percent of $9,167,895.32, for a total
registration fee of $2,548.68. In accordance with Rule 457 under the
Securities Act, the fee of $3,490.34 paid by SunPharm pursuant to Rule
14a-6(i)(1) under the Exchange Act upon the filing of its preliminary proxy
material relating to the merger has been credited against the registration
fee payable in connection with this filing. The balance of the fee payable
with this filing is therefore $0.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED OCTOBER 5, 1999
The information in this proxy statement/prospectus is not complete and may
be changed. We may not issue these securities until the registration statement
filed with the SEC is effective. This proxy statement/prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
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PROXY STATEMENT PROSPECTUS OF
FOR SPECIAL MEETING OF STOCKHOLDERS OF SUNPHARM GELTEX PHARMACEUTICALS, INC.
CORPORATION UP TO 1,198,606 SHARES OF COMMON STOCK, $.01 PAR
VALUE
</TABLE>
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
The boards of directors of GelTex Pharmaceuticals, Inc. and SunPharm
Corporation have unanimously approved a merger agreement between GelTex and
SunPharm. Pursuant to the terms of the merger, SunPharm will merge with and into
a subsidiary of GelTex, and as a result SunPharm will become a wholly-owned
subsidiary of GelTex.
In the merger, each share of common stock of SunPharm will be automatically
converted into between 0.12225 and 0.14493 of a share of GelTex common stock,
and each share of SunPharm preferred stock will be automatically converted into
between 0.18338 and 0.21740 of a share of GelTex common stock, in each case
subject to adjustment as set forth in the merger agreement. GelTex common stock
is listed on The Nasdaq Stock Market under the trading symbol "GELX," and on
October 4, 1999, GelTex common stock closed at $11.88 per share. The following
affirmative votes of SunPharm stockholders entitled to vote at the special
meeting are required to approve the merger agreement and related transactions:
- at least a majority of all outstanding SunPharm common stock and Series A
and Series B preferred stock, voting together as a single class;
- at least 66 2/3% of all outstanding SunPharm Series A preferred stock;
and
- at least 66 2/3% of all outstanding SunPharm Series B preferred stock.
Only stockholders who hold common stock or preferred stock of SunPharm at
the close of business on October 1, 1999, the record date, will be entitled to
vote at the special meeting.
It is estimated that GelTex will issue no more than 1,198,606 shares of
GelTex common stock to SunPharm stockholders in the merger, based on the
approximate number of shares of SunPharm common stock and preferred stock
outstanding on October 1, 1999, and on the closing price of GelTex common stock
as reported on The Nasdaq Stock Market on October 1, 1999. If all such shares
are issued, these shares will represent approximately 6.6% of the outstanding
GelTex common stock after the merger. GelTex shares held by GelTex stockholders
before the merger will represent approximately 93.4% of the outstanding GelTex
shares after the merger.
AFTER CAREFUL CONSIDERATION, SUNPHARM'S BOARD OF DIRECTORS UNANIMOUSLY
DETERMINED THE MERGER TO BE FAIR TO YOU AND IN YOUR BEST INTERESTS AND DECLARED
THE MERGER ADVISABLE. SUNPHARM'S BOARD OF DIRECTORS APPROVED THE MERGER
AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE MERGER AGREEMENT.
This proxy statement/prospectus provides you with detailed information
concerning SunPharm, GelTex and the merger. GelTex has provided the information
about GelTex, and SunPharm has provided the information about SunPharm. Please
see "Where You Can Find Additional Information" on page 99 for additional
information about GelTex and SunPharm on file with the SEC. Please give all of
the information contained in the proxy statement/prospectus your careful
attention. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE
SECTION ENTITLED "RISK FACTORS" ON PAGE 15 OF THIS PROXY STATEMENT/PROSPECTUS.
The date, time and place of the special meeting is as follows:
November 16, 1999
9:00 a.m., Eastern time
At the offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
located at One Financial Center, Boston, Massachusetts
Whether or not you plan to attend the meeting, please complete, sign, date
and return the accompanying proxy in the enclosed self-addressed stamped
envelope. Returning the proxy does NOT deprive you of your right to attend the
meeting and to vote your shares in person. YOUR VOTE IS VERY IMPORTANT.
STEFAN BORG
President and Chief Executive Officer
SunPharm Corporation
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated October 5, 1999 and was first
mailed to stockholders on or about October 11, 1999.
<PAGE> 3
[SUNPHARM LOGO]
THE VERANDA, SUITE 301
814 HIGHWAY, A1A
PONTE VEDRA BEACH, FLORIDA 32082
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOVEMBER 16, 1999
AT 9:00 A.M.
To the stockholders of SunPharm Corporation:
Notice is hereby given that a special meeting of stockholders of SunPharm
Corporation will be held on Tuesday, November 16, 1999 at 9:00 a.m. Eastern time
at the offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., located
at One Financial Center, Boston, Massachusetts, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of August 13, 1999, by and among
GelTex Pharmaceuticals, Inc., Shine Acquisition Sub, Inc., or Merger Sub, a
wholly-owned subsidiary of GelTex, and SunPharm, pursuant to which Merger
Sub will merge with and into SunPharm, and SunPharm will survive the merger
as a wholly-owned subsidiary of GelTex. Adoption of the merger agreement
will also constitute approval of the merger and the other transactions
contemplated by the merger agreement. In the merger:
- holders of outstanding common stock of SunPharm will receive between
0.12225 and 0.14493 of a share of common stock of GelTex for each
share of common stock of SunPharm, subject to adjustment as provided
in the merger agreement; and
- holders of outstanding Series A or Series B preferred stock of
SunPharm will receive between 0.18338 and 0.21740 of a share of common
stock of GelTex for each share of preferred stock of SunPharm, subject
to adjustment as provided in the merger agreement.
2. To transact such other business as may properly come before the
special meeting or any adjournment thereof.
These items of business are described in the attached proxy
statement/prospectus. Only holders of record of SunPharm common stock or
preferred stock at the close of business on October 1, 1999, the record date,
are entitled to vote on the matters listed in this Notice of Special Meeting of
Stockholders. If your shares are held of record by a broker, bank or other
nominee, you must instruct your broker, bank or other nominee on how to vote
your shares, or else your shares will NOT be voted. If you attend the SunPharm
special meeting, you may vote your shares in person, which will revoke any
previously executed proxy. Failure to return a properly executed proxy card or
to vote at the special meeting will have the same effect as a vote against the
merger.
By Order of the Board of Directors
of SunPharm Corporation
Cecilia Bryant, Secretary
Ponte Vedra Beach, Florida
October 5, 1999
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WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY
IN THE ENCLOSED SELF-ADDRESSED STAMPED ENVELOPE.
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[SUNPHARM LOGO] [GELTEX LOGO]
PROXY STATEMENT PROSPECTUS
TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... iii
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................... 1
The Companies.......................................... 1
Summary of the Merger.................................. 1
Opinion of SunPharm's Financial Advisor................ 7
Procedure for Casting Your Vote........................ 7
Procedure for Casting Your Vote if Your Shares are Held
by Your Broker in Street Name......................... 7
Procedure for Changing Your Vote....................... 8
Procedure for Exchanging Your Stock Certificates....... 8
Where You Can Find Additional Information.............. 8
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA............ 9
How the Financial Statements Were Prepared............. 9
Accounting Treatment................................... 9
Merger-Related Expenses................................ 9
Periods Covered........................................ 9
Integration-Related Expenses........................... 9
SELECTED HISTORICAL FINANCIAL DATA.......................... 10
Selected Historical Financial Data of GelTex........... 10
Selected Historical Financial Data of SunPharm......... 11
Selected Unaudited Combined Pro Forma Financial Data... 12
UNAUDITED COMPARATIVE PER SHARE INFORMATION................. 13
COMPARATIVE PER SHARE MARKET PRICE DATA..................... 14
RISK FACTORS................................................ 15
Risks Related to the Merger............................ 15
Risks Related to Operations............................ 17
FORWARD-LOOKING STATEMENTS.................................. 28
THE SPECIAL MEETING......................................... 29
Proxy Statement/Prospectus............................. 29
Date, Time and Place of the Special Meeting............ 29
Purpose of the Special Meeting......................... 29
Stockholder Record Date for the Special Meeting........ 29
Vote of SunPharm Stockholders Required for Adoption of
the Merger Agreement.................................. 29
Proxies................................................ 30
THE MERGER.................................................. 32
Background of the Merger............................... 32
Joint Reasons for the Merger........................... 33
SunPharm's Reasons for the Merger...................... 34
Recommendation of SunPharm's Board of Directors........ 35
GelTex's Reasons for the Merger........................ 35
Opinion of SunPharm's Financial Advisor................ 36
Interests of Related Persons in the Merger............. 41
Completion and Effectiveness of the Merger............. 44
Structure of the Merger and Conversion of SunPharm
Common Stock and Preferred Stock...................... 44
Exchange of SunPharm Stock Certificates for GelTex
Stock Certificates.................................... 44
Transmittal Instructions............................... 44
Material United States Federal Income Tax Consequences
of the Merger......................................... 45
Accounting Treatment of the Merger..................... 46
Regulatory Filings and Approvals Required to Complete
the Merger............................................ 46
Restrictions on Sales of Shares by Affiliates of
SunPharm.............................................. 47
Listing on The Nasdaq Stock Market of GelTex Common
Stock to be Issued in the Merger...................... 47
Dissenters' and Appraisal Rights....................... 47
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PAGE
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Delisting and Deregistration of SunPharm Common Stock
After the Merger...................................... 48
The Merger Agreement................................... 48
The Stockholders Agreement............................. 57
Operations After the Merger............................ 57
COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND
INFORMATION............................................... 58
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 60
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 65
SUNPHARM'S BUSINESS......................................... 67
Business Overview...................................... 67
Technology Overview.................................... 68
Products Under Development............................. 69
Strategic Alliances.................................... 73
Licensed Technology and Sponsored Research............. 74
Patents and Proprietary Technology..................... 76
Government Regulation.................................. 76
Competition............................................ 77
Employees.............................................. 77
SUNPHARM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 78
Overview............................................... 78
Results of Operations.................................. 78
Liquidity and Capital Resources........................ 79
COMPARISON OF RIGHTS OF HOLDERS OF SUNPHARM CAPITAL STOCK
AND GELTEX COMMON STOCK................................... 83
DESCRIPTION OF GELTEX CAPITAL STOCK......................... 92
Authorized Capital Stock............................... 92
GelTex Common Stock.................................... 92
GelTex Preferred Stock................................. 92
GelTex Series A Junior Participating Preferred Stock
and Stockholder Rights Agreement...................... 92
Anti-Takeover Measures................................. 95
Transfer Agent......................................... 96
Stock Exchange Listing................................. 96
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS, MANAGEMENT AND
DIRECTORS OF SUNPHARM..................................... 97
LEGAL MATTERS............................................... 99
EXPERTS..................................................... 99
WHERE YOU CAN FIND ADDITIONAL INFORMATION................... 99
STOCKHOLDER PROPOSALS....................................... 101
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEXES
Annex A Agreement and Plan of Merger
Annex B Stockholders Agreement
Annex C Opinion of Petkevich & Partners, L.L.C.
Annex D Delaware General Corporation Law Section 262
ii
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS THE PROPOSED TRANSACTION?
A: A wholly-owned subsidiary of GelTex will merge with and into SunPharm. As a
result, SunPharm will become a wholly-owned subsidiary of GelTex, and
SunPharm stockholders will exchange their shares of SunPharm common stock
and SunPharm preferred stock for shares of GelTex common stock.
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: GelTex and SunPharm are proposing to merge because each believes that the
combination of SunPharm's expertise in two chemically related classes of
molecules, polyamines and iron chelators, and GelTex's expertise in
polymer-based, non-absorbed pharmaceuticals that act within the
gastrointestinal tract will provide substantial benefits to stockholders of
both companies. Both SunPharm and GelTex believe that SunPharm's iron
chelator technology will complement GelTex's own significant intellectual
property position in this area, and that SunPharm's small-molecule novel
polyamine analogues have significant potential in the areas of cancer,
AIDS-related diarrhea and gastrointestinal inflammation. Several of these
potential indications are directed at the gastrointestinal tract, which
complement GelTex's core competencies. Both companies believe that the
complementary technologies, together with GelTex's abilities in clinical
development and regulatory review, will result in a combined company with a
strong pipeline of potential products in various stages of preclinical and
clinical development and the capability to develop those potential products
in an efficient manner.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If the merger is approved, each share of outstanding SunPharm common stock
will be converted into the right to receive from GelTex a fraction of a
share of GelTex common stock equal to the common stock exchange ratio
fraction. Each outstanding share of SunPharm's Series A preferred stock and
Series B preferred stock will be converted into the right to receive from
GelTex a fraction of a share of GelTex common stock equal to the preferred
stock exchange ratio fraction.
You will not receive fractional shares. Instead, if you are a SunPharm
stockholder, you will receive cash, without interest, for any fractional
share of GelTex common stock you might otherwise have been entitled to
receive on the date the merger occurs.
Upon completion of the merger, each share of SunPharm common stock will be
converted into between 0.12225 and 0.14493 shares of GelTex common stock and
each share of SunPharm preferred stock will be converted into between
0.18338 and 0.21740 shares of GelTex common stock.
Q: WILL THE EXCHANGE RATIO FRACTIONS CHANGE BETWEEN NOW AND THE TIME THE MERGER
IS COMPLETED?
A: The exchange ratio fractions will be determined based on the average closing
price per share of GelTex common stock during the 20 consecutive trading
days ending on the second trading day immediately prior to completion of the
merger.
Q: WILL THE NUMBER OF SHARES OF GELTEX COMMON STOCK THAT I RECEIVE IN THE
MERGER CHANGE BETWEEN NOW AND THE TIME THE MERGER IS COMPLETED?
A: In all likelihood it will. The number of shares of GelTex common stock that
you receive in the transaction may fluctuate between the date of this proxy
statement/prospectus and the completion of the merger, based upon the market
price for GelTex common stock. In the merger you will receive a fraction of
a share of GelTex common stock that is fixed within a range, but may change
depending
iii
<PAGE> 7
on the price of GelTex common stock. Any fluctuation in the market price of
GelTex common stock will change the number of shares of GelTex common stock
that you will receive.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: The exchange of your shares of SunPharm common stock or preferred stock for
GelTex common stock generally will be tax-free to you for federal income tax
purposes. However, you will recognize gain or loss with respect to the cash
received in lieu of any fractional share. To review the tax consequences to
stockholders in greater detail, see "The Merger -- Material United States
Federal Income Tax Consequences of the Merger" on page 45.
Q: WHAT WILL MY TAX BASIS BE IN THE GELTEX COMMON STOCK RECEIVED IN THE MERGER?
A: Your tax basis in your shares of GelTex common stock received in the merger
will equal your current tax basis in your SunPharm common stock or preferred
stock, reduced by the amount of any basis which is allocable to fractional
shares for which you receive a cash payment.
Q: WHEN AND WHERE IS THE SUNPHARM STOCKHOLDER MEETING?
A: The SunPharm special meeting of stockholders will take place on Tuesday,
November 16, 1999 at 9:00 a.m., Eastern time. The special meeting will be
held at the offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
located at One Financial Center, Boston, Massachusetts.
GelTex does not require a stockholder meeting to approve the merger.
Q: WHAT DO I NEED TO DO NOW?
A: After you have read and considered the information in this document, just
indicate on your proxy card how you want to vote and sign and mail it in the
enclosed return envelope as soon as possible, so that your shares may be
represented at the special meeting. If you sign and send in your proxy and
do not indicate how you want to vote, your proxy will be counted as a vote
in favor of the merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD OR CONSENT
FORM?
A: Yes. If you have submitted a proxy, you can change your vote at any time
before your proxy is voted at the special meeting. You can do this in one of
the following three ways:
First, you can send a written notice stating that you would like to revoke
your proxy.
Second, you can complete and submit a new proxy card. If you choose either
of these two methods, you must submit your notice of revocation or your new
proxy card to SunPharm's Secretary at the address indicated prior to the
date of the special meeting.
Third, you can attend the special meeting and vote in person. Simply
attending the special meeting, however, will not revoke your proxy; you must
vote at the special meeting.
Q: AM I ENTITLED TO APPRAISAL RIGHTS?
A: Yes. Under Delaware law, which governs the merger, you are entitled to
appraisal rights. To review your appraisal rights under Delaware law in
greater detail, see "The Merger -- Dissenters' and Appraisal Rights" on page
47.
iv
<PAGE> 8
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: If you do not provide your broker with instruction on how to vote your
"street name" shares, your broker will NOT be permitted to vote them on the
merger. You should therefore be sure to provide your broker with
instructions on how to vote your shares.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: NO. You will be sent written instructions for exchanging your stock
certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: SunPharm is required to obtain stockholder approval of the merger and both
parties intend to complete the merger as soon as possible after SunPharm's
special meeting. The parties plan to complete the merger by the end of 1999.
Q: WHO DO I CALL IF I HAVE QUESTIONS ABOUT THE MEETING OR THE MERGER?
A: If you have any questions about the merger, please call SunPharm Investor
Relations at 1-904-394-2800.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT GELTEX AND SUNPHARM?
A: More information about GelTex and SunPharm is available from various sources
described under "Where You Can Find Additional Information" on page 99 of
this proxy statement/prospectus. Additional information about GelTex may be
obtained from its website at www.geltex.com and additional information about
SunPharm may be obtained from its website at www.sunpharm.com.
v
<PAGE> 9
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This summary may not contain all of the information that is important to
you. You should carefully read this entire document and the other documents we
refer to for a more complete understanding of the merger. In particular, you
should read the documents attached to this proxy statement/prospectus, including
the merger agreement and the stockholders agreement, which are attached as
Annexes A and B, respectively. In addition, we incorporate by reference
important business and financial information about GelTex and SunPharm into this
proxy statement/prospectus, and you may obtain this information without charge
by following the instructions in the section entitled "Where You Can Find
Additional Information" on page 99 of this proxy statement/prospectus.
THE COMPANIES
GELTEX PHARMACEUTICALS, INC.
153 Second Avenue
Waltham, Massachusetts 02451
Telephone: (781) 290-5888
GelTex is a pharmaceutical company which develops non-absorbed,
polymer-based drugs that selectively bind and eliminate target substances from
the intestinal tract.
SUNPHARM CORPORATION
The Veranda, Suite 301
814 Highway A1A
Ponte Vedra Beach, Florida 32082
Telephone: (904) 394-2800
SunPharm is a research-based development stage pharmaceutical company which
designs and develops small molecule pharmaceutical products. SunPharm's
potential products target disease areas such as cancer, refractory AIDS-related
diarrhea, gastrointestinal disorders and systemic iron overload.
SUMMARY OF THE MERGER
The merger agreement is attached as Annex A to this proxy
statement/prospectus. You are encouraged to read the merger agreement as it is
the legal document that governs the merger.
STRUCTURE OF THE MERGER (SEE PAGE 44)
SunPharm will merge with a subsidiary of GelTex and become a wholly-owned
subsidiary of GelTex. Following the merger, as a stockholder of GelTex, you will
have an equity stake in SunPharm's parent company.
SUNPHARM'S REASONS FOR THE MERGER (SEE PAGE 34)
The SunPharm board of directors has concluded that the merger will result
in a combined company with complementary technologies and will benefit
SunPharm's continued development of its lead products aimed at major treatment
areas including cancer, AIDS and gastrointestinal diseases.
WHAT YOU WILL RECEIVE IN THE MERGER (SEE "THE MERGER -- STRUCTURE OF THE
MERGER AND CONVERSION OF SUNPHARM COMMON STOCK AND PREFERRED STOCK" ON PAGE 44)
If the merger is approved, holders of SunPharm common stock will receive
between 0.12225 and 0.14493 of a share of GelTex common stock for each share of
SunPharm common stock they own, and holders of SunPharm preferred stock will
receive between 0.18338 and 0.21740 of a share of GelTex common stock for each
share of SunPharm preferred stock they own, subject to adjustment as provided in
the merger agreement. GelTex will not issue fractional shares. Holders of
SunPharm common stock and
1
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preferred stock will be paid cash in lieu of fractional shares of GelTex common
stock equal to the product of the fraction multiplied by the closing average of
the GelTex common stock, in accordance with the merger agreement.
The exchange ratio fraction for the SunPharm common stock is fixed within a
range between 0.12225 and 0.14493, and the exchange ratio fraction for the
SunPharm preferred stock is fixed within a range between 0.18338 and 0.21740.
The exchange ratio fraction for the SunPharm preferred stock is 150% of the
exchange ratio fraction for the SunPharm common stock. The actual exchange ratio
fractions for the SunPharm common stock and SunPharm preferred stock will be
determined within these respective ranges, and will be based on the average
closing price per share of GelTex common stock during the 20 consecutive trading
days ending on the second trading day immediately prior to completion of the
merger.
Example for SunPharm common stockholders. If you currently own 1,000
shares of SunPharm common stock, the following table shows what you will receive
in the merger at each of the low, midpoint and high end of the exchange ratio
fraction range for the SunPharm common stock:
<TABLE>
<CAPTION>
COMMON STOCK
EXCHANGE RATIO FRACTION YOU RECEIVE
----------------------- -----------
<S> <C>
0.12225 122 shares of GelTex common stock and a check for
the market value of the 0.25 fractional share
0.13359 133 shares of GelTex common stock and a check for
the market value of the 0.59 fractional share
0.14493 144 shares of GelTex common stock and a check for
the market value of the 0.93 fractional share
</TABLE>
Example for SunPharm preferred stockholders. If you currently own 1,000
shares of SunPharm preferred stock, the following table shows what you will
receive in the merger at each of the low, midpoint and high end of the exchange
ratio fraction range for the SunPharm preferred stock:
<TABLE>
<CAPTION>
PREFERRED STOCK
EXCHANGE RATIO FRACTION YOU RECEIVE
----------------------- -----------
<S> <C>
0.18338 183 shares of GelTex common stock and a check for
the market value of the 0.38 fractional share
0.20039 200 shares of GelTex common stock and a check for
the market value of the 0.39 fractional share
0.21740 217 shares of GelTex common stock and a check for
the market value of the 0.40 fractional share
</TABLE>
The number of shares of GelTex common stock you will receive if the merger
is completed is fixed within the exchange ratio fraction ranges for the SunPharm
common stock and SunPharm preferred stock, but the actual exchange ratio
fractions will depend upon the price of GelTex common stock as described above.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (SEE PAGE 14)
GelTex common stock is listed on The Nasdaq Stock Market. On August 13,
1999, the last full trading day before GelTex and SunPharm issued press releases
announcing the proposed merger, GelTex common stock closed at $14.25. On October
4, 1999, GelTex common stock closed at $11.88.
LISTING OF GELTEX COMMON STOCK (SEE PAGE 47)
It is a condition to the merger that the GelTex common stock to be issued
in connection with the merger be approved for listing on The Nasdaq Stock
Market, subject to official notice of issuance. If GelTex and SunPharm complete
the merger, SunPharm stockholders will then be able to trade the shares of
GelTex common stock which they receive in the merger on The Nasdaq Stock Market.
In addition,
- --------------------------------------------------------------------------------
2
<PAGE> 11
- --------------------------------------------------------------------------------
SunPharm common stock will no longer be listed on The Nasdaq SmallCap Market or
any other over-the-counter market or exchange.
OWNERSHIP OF GELTEX FOLLOWING THE MERGER (SEE "THE MERGER -- STRUCTURE OF THE
MERGER AND CONVERSION OF SUNPHARM COMMON STOCK AND PREFERRED STOCK" ON PAGE 44)
It is estimated that GelTex will issue no more than 1,198,606 shares of
GelTex common stock to SunPharm stockholders in the merger based on the closing
price of GelTex common stock on October 1, 1999. If all such shares are issued,
these shares will represent approximately 6.6% of the outstanding GelTex common
stock after the merger. GelTex shares held by GelTex stockholders before the
merger will represent approximately 93.4% of the outstanding GelTex common stock
after the merger. This information does not take into account stock options or
other equity-based awards of GelTex after such date, and will depend upon the
actual exchange ratio fractions.
STOCKHOLDER APPROVAL (SEE "THE SPECIAL MEETING -- VOTE OF SUNPHARM
STOCKHOLDERS REQUIRED FOR ADOPTION OF THE MERGER AGREEMENT" ON PAGE 29)
The following affirmative votes of SunPharm stockholders entitled to vote
at the special meeting are required to approve the merger agreement and related
transactions:
- at least a majority of all outstanding SunPharm common stock and Series A
and Series B preferred stock, voting together as a single class;
- at least 66 2/3% of all outstanding SunPharm Series A preferred stock;
and
- at least 66 2/3% of all outstanding SunPharm Series B preferred stock.
You are entitled to cast one vote per share of common stock and preferred
stock of SunPharm that you owned as of October 1, 1999, the record date. GelTex
stockholders are not required to adopt the merger agreement and will not vote on
the merger.
RECOMMENDATION OF SUNPHARM'S BOARD OF DIRECTORS (SEE PAGE 35)
After careful consideration, SunPharm's board of directors unanimously
determined the merger to be fair to you and in your best interests and declared
the merger advisable. SUNPHARM'S BOARD OF DIRECTORS APPROVED THE MERGER
AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE MERGER AGREEMENT.
SOME SUNPHARM STOCKHOLDERS HAVE ENTERED INTO A STOCKHOLDERS AGREEMENT (SEE
PAGE 57)
Some SunPharm stockholders have entered into a stockholders agreement with
GelTex. The stockholders agreement requires these SunPharm stockholders to vote
all the shares of common stock and preferred stock of SunPharm they beneficially
own in favor of adoption of the merger agreement. These SunPharm stockholders
were not paid additional consideration in connection with the stockholders
agreement.
The SunPharm stockholders who entered into the stockholders agreement
collectively held approximately 37% of the outstanding common stock and 86% of
the outstanding preferred stock of SunPharm as of the record date.
You are urged to read the stockholders agreement in its entirety, which is
attached to this proxy statement/prospectus as Annex B.
SOME OF SUNPHARM'S OFFICERS AND DIRECTORS HAVE AN INTEREST IN THE MERGER (SEE
"THE MERGER -- INTERESTS OF RELATED PERSONS IN THE MERGER" ON PAGE 41)
When considering the recommendation of SunPharm's board of directors, you
should be aware that certain SunPharm directors and officers have interests in
the merger as employees, consultants and/or
- --------------------------------------------------------------------------------
3
<PAGE> 12
- --------------------------------------------------------------------------------
directors that are different from, or are in addition to, your interests as a
stockholder. SunPharm has entered into severance agreements with certain of its
executive officers, who, along with board members, may also be entitled to
accelerated vesting of their outstanding stock options, and certain
indemnification arrangements for existing directors and officers of SunPharm
will be continued following the merger. Please read "The Merger -- Interests of
Related Persons in the Merger" on page 41 of this proxy statement/prospectus.
As of the record date, directors and executive officers of SunPharm and
their affiliates beneficially owned approximately 34% of the outstanding common
stock of SunPharm and 68% of the outstanding preferred stock of SunPharm.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 45)
The merger has been structured as a "tax-free reorganization" for federal
income tax purposes. Accordingly, GelTex, SunPharm and their respective
stockholders will not generally recognize gain or loss for United States federal
income tax purposes in the merger, except for any gain or loss recognized in
connection with the receipt of cash by SunPharm stockholders instead of
fractional shares. It is a condition to the merger that the parties receive
legal opinions to this effect.
The federal income tax consequences described above may not apply to all
holders of SunPharm stock. Your tax consequences will depend upon your personal
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the merger to you.
ACCOUNTING TREATMENT OF THE MERGER (SEE PAGE 46)
The merger will be accounted for by GelTex under the purchase method of
accounting in accordance with generally accepted accounting principles, or GAAP.
Therefore, the aggregate consideration paid by GelTex in connection with the
merger, together with the direct costs of acquisition, will be allocated to
SunPharm's assets and liabilities based on their fair market values with any
excess being treated as goodwill. The assets and liabilities and results of
operations of SunPharm will be consolidated into the assets and liabilities and
results of operations of GelTex after the merger.
RESTRICTIONS ON THE ABILITY TO SELL GELTEX COMMON STOCK (SEE "RESTRICTIONS ON
SALES OF SHARES BY AFFILIATES OF SUNPHARM" ON PAGE 46)
All shares of GelTex common stock received by you in connection with the
merger will be freely transferable unless you are considered an "affiliate" of
SunPharm under the Securities Act. After completion of the merger, shares of
GelTex common stock held by former SunPharm affiliates may only be sold pursuant
to a registration statement or exemption under the Securities Act.
YOU HAVE DISSENTERS' AND APPRAISAL RIGHTS (SEE PAGE 47)
Stockholders of SunPharm have a right to an appraisal of the value of their
shares in connection with the merger if they do not vote in favor of the merger
and follow certain procedures outlined in Section 262 of the Delaware General
Corporation Law, which is summarized under the heading "The Merger --
Dissenters' and Appraisal Rights" on page 47 and is attached to this proxy
statement/prospectus as Annex D. We urge you to read this in its entirety.
As a condition to completion of the merger, dissenting stockholders must
not have exercised dissenters' rights with respect to any shares of the issued
and outstanding SunPharm preferred stock or with respect to more than 2% of the
issued and outstanding shares of SunPharm common stock.
COMPLETION AND EFFECTIVENESS OF THE MERGER (SEE PAGE 43)
GelTex and SunPharm will complete the merger when all of the conditions to
completion of the merger are satisfied or waived. The merger will become
effective when the parties file a certificate of merger with the State of
Delaware.
- --------------------------------------------------------------------------------
4
<PAGE> 13
GelTex and SunPharm are working toward completing the merger as quickly as
possible after SunPharm's special meeting. GelTex and SunPharm hope to complete
the merger by the end of 1999.
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE 53)
The respective obligations of GelTex and SunPharm to complete the merger
are subject to the prior satisfaction or waiver of conditions. If either GelTex
or SunPharm waives any conditions, SunPharm will consider the facts and
circumstances at that time and make a determination as to whether a
resolicitation of proxies from SunPharm stockholders is appropriate. The
conditions that must be satisfied or waived before the completion of the merger
include the following:
- GelTex's registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, shall be effective;
- the merger agreement and the related transactions must be authorized by
the SunPharm stockholders;
- the shares of GelTex common stock to be issued to SunPharm stockholders
in the merger must have been approved for listing on The Nasdaq Stock
Market;
- all approvals and consents required to consummate the merger shall have
been received;
- no injunction or order preventing the completion of the merger may be in
effect;
- each of SunPharm and GelTex must receive an opinion of tax counsel to the
effect that the merger will qualify as a tax-free reorganization, as well
as opinions of counsel with respect to certain other matters;
- GelTex's and SunPharm's respective representations and warranties in the
merger agreement must be true and correct;
- GelTex and SunPharm must have complied with their respective agreements
in the merger agreement; and
- each of SunPharm and the Merger Sub shall have executed and delivered the
certificate of merger.
In addition, GelTex's obligation to complete the merger is subject to:
- receipt of certain related agreements, consulting agreements and release
agreements by designated SunPharm stockholders and consultants;
- the absence of a material adverse effect, except for certain agreed upon
events, on SunPharm since the date of the merger agreement;
- the termination of certain registration rights and the termination or
expiration of a lien on assets of SunPharm as designated in the merger
agreement;
- the receipt of any required consents by SunPharm from third parties
relating to the merger; and
- dissenting stockholders must not have exercised dissenters' rights with
respect to any shares of the issued and outstanding SunPharm
preferred stock or with respect to more than 2% of the issued and
outstanding SunPharm common stock.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 55)
(a) The merger agreement may be terminated by mutual consent of the boards
of directors of GelTex and SunPharm.
5
<PAGE> 14
(b) The merger agreement may be terminated by either of the boards of
directors of GelTex and SunPharm if:
- the merger is not completed by December 31, 1999;
- a final court order prohibiting the merger is issued and is not
appealable;
- the SunPharm stockholders do not authorize the merger agreement at the
special meeting; or
- the other party (1) is in breach of its representations and warranties
under the merger agreement or (2) has willfully breached any of its
covenants or agreements under the merger agreement, provided, however,
that the party terminating the merger agreement is not also in
material breach of its obligations under the merger agreement.
(c) The merger agreement may be terminated by GelTex if SunPharm's board of
directors:
- approves, recommends or proposes to approve or recommend any action
with respect to an acquisition proposal prohibited by the merger
agreement, examples of which would be a merger or a sale of
significant assets involving SunPharm and a party other than GelTex,
or the solicitation, initiation or knowing encouragement of a party to
propose an acquisition proposal or any discussions with a party
regarding an acquisition proposal;
- fails to present and recommend that SunPharm stockholders authorize
the merger agreement, or withdraws or modifies, or proposes to
withdraw or modify its recommendation of the merger;
- fails to mail a proxy statement to its stockholders within five
business days of when the proxy statement was available for mailing or
failed to include in the proxy statement a recommendation to adopt the
merger agreement;
- fails to reaffirm the approval and recommendation of the merger within
two business days after GelTex has made a request to do so;
- enters into any letter of intent or similar agreement with respect to,
or solicits, facilitates, initiates or encourages, an acquisition
proposal of the nature specified in the merger agreement, such as a
merger or a sale of significant assets, involving SunPharm and a party
other than GelTex; or
- resolves or announces its intention to do any of the above.
(d) In addition, the merger agreement may be terminated by GelTex if any
person or entity who is a party to the stockholders agreement publicly
announces or makes a public statement regarding the stockholder's
disapproval of the merger or otherwise encourages other stockholders of
SunPharm not to vote in favor of the merger.
PAYMENT OF TERMINATION FEE OR TOPPING FEE (SEE PAGE 56)
SunPharm has agreed to pay GelTex a termination fee of $500,000 plus
expenses if the merger agreement is terminated in any of the following
circumstances:
(a) by GelTex because:
- SunPharm's board of directors takes any of the actions described in
paragraph (c) under "Termination of the Merger Agreement" above; or,
- any person or entity who is a party to the stockholders agreement
publicly announces or makes a public statement regarding the
stockholder's disapproval of the merger or otherwise encourages other
stockholders of SunPharm not to vote in favor of the merger; or
(b) by GelTex or SunPharm because SunPharm's stockholders do not authorize
the merger agreement and at the time of termination or prior to the
special meeting, SunPharm makes, proposes, communicates or discloses in
a manner which becomes public an intention to complete
6
<PAGE> 15
an acquisition proposal of the nature specified in the merger
agreement, such as a merger or a sale of significant assets, involving
SunPharm and a party other than GelTex.
Alternatively, SunPharm has agreed to pay GelTex a topping fee of
$1,000,000 plus expenses if the merger agreement is terminated by GelTex or
SunPharm because SunPharm's stockholders do not authorize the merger agreement
and SunPharm enters into a binding agreement in connection with an acquisition
proposal or an acquisition proposal involving SunPharm and a party other than
GelTex is completed within 12 months of the termination of the merger agreement.
SUNPHARM MAY NOT SOLICIT OTHER PROPOSALS (SEE PAGE 51)
SunPharm has agreed not to directly or indirectly take any of the following
actions:
- solicit, facilitate, initiate or encourage an acquisition proposal of the
nature specified in the merger agreement, such as a merger or a sale of
significant assets, involving SunPharm and a party other than GelTex; or
- with respect to any person, entity or group that is pursuing an
acquisition proposal, such as a merger or a sale of significant assets:
- engage in discussions; or
- disclose any non-public information relating to SunPharm.
However, SunPharm may engage in these acts, other than solicitation,
initiation or knowing encouragement, if all of the following occur:
- SunPharm's board of directors believes in good faith that a particular
proposal concerning an acquisition proposal of the nature specified in
the merger agreement, such as a merger or a sale of significant assets,
will result in a transaction more favorable to SunPharm's stockholders
than the merger with GelTex;
- SunPharm's board of directors determines in good faith after consultation
with its outside counsel that taking such action is required to satisfy
the board's fiduciary duties under applicable law; and
- SunPharm provides written notice to GelTex of its intention to engage in
these acts.
OPINION OF SUNPHARM'S FINANCIAL ADVISOR (SEE PAGE 36)
Petkevich & Partners, L.L.C., SunPharm's financial advisor, delivered a
written opinion to SunPharm's board of directors that, subject to the
considerations described in its opinion, the aggregate consideration to be
received in the merger is fair to the holders of the capital stock of SunPharm
from a financial point of view. The complete opinion of Petkevich & Partners is
attached to this proxy statement/prospectus as Annex C. You are urged to read it
in its entirety.
PROCEDURE FOR CASTING YOUR VOTE (SEE "THE SPECIAL MEETING -- PROXIES" ON PAGE
30)
Please mail your signed proxy card in the enclosed return envelope as soon
as possible so that your common stock or preferred stock of SunPharm may be
represented at the special meeting. If you do not include instructions on how to
vote your properly executed proxy, your shares will be voted "FOR" adoption of
the merger agreement.
PROCEDURE FOR CASTING YOUR VOTE IF YOUR SHARES ARE HELD BY YOUR BROKER IN STREET
NAME (SEE "THE SPECIAL MEETING -- PROXIES" ON PAGE 30)
Your broker will vote your shares only if you provide instructions on how
to vote by following the information provided to you by your broker. If you do
not provide your broker with voting instructions, your shares will NOT be voted
at the SunPharm special meeting and it will have the same effect as voting
against adoption of the merger agreement.
7
<PAGE> 16
PROCEDURE FOR CHANGING YOUR VOTE (SEE "THE SPECIAL MEETING -- PROXIES" ON PAGE
30)
If you want to change your vote, just send the Secretary of SunPharm a
later-dated, signed proxy card to the address identified in the Notice of
Special Meeting of Stockholders before the special meeting or attend and vote at
the special meeting in person. You may also revoke your proxy by sending written
notice to the Secretary of SunPharm before the special meeting.
PROCEDURE FOR EXCHANGING YOUR STOCK CERTIFICATES (SEE PAGE 44)
After the merger is completed, you will receive written instructions for
exchanging your SunPharm stock certificates for GelTex stock certificates. DO
NOT SEND YOUR SUNPHARM STOCK CERTIFICATES NOW.
WHERE YOU CAN FIND ADDITIONAL INFORMATION (SEE PAGE 99)
If you have any questions about the merger, please call SunPharm Investor
Relations at 1-904-394-2800.
8
<PAGE> 17
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
HOW THE FINANCIAL STATEMENTS WERE PREPARED
The following information has been provided to aid you in your analysis of
the financial aspects of the merger. This information has been derived from the
audited financial statements of GelTex for each of the years in the five-year
period ended December 31, 1998 and the unaudited financial statements of GelTex
for the six months ended June 30, 1998 and 1999, and from the audited financial
statements of SunPharm for each of the years in the five-year period ended
December 31, 1998 and the unaudited financial statements of SunPharm for the six
months ended June 30, 1998 and 1999. The information is only a summary and you
should read it together with the historical financial statements and related
notes contained elsewhere in this proxy statement/prospectus. See "Where You Can
Find Additional Information" on page 99.
ACCOUNTING TREATMENT
The pro forma condensed combined statements of income and pro forma
condensed combined balance sheets have been prepared by adding or combining the
historical amounts of each company. The accounting policies of GelTex and
SunPharm are substantially comparable. Consequently, no adjustments have been
made to the unaudited pro forma condensed combined financial statements to
conform the accounting policies of the combining companies. The companies may
have performed differently had they always been combined. You should not rely on
the unaudited pro forma condensed combined financial information as being
indicative of the historical results that the parties would have had or the
future results that the parties will experience after the merger. See "Unaudited
Pro Forma Condensed Combined Financial Statements" on page 60.
MERGER-RELATED EXPENSES
Merger-related fees and expenses, consisting primarily of SEC filing fees,
fees and expenses of investment bankers, attorneys and accountants, and
financial printing and other related charges, are estimated to be approximately
$720,000. See Note 2 on page 66.
PERIODS COVERED
The unaudited pro forma condensed combined statements of operations combine
GelTex's results for the year ended December 31, 1998 and the six months ended
June 30, 1998 and 1999, giving effect to the merger as if it had occurred on
January 1, 1998. The unaudited pro forma condensed combined balance sheet
combines the balance sheets of GelTex and SunPharm as of June 30, 1999, giving
effect to the merger as if it had occurred on June 30, 1999.
INTEGRATION-RELATED EXPENSES
It is estimated that costs of approximately $125,000 will be incurred after
the effective date of the merger for integration-related expenses. These
expenditures are necessary to ensure an efficient transition of the business.
These non-recurring costs will be charged to operations of the combined entity
in the relevant period and therefore are not reflected in the unaudited pro
forma condensed combined financial statements. See Note 2 on page 66.
9
<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA OF GELTEX
The following selected historical financial data for each of the years
ended December 31, 1994 through 1998 has been derived from GelTex's audited
financial statements and the selected historical financial data for the six
month periods ended June 30, 1998 and 1999 has been derived from GelTex's
unaudited financial statements. This information is only a summary and you
should read it in conjunction with GelTex's historical financial statements and
related notes and Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the annual reports, quarterly reports and
other information on file with the SEC. See "Where You Can Find Additional
Information" on page 99.
GELTEX PHARMACEUTICALS, INC.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License fee and research revenue.............. $ 3,000 $ 750 $ 1,244 $ 1,000 $ 25,000 $ -- $ 1,751
Collaborative Joint Venture project
reimbursement............................... -- -- -- 9,196 7,658 5,199 2,962
Research grant................................ -- 157 419 289 -- -- --
------- ------- -------- -------- -------- -------- --------
Total revenue.......................... 3,000 907 1,663 10,485 32,658 5,199 4,713
Costs and Expenses:
Research and development...................... 3,655 6,504 21,755 22,251 27,904 11,608 13,890
Collaborative Joint Venture project costs..... -- -- -- 9,196 7,658 5,199 2,962
------- ------- -------- -------- -------- -------- --------
Total research and development......... 3,655 6,504 21,755 31,447 35,562 16,807 16,852
General and administrative.................... 1,280 1,873 2,924 4,089 5,583 2,573 3,135
Other, nonrecurring........................... -- -- 230 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Total costs and expenses............... 4,935 8,377 24,909 35,536 41,145 19,380 19,987
------- ------- -------- -------- -------- -------- --------
Loss from operations............................ (1,935) (7,470) (23,246) (25,051) (8,487) (14,181) (15,273)
Interest income................................. 303 684 3,343 3,095 5,069 1,806 2,448
Interest expense................................ (51) (99) (75) (218) (613) (215) (260)
Equity in loss of Joint Venture................. -- -- -- (2,310) (7,536) (2,925) (4,068)
------- ------- -------- -------- -------- -------- --------
Net loss........................................ $(1,683) $(6,885) $(19,978) $(24,484) $(11,567) $(15,515) $(17,153)
======= ======= ======== ======== ======== ======== ========
Net loss per common share and per common share
assuming dilution............................. $ (0.27) $ (0.85) $ (1.60) $ (1.80) $ (0.72) $ (0.97) $ (1.02)
======= ======= ======== ======== ======== ======== ========
Shares used in computing net loss per common
share and per common share assuming
dilution...................................... 6,139 8,109 12,513 13,592 16,023 16,052 16,844
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, AS OF
------------------------------------------------ JUNE 30,
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $13,953 $33,175 $73,425 $52,623 $104,952 $ 78,472
Working capital........................................... 12,665 31,824 72,461 49,099 110,821 89,884
Total assets.............................................. 16,111 35,993 78,068 67,118 133,445 113,475
Long term obligations, less current portion............... 671 420 124 6,923 5,206 5,206
Stockholders' equity...................................... 13,979 33,650 75,056 53,418 120,020 102,978
</TABLE>
10
<PAGE> 19
SELECTED HISTORICAL FINANCIAL DATA OF SUNPHARM
The following selected historical financial data for each of the years
ended December 31, 1994 through December 31, 1998 has been derived from
SunPharm's audited financial statements. The historical financial data for the
six months ended June 30, 1998 and 1999 has been derived from SunPharm's
unaudited financial statements. This information is only a summary and you
should read it together with SunPharm's historical financial statements and
related notes contained elsewhere in this proxy statement/prospectus.
SUNPHARM CORPORATION
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Sponsored research/sublicensing
revenue....................... $ 1,035 $ -- $ 1,000 $ -- $ 230 $ -- $ --
Interest and investment
income........................ -- 163 73 280 163 96 35
------- ------- ------- ------- ------- ------- -------
Total revenue......... 1,035 163 1,073 280 393 96 35
Costs and Expenses:
Research and development........ 1,676 1,965 2,228 2,417 2,510 1,165 1,131
General and administrative...... 1,518 2,568 1,401 1,769 1,652 1,019 834
Royalty......................... -- -- 280 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 3,194 4,532 3,909 4,186 4,162 2,184 1,964
------- ------- ------- ------- ------- ------- -------
Net loss........................ $(2,159) $(4,370) $(2,837) $(3,906) $(3,767) $(2,088) $(1,929)
======= ======= ======= ======= ======= ======= =======
Net loss per share.............. $ (1.21) $ (1.55) $ (0.92) $ (0.75) $ (0.64) $ (0.36) $ (0.28)
======= ======= ======= ======= ======= ======= =======
Shares used in computing net
loss per share................ 1,781 2,811 3,085 5,215 5,877 5,757 6,804
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, AS OF
-------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
------- ------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ -- $ 331 $ 341 $ 357 $ -- $ 405
Short-term investments............... -- 1,290 1,795 4,269 1,699 249
Working capital...................... 79 855 1,444 4,045 1,410 48
Total assets......................... 1,343 1,809 2,771 4,972 2,054 944
Current liabilities.................. (3,294) (926) (1,305) (787) (452) (701)
Accumulated deficit during
development stage.................. (4,390) (8,760) (11,597) (15,503) (19,270) (21,199)
Total stockholders' equity
(deficit).......................... (2,947) 883 1,466 4,185 1,602 243
</TABLE>
11
<PAGE> 20
SELECTED UNAUDITED COMBINED PRO FORMA FINANCIAL DATA
The selected unaudited pro forma combined financial data has been derived
from and should be read with the Unaudited Pro Forma Condensed Combined
Financial Statements and related notes on pages 60 through 66. This information
is based on the historical consolidated balance sheets and related historical
consolidated statements of operations of GelTex and SunPharm giving effect to
the merger using the purchase method of accounting for business combinations.
This information is for illustrative purposes only. The companies may have
performed differently had they always been combined. You should not rely on the
selected unaudited pro forma combined financial data as being indicative of the
historical results that would have been achieved had the companies always been
combined or the future results that the combined company will experience after
the merger.
GELTEX PHARMACEUTICALS, INC. AND SUNPHARM CORPORATION
SELECTED UNAUDITED COMBINED PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED ----------------------------
DECEMBER 31, 1998 1998 1999
----------------- ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................................. $ 32,888,961 $ 5,198,819 $ 4,713,266
Loss from operations........................... (13,615,077) (16,964,085) (17,836,028)
Net loss....................................... (16,531,844) (18,201,253) (19,680,095)
Net loss per share -- basic and diluted........ (0.96) (1.06) (1.09)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
AS OF ----------------------------
DECEMBER 31, 1998 1998 1999
----------------- ------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................... $122,410,168 $133,792,796 $122,659,321
Total debt..................................... 6,046,988 8,324,181 6,046,988
Stockholders' equity........................... 110,269,364 122,331,364 110,269,364
</TABLE>
12
<PAGE> 21
UNAUDITED COMPARATIVE PER SHARE INFORMATION
Set forth below are the net loss and book value per common share data
separately for GelTex and SunPharm on a historic basis, for GelTex on a pro
forma combined basis and on a pro forma combined basis per SunPharm equivalent
share. The exchange ratio fraction for the business combination is between
0.12225 and 0.14493 of a share of GelTex common stock for each share of SunPharm
common stock, and between 0.18338 and 0.21740 of a share of GelTex common stock
for each share of SunPharm preferred stock.
The GelTex pro forma data was derived by combining the historic financial
information of GelTex and SunPharm using the purchase method of accounting for
business combinations as described under "Unaudited Pro Forma Condensed Combined
Financial Statements" beginning on page 60.
The SunPharm equivalent share pro forma information shows the effect of the
merger from the perspective of an owner of SunPharm common stock or preferred
stock. In the case of SunPharm common stock, the information was computed by
multiplying the GelTex pro forma information by the exchange ratio fraction of
0.13359, the midpoint of the range of the exchange ratio fraction for the
SunPharm common stock. In the case of SunPharm preferred stock, the information
was computed by multiplying the GelTex pro forma information by the exchange
ratio fraction of 0.20039, the midpoint of the range of the exchange ratio
fraction for the SunPharm preferred stock.
You should read the information below together with the Unaudited Pro Forma
Condensed Combined Financial Statements and notes thereto beginning on page 60,
SunPharm's historical financial statements and related notes contained elsewhere
in this proxy statement/prospectus, and the audited and unaudited financial
statements of GelTex incorporated by reference into this proxy
statement/prospectus. See "Where You Can Find Additional Information" on page
99. The unaudited pro forma combined data below is for illustrative purposes
only. The companies may have performed differently had they always been
combined. You should not rely on this information as being indicative of the
historical results that would have been achieved had the companies always been
combined or the future results that the combined company will experience after
the merger.
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF AND FOR THE
PERIOD ENDED SIX MONTHS ENDED
----------------- ------------------------------
DECEMBER 31, 1998 JUNE 30, 1999 JUNE 30, 1998
----------------- ------------- -------------
<S> <C> <C> <C>
PRO FORMA COMBINED:
Net loss per common share............... $(0.96) $(1.09) $(1.06)
Cash dividends declared per common
share................................ -- -- --
Book value per common share............. 6.41 6.12 7.10
SUNPHARM PER SHARE EQUIVALENTS:
Net loss per common share............... (0.13) (0.15) (0.14)
Net loss per preferred share............ (0.19) (0.22) (0.21)
Cash dividends declared per common
share................................ -- -- --
Cash dividends declared per preferred
share................................ -- -- --
Book value per common share............. 0.86 0.82 0.95
Book value per preferred share.......... 1.28 1.23 1.42
SUNPHARM -- HISTORICAL:
Net loss per common share............... (0.64) (0.28) (0.36)
Cash dividends declared per common
share................................ -- -- --
Book value per common share............. 0.27 0.04 0.28
GELTEX -- HISTORICAL:
Net loss per common share............... (0.72) (1.02) (0.97)
Cash dividends declared per common
share................................ -- -- --
Book value per common share............. 6.43 6.11 7.78
</TABLE>
13
<PAGE> 22
COMPARATIVE PER SHARE MARKET PRICE DATA
GelTex common stock is traded on The Nasdaq National Market under the
symbol "GELX." SunPharm common stock is traded on The Nasdaq SmallCap Market
under the symbol "SUNP."
The following table sets forth the closing prices per share of SunPharm
common stock as reported on The Nasdaq SmallCap Market and the closing prices
per share of GelTex common stock as reported on The Nasdaq National Market on
(1) August 13, 1999, the last business day preceding public announcement that
GelTex and SunPharm had entered into the merger agreement and (2) October 4,
1999.
The following table also sets forth the equivalent price per share of
GelTex shares for SunPharm common stock on those dates. The equivalent price per
share of GelTex common stock for SunPharm common stock is equal to the closing
price of a share of GelTex common stock on that date multiplied by 0.13359, the
number of shares of GelTex common stock to be issued in exchange for each share
of SunPharm common stock, assuming the midpoint of the exchange ratio fraction
for the SunPharm common stock. The equivalent price per share of GelTex common
stock for SunPharm preferred stock is equal to the closing price of a share of
GelTex common stock on that date multiplied by 0.20039, the number of shares of
GelTex common stock to be issued in exchange for each share of SunPharm
preferred stock, assuming the midpoint of the range of the exchange ratio
fraction for the SunPharm preferred stock. This equivalent per share price
reflects the value of the GelTex common stock you would receive for each share
of SunPharm common stock or preferred stock you own if the merger was completed
on any of these dates.
<TABLE>
<CAPTION>
EQUIVALENT EQUIVALENT
PER PER
SUNPHARM GELTEX SHARE PRICE SHARE PRICE
COMMON COMMON FOR SUNPHARM FOR SUNPHARM
STOCK STOCK COMMON STOCK PREFERRED STOCK
-------- ------ ------------ ---------------
<S> <C> <C> <C> <C>
August 13, 1999.............................. $1.75 $14.25 $1.90 $2.85
October 4, 1999.............................. $1.38 $11.88 $1.59 $2.38
</TABLE>
Because the market price of GelTex common stock may increase or decrease
before the completion of the merger, you are urged to obtain current market
quotations for GelTex common stock from publicly available sources.
14
<PAGE> 23
RISK FACTORS
Each SunPharm stockholder voting in favor of the merger will be choosing to
invest in GelTex common stock. An investment in GelTex common stock involves a
high degree of risk. In addition to the other information contained in this
proxy statement/prospectus, you should carefully consider the following risk
factors in deciding how to vote on the merger proposal.
RISKS RELATED TO THE MERGER
The following risks relate to the merger and to the combination of the
businesses of GelTex and SunPharm.
YOU WILL NOT KNOW THE VALUE OF THE GELTEX COMMON STOCK YOU WILL RECEIVE IN THE
MERGER WHEN YOU VOTE ON THE MERGER
Under the merger agreement, the exchange ratio fractions for the SunPharm
common stock and the SunPharm preferred stock will not be determined until two
trading days prior to the completion of the merger. As a result, it is likely
that you will not know the exact exchange ratio fractions for the SunPharm
common stock and the SunPharm preferred stock at the time you vote on the
proposal to approve the merger agreement.
Upon completion of the merger, each share of SunPharm common stock will be
converted into the right to receive between 0.12225 and 0.14493 of a share of
GelTex common stock, and each share of SunPharm preferred stock will be
converted into the right to receive between 0.18338 and 0.21740 of a share of
GelTex common stock. Although the actual exchange ratio fractions may change
within each fixed range based on the average closing price of GelTex common
stock for the designated trading days, there will be no adjustment to the
exchange ratio fraction ranges in the event of a change in the price of SunPharm
common stock. GelTex and SunPharm have no right to terminate or renegotiate the
merger agreement and SunPharm has no right to resolicit the vote of its
stockholders due solely to any increase or decrease in GelTex's or SunPharm's
stock price either before or after the exchange ratio fractions are determined.
Even after the exchange ratio fractions have been determined, you will not
know the exact value of the GelTex common stock that you will receive in the
merger. The price of GelTex common stock on the date of the merger agreement,
the date of this proxy statement/prospectus, the date of the special meeting or
at the time of the merger is likely to be different from the average closing
price of GelTex common stock for the designated trading days. As a result, the
actual value of the GelTex common stock you receive when the merger is completed
may be greater than or less than the value that was used to determine the
exchange ratio fractions. The price of GelTex common stock may change based upon
changes in the business, operations and prospects of GelTex, general market and
economic conditions, regulatory matters, market assessments of the likelihood
that the merger will be completed and other factors. Accordingly, the dollar
value of the GelTex common stock you receive at completion of the merger will
depend upon the price of the GelTex common stock at completion of the merger. We
urge you to obtain current market quotations for GelTex common stock.
CHANGE OF CONTROL OF SUNPHARM AND INTEGRATION OF THE TWO BUSINESSES MAY RESULT
IN LOSS OF CONTINUITY DURING TRANSITION, WHICH MAY ADVERSELY AFFECT PROGRESS OF
SUNPHARM PROJECTS
UNDER DEVELOPMENT
The merger may result in changes in management of certain relationships
that will be important to the combined company, including SunPharm's current
relationships with the University of Florida Research Foundation, Inc., or the
Foundation, which is the technology transfer subsidiary of the University of
Florida, and with Dr. Raymond Bergeron, a graduate research professor at the
University of Florida and the inventor of SunPharm's polyamine analogues and
iron chelators. SunPharm depends on the University of Florida and Dr. Raymond
Bergeron for all of SunPharm's research and a large portion of the early
15
<PAGE> 24
preclinical development of its potential products. Neither GelTex nor SunPharm
can assure that the combined company will be able to maintain SunPharm's
relationship with the University of Florida and Dr. Raymond Bergeron or that the
SunPharm projects under development will continue to progress after announcement
of completion of the merger and during the integration process in a manner
similar to that made under SunPharm's management. The failure to preserve the
continuity of these relationships prior to completion of the merger and
thereafter could delay or impair the development of iron chelator and polyamine
analogue technologies and the combined company's intellectual property position
in these areas, and adversely affect the progress of SunPharm projects currently
under development. If GelTex and SunPharm fail to effectively progress the
SunPharm projects under development, the combined company will not achieve the
benefits which the parties hope to obtain from the merger.
THE COSTS OF COMPLETING THE MERGER ARE SUBSTANTIAL, AND MAY AFFECT RESULTS OF
OPERATIONS
Completion of the merger will result in total pre-tax costs estimated at
approximately $1.33 million, primarily relating to costs associated with
combining the businesses of the two companies and payment of severance to
SunPharm employees who will not be retained by the combined company following
the merger, and fees of attorneys, accountants and SunPharm's financial advisor.
It is possible that this estimate may not be correct and unanticipated events
could occur that will substantially increase the costs of combining the two
companies. In any event, costs associated with the merger will negatively affect
GelTex's results of operations in the quarter and fiscal year in which the
merger is completed. The GelTex statement of operations for the period in which
the merger occurs will include a significant charge for acquired in-process
research and development, currently estimated to be approximately $9.5 million.
Additionally, amortization associated with goodwill acquired in the merger will
result in a charge of approximately $1.2 million per year over the next seven
years, and this will negatively affect GelTex's results of operations during
such periods.
SUNPHARM MAY NEED ADDITIONAL FUNDING TO CONTINUE OPERATIONS THROUGH THE TIME
PERIOD PRIOR TO THE EFFECTIVE TIME OF THE MERGER
Prior to completion of the merger, or if the merger is not completed,
SunPharm may need additional funding to continue its operations. SunPharm has
expended and will continue to expend substantial funds for the following:
- research and development;
- preclinical investigations and clinical trials;
- clinical and commercial-scale manufacturing in its own or others'
facilities; and
- seeking corporate partners for marketing its products.
A number of factors will affect the amount and timing of these
expenditures. SunPharm believes that its current capital resources may not be
sufficient to fund operations through the end of 1999. SunPharm cannot assure
that Warner-Lambert or Nippon Kayaku will achieve certain milestones for product
development specified in the respective license agreements, and thereby pay
related milestone payments. Please read "SunPharm's Business -- Strategic
Alliances" on page 73 for a complete description of these relationships.
Therefore, SunPharm may require additional funding prior to completion of the
merger.
A lack of adequate funds, either from milestone payments or from additional
sources of financing, may materially and adversely affect SunPharm's business
and delay progress of certain projects.
16
<PAGE> 25
GELTEX'S STOCK PRICE IS VOLATILE
The market price of GelTex's common stock is volatile and may decline. A
decline in the market price of GelTex common stock following the day on which
the exchange ratio fractions are determined would reduce the value of
consideration to be received by SunPharm stockholders in the merger. GelTex's
stock price may be affected by, among other things, variations in quarterly
operating results, clinical trial results and other product development-related
announcements by GelTex or its competitors, regulatory matters, announcements in
the scientific and research community, intellectual property and legal matters,
changes in reimbursement policies or medical practices, broader industry and
market trends, and other external factors unrelated to GelTex's performance.
SUNPHARM STOCKHOLDERS WILL HAVE REDUCED OWNERSHIP AND VOTING INTERESTS AFTER THE
MERGER
After completion of the merger, SunPharm stockholders will own between 5%
and 7% of GelTex's outstanding common stock. Consequently, they will exercise
less influence over the management and policies of GelTex than they currently
exercise over SunPharm.
SUBSTANTIAL SALES OF GELTEX COMMON STOCK COULD ADVERSELY AFFECT ITS MARKET PRICE
GelTex cannot predict the effect, if any, that future sales of shares of
GelTex common stock or the availability of such shares for future sale will have
on the market price of its common stock from time to time. Although certain of
SunPharm's stockholders will enter into agreements restricting sales of GelTex
common stock for a period of one year following the merger, sales of substantial
amounts of GelTex common stock, or the perception that such sales could occur,
could adversely affect prevailing market prices for the stock.
RISKS RELATED TO OPERATIONS
The following risks relate to the ongoing business and operations of
GelTex, SunPharm and, if the merger is completed, the resulting combined
company.
GELTEX AND SUNPHARM DEPEND ON CORPORATE OR STRATEGIC COLLABORATIONS FOR RESEARCH
AND DEVELOPMENT AND SALES AND MARKETING OF PRODUCTS
GelTex has entered into a joint venture with Genzyme Corporation, or
Genzyme, for the final development and commercialization of sevelamer
hydrochloride, or Renagel(R), for the reduction of elevated serum phosphorous
levels in patients with end stage renal disease. GelTex also intends to enter
into development and marketing agreements for the continued development and
commercialization of colesevelam hydrochloride, or Cholestagel(R), a bile acid
sequestrant, as well as for GelTex's second generation bile acid sequestrant.
With respect to these products, GelTex is relying or plans to rely upon its
corporate partners to:
- conduct certain clinical trials;
- obtain certain regulatory approvals; and
- commercialize potential products.
If GelTex's existing collaborations are terminated or otherwise
unsuccessful, or if GelTex cannot conclude an agreement with a Cholestagel
partner as planned, GelTex will have to either delay the continued development
and commercialization of its products or expend its resources to fund such
activities. A delay in product development or commercialization or an increase
in expenditures to fund development, sales and marketing would likely require
GelTex to seek additional sources of funding, and GelTex cannot assure that such
funding will be available when needed or on acceptable terms. To the extent that
GelTex is successful in obtaining and maintaining corporate partners for its
products, it will be dependent upon the efforts of these partners. GelTex cannot
assure that its efforts to obtain corporate partners will be successful, or that
such partners will be able to gain market acceptance for GelTex
17
<PAGE> 26
products. Although Genzyme has built its own specialty sales force to sell
Renagel, it does not have previous experience marketing to physicians who treat
patients with kidney failure. GelTex cannot assure that Genzyme will be
successful in achieving market acceptance for Renagel at a level consistent with
GelTex's projections for this product.
SunPharm depends on collaborative arrangements with the University of
Florida and Dr. Raymond Bergeron for all of SunPharm's research and a large
portion of the early preclinical development of its potential products. As a
result, the failure to retain the relationship with Dr. Bergeron and the
University of Florida would have a materially adverse effect on the combined
company. Without Dr. Bergeron's expertise, there can be no assurance that the
combined company will be able to facilitate efficient development of the
combined company's intellectual property position in iron chelator and polyamine
technology. In addition, SunPharm also has no control over the facilities where
the university personnel perform, or over the personnel performing, the work at
the University of Florida. If the University of Florida breaches its obligations
under the collaborative agreement, SunPharm's remedies may be limited by
applicable law affecting actions against state agencies. The combined company
will be subject to the same dependence, lack of control, and potential limited
remedies, with respect to its research and work with the University of Florida
and Dr. Bergeron.
SunPharm depends on strategic alliances with Warner-Lambert Company, or
Warner-Lambert, and Nippon Kayaku Co., Ltd., or Nippon Kayaku, to develop and
commercialize diethylnorspermine, or DENSPM, but there can be no assurance that
these collaborative partners will pursue development or commercialization of
DENSPM with the same allocation of resources after completion of the merger.
In addition, the Warner-Lambert license agreement may be terminated by
Warner-Lambert at any time, for any reason. SunPharm cannot assure that its
collaborative relationships will continue under the management of the combined
company. If the combined company loses these relationships, its expenses may
increase and the potential revenue from the achievement of milestones will be
lost, which may affect the combined company's ability to attain long-range
objectives and achieve the desired results of the merger.
Reliance on these collaborative arrangements will subject the combined
company to the following risks:
- collaborators may be unable to satisfy minimum royalty obligations or
achieve projected sales levels under sales and marketing agreements with
the combined company, which could result in the termination of such
agreements, causing a material adverse effect on the combined company's
business, financial condition and results of operations;
- the combined company may need to seek new collaborators or alliances to
sell and distribute future products or to establish its own direct
commercialization capabilities which is a costly and time-consuming
process, and there is no guarantee that agreements with new collaborators
will be favorable to the combined company and that such collaborations
will be successful;
- if the collaborative agreements require the combined company to meet
certain research and development and commercialization milestones, the
failure to achieve such milestones could have a material adverse effect
on the combined company's receipt of funding and revenues under the
agreement and the continuation of the agreement; and
- the failure to maintain existing strategic alliances for whatever reason
and to secure new alliances would delay the commercialization of existing
and future combined company products.
RISKS RELATED TO LEAD PRODUCTS AND POTENTIAL PRODUCTS AND FAILURE TO GENERATE
SIGNIFICANT PRODUCT SALES COULD IMPAIR THE BUSINESS OF THE COMBINED COMPANY
As of June 30, 1999, GelTex's lead product, Renagel, has generated minimal
revenue from product sales in the amount of approximately $7,933,000 since
commercial sale of the product in capsule form commenced in November 1998.
GelTex has not generated any other revenue from product sales. Although
18
<PAGE> 27
the U.S. Food and Drug Administration, or FDA, has granted marketing approval
for Renagel capsules, GelTex cannot assure that the product will receive market
acceptance and meet sales expectations. Renagel is currently undergoing
regulatory review in Europe and Canada, but GelTex cannot assure that regulatory
authorities in these territories will approve the product or that the product
will be successfully marketed by Genzyme, GelTex's joint venture partner for
Renagel.
On July 30, 1999, GelTex filed a New Drug Application, or NDA, for
Cholestagel with the FDA for the treatment of hypercholesterolemia, a condition
characterized by undesirably high blood cholesterol levels. There can be no
assurance that the results of any of GelTex's clinical trials or that its NDA
will be sufficient to meet the FDA's requirements for product approval. The
failure of GelTex to obtain FDA approval for Cholestagel, or any significant
delay in obtaining such approval, would have a material adverse effect on
GelTex. Even if FDA approval for Cholestagel is obtained, GelTex has not entered
into an agreement with a marketing partner for Cholestagel, and there can be no
assurance that such an agreement will be finalized prior to FDA approval, if at
all. If a partnering agreement is not executed prior to FDA approval, GelTex
will have to delay commercial launch of the product or use its own resources to
acquire, either directly or indirectly, the personnel necessary to commercialize
the product. In any event, there can be no assurance that the product will
achieve market acceptance or meet expected sales goals.
SunPharm has not generated any revenues to date from product sales and
cannot assure the successful development or commercialization of any of its
potential products. SunPharm expects no revenue from product sales for at least
several years. SunPharm is in the development stage and has realized to date
only limited revenues, essentially all from Warner-Lambert and Nippon Kayaku,
principally by achievement of identified research milestones for DENSPM. Neither
GelTex nor SunPharm can assure that revenues from these relationships will
continue after completion of the merger, as the collaborative work with
Warner-Lambert and Nippon Kayaku is not integral to SunPharm's iron chelator
technology.
PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD SUCCESSFUL PRODUCT INTRODUCTIONS AND
MARKET ACCEPTANCE
GelTex's and SunPharm's future business success will depend on their
ability to successfully develop and obtain regulatory approval to market new
pharmaceutical products. Successful commercialization of the combined company's
product candidates under development depends on whether the combined company is
able to:
- complete their development in a timely fashion;
- obtain and maintain patents or other proprietary protections;
- obtain required regulatory approvals;
- implement and maintain efficient, commercial-scale manufacturing
processes or maintain relationships with third party manufacturers for
such purposes;
- gain early entry into relevant markets;
- obtain reimbursement for sales of its products;
- establish and maintain sales, marketing, distribution and development
collaborations; and
- demonstrate the competitiveness of the combined company's products.
GelTex's anti-obesity and infectious disease programs are the primary focus
of GelTex's current research and development efforts and are in early stages of
pre-clinical development. Since its inception, SunPharm has devoted its efforts
exclusively to the research and development of potential pharmaceutical
products, primarily through its licensed polyamine analogue and iron chelator
technologies. Currently, SunPharm has nine compounds targeting six indications
in various stages of research or development, including two pharmaceutical
products, diethylhomospermine, or DEHOP, and DENSPM, in Phase II clinical
trials. Typically, Phase II trials are not sufficient to demonstrate
conclusively the safety or efficacy of the products under investigation, and the
success of substantial further clinical trials may be required
19
<PAGE> 28
before the FDA may approve the products for commercialization. SunPharm cannot
assure that DEHOP, DENSPM, or any of its other potential products, will:
- prove safe or effective in clinical trials;
- meet applicable regulatory standards;
- be produced in commercial quantities at acceptable cost; or
- be successfully marketed.
Neither GelTex nor SunPharm can assure that their respective research and
development activities in these and other areas will be successful or that any
product candidates will be chosen from pre-clinical studies. Should GelTex or
SunPharm commence the clinical development of any additional compounds, neither
GelTex nor SunPharm can assure that clinical trials of products under
development will demonstrate the safety and efficacy of such products at all or
to the extent necessary to obtain regulatory approvals.
Development of a product requires substantial technical, financial and
human resources even if the product is not successfully completed. Due to
uncertainties that are part of the development process, many of the products
that the combined company tries to develop may not be successfully completed,
execution of product development in a timely manner may not be possible, and the
combined company may not be able to fully fund development programs necessary to
complete product development. Delays or unanticipated increases in costs of
development at any stage of development, or the failure of GelTex or SunPharm to
obtain regulatory approval or market acceptance for their products, could
adversely affect the combined company's operating results.
The potential products of SunPharm are new and may relate to the treatment
of conditions that doctors may under-diagnose or not completely understand. It
may be difficult for the combined company to achieve adequate market acceptance
and revenues from product sales of these products, which could adversely affect
the results of operations of the combined company.
BOTH GELTEX AND SUNPHARM HAVE EXPERIENCED OPERATING LOSSES, WHICH ARE EXPECTED
TO CONTINUE
Both GelTex and SunPharm have historically operated with net losses and
expect that the combined company will continue to operate with net losses
through at least 2000. As of June 30, 1999, GelTex had an accumulated deficit of
approximately $83.7 million and SunPharm had an accumulated deficit of
approximately $21.2 million. The continuing development and commercialization of
GelTex's and/or SunPharm's potential products will require the commitment of
substantial resources. To achieve sustained profitable operations, GelTex, alone
or with its corporate partners, must successfully develop, obtain regulatory
approval for, manufacture and market its products. SunPharm also expects to
incur losses for the foreseeable future. SunPharm cannot assure that it will
successfully transition from its development stage to successful operations
and/or profitability. The amount of net losses and the time required to reach
sustained profitability are highly uncertain for both companies. GelTex and
SunPharm cannot assure that the combined company will be able to achieve or
sustain profitability.
THE COMBINED COMPANY MAY REQUIRE SUBSTANTIAL ADDITIONAL CAPITAL, WHICH MAY BE
DIFFICULT TO OBTAIN
The combined company's cash requirements may potentially increase
materially from those now planned and could result in the need for substantial
additional capital if any of the following should occur:
- FDA approval of NDAs, particularly with respect to Cholestagel, are
delayed or not obtained;
- GelTex is unable to secure a strategic partner for Cholestagel and
GelTex's second generation bile acid sequestrant;
- results of research and development efforts or results of clinical trials
indicate a requirement for increased funding;
20
<PAGE> 29
- termination or alteration of GelTex's Renagel joint venture with Genzyme,
or SunPharm's agreements with the University of Florida, Warner-Lambert
or Nippon Kayaku;
- increases in, or interruptions in the supply of, special materials
required for the manufacture of products;
- competitive technological advances; or
- additional funding is required in connection with the FDA review or other
regulatory processes and other factors.
Adequate additional funds, whether through additional sales of securities
or collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the combined
company. Insufficient funds may require the combined company to delay, scale
back or eliminate certain of its research and product development programs, or
license third parties to commercialize products or technologies under terms that
the combined company might otherwise find unacceptable. If required additional
funding is not obtained, the combined company's business and operating results
would be adversely affected.
UNCERTAINTY OF MANUFACTURING AND SUPPLY RELATIONSHIPS MAY AFFECT THE ABILITY OF
GELTEX AND SUNPHARM TO PRODUCE AND SELL PRODUCTS
GelTex and its Renagel joint venture with Genzyme have relied and will
continue to rely upon third parties to manufacture commercial quantities of
Renagel. GelTex and its Renagel joint venture currently have or are in the
process of negotiating the following manufacturing or supply relationships
related to Renagel:
- GelTex has non-exclusively sublicensed its rights to manufacture the
starting material for Renagel to a supplier, is purchasing quantities of
this material under purchase orders issued to this supplier, and is in
the process of negotiating a long-term fixed price supply agreement with
this supplier;
- GelTex has entered into a long-term fixed price supply agreement with The
Dow Chemical Company for the active ingredient for Renagel;
- GelTex's Renagel joint venture with Genzyme has entered into a long-term
fixed price supply agreement with Genzyme to manufacture the active
ingredient for Renagel;
- GelTex has concluded a long-term fixed price service agreement with one
encapsulator to formulate the Renagel active ingredient into finished
Renagel capsules; and
- GelTex is in the process of negotiating a long-term fixed price service
agreement with a tabulator to formulate the Renagel active ingredient
into finished Renagel tablets.
With respect to Cholestagel, GelTex currently has or is in the process of
negotiating the following manufacturing or supply relationships:
- GelTex has non-exclusively sublicensed its rights to manufacture the
starting material for Cholestagel to a supplier, is purchasing quantities
of this material under purchase orders issued to this supplier, and is in
the process of negotiating a long-term fixed price supply agreement with
this supplier;
- GelTex is concluding negotiations related to the supply of initial
commercial quantities of the active ingredient for Cholestagel; and
- GelTex is in the process of negotiating a long-term fixed price service
agreement with a formulator to formulate the Cholestagel active
ingredient into finished Cholestagel capsules and/or tablets.
Should any of these manufacturing relationships or negotiations terminate
or should any of the suppliers be unable to satisfy GelTex's requirements for
starting material, active ingredients or finished goods, GelTex would be unable
to commercialize its products as expected, and GelTex's business and
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financial condition would be materially and adversely affected. GelTex cannot
assure that it will be successful in obtaining additional sources for any of the
products or services described above or that it will be able to obtain such
products or services on commercially reasonable terms.
SunPharm contracts with third parties for the production of compounds in
limited quantities for its preclinical and clinical trials and does not at the
present time possess the staff or facilities necessary to manufacture products
in commercial quantities. However, SunPharm has entered into agreements for the
production of clinical-scale quantities of its products by third party
contractors. SunPharm cannot ensure that it or its suppliers can manufacture the
polyamine analogue compounds or iron chelators at a cost or in quantities
necessary to make these compounds commercially viable products. The combined
company may utilize existing relationships with manufacturers of SunPharm
compounds and could be materially adversely affected by delays or interruptions
in supply of polyamine analogue compounds or iron chelators.
A shutdown in any of the manufacturing facilities utilized by suppliers of
GelTex or SunPharm due to technical, regulatory or other problems, resulting in
an interruption in supply of products, could significantly delay the
manufacturing of one or more GelTex or SunPharm products, which could have an
adverse impact on GelTex's or SunPharm's financial results. The manufacturing
process for pharmaceutical products is highly regulated, and regulators may shut
down manufacturing facilities that they believe do not comply with regulations.
The FDA's current Good Manufacturing Practices are extensive regulations
governing manufacturing processes, stability testing, record-keeping and quality
standards. Because the suppliers of key components and materials must be named
in an NDA filed with the FDA for a product, significant delays can occur if the
qualification of a new supplier is required. In the event of any interruption in
supply from a contract manufacturer due to regulatory reasons, processing
problems, capacity constraints or other causes, alternative manufacturing
arrangements may not be available to the combined company on a timely basis, if
at all.
GELTEX AND SUNPHARM RELY ON LICENSES FROM THIRD PARTIES FOR ACCESS TO MATERIALS
AND TECHNOLOGIES, AND FAILURE TO MAINTAIN THESE LICENSES WOULD NEGATIVELY IMPACT
GELTEX AND SUNPHARM
GelTex has obtained a non-exclusive license from the third party which has
patents covering the starting material employed in the manufacture of Renagel
and Cholestagel. GelTex may not sublicense its rights under this license without
the licensor's consent, except to GelTex's current supplier of the starting
material and certain other parties specified in the license. The license
agreement may be terminated upon short notice if GelTex fails to meet its
material obligations under the license agreement, including lump sum payments,
royalties and confidentiality obligations. If the license is terminated and the
owner of the patent is unwilling to supply material to GelTex, GelTex may not be
able to commercialize its lead products using current manufacturing procedures,
if at all, which would have a material adverse effect on GelTex's financial
condition and results of operations.
SunPharm licenses significant technology from the Foundation. SunPharm
exclusively licenses more than 45 issued US and foreign patents and numerous
pending patent applications, subject to the nonexclusive statutory US government
license. SunPharm derives all rights for its products from its license agreement
with the Foundation, and the license agreement sets forth milestone and
diligence requirements which SunPharm must satisfy to retain its license to the
patents and other proprietary rights under the agreement. Neither SunPharm nor
GelTex can assure that either SunPharm, prior to the effective time of the
merger, or the combined company, after the effective time of the merger, will
satisfy any of these requirements.
The Foundation may terminate SunPharm's rights under this license agreement
under certain circumstances, including SunPharm's:
- failure to pay royalties as required;
- material breach of the license agreement;
- bankruptcy or failure to carry on its business;
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- failure to commence marketing of a licensed product within six months of
approval in any specific market; and
- failure to comply with the terms of its sponsored research agreement with
the University of Florida.
To date, no licensed products under the agreement have received marketing
approvals in any specific market. If the Foundation terminates the license
agreement, SunPharm's rights to manufacture and market DEHOP, DENSPM and its
other potential products would terminate, and SunPharm's financial condition and
results of operations would be materially adversely affected. Please read
"SunPharm's Business -- Licensed Technology and Sponsored Research -- License
Agreement" on page 74 for a more in-depth discussion about SunPharm's license
agreement.
GELTEX'S AND SUNPHARM'S OPERATIONS DEPEND ON COMPLIANCE WITH COMPLEX GOVERNMENT
REGULATIONS
Government authorities in the U.S. and other countries, including the FDA,
extensively regulate both GelTex's and SunPharm's research, preclinical
development, clinical trials, and the manufacturing and marketing of products
under development. To obtain approval to commercialize a product, the combined
company must demonstrate to the satisfaction of these authorities that a product
is safe and effective for its intended uses, and that the product can be
manufactured to the applicable standards. In the U.S., the product must also
undergo extensive preclinical testing. To date, GelTex has received only U.S.
regulatory approval to market Renagel capsules. Delays in obtaining additional
regulatory approvals could adversely affect the marketing of products developed
by the combined company and its ability to generate commercial product revenues.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in most foreign countries must be obtained prior to the
commencement of commercial sales of the product in these countries. The
requirements governing the conduct of clinical trials and product approvals vary
widely from country to country, and the time required for approval may be longer
or shorter than that required for FDA approval. Although there are some
procedures for unified filings in the European Union, in general, each country
at this time has its own procedures and requirements. Further, the FDA regulates
the export of products produced in the U.S. and may prohibit the export even if
such products are approved for sale in other countries.
The combined company will also be subject to numerous environmental,
health, and workplace safety laws and regulations, including those governing
laboratory procedures and the handling of biohazardous materials. Any violation
of, and cost of compliance with, these laws and regulations could adversely
affect the combined company's operations.
The effects of this governmental regulation will have considerable effect
on the development of the combined company's products including:
- The regulatory process includes pre-clinical studies and clinical trials
of each product to establish its safety and efficacy, and may include
post-marketing studies that require expenditure of substantial resources.
- The results for pre-clinical studies and early clinical trials conducted
by GelTex or the combined company may not be predictive of results
obtained in later clinical trials, and there can be no assurance that
clinical trials conducted by GelTex will demonstrate sufficient safety
and efficacy to obtain marketing approvals.
- The rate of completion of GelTex's clinical trials may be delayed by many
factors, including slower than anticipated patient enrollment of adverse
events occurring during the clinical trials.
- Data obtained from pre-clinical and clinical activities are susceptible
to varying interpretations, which could delay, limit or prevent
regulatory approval. In addition, delays or rejections may be encountered
based upon many factors, including changed in regulatory policy during
the period of product development.
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- As a result of FDA reviews or complications that may arise in any phase
of the clinical trial program, the proposed schedules for IND, IDE and
clinical protocol submissions to the FDA, initiations of studies and
completions of clinical trials may not be maintained.
Neither SunPharm nor GelTex can assure that the combined company will have
sufficient resources to complete regulatory processes or that the combined
company could survive the inability to obtain, or delays in obtaining, those
approvals. Regulatory authorities may decide at any time to review any approvals
they may have previously granted, and their later discovery of previously
unknown problems may result in withdrawal of products from the market. Failure
to comply with applicable regulatory requirements can result in fines,
suspensions of regulatory approvals, product recalls, operating restrictions and
criminal prosecution. Further, authorities may establish additional regulations
that could prevent or delay regulatory approval of and/or limit federal
government reimbursement for the combined company's products.
GELTEX AND SUNPHARM FACE INTENSE COMPETITION FROM OTHER COMPANIES WHOSE PRODUCTS
MAY GAIN GREATER MARKET ACCEPTANCE
The pharmaceutical industry is intensely competitive and is subject to
rapid and significant technological change. Many companies, including
biotechnology, chemical and pharmaceutical companies, are actively engaged in
activities similar to those of GelTex, including research and development of
products for the treatment of hyperphosphatemia, hypercholesterolemia, obesity
and infectious diseases. Phosphate binders are currently the only available
treatment in the U.S. for the treatment of hyperphosphatemia. In addition to
Renagel capsules, there are several other phosphate binders available or under
development. A prescription calcium acetate preparation is currently the only
other product approved in the U.S. for the treatment of elevated phosphorus
levels in patients with end-stage renal disease. Other products currently used
as phosphate binders include over-the-counter calcium- and aluminum-based
products and dietary calcium supplements.
In the cholesterol reduction field, products are currently available that
address many of the needs of the market. These products include other bile acid
sequestrants, HMG-CoA reductase inhibitors, fibric acid derivatives and niacin
products. In 1998, sales of HMG-CoA reductase inhibitors represented
approximately 97% of the market for cholesterol-reducing drugs sold in the U.S.
Currently marketed products often have a significant competitive advantage over
new products such as those which may be introduced by GelTex, and GelTex cannot
assure that its products will be able to compete successfully with existing
therapies or will achieve market acceptance. GelTex's success depends upon
developing and maintaining a competitive position in the development of products
and technologies in its areas of focus. Failure to achieve these objectives will
adversely affect GelTex's ability to achieve and sustain profitability.
Neither GelTex nor SunPharm can assure that their respective competitors
will not succeed in developing technologies and products that are more effective
than any which are being developed by GelTex or SunPharm or are anticipated to
be developed by the combined company, which would render the combined company's
technology and products obsolete or noncompetitive. Many of these competitors
have substantially greater financial and technical resources, larger research
and development staffs and more extensive marketing and manufacturing
capabilities than GelTex and its partners, and certain of these competitors may
compete with the combined company in establishing development and marketing
agreements with pharmaceutical companies. In addition, many of GelTex's and
SunPharm's competitors have greater experience in conducting pre-clinical
testing and human clinical trials and obtaining FDA and other regulatory
approvals. The combined company's competitors may succeed in obtaining FDA
approval for competitive products, including more rapidly than the combined
company.
PATENTS AND PROPRIETARY TECHNOLOGY MAY BE DIFFICULT TO OBTAIN OR INEFFECTIVE,
ALLOWING OTHER COMPANIES TO MORE EASILY PRODUCE PRODUCTS SIMILAR TO THE COMBINED
COMPANY'S PRODUCTS
The biotechnology and pharmaceutical industries place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. GelTex's success will depend, in part, on its ability to
obtain patent protection for its manufacturing processes and products (including
the
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use of its products), preserve its trade secrets and operate without infringing
the proprietary rights of third parties. GelTex has ongoing research efforts and
expects to seek additional patents covering this research in the future. GelTex
cannot assure its success or timeliness in obtaining any patents, or of the
breadth or degree of protection that any such patents will afford GelTex. GelTex
cannot assure that patent applications relating to GelTex's potential products
or technology will result in patents being issued or that any current or future
patents will afford adequate protection to GelTex or not be challenged,
invalidated or infringed. Furthermore, GelTex cannot assure that others will not
independently develop similar products and processes, duplicate any of GelTex's
products or design around any current or future patents of GelTex.
SunPharm also possesses important proprietary trade secrets and unpatented
know-how. The combined company cannot assure that others may not independently
develop the same or similar technologies. Although SunPharm has taken steps to
protect these technologies, third parties may gain access to them. Also,
SunPharm's sponsored research agreement with the University of Florida requires
it and its employees to treat confidentially the proprietary information owned
by or licensed to SunPharm. Nonetheless, third parties may gain access to this
information.
In addition, GelTex may be required to obtain licenses to patents or other
proprietary rights of third parties. GelTex cannot assure that any licenses
required under any such patents or proprietary rights would be made available on
terms acceptable to GelTex, if at all. If GelTex does not obtain such licenses,
it could encounter delays in product market introductions while it attempts to
design around such patents or other rights, or it may be unable to develop,
manufacture or sell such products. GelTex also seeks to protect its proprietary
technology, including technology which may not be patented or patentable, in
part by confidentiality agreements and, if possible, inventions rights
agreements with its collaborators, advisors, employees and consultants. GelTex
cannot assure that these agreements will not be breached, that GelTex will have
adequate remedies for any breach or that GelTex's trade secrets will not
otherwise be disclosed to, or discovered by, competitors. GelTex cannot assure
that such persons or institutions will not assert rights to intellectual
property arising out of their relationships with GelTex.
SunPharm cannot assure that its patents from the Foundation will provide it
with substantial protection or commercial benefit, afford it adequate protection
from competing products, not be challenged or declared invalid, or that
additional government patents will be issued. Since the U.S. government funds
research at academic institutions, it retains a non-exclusive license to
inventions made under grants from the National Institutes of Health, or NIH. As
a non-exclusive licensee of the Foundation's patents, the U.S. government could
increase the supply of products based on the patents or reduce the cost of
treatment with the products, should the government exercise its non-exclusive
rights. Any of these factors could materially and adversely affect SunPharm's
operations.
Significant litigation has been conducted in the biotechnology and
pharmaceutical industry regarding patents and other proprietary rights. The
combined company could incur substantial costs in defending itself in suits
brought against it or in suits in which it may assert its patents against
others. If the outcome of any such litigation is unfavorable to the combined
company, its business could be materially and adversely affected. To determine
the priority of inventions, the combined company may also have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office, which
could result in adverse decisions and substantial cost to the combined company.
If the combined company becomes involved in similar litigation on its
intellectual property rights, it would be materially adversely effected.
PRODUCT LIABILITY CLAIMS MAY INCREASE COSTS AND DECREASE PROFITS
GelTex's business exposes it to potential product liability claims, which
are inherent in the testing, manufacturing, marketing and sale of
pharmaceuticals. The use of GelTex's product candidates in clinical trials also
exposes GelTex to product liability claims and possible adverse publicity. These
risks increase with respect to GelTex's product candidates, if any, that receive
regulatory approval for commercialization. GelTex currently has limited product
liability insurance coverage for the clinical research use of its product
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candidates, and has product liability coverage for the commercial sale of
Renagel. However, GelTex cannot assure that it will be able to obtain additional
insurance coverage for other GelTex products which may be commercialized in the
future on acceptable terms, if at all, or that a product liability claim would
not materially adversely affect the business of GelTex.
SunPharm has product liability risk through its testing, marketing and sale
of pharmaceutical products. SunPharm currently maintains product liability
insurance coverage for clinical trials currently underway or expected to
commence in 1999. The combined company will have the benefit of this insurance
coverage, but neither GelTex nor SunPharm can assure that the combined company
will have the ability to obtain additional insurance at a reasonable cost
sufficient to cover all possible liabilities. If a successful product liability
suit is brought against it, SunPharm could be materially and adversely affected
by insufficient insurance coverage. Also, SunPharm indemnifies the University of
Florida and its trustees, officers, employees and affiliates against claims
resulting from the manufacture or sale of products derived from SunPharm's
compounds, and SunPharm maintains product liability coverage naming the
University of Florida as an additional insured for these risks.
If the combined company's marketing and sales activities are expanded or if
there is an increase in the sale of products marketed directly by the combined
company, the exposure to product liability claims may increase significantly. It
is possible that a single product liability claim could exceed the insurance
coverage limits of the combined company, and multiple claims are possible. If
that happens, the insurance coverage of the combined company may not be
adequate, and in the future such insurance may not be renewed at an acceptable
cost, if at all. The combined company's business, financial condition and
results of operations could be materially and adversely affected by one or more
successful product liability claims.
PHARMACEUTICAL PRICING AND REIMBURSEMENT PROCEDURES MAY AFFECT THE COMBINED
COMPANY'S FINANCIAL PERFORMANCE
In both domestic and foreign markets, GelTex's or its corporate partners'
ability to commercialize GelTex's products and SunPharm's ability to
successfully commercialize its products may depend on whether government health
administration authorities, private health insurers and others provide for
reimbursement of the costs of these products and related treatments and other
organizations. Third-party payors are increasingly challenging the price and
cost effectiveness of medical products. Neither GelTex nor SunPharm can assure
that these third party payors will consider proposed products cost effective or
that third party payors will adequately reimburse GelTex, SunPharm or their
corporate partners to allow each to maintain sufficient price levels for an
appropriate return on their respective investment in product development. If the
government and third party payors do not provide adequate coverage and
reimbursement levels for use of GelTex's therapeutic products, the market
acceptance of these products and the combined company's financial performance
would be adversely affected. This is particularly true with respect to Renagel,
which competes with certain low-priced, over-the-counter products.
Healthcare reform, in particular, may have a significant impact on any
SunPharm products under development. Any reform measures, if adopted, could
adversely affect the pricing of therapeutic products in the U.S. or the amount
of reimbursement available from U.S. agencies or third party insurers and could
materially and adversely affect the combined company in general. Also, GelTex's
ability to commercialize SunPharm's potential products may be adversely affected
if these proposals materially and adversely affect the business, financial
condition and profitability of prospective collaborators for certain of its
proposed products. Legislation and regulations affecting the pricing of
pharmaceuticals may change before any of the combined company's proposed
products are approved for marketing. Adoption of legislation or regulations
could further limit reimbursement.
In addition, in many international markets, governments control the prices
of prescription pharmaceuticals. In these markets, once marketing approval is
received, pricing negotiation can take another six to twelve months or longer.
The combined company may be forced to lower prices by competing product sales,
and attempts to gain market share or introductory pricing programs, which could
adversely affect its business, financial condition and results of operations.
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GELTEX'S FAILURE TO CONTINUE TO HIRE AND RETAIN QUALIFIED PERSONNEL COULD HARM
ITS BUSINESS
GelTex is highly dependent on the members of its management and scientific
staff, the loss of one or more of whom could have a material adverse effect on
GelTex. In addition, GelTex believes that its future success will depend in
large part upon its ability to attract and retain highly skilled scientific and
managerial personnel. GelTex faces significant competition for such personnel
from other companies, research and academic institutions, government entities
and other organizations. GelTex cannot assure that it will be successful in
hiring or retaining the personnel it requires for continued growth. The failure
to hire and retain such personnel could materially and adversely affect GelTex.
POTENTIAL YEAR 2000 PROBLEMS MAY AFFECT THE COMBINED COMPANY
GelTex has developed a four-part plan to ensure that its information
technology and other systems will be year 2000 compliant and has completed its
assessment phase. The assessment indicated that certain embedded systems are not
year 2000 compliant. GelTex intends to complete the remaining three phases of
testing for these non-compliant embedded systems by December 1999, and estimates
that the cost of remediating these systems will be approximately $100,000.
GelTex has not yet developed a comprehensive contingency plan to address
situations that may result if GelTex or any of the third parties upon which
GelTex is dependent are unable to achieve year 2000 readiness, although such a
plan is under evaluation.
SunPharm also has assessed its financial and operational systems to ensure
year 2000 compliance. Based on its review, SunPharm does not anticipate
significant costs for remediation of year 2000 problems for its information
technology systems. However, SunPharm cannot assure that it or its research and
business partners will successfully identify and remedy all potential year 2000
problems or that a resulting system failure would not materially and adversely
affect SunPharm.
After the merger, GelTex expects that the combined company will continue
the assessment, implementation, remediation, testing and contingency planning
related to year 2000 compliance, but cannot assure that the merger will not
cause some delay or disruption in this assessment and remediation process. In
the event that GelTex is not able to complete the necessary phases of its year
2000 compliance, the combined company could experience business interruptions.
In addition, the inability of a third party upon which GelTex or SunPharm is
dependent to complete its year 2000 compliance program in a timely manner, as
well as disruptions in the general economy resulting from the year 2000 issue
could have a material adverse effect on the combined company's business,
financial condition, and results of operations.
GELTEX'S ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRORS OF
GELTEX AND MAY DEPRESS ITS STOCK PRICE
Certain provisions of GelTex's restated certificate of incorporation and
by-laws and the terms of its stockholder rights plan may have the effect of
delaying or preventing a change in control of GelTex and may deprive
stockholders of the opportunity to receive a premium for their GelTex common
stock. In addition, GelTex's authorized capital stock includes shares of
undesignated preferred stock that may be issued from time to time by GelTex's
board of directors in one or more series. The issuance of series preferred stock
could have the effect of discouraging attempts to acquire control of GelTex.
In addition, under GelTex's stockholder rights plan, holders of GelTex
common stock are entitled to one preferred share purchase right for each
outstanding share of GelTex common stock they hold, exercisable under certain
defined circumstances involving a potential change of control, as discussed in
"Description of GelTex Capital Stock" on pages 92 through 96 of this proxy
statement/prospectus. The preferred share purchase rights have the anti-takeover
effect of causing substantial dilution to a person or group that attempts to
acquire GelTex on terms not approved by GelTex's board of directors. The
foregoing provisions could have a material adverse effect on the premium that
potential acquirors might be willing to pay in a merger or that investors might
be willing to pay in the future for shares of GelTex common stock.
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FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains certain statements that constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. All statements other than statements of
historical information provided herein are forward-looking statements and may
contain information about financial results, economic conditions, trends and
known uncertainties. These forward-looking statements are subject to risks and
uncertainties, including, without limitation, quarterly fluctuations in
operating results, the timely availability of new products, market acceptance of
GelTex's or the combined company's products, and the impacts of competitive
products and pricing and other factors set forth above under the heading "Risk
Factors" on page 15. These risks and uncertainties could cause actual results to
differ materially from those reflected in the forward-looking statements.
SunPharm stockholders are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis, judgment,
belief or expectation only as of the date hereof. GelTex and SunPharm undertake
no obligation to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof.
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THE SPECIAL MEETING
PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus is being furnished to you for the
solicitation of your proxy by SunPharm's board of directors in connection with
the proposed merger.
This proxy statement/prospectus is first being furnished to stockholders of
SunPharm on or about October 11, 1999.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The special meeting of stockholders of SunPharm is scheduled to be held as
follows:
November 16, 1999
9:00 a.m., Eastern time
At the offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
located at One Financial Center, Boston, Massachusetts
PURPOSE OF THE SPECIAL MEETING
SunPharm is holding the special meeting so that its stockholders may
consider and vote upon a proposal to approve the merger agreement, and to
transact any other business that properly comes before the special meeting or
any adjournment. Adoption of the merger agreement will also constitute approval
of the merger and the other transactions contemplated by the merger agreement.
If the stockholders of SunPharm adopt the merger agreement, the Merger Sub
will merge with and into SunPharm, and SunPharm will survive the merger as a
wholly-owned subsidiary of GelTex. You will receive between 0.12225 and 0.14493
of a share of GelTex common stock for each share of SunPharm common stock you
hold and between 0.18338 and 0.21740 of a share of GelTex common stock for each
share of SunPharm preferred stock you hold.
STOCKHOLDER RECORD DATE FOR THE SPECIAL MEETING
SunPharm's board of directors has fixed the close of business on October 1,
1999, as the record date for determination of SunPharm stockholders entitled to
notice of and entitled to vote at the special meeting. On the record date, there
were 7,249,241 shares of common stock of SunPharm outstanding, held by
approximately 140 holders of record, and 366,667 shares of preferred stock of
SunPharm outstanding, held by approximately 8 holders of record.
VOTE OF SUNPHARM STOCKHOLDERS REQUIRED FOR ADOPTION OF THE MERGER AGREEMENT
A majority of the outstanding shares of common stock of SunPharm entitled
to vote at the special meeting must be represented, either in person or by
proxy, to constitute a quorum at the special meeting. You are entitled to one
vote for each share of SunPharm common stock and for each share of SunPharm
preferred stock held by you on the record date on each proposal to be presented
to stockholders at the special meeting. The following affirmative votes of
SunPharm stockholders entitled to vote at the special meeting are required to
approve the merger agreement and related transactions:
- at least a majority of all outstanding SunPharm common stock and Series A
and Series B preferred stock, voting together as a single class;
- at least 66 2/3% of all outstanding SunPharm Series A preferred stock;
and
- at least 66 2/3% of all outstanding SunPharm Series B preferred stock.
The SunPharm stockholders who are parties to the stockholders agreement
with GelTex agreed to vote their shares of SunPharm common stock and preferred
stock in favor of the adoption of the merger
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agreement. As of the record date, these stockholders held approximately
2,662,241 shares of the outstanding common stock of SunPharm and 316,667 shares
of the outstanding preferred stock of SunPharm, which represented approximately
39% of all outstanding SunPharm common stock and preferred stock in the
aggregate.
As of the record date, directors and executive officers of SunPharm and
their affiliates beneficially owned approximately 2,478,908 shares of common
stock of SunPharm and 250,000 shares of preferred stock of SunPharm, which
represented in the aggregate approximately 36% of all outstanding common stock
and preferred stock of SunPharm entitled to vote at the special meeting.
PROXIES
All SunPharm common stock and preferred stock represented by properly
executed proxies received before or at the special meeting will, unless the
proxies are revoked, be voted in accordance with the instructions indicated
thereon. If you properly execute your proxy but fail to indicate your voting
instructions to us, your shares will be voted "FOR" adoption of the merger
agreement. You are urged to mark the box on the proxy to indicate how to vote
your shares.
If you return a properly executed proxy and have abstained from voting on
adoption of the merger agreement, the SunPharm common stock or preferred stock
represented by your proxy will be considered present at the special meeting for
purposes of determining a quorum and for purposes of calculating the vote, but
will not be considered to have been voted in favor of adoption of the merger
agreement. Similarly, if an executed proxy is returned by a broker holding
SunPharm common stock or preferred stock in street name which indicates that the
broker does not have discretionary authority to vote on adoption of the merger
agreement, the shares will be considered present at the meeting for purposes of
determining the presence of a quorum and of calculating the vote, but will not
be considered to have been voted in favor of adoption of the merger agreement.
Your broker will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker.
Abstentions, failures to vote and broker non-votes will have the same
effect as a vote against adoption of the merger agreement.
SunPharm does not expect that any matter other than adoption of the merger
agreement will be brought before the special meeting. If, however, other matters
are properly presented, the persons named as proxies will vote in accordance
with their judgment with respect to those matters, unless authority to do so is
withheld in the proxy.
You may revoke your proxy at any time before it is voted by:
- notifying in writing the Secretary of SunPharm at: SunPharm Corporation,
The Veranda, Suite 301, 814 Highway A1A, Ponte Vedra Beach, Florida,
32082;
- granting a subsequent proxy; or
- appearing in person and voting at the special meeting. Attendance at the
special meeting will not in and of itself constitute revocation of a
proxy.
SunPharm and GelTex will equally share the expenses incurred in connection
with the printing and mailing of this proxy statement/prospectus. SunPharm will
also request banks, brokers and other intermediaries holding shares beneficially
owned by others to send this proxy statement/prospectus to, and obtain proxies
from, the beneficial owners and will reimburse the holders for their reasonable
expenses in so doing.
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YOU SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXIES. A
TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF STOCK CERTIFICATES FOR
COMMON STOCK AND PREFERRED STOCK OF SUNPHARM WILL BE MAILED TO YOU AS SOON AS
PRACTICABLE AFTER COMPLETION OF THE MERGER.
[THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK.]
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THE MERGER
This section of the proxy statement/prospectus describes material aspects
of the proposed merger, including the merger agreement. While GelTex and
SunPharm believe that the description covers the material terms of the merger
and the related transactions, this summary may not contain all of the
information that is important to you. You should read this entire document and
the other documents referred to carefully for a more complete understanding of
the merger.
BACKGROUND OF THE MERGER
For a number of years, GelTex has believed that entering into beneficial
alliances with significant partners is important in supporting and leveraging
its marketing and research and development efforts, and has been evaluating
companies with complementary technologies and products under development which
could benefit from GelTex's clinical and regulatory expertise.
In October 1998, Dr. Douglas Reed, Vice President -- Business Development
of GelTex, contacted Mr. Stefan Borg, SunPharm's President and Chief Executive
Officer. Dr. Reed and Mr. Borg initiated discussions to explore a possible
collaboration for SunPharm's compounds that target ulcerative colitis. SunPharm
provided Dr. Reed with information on ulcerative colitis, abstracts on the use
of iron chelators for ulcerative colitis, and information on the use of DEHOP
for AIDS-related refractory diarrhea.
In December 1998, SunPharm entered into an agreement with Petkevich &
Partners, L.L.C., pursuant to which Petkevich & Partners was engaged to provide
SunPharm with general financial advisory services, including the identification
and review of potential merger candidates for SunPharm and/or acquirors of
SunPharm, and structuring and negotiating a merger or acquisition with one of
the potential candidates. Dr. Raymond Bergeron of the University of Florida, the
inventor of SunPharm's polyamine analogues and iron chelators, corresponded with
Dr. Reed in December regarding GelTex's interest in SunPharm's portfolio of
drugs for gastrointestinal and cancer indications.
On February 11, 1999, Mr. Borg, Dr. Michael Cullen of SunPharm and Dr.
Bergeron made a presentation to Dr. Reed about SunPharm's gastrointestinal and
cancer portfolios.
In March 1999, Dr. Reed indicated GelTex's interest in the portfolios and
stated GelTex's intent to pursue the matter further. Dr. Reed asked for a sample
of the drugs as well as another meeting with Dr. Bergeron. GelTex
representatives visited the University of Florida and viewed an ulcerative
colitis model in rodents.
In April 1999, GelTex and SunPharm executed and delivered a material
transfer agreement to permit GelTex to conduct preclinical studies on a SunPharm
compound to evaluate anti-inflammatory effects in an inflammatory bowel disease
model.
In June 1999, Mr. Mark Skaletsky, President and Chief Executive Officer of
GelTex, indicated to Mr. Borg that GelTex was prepared to enter into serious
negotiations regarding a business combination of SunPharm with GelTex.
Thereafter, SunPharm consulted with Petkevich & Partners to discuss the
possibility of a combination with GelTex and selected Andrews & Kurth, L.L.P. as
legal counsel to represent it in the evaluation of GelTex's proposal.
On July 7, 1999, Mr. Skaletsky, Mr. Borg, Dr. Reed, Mr. Misha Petkevich and
Mr. Philip Tracy, a director of SunPharm, met in New York to further discuss a
business combination of SunPharm and GelTex.
On July 21, 1999, the SunPharm board of directors held a telephonic board
meeting in which the proposal from GelTex was discussed, and authorized SunPharm
management to proceed with negotiations with GelTex concerning the combination
proposal.
On July 23, 1999, the GelTex board of directors conducted a telephonic
board meeting to discuss the terms of an acquisition of SunPharm, and authorized
GelTex to commence detailed technical and financial due diligence of SunPharm.
The GelTex board of directors discussed the possibility of entering into a non-
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binding letter of intent with SunPharm concerning the terms of an acquisition,
but instead elected to commence preparation of a merger agreement based on the
deal structures previously discussed between Mr. Skaletsky and Mr. Borg. GelTex
management engaged Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. as legal
counsel to represent it in the negotiations with SunPharm and the preparation of
the draft merger agreement and related documentation.
Throughout the remainder of July, both companies conducted technical and
financial due diligence of each other. The due diligence included visits to
company facilities, extensive documentation review, consultation with outside
technical experts and consultants and questioning of management, research
collaborators and financial advisors.
On August 4, 1999, senior management of GelTex and SunPharm and their
respective financial and legal advisors held meetings to negotiate and finalize
the terms of the proposed definitive merger agreement. On August 5 and August 6,
1999, senior management of GelTex and SunPharm continued to advise their
respective boards of directors of the status of the negotiations between the
parties.
The GelTex board of directors held a telephonic meeting on August 9, 1999
at which attorneys from Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. also
participated. After a review and discussion of the terms of the proposed merger
agreement, and discussions regarding the financial and other effects the
proposed merger would have on GelTex stockholders, the GelTex board of directors
unanimously approved the merger and authorized the officers of GelTex to
finalize and execute the merger agreement.
From August 9 through 11, 1999, senior management of GelTex and SunPharm
and their respective financial and legal advisors continued to negotiate and
finalize the terms of the proposed definitive merger agreement.
On August 11, 1999, the SunPharm board of directors held a meeting to
review the terms of the merger agreement and asked SunPharm's legal advisors to
pursue clarification and improvement of certain terms and conditions in the
merger agreement. Advisors from Andrews & Kurth and Petkevich & Partners were
present during discussions of the terms of the merger agreement and participated
in the discussions.
On August 12 and 13, 1999, senior management of GelTex and SunPharm and
their respective financial and legal advisors continued to negotiate and
finalize the terms of the proposed definitive merger agreement.
The SunPharm board of directors held a telephonic meeting on August 13,
1999 (a continuation of the August 11 board meeting) at which attorneys from
Andrews & Kurth and financial advisors from Petkevich & Partners also
participated. After a review and discussion of the terms of the proposed merger
agreement, and discussions regarding the financial and other effects the
proposed merger would have on SunPharm stockholders and employees, the SunPharm
board of directors unanimously approved the merger and authorized the officers
of SunPharm to finalize and execute the merger agreement.
The definitive merger agreement was executed on behalf of GelTex, SunPharm
and the Merger Sub on August 13, 1999.
JOINT REASONS FOR THE MERGER
GelTex's and SunPharm's boards of directors have determined that the
combined company following the merger would have the potential to realize
long-term improved operating and financial results and a stronger competitive
position. GelTex's and SunPharm's boards of directors have identified additional
potential mutual benefits of the merger that they believe will contribute to the
success of the combined company. These potential benefits include the following:
- the ability of GelTex to enhance its diverse, polymer-based product
pipeline through the addition of the polyamine and iron chelator
technologies of SunPharm;
- a more rapid path to commercialization for the research being conducted
on behalf of SunPharm by Dr. Raymond Bergeron at the University of
Florida in the areas of iron chelators (in diseases
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<PAGE> 42
such as sickle cell anemia, thalassemia and myelodysplasia) and polyamine
compounds resulting from applications of Geltex's expertise in clinical
development and regulatory review;
- the application of GelTex's regulatory experience in the management of
the investigational new drug applications expected to be submitted by
SunPharm within the next year related to SunPharm's polyamine and iron
chelator programs;
- a stronger research and development team in the combined companies;
- GelTex can benefit from SunPharm's collaboration in place with
Warner-Lambert under which SunPharm's lead polyamine analogue, DENSPM, is
in Phase II clinical studies for treatment of solid tumor cancers. GelTex
will also use its experience to manage SunPharm's DEHOP polyamine
analogue, which is in a Phase II study to treat chronic, refractory
AIDS-related diarrhea; and
- the broadening of the GelTex product line resulting in avoiding excessive
dependence on any particular product or technology platform.
SUNPHARM'S REASONS FOR THE MERGER
The SunPharm board of directors has unanimously approved the merger
agreement and the transactions contemplated thereby and has determined that the
merger is fair to, and in the best interests of, SunPharm and its stockholders.
In reaching its determination, the SunPharm board consulted with SunPharm's
management, as well as its legal counsel and financial advisor, and considered
the following material factors:
- SunPharm's difficulty in raising additional capital to meet its
commitments and drug development goals and, correspondingly, to meet the
listing requirements of The Nasdaq SmallCap Market;
- increased ability of the combined company to fund research and
development of SunPharm's products;
- the opportunity the merger affords SunPharm's stockholders to reduce
their exposure to the risks inherent in SunPharm's reliance on a limited
number of currently uncommercialized products, and the difficulties in
competing against larger companies with greater financial resources;
- the merger will allow holders of SunPharm common stock to retain an
equity interest in the combined company, to achieve greater liquidity
than could be achieved by continuing to hold SunPharm common stock, and
to participate in the potential growth of GelTex;
- the exchange ratio fraction and recent trading prices for SunPharm and
GelTex common stock;
- the likelihood that the merger will be consummated, including the terms
and conditions of the merger agreement, and the limited conditions to the
consummation of the merger;
- the expectation that the merger will be nontaxable to the stockholders of
SunPharm for federal income tax purposes; and
- the oral opinion of Petkevich & Partners delivered August 11, 1998 at the
SunPharm board meeting (subsequently confirmed in a written opinion dated
August 13, 1998) that as of such date the merger consideration is fair to
holders of capital stock of SunPharm from a financial point of view. (See
"The Merger -- Opinion of SunPharm's Financial Advisor" on page 36).
The SunPharm board also considered the following potentially negative
material factors in its deliberations concerning the merger:
- the loss of control over the future operations of SunPharm following the
merger, and
- the risk that the benefits sought to be achieved in the merger may not be
achieved.
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<PAGE> 43
After reviewing these potentially negative factors, the SunPharm board
concluded that they were outweighed by the positive factors described above and
accordingly determined that the merger is fair to, and in the best interests of,
SunPharm and its stockholders.
In view of the wide variety of factors considered by the SunPharm board, it
did not find it practicable to quantify, or otherwise attempt to assign relative
weights to, the specific factors considered in making its determination.
Consequently, the SunPharm board did not quantify the assumptions and results of
its analysis in reaching its determination that the merger is fair to, and in
the best interests of, SunPharm and its stockholders. The SunPharm board
unanimously recommends that SunPharm stockholders vote "FOR" the proposal to
approve and adopt the merger agreement and approve the merger.
RECOMMENDATION OF SUNPHARM'S BOARD OF DIRECTORS
AFTER CAREFUL CONSIDERATION, SUNPHARM'S BOARD OF DIRECTORS UNANIMOUSLY
DETERMINED THE MERGER TO BE FAIR TO YOU AND IN YOUR BEST INTEREST AND DECLARED
THE MERGER ADVISABLE. SUNPHARM'S BOARD OF DIRECTORS APPROVED THE MERGER
AGREEMENT AND UNANIMOUSLY RECOMMENDS YOUR ADOPTION OF THE MERGER AGREEMENT.
In considering the recommendation of the SunPharm board of directors with
respect to the merger agreement, you should be aware that certain directors and
officers of SunPharm have certain interests in the merger that are different
from, or are in addition to the interests of SunPharm stockholders generally.
Please see the section entitled "Interests of Related Persons in the Merger" on
page 41 of this proxy statement/prospectus.
GELTEX'S REASONS FOR THE MERGER
At a meeting of the GelTex board of directors held on August 9, 1999, after
due consideration, the GelTex board determined that the merger agreement, the
merger and the related transactions are in the best interests of GelTex and its
stockholders and approved the merger agreement, the merger and the related
transactions. In approving the transaction, the GelTex board of directors
consulted with GelTex's management as well as its outside legal counsel, and
considered certain material factors, including:
- all the reasons described in "Joint Reasons for the Merger" above;
- the possibility, as alternatives to the merger, of pursuing an
acquisition of or a business combination or joint venture with an entity
other than SunPharm and the GelTex board's conclusion that a transaction
with SunPharm is more feasible, and is expected to yield greater
benefits, than the likely alternatives. The GelTex board reached this
conclusion for reasons including SunPharm's interest in pursuing a
transaction with GelTex, GelTex's view that the transaction could be
acceptably completed from a timing and regulatory standpoint, and GelTex
management's assessment of the alternatives and the expected benefits of
the merger and compatibility of the companies as described above, and the
GelTex board's favorable conclusion regarding the strengths of SunPharm's
polyamine and iron chelator technologies;
- the fact that GelTex stockholders would participate in the potential
growth of the combined company as a result of their holding between
approximately 93% and 95% of the outstanding stock of the combined
company after the merger;
- current industry, economic and market conditions, including the
difficulties which biotechnology companies currently face in raising
capital in the public markets and trends toward consolidation among
companies having market capitalizations comparable to that of GelTex;
- comparisons of historical information concerning SunPharm's business,
technology, financial performance and condition, management and
competitive position;
- the ability to complete the merger as a tax-free reorganization for U.S.
federal income tax purposes;
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- the terms and conditions of the merger agreement, including the
conditions to closing and the termination fees or topping fees payable
under certain circumstances (see "-- The Merger Agreement -- Conditions
to the Completion of the Merger" on page 53 and "-- The Merger Agreement
-- Termination of the Merger Agreement" on page 54);
- the role that GelTex's current management would play in the management of
the combined company and the composition of the combined company's board
of directors;
- the challenges of combining the businesses of the two corporations and
the risk of not achieving developmental synergies or expected cost
servings and other benefits and of directing management focus from other
strategic and operational matters; and
- that while the merger is likely to be completed, there are risks
associated with obtaining necessary approvals, and as a result of certain
conditions to the completion of the merger, it is possible that the
merger may not be completed even if approved by SunPharm stockholders
(see "-- The Merger -- Conditions to the Completion of the Merger" on
page 53).
In view of the wide variety of factors considered in connection with its
evaluation of the merger and the complexity of these matters, the GelTex board
did not find it useful to and did not attempt to quantify, rank or otherwise
assign relative weights to these factors.
In addition, the GelTex board did not undertake to make any specific
determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to the GelTex board's ultimate
determination, but rather the GelTex board conducted an overall analysis of the
factors described above, including thorough discussions with and questioning of
GelTex's management and legal, financial and accounting advisors. In considering
the factors described above, individual members of the GelTex board may have
given different weight to different factors.
OPINION OF SUNPHARM'S FINANCIAL ADVISOR
On December 1, 1998, SunPharm and Petkevich & Partners executed an
engagement letter pursuant to which Petkevich & Partners was engaged to act as
SunPharm's financial advisor in connection with the merger. Pursuant to the
engagement letter, SunPharm retained Petkevich & Partners to provide financial
advisory services in connection with a possible strategic transaction, including
a potential strategic combination, and to render an opinion as to the fairness
of any such transaction, from a financial point of view, to the holders of
capital stock of SunPharm. See "-- Background of the Merger" on page 32.
At a meeting of the SunPharm board held on August 11, 1999 and concluded on
August 13, 1999, Petkevich & Partners gave a presentation on the financial terms
of the merger and rendered its oral opinion, which opinion was subsequently
confirmed in writing, that as of August 13, 1999 and based on the matters
described therein, the aggregate consideration to be paid in the merger was
fair, from a financial point of view, to the holders of capital stock of
SunPharm. Petkevich & Partners does not admit that it is an "expert" within the
meaning of the term "expert" as used in the Securities Act or the rules and
regulations promulgated thereunder, or that its opinion constitutes a report or
valuation within the meaning of Section 11 of the Securities Act and the rules
and regulations promulgated thereunder.
The full text of the opinion, which sets forth, among other things,
assumptions made, matters considered and limitations on the review undertaken,
is attached hereto as Annex C and is incorporated herein by reference. Holders
of capital stock of SunPharm are urged to read the opinion in its entirety. The
opinion was prepared for the benefit and use of the SunPharm board in its
consideration of the merger and does not constitute a recommendation to holders
of capital stock of SunPharm as to how they should vote at the special meeting
in connection with the merger. The opinion does not address the relative merits
of the merger and any other transactions or business strategies discussed by the
SunPharm board as alternatives to the merger or, except with respect to the
fairness of the aggregate consideration to be paid in the merger from a
financial point of view to the holders of capital stock of SunPharm, the
underlying business decision of the SunPharm board of directors to proceed with
or effect the merger. The
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summary of the opinion set forth in this proxy statement/prospectus is qualified
in its entirety by reference to the full text of the opinion.
In connection with the preparation of the opinion, Petkevich & Partners,
among other things:
- reviewed financial information relating to SunPharm and GelTex disclosed
to Petkevich & Partners by each company, including certain financial
analyses and other information and data prepared by the respective
managements of SunPharm and GelTex;
- reviewed publicly available information concerning SunPharm and GelTex;
- held discussions with management of GelTex and SunPharm concerning the
business, past and current business operations, financial conditions and
future prospects of both companies, independently and combined, including
discussions with the managements of SunPharm and GelTex concerning their
views regarding the strategic rationale of the merger;
- reviewed the merger agreement;
- reviewed the stock prices and trading histories of SunPharm and GelTex;
- reviewed the contribution by each company to pro forma combined revenue,
operating income and net income;
- reviewed the valuations of publicly traded companies which it deemed
comparable to SunPharm;
- compared the financial terms of the merger with other transactions which
it has deemed relevant;
- analyzed the pro forma earnings per share of the combined company; and
- reviewed such other financial data, performed such other analyses and
considered such other information as it deemed necessary and appropriate
under the circumstances.
In its review and analysis, and in arriving at its opinion, Petkevich &
Partners has assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to Petkevich & Partners or publicly
available and has neither attempted independently to verify nor assumed
responsibility for verifying any of such information. Petkevich & Partners has
relied upon the assurances of the managements of SunPharm and GelTex, that they
are not aware of any facts that would make such information inaccurate or
misleading. Furthermore, Petkevich & Partners did not obtain or make, or assume
responsibility for obtaining or making, any independent evaluation or appraisal
of any of the properties or assets and liabilities (contingent or otherwise) of
SunPharm or GelTex, nor were any such evaluations or appraisals furnished to
Petkevich & Partners. Petkevich & Partners has not conducted any evaluation or
analyses of the technology underlying the products of SunPharm or GelTex. With
respect to the financial information (and the assumptions and bases therefor) of
SunPharm and GelTex which Petkevich & Partners has discussed with the
managements of SunPharm and GelTex, upon the advice of SunPharm and GelTex,
Petkevich & Partners has assumed that such information has been reasonably
prepared in good faith on the basis of reasonable assumptions, reflects the best
currently available estimates and judgments of the managements of SunPharm and
GelTex and that such information (and the technological milestones necessary to
achieve such results) will be realized in the amounts and in the time periods
currently estimated by the managements of SunPharm and GelTex. Petkevich &
Partners has assumed that the merger will be consummated upon the terms set
forth in the Agreement without material alterations thereof and that the merger
will qualify for the tax and accounting treatment intended by the parties.
Petkevich & Partners has relied as to all legal matters relevant to rendering
its opinion on the advice of counsel.
Without limiting the generality of the foregoing, Petkevich & Partners did
not undertake any independent analysis of any pending or threatened litigation,
possible unasserted claims or other contingent liabilities, to which SunPharm,
GelTex or any of their respective affiliates was a party or may be subject and,
at SunPharm's direction and with its consent, the opinion made no assumption
concerning and therefore did not consider, the possible assertion of claims,
outcomes or damages arising out of any such
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matters. Although developments following the date of the opinion may affect the
opinion, Petkevich & Partners assumed no obligation to update, revise or
reaffirm the opinion.
The following is a summary of the material financial analyses performed by
Petkevich & Partners in connection with rendering the opinion:
Comparable Company Analysis. Petkevich & Partners compared certain
financial information and valuation ratios relating to SunPharm to corresponding
publicly-available data and ratios from a group of selected publicly traded
companies deemed comparable to SunPharm. The comparable companies selected were
six publicly traded companies involved in the development and manufacture of
pharmaceutical products, including:
- Cima Labs, Inc.
- Cyanotech Corporation
- Flamel Technologies S.A.
- Nutraceutical International Corporation
- Orphan Medical, Inc.
- Penwest Pharmaceuticals Co.
The analysis, with respect to SunPharm, produced multiples of selected
valuation data based upon closing stock prices of the comparable companies as of
August 12, 1999, which were then compared to the equity value of SunPharm of
$16.5 million implied by the aggregate consideration to be paid in the merger
based on the closing price of GelTex common stock on August 13, 1999. The
multiples included in the analysis were:
- market capitalization to 1998 calendar revenues;
- market capitalization to 1999 calendar revenue estimates of the
comparable companies; and
- market capitalization to 2000 calendar revenue estimates of the
comparable companies.
Revenue estimates for comparable companies were based on estimates taken
from published analyst's reports. Revenue estimates for SunPharm were based on
management estimates. The following table summarizes the results of this
analysis.
<TABLE>
<CAPTION>
IMPLIED SUNPHARM
MULTIPLE: MULTIPLE RANGE MEAN MEDIAN EQUITY VALUATION
- --------- -------------- ---- ------ --------------------
<S> <C> <C> <C> <C>
1998 Revenues............................ 0.5x - 10.7x 4.2x 3.0x $0.2 - $ 4.2 million
1998 Revenues............................ 0.5x - 6.3x 2.5x 1.7x $0.4 - $ 4.5 million
1998 Revenues............................ 0.4x - 3.9x 1.5x 1.2x $2.6 - $24.8 million
</TABLE>
Comparable Transaction Analysis. The comparable transaction analysis was
based on eleven acquisitions involving publicly traded companies engaged in
development and manufacture of pharmaceutical products, including Perdue Pharma
LP/ConCensys, Inc. (Pending); Merck & Co., Inc./SIBIA Neuroscience, Inc.
(Pending); Smith & Nephew, Inc./Exogen, Inc. (Pending); PerBio Science
AB/Endogen, Inc. (Pending); SkyePharma PLC/DepoTech Corporation; Immucor,
Inc./Gamma Biologicals, Inc.; Mylan Laboratories, Inc./Penederm, Inc.; T Cell
Sciences, Inc./Virus Research Institute, Inc.; Merck AG/Pharmaceutical
Resources, Inc.; Pierre Fabre SA/Laboratoires Dolisos; and Biotech
International, Ltd./AGEN, Ltd. An analysis of the comparable transactions
produced multiples of market capitalization to revenues recorded over the last
twelve months with respect to the purchased companies. These multiples were then
compared to the equity value of SunPharm of $16.5 million implied for the
aggregate consideration to be paid in the merger based on the closing price of
GelTex common stock on August 13, 1999. Estimated multiples paid in the
comparable transactions were based on information
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obtained from public filings, public company disclosures, press releases,
industry and popular press reports, databases and other sources. The following
table summarizes the results of this analysis.
<TABLE>
<CAPTION>
IMPLIED SUNPHARM
MULTIPLE: MULTIPLE RANGE MEAN MEDIAN EQUITY VALUATION
- --------- -------------- ---- ------ --------------------
<S> <C> <C> <C> <C>
LTM Revenues............................. 0.7x - 19.1x 3.0x 6.4x $0.4 - $10.5 million
</TABLE>
No company, transaction or business used in the comparable company analysis
or comparable transaction analysis as a comparison is identical to SunPharm or
the merger. Accordingly, an analysis of the results of the foregoing involves
complex considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the acquisition,
public trading and other values of the comparable companies, comparable
transactions or the business segment, company or transactions to which they are
being compared. In evaluating the comparable companies and transactions,
Petkevich & Partners made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of SunPharm or GelTex, such
as the impact of competition on SunPharm or GelTex and the industry generally,
industry growth and/or technological change and the absence of any adverse
material change in the financial conditions and prospects of SunPharm and GelTex
or the industry or financial markets in general. Mathematical analysis (such as
determining the mean or median) is not, in itself, necessarily a meaningful
method of using comparable company or transaction data.
Pro Forma Analysis. Petkevich & Partners analyzed pro forma effects
resulting from the impact of the merger on the projected revenues, cash
earnings, and net income per share of the combined company for the calendar year
2000, based on management estimates for SunPharm and GelTex, respectively,
without taking into account certain operating cost synergies that the combined
company may realize following consummation of the merger. The results of the pro
forma earnings analysis suggested that the merger would be non-dilutive to the
combined company's revenues per share, but dilutive to cash earnings and net
income per share in the calendar year 2000. The actual results achieved by the
combined company after the merger may vary from projected results and the
variations may be material.
Contribution Analysis. Petkevich & Partners analyzed the respective
contributions of SunPharm and GelTex to the estimated total revenues for the
calendar years 1998, 1999, 2000 and 2001 based on management estimates for
SunPharm and GelTex, respectively. The results of the analysis are summarized in
the following table.
<TABLE>
<CAPTION>
REVENUES: GELTEX SUNPHARM
- --------- ------ --------
<S> <C> <C>
1998..................................................... 98.8% 1.2%
1999..................................................... 96.9% 3.1%
2000..................................................... 88.9% 11.1%
2001..................................................... 91.8% 8.2%
</TABLE>
By way of comparison, Petkevich & Partners noted that, based upon the
market price of common stock of GelTex and the number of outstanding shares of
capital stock of SunPharm as of August 12, 1999, the exchange ratio fraction
would result in holders of capital stock of SunPharm receiving between 5.7% and
6.6% collective ownership of the combined company following the merger.
Other Factors and Comparative Analyses. In rendering its opinion,
Petkevich & Partners considered certain other factors and conducted certain
other comparative analyses, including, among other things, a review of:
- the history of trading prices and volume for the common stock of SunPharm
from August 12, 1998 through August 12, 1999, and the common stock of
GelTex from August 12, 1998 through August 12, 1999;
- the historical cash requirements of SunPharm and GelTex and managements'
estimates as to future needs; and
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- selected published analysts' reports on each of SunPharm and GelTex,
including analysts' estimates as to the earnings growth potential of
SunPharm and GelTex.
While the foregoing summary describes certain analyses and factors that
Petkevich & Partners deemed material in its presentation to the SunPharm board
of directors, it is not a comprehensive description of all analyses and factors
considered by Petkevich & Partners. The preparation of a fairness opinion is a
complex process that involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these methods
to the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Petkevich & Partners believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, would create an incomplete view of the evaluation process
underlying its opinion. Several analytical methodologies were employed and no
one method of analysis should be regarded as critical to the overall conclusion
reached by Petkevich & Partners. Each analytical technique has inherent
strengths and weaknesses, and the nature of the available information may
further affect the value of particular techniques. The conclusions reached by
Petkevich & Partners are based on all analyses and factors taken as a whole and
also on application of Petkevich & Partners' own experience and judgment. Such
conclusions may involve significant elements of subjective judgment and
qualitative analysis. Petkevich & Partners therefore gives no opinion as to the
value or merit standing alone of any one or more parts of the analysis it
performed. In performing its analyses, Petkevich & Partners considered general
economic, market and financial conditions and other matters, many of which are
beyond the control of SunPharm and GelTex. The analyses performed by Petkevich &
Partners are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than those suggested by such
analyses. Accordingly, analyses relating to the value of a business do not
purport to be appraisals or to reflect the prices at which the business actually
may be purchased. Furthermore, no opinion is being expressed as to the price at
which the common stock of GelTex may trade at any future time.
SunPharm engaged Petkevich & Partners pursuant to the engagement letter on
December 1, 1998. The engagement letter provides that, for its services,
Petkevich & Partners is entitled to receive, contingent upon consummation of the
merger, a fee equal to 1% percent of the aggregate consideration paid to
SunPharm and/or its holders of capital stock in connection with the merger, as
well as warrants to purchase 100,000 shares of SunPharm common stock at an
exercise price of $1.75 per share. In addition, SunPharm granted warrants to
purchase 100,000 shares of SunPharm common stock at an exercise price of $1.75
per share to Petkevich & Partners upon delivery of its fairness opinion to the
SunPharm board of directors. The remainder of the Petkevich & Partners fee is
due and payable upon consummation of the merger. SunPharm has also agreed to
reimburse Petkevich & Partners for its out of pocket expenses and to indemnify
and hold harmless Petkevich & Partners and its affiliates and any person,
director, employee or agent acting on behalf of Petkevich & Partners or any of
its affiliates, or any person controlling Petkevich & Partners or its affiliates
for certain losses, claims, damages, expenses and liabilities relating to or
arising out of services provided by Petkevich & Partners as financial advisor to
SunPharm. The terms of the fee arrangement with Petkevich & Partners, which
SunPharm and Petkevich & Partners believe are customary in transactions of this
nature, were negotiated at arm's length between SunPharm and Petkevich &
Partners, and the SunPharm board was aware of such fee arrangements.
Petkevich & Partners was retained based on Petkevich & Partners' experience
as a financial advisor in connection with mergers and acquisitions, as well as
Petkevich & Partners' investment banking relationship with SunPharm and
familiarity with SunPharm's business and its market.
Petkevich & Partners is an investment banking firm with significant
relevant industry experience. As part of its investment banking business,
Petkevich & Partners is frequently engaged in the valuation of businesses in
connection with mergers and acquisitions, private placements and other purposes.
Petkevich & Partners may actively trade the equity securities of SunPharm and
GelTex for its own account and, accordingly, may at any time hold a long or
short position in such securities.
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<PAGE> 49
THE OPINION OF PETKEVICH & PARTNERS IS ATTACHED AS ANNEX C TO THIS PROXY
STATEMENT/PROSPECTUS. SUNPHARM STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE
OPINION CAREFULLY AND IN ITS ENTIRETY. PETKEVICH & PARTNERS' OPINION IS DIRECTED
TO SUNPHARM'S BOARD OF DIRECTORS AND ADDRESSES ONLY THE FAIRNESS OF THE MERGER
CONSIDERATION TO THE HOLDERS OF CAPITAL STOCK OF SUNPHARM FROM A FINANCIAL POINT
OF VIEW AS OF THE DATE OF THE OPINION. PETKEVICH & PARTNERS' OPINION DOES NOT
ADDRESS ANY OTHER ASPECT OF THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION
TO ANY HOLDER OF CAPITAL STOCK OF SUNPHARM AS TO HOW TO VOTE AT THE SUNPHARM
SPECIAL MEETING. THE SUMMARY OF THE OPINION OF PETKEVICH & PARTNERS SET FORTH IN
THIS PROXY STATEMENT/PROSPECTUS, ALTHOUGH MATERIALLY COMPLETE, IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED AS ANNEX C
TO THIS PROXY STATEMENT/PROSPECTUS.
INTERESTS OF RELATED PERSONS IN THE MERGER
In considering the recommendation of the SunPharm board with respect to the
merger agreement and the merger, you should be aware that certain directors and
officers of SunPharm have interests in the merger as employees, consultants
and/or directors that are different from, or are in addition to, the interests
of holders of SunPharm common stock and preferred stock generally. The SunPharm
board has considered these interests, among other matters, in approving the
merger agreement and the merger.
Stock Options. SunPharm's Amended and Restated 1994 Stock Option Plan, or
the 1994 Plan, provides for accelerated vesting of options granted under the
1994 Plan in the event of an acquisition of SunPharm or similar transaction, and
SunPharm is required under the merger agreement to, as soon as practicable after
execution of the merger agreement:
- notify each holder of an outstanding option under the 1994 Plan of the
merger;
- provide for the accelerated vesting of each outstanding option under the
1994 Plan;
- notify the holder that unless the options are exercised, each option
shall be cancelled and terminate on the date 15 days following the date
of the notice; and
- cause the 1994 Plan to be terminated.
The accelerated vesting of the 1994 Plan options, the cancellation and
termination of the 1994 Plan options, and the termination of the 1994 Plan are
contingent upon completion of the merger.
SunPharm's Amended and Restated 1995 Non-employee Directors' Stock Option
Plan, or the 1995 Plan, and its related option agreements, provide that vesting
of all options covered by the 1995 Plan and agreements will accelerate upon a
change of control of SunPharm and will remain exercisable for two years
following the termination of the director holding the options. The merger will
constitute a change of control, and under the merger agreement all current
directors of SunPharm will cease to be directors of SunPharm as of the effective
time of the merger. The terms of outstanding SunPharm options granted outside of
the 1994 Plan and 1995 Plan, and outstanding warrants to purchase SunPharm
common stock do not provide for acceleration of vesting upon a change of control
or a merger or other business combination involving SunPharm. As soon as
practicable after execution of the merger agreement, SunPharm is required to use
commercially reasonable best efforts to cause the exercise or termination of all
outstanding:
- options granted under the 1995 Plan;
- options granted outside of the 1994 Plan or 1995 Plan; and
- warrants to purchase SunPharm common stock.
At the effective time of the merger, each SunPharm stock option or warrant
to purchase SunPharm common stock which is outstanding and has not been
exercised, exchanged or terminated will be converted
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<PAGE> 50
into an option or warrant, as the case may be, to acquire an appropriate number
of shares of GelTex common stock, with corresponding adjustments to the exercise
price of each option or warrant. GelTex will assume these options and warrants.
See "-- The Merger Agreement -- Treatment of SunPharm Stock Options and
Warrants" on page 51.
SunPharm has provided notification to each holder of outstanding options
under the 1994 Plan, including certain executive officers, as required under the
merger agreement. As of the record date, 1994 Plan options to acquire 10,000
shares have been exercised and options to acquire an additional 134,430 shares
of common stock will remain subject to exercise after the record date. The
holders of the remaining 1994 Plan options have not timely notified SunPharm of
the exercise of the remaining 1994 Plan options. As a result, each outstanding
option under the 1994 Plan has, contingent upon the completion of the merger,
either been exercised or canceled, with the exception of the 134,430 options
described above, which by their terms will either be exercised prior to
completion of the merger or canceled. No executive officer of SunPharm timely
notified SunPharm of such officer's exercise of any 1994 Plan option. Other than
options to purchase 38,950 shares of SunPharm common stock held by Ronald W.
Sanda, Vice President -- Manufacturing and Operations, which will remain subject
to exercise after the record date and terminate upon completion of the merger,
each outstanding 1994 Plan option held by SunPharm's executive officers has been
terminated contingent upon completion of the merger. Pursuant to the 1995 Plan,
options to acquire in the aggregate 26,665 shares of SunPharm common stock are
subject to accelerated vesting upon consummation of the merger. Assuming that
the merger is consummated on November 16, 1999, the following table shows the
number of unvested options held by each non-employee director of SunPharm
immediately prior to the completion of the merger, which are subject to
accelerated vesting as a result of the merger.
<TABLE>
<CAPTION>
UNVESTED OPTIONS WHOSE
VESTING WOULD ACCELERATE
UPON COMPLETION OF THE
MERGER
BENEFICIAL OWNER (# OF SHARES)
- ---------------- ------------------------
<S> <C>
Outside Directors of SunPharm:
Philip R. Tracy....................................... 10,000
Charles L. Dimmler, III............................... 3,333
Jerry T. Jackson...................................... 3,333
Robert S. Janicki, M.D................................ 3,333
Jay Moorin............................................ 3,333
Robert A. Schoellhorn................................. 3,333
</TABLE>
Mr. Borg's Consulting Agreement. As a condition to completion of the
merger, SunPharm and Mr. Borg will enter into a consulting agreement under which
Mr. Borg will:
- act as a consultant to SunPharm for SunPharm projects currently under
development for six months following completion of the merger; and
- be entitled to receive an option to purchase up to 7,500 shares of GelTex
common stock upon terms and conditions to be determined if SunPharm
enters into a binding license or other collaborative arrangement in
connection with SunPharm projects currently under development.
Amendment of Mr. Borg's Employment Agreement. As a further condition to
completion of the merger, SunPharm and Mr. Borg will amend Mr. Borg's current
employment agreement with SunPharm. This amendment will eliminate Mr. Borg's
current benefits, payments and debt forgiveness and similar provisions regarding
a change of control of SunPharm or Mr. Borg's termination without cause, but
will provide that SunPharm will, upon completion of the merger:
- forgive all of Mr. Borg's debt owed to SunPharm as of June 30, 1999
(totaling $117,086), and will pay Mr. Borg a bonus payment of $30,000 to
cover Mr. Borg's approximate tax liability that he will incur as a result
of the forgiveness of the debt;
- pay to Mr. Borg as compensation for his services under the consulting
agreement a lump sum in the amount of six months of his current base
monthly salary; and
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<PAGE> 51
- pay to Mr. Borg as severance his current base monthly salary for a period
of 12 months and will continue to provide Mr. Borg his employment
benefits for the same period.
Amendment of Certain Warrants. Following the execution of the merger
agreement, SunPharm amended an outstanding warrant held by Robert A.
Schoellhorn, a director of SunPharm, to purchase 77,900 shares of SunPharm's
common stock to reduce the exercise price from $1.93 per share to $1.25 per
share. Mr. Schoellhorn has fully exercised the warrant and acquired the 77,900
shares of SunPharm's common stock. As consideration for consulting services
provided in connection with the merger by Charles L. Dimmler, III, a director of
SunPharm, SunPharm amended warrants for the purchase of 100,000 shares of
SunPharm common stock held by the Cross Atlantic Partners Funds, of which Mr.
Dimmler is an affiliate, to reduce the exercise price from $4.00 to $1.00 per
share. The Cross Atlantic Partners Funds have exercised the warrants to acquire
the 100,000 shares of SunPharm's common stock. Together, SunPharm raised
$197,375 due to the exercise of these warrants, which amount was used to fund
operations pending completion of the merger.
Severance Benefits. Under their employment agreements with SunPharm,
Cecilia Bryant, Vice President -- Legal Affairs, Secretary and General Counsel,
Dr. Michael T. Cullen, Vice President and Medical Director, and Paul M. Herron,
Vice President and Chief Financial Officer, are entitled to receive a severance
payment equal to six months of their current base salary if they are terminated
and no successor employment agreement is executed prior to their termination. In
addition, Mr. Herron's outstanding debt owed to SunPharm as of the date of his
termination will be forgiven (totaling $22,547), and he is entitled to receive a
bonus payment of $6,000 to cover his approximate tax liability for forgiveness
of the debt in the event the above described termination occurs. Ronald M.
Sanda, Vice President -- Manufacturing and Operations, is entitled to receive a
severance payment equal to six months of his current base salary if SunPharm
terminates his employment without cause. As a result of the merger, it is
anticipated that these employees will be terminated by SunPharm and entitled to
receive the severance benefits described above.
The following table identifies Mr. Borg and the other executive officers of
SunPharm who have such severance benefits and their current base monthly salary.
<TABLE>
<CAPTION>
EXECUTIVE OFFICER/TITLE BASE MONTHLY SALARY
- ----------------------- -------------------
<S> <C>
Stefan Borg........................................ $16,668.68
President and Chief Executive Officer
Cecilia Bryant..................................... $ 4,888.84
Vice President -- Legal Affairs, Secretary and
General Counsel
Michael T. Cullen, M.D............................. $14,583.34
Vice President and Medical Director
Paul M. Herron..................................... $10,416.68
Vice President and Chief Financial Officer
Ronald W. Sanda.................................... $ 9,375.00
Vice President -- Manufacturing and Operations
</TABLE>
Indemnification and Insurance. After the effective time of the merger,
GelTex will cause SunPharm to, and SunPharm will:
- fulfill and honor in all material respects the indemnification
obligations of SunPharm contained in SunPharm's certificate of
incorporation or by-laws as in effect immediately prior to the effective
time of the merger; and
- maintain in effect directors' and officers' liability insurance covering
those persons who, immediately prior to the effective time of the merger,
are covered by SunPharm's directors' and officers' liability policy.
Neither GelTex nor SunPharm is required to expend in excess of 150% of
the annual premium currently paid by SunPharm for such coverage.
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<PAGE> 52
COMPLETION AND EFFECTIVENESS OF THE MERGER
The merger will be completed when all of the conditions to completion of
the merger are satisfied or waived, including adoption of the merger agreement
by the stockholders of SunPharm. The merger will become effective upon the
filing of a certificate of merger with the State of Delaware.
GelTex and SunPharm are working towards completing the merger as quickly as
possible after SunPharm's special meeting and plan to complete the merger by the
end of 1999.
STRUCTURE OF THE MERGER AND CONVERSION OF SUNPHARM COMMON STOCK AND PREFERRED
STOCK
In accordance with the merger agreement and Delaware law, the Merger Sub, a
newly-formed and wholly-owned subsidiary of GelTex, will be merged with and into
SunPharm. As a result of the merger, the separate corporate existence of the
Merger Sub will cease and SunPharm will survive the merger as a wholly-owned
subsidiary of GelTex.
Upon completion of the merger, each outstanding share of SunPharm common
stock will be automatically converted into the right to receive between 0.12225
and 0.14493 of a fully paid and nonassessable share of GelTex common stock, and
each outstanding share of SunPharm preferred stock will be automatically
converted into between 0.18338 and 0.21740 of a fully paid and nonassessable
share of GelTex common stock, in each case together with the associated GelTex
preferred stock purchase right. These rights are described in "Description of
GelTex Capital Stock -- GelTex Series A Junior Participating Preferred Stock and
Stockholder Rights Agreement" on page 92.
No certificate or scrip representing fractional shares of GelTex common
stock will be issued in connection with the merger. Instead you will receive
cash, without interest, in lieu of a fraction of a share of GelTex common stock.
Specifically, the exchange agent in the merger will sell a number of shares of
GelTex common stock equal to the aggregate number of fractional shares that
would otherwise be issuable in the merger and will remit to you an amount equal
to your pro rata portion of the proceeds of these sales.
EXCHANGE OF SUNPHARM STOCK CERTIFICATES FOR GELTEX STOCK CERTIFICATES
When the merger is completed, the exchange agent will mail to you an
executed letter of transmittal and instructions for use in surrendering your
SunPharm stock certificates in exchange for GelTex stock certificates. When you
deliver your SunPharm stock certificates to the exchange agent along with a
properly executed letter of transmittal and any other required documents, your
SunPharm stock certificates will be canceled and you will receive GelTex stock
certificates representing the number of full shares of GelTex common stock to
which you are entitled under the merger agreement.
You will receive payment in cash, without interest, in lieu of any
fractional shares of GelTex common stock which would have been otherwise
issuable to you as a result of the merger.
YOU SHOULD NOT SUBMIT YOUR SUNPHARM STOCK CERTIFICATES FOR EXCHANGE UNLESS AND
UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT
You are not entitled to receive any dividends or other distributions on
GelTex common stock until the merger is completed and you have surrendered your
SunPharm stock certificates in exchange for GelTex stock certificates.
If there is any dividend or other distribution on GelTex common stock with
a record date after the merger and a payment date prior to the date you
surrender your SunPharm stock certificates in exchange for GelTex stock
certificates, you will receive it with respect to the whole shares of GelTex
common stock issued to you promptly after they are issued. If there is any
dividend or other distribution on GelTex common stock with a record date after
the merger and a payment date after the date you surrender your SunPharm stock
certificates in exchange for GelTex stock certificates, you will receive it with
respect to the whole shares of GelTex common stock issued to you promptly after
the payment date.
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GelTex will only issue a GelTex stock certificate or a check in lieu of a
fractional share in a name other than the name in which a surrendered SunPharm
stock certificate is registered if you present the exchange agent with all
documents required to show and effect the unrecorded transfer of ownership and
show that you paid any applicable stock transfer taxes.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
In the opinions of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. and
Andrews & Kurth, L.L.P., the following are the material United States federal
income tax consequences of the merger. These opinions and the following
discussion are based on the Internal Revenue Code of 1986, the regulations
promulgated thereunder, existing administrative interpretations and court
decisions, all of which are subject to change, possibly with retroactive effect,
and assumptions, limitations, representations and covenants, including those
contained in certificates of officers of GelTex, Merger Sub and SunPharm
expected to be executed as of the completion of the merger. This discussion does
not address all aspects of United States federal income taxation that may be
important to you in light of your particular circumstances or if you are subject
to special rules, such as rules relating to:
- stockholders who are not citizens or residents of the United States;
- financial institutions;
- tax-exempt organizations;
- insurance companies;
- dealers in securities;
- stockholders who acquired their common stock of SunPharm pursuant to the
exercise of options or similar derivative securities or otherwise as
compensation; and
- stockholders who hold their common stock of SunPharm as part of a
straddle or conversion transaction.
This discussion assumes you hold your common stock or preferred stock of
SunPharm as capital assets within the meaning of Section 1221 of the Internal
Revenue Code.
Tax opinions regarding the merger. Completion of the merger is conditioned
on:
- the delivery of an opinion to GelTex from Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.; and
- the delivery of an opinion to SunPharm from Andrews & Kurth, L.L.P.
These opinions will state that the merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. These opinions will assume the absence of changes in existing facts and
will rely on assumptions, representations and covenants including those
contained in certificates to be executed by officers of GelTex, Merger Sub and
SunPharm dated as of the completion of the merger. These opinions will neither
bind the IRS nor preclude the IRS from adopting a position contrary to that
expressed below, and no assurance can be given that contrary positions will not
be successfully asserted by the IRS or adopted by a court if the issues are
litigated. Both GelTex and SunPharm may waive the receipt of these opinions of
counsel. Neither GelTex nor SunPharm intends to obtain a ruling from the IRS
with respect to the tax consequences of the merger.
Tax implications to GelTex stockholders. GelTex stockholders will not
recognize gain or loss for United States federal income tax purposes as a result
of the merger.
Tax implications to SunPharm stockholders. Except as discussed below, you
will not recognize gain or loss for United States federal income tax purposes
when you exchange your SunPharm common stock or preferred stock for GelTex
common stock pursuant to the merger. The aggregate tax basis of the GelTex
common stock you receive as a result of the merger will be the same as your
aggregate tax basis
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<PAGE> 54
in the SunPharm stock you surrender in the exchange, reduced by the tax basis of
any SunPharm stock for which you receive cash instead of fractional shares of
GelTex common stock. The holding period of the GelTex common stock you receive
as a result of the exchange will include the period during which you held the
SunPharm stock you exchange in the merger.
Fractional shares of GelTex common stock will not be issued in the merger.
You will recognize gain or loss for United States federal income tax purposes
with respect to the cash you receive instead of a fractional share interest in
GelTex common stock. Your gain or loss will equal the difference between the
amount of cash you receive and the tax basis of your SunPharm stock surrendered
in the merger that is allocated to fractional shares. This gain or loss will be
capital gain or loss, and will be a long-term capital gain or loss if your stock
has been held for more than one year at the time the merger is completed.
Tax implications to GelTex, SunPharm and Merger Sub. GelTex, SunPharm and
the Merger Sub will not recognize gain or loss for United States federal income
tax purposes as a result of the merger.
Backup withholding. Unless an exemption applies under the applicable law
and regulations, the exchange agent may be required to withhold and, if
required, will withhold 31% of any cash payments to a SunPharm stockholder in
the merger unless the holder provides the appropriate form. A holder should
complete and sign the substitute Form W-9 enclosed with the letter of
transmittal sent by the exchange agent. Unless an applicable exemption exists
and is proved in a manner satisfactory to the exchange agent, this completed
form provides the information, including the holder's taxpayer identification
number, and certification necessary to avoid backup withholding.
THIS DISCUSSION IS NOT INTENDED TO BE A COMPLETE ANALYSIS OR DESCRIPTION OF
ALL POTENTIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OR ANY OTHER
CONSEQUENCES OF THE MERGER. IN ADDITION, THIS DISCUSSION DOES NOT ADDRESS TAX
CONSEQUENCES WHICH MAY VARY WITH, OR ARE CONTINGENT ON, YOUR INDIVIDUAL
CIRCUMSTANCES. MOREOVER, THIS DISCUSSION DOES NOT ADDRESS ANY NON-INCOME TAX OR
ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE MERGER. ACCORDINGLY, YOU ARE
STRONGLY URGED TO CONSULT WITH YOUR TAX ADVISOR TO DETERMINE THE PARTICULAR
UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES
TO YOU OF THE MERGER.
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for by GelTex under the purchase method of
accounting in accordance with GAAP. Under the purchase method of accounting, all
of the assets and liabilities of SunPharm will be recorded in GelTex's
consolidated financial statements at their estimated fair values at the
effective time of the merger, and the consideration to be paid in the merger
will be allocated to such assets and liabilities based on such fair values. The
amount by which such consideration exceeds the fair value of the net assets
acquired by GelTex through the merger will be recorded as goodwill. GelTex's
consolidated financial statements will include the operations of SunPharm after
the effective time of the merger. Income (or loss) of SunPharm prior to the
effective time will not be included in the income of the combined company.
The selected unaudited pro forma combined financial data and the unaudited
pro forma combined financial statements contained in this proxy
statement/prospectus have been prepared using the purchase accounting method to
account for the merger. Please see "Selected Historical and Pro Forma Financial
Data -- Accounting Treatment" on page 9.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE MERGER
Neither GelTex nor SunPharm is aware of any material governmental or
regulatory approval required for completion of the merger, other than the filing
of a certificate of merger with the Secretary of State of the State of Delaware,
the filing with the SEC of the registration statement on Form S-4 registering
the
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<PAGE> 55
merger shares and of this proxy statement/prospectus which constitutes a part
thereof, and compliance with all applicable state securities laws regarding the
offering and issuance of the merger shares.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF SUNPHARM
The shares of GelTex common stock to be issued in connection with the
merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares of GelTex common stock
issued to any person who is deemed to be an "affiliate" of SunPharm at the time
of the special meeting. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under common
control of SunPharm and may include SunPharm officers and directors, as well as
SunPharm principal stockholders and stockholders. Affiliates may not sell their
shares of GelTex common stock acquired in connection with the merger except
pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares;
- an exemption under paragraph (d) of Rule 145 under the Securities Act; or
- any other applicable exemption under the Securities Act.
GelTex's registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of shares of GelTex
common stock to be received by SunPharm affiliates in the merger.
LISTING ON THE NASDAQ STOCK MARKET OF GELTEX COMMON STOCK TO BE ISSUED IN THE
MERGER
GelTex will use reasonable efforts to cause the shares of GelTex common
stock to be issued in the merger to be approved for listing on The Nasdaq Stock
Market, subject to official notice of issuance, before the completion of the
merger.
DISSENTERS' AND APPRAISAL RIGHTS
By virtue of Section 262 of the Delaware General Corporation Law, or the
DGCL, if holders of SunPharm stock exercise appraisal rights in connection with
the merger, any shares of SunPharm stock as to which such appraisal rights are
exercised will not be converted into the right to receive shares of GelTex
common stock but instead will be converted into the right to receive such
consideration as may be determined to be due with respect to such dissenting
shares pursuant to the DGCL. GelTex's obligation to complete the merger is
conditioned on none of the holders of SunPharm preferred stock exercising
appraisal rights and the holders of no more than 2% of the SunPharm common stock
exercising appraisal rights.
THE FOLLOWING SUMMARY OF THE PROVISIONS OF SECTION 262 OF THE DGCL IS NOT
INTENDED TO BE A COMPLETE STATEMENT OF THE PROVISIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SECTION 262 OF THE DGCL, A COPY OF
WHICH IS ATTACHED HERETO AS ANNEX D AND IS INCORPORATED HEREIN BY REFERENCE.
If the merger is approved by the required vote of SunPharm's stockholders,
each holder of SunPharm stock who (1) files written notice with SunPharm of an
intention to exercise rights to appraisal of his shares prior to the SunPharm
special meeting and (2) does not vote in favor of the merger and who follows the
procedures set forth in Section 262 will be entitled to have his SunPharm stock
purchased by the surviving corporation for cash at the fair market value of the
shares of SunPharm stock. The fair market value of shares of SunPharm stock will
be determined by the Delaware Court of Chancery, exclusive of any element of
value arising from the merger. The shares of SunPharm stock with respect to
which holders have perfected their appraisal demand in accordance with Section
262 and have not effectively withdrawn or lost such appraisal rights are
referred to in this proxy statement/prospectus as the "dissenting shares".
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Within ten days after the effective date of the merger, SunPharm, as the
surviving corporation in the merger, must mail a notice to all stockholders who
have complied with (1) and (2) above notifying such stockholders of the
effective date of the merger. Within 120 days after the effective date such
holders of stock may file a petition in the Delaware Court of Chancery for the
appraisal of their shares, provided such holders may within 60 days of the
effective date withdraw their demand for appraisal. Within 120 days of the
effective time, the holders of dissenting shares may also, upon written request,
receive from the surviving corporation a statement setting forth the aggregate
number of shares with respect to which demands for appraisals have been
received.
If any holder of SunPharm stock who demands the appraisal and purchase of
the holder's shares under Section 262 fails to perfect, or effectively withdraws
or loses the right to such purchase, the shares of the holder will be converted
into a right to receive a number of shares of GelTex common stock in accordance
with the terms of the merger agreement. Dissenting shares lose their status as
dissenting shares if:
- the merger is abandoned;
- the shares are transferred prior to their submission for the required
endorsement;
- the dissenting stockholder fails to make a timely written demand for
appraisal;
- the dissenting shares are voted in favor of the merger;
- neither SunPharm nor the stockholder files a complaint or intervenes in a
pending action within 120 days after mailing of the approval notice; or
- the stockholder delivers to SunPharm, as the surviving corporation, a
written withdrawal of the stockholder's demand for appraisal of the
dissenting shares.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF APPRAISAL RIGHTS, IN WHICH
EVENT A SUNPHARM STOCKHOLDER WILL BE ENTITLED TO RECEIVE THE CONSIDERATION WITH
RESPECT TO THE HOLDER'S DISSENTING SHARES IN ACCORDANCE WITH THE MERGER
AGREEMENT. IN VIEW OF THE COMPLEXITY OF THE PROVISIONS OF SECTION 262 OF THE
DGCL, SUNPHARM STOCKHOLDERS WHO ARE CONSIDERING OBJECTION TO THE MERGER SHOULD
CONSULT THEIR OWN LEGAL ADVISORS.
DELISTING AND DEREGISTRATION OF SUNPHARM COMMON STOCK AFTER THE MERGER
If the merger is completed, SunPharm common stock will be delisted from The
Nasdaq SmallCap Market and will be deregistered under the Exchange Act.
THE MERGER AGREEMENT
Representations and Warranties. SunPharm and GelTex each made a number of
representations and warranties in the merger agreement regarding aspects of
their respective businesses, financial condition, structure and other facts
pertinent to the merger.
The representations given by SunPharm cover the following topics, among
others, as they relate to SunPharm:
- the corporate organization and qualification to do business of SunPharm;
- SunPharm's certificate of incorporation and by-laws;
- SunPharm's capitalization;
- authorization of the merger agreement by SunPharm and the required vote
of its stockholders;
- the effect of the merger on obligations of SunPharm and under applicable
laws;
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- SunPharm's material agreements;
- SunPharm's compliance with applicable laws;
- SunPharm's filings and reports with the SEC;
- SunPharm's financial statements;
- changes in SunPharm's business since December 31, 1998;
- SunPharm's liabilities;
- litigation involving SunPharm;
- SunPharm's employee benefit plans;
- labor and other matters related to SunPharm's employees;
- information supplied by SunPharm in this proxy statement/prospectus and
the related registration statement filed by GelTex;
- restrictions on SunPharm's ability to conduct its business activities;
- SunPharm's title to the assets it owns and leases;
- SunPharm's taxes;
- environmental laws that apply to SunPharm;
- intellectual property used by SunPharm;
- SunPharm's insurance;
- required payments related to the merger to financial advisors or brokers;
- SunPharm's business practices with respect to certain sensitive payments;
- transactions with officers, directors and other persons affiliated with
SunPharm;
- the fairness opinion of SunPharm's financial advisor;
- the absence of SunPharm subsidiaries;
- SunPharm's disclosure in the merger agreement; and
- that no antitrust filing under the Hart-Scott-Rodino Act is required in
connection with the merger.
The representations given by GelTex cover the following topics, among
others, as they relate to GelTex and its subsidiaries:
- the corporate organization and qualification to do business of GelTex and
the Merger Sub;
- the capitalization of GelTex and the Merger Sub;
- authorization of the merger agreement by GelTex and the Merger Sub;
- regulatory approvals required to complete the merger;
- the effect of the merger on obligations of GelTex and under applicable
laws;
- GelTex's filings and reports with the SEC;
- changes in GelTex's business since December 31, 1998;
- information supplied by GelTex in this proxy statement/prospectus and the
related registration statement filed by GelTex;
- litigation involving GelTex;
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<PAGE> 58
- GelTex's compliance with laws;
- GelTex's taxes;
- GelTex's review and assessment for Year 2000 compliance purposes; and
- GelTex's intellectual property rights.
The representations and warranties in the merger agreement are complicated
and not easily summarized. You are urged to carefully read the articles of the
merger agreement entitled "Representations and Warranties of the Company" and
"Representations and Warranties of Parent and Merger Sub." A copy of the merger
agreement is attached hereto as Annex A.
SunPharm's conduct of business before completion of the merger. SunPharm
agreed that until the completion of the merger or unless GelTex consents in
writing, SunPharm will operate its businesses in good faith with the goal of:
- preserving intact the assets and current business organizations of
SunPharm; and
- maintaining its material contracts and preserving its relationships with:
- advertisers;
- sponsors;
- customers;
- licensees;
- suppliers; and
- others having business relationships with them.
SunPharm also agreed that until the completion of the merger or unless
GelTex consents in writing, SunPharm would conduct its business in compliance
with specific restrictions relating to the following:
- amendments to or modification of SunPharm's certificate of incorporation
and by-laws;
- the issuance and redemption of securities;
- the issuance of dividends or other distributions;
- the disposition of SunPharm's assets;
- the disposition or modification of any of SunPharm's intellectual
property rights;
- the merger of assets or other entities;
- the incurrence of indebtedness (subject to specified exceptions);
- capital expenditures above a specified minimum amount;
- entrance into or modification of contracts (other than specified
contracts);
- employees and employee benefits;
- accounting policies and procedures;
- liens on SunPharm's assets;
- entrance into or modification of leases;
- tax elections and liabilities;
- settlement of litigation and claims;
- transactions with related parties; and
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<PAGE> 59
- insurance policies and payment of premiums thereon.
The agreements related to the conduct of SunPharm's business in the merger
agreement are complicated and not easily summarized. You are urged to carefully
read the article of the merger agreement entitled "Conduct of Business Pending
the Merger." A copy of the merger agreement is attached hereto as Annex A.
No solicitation of other proposals. In addition to the restrictions on
SunPharm outlined above, until the merger is completed or the merger agreement
is terminated, SunPharm has agreed not to take any of the following actions:
- solicit, facilitate, initiate or encourage an acquisition proposal; or
- with respect to any person, entity or group that is pursuing an
acquisition proposal:
- engage in discussions or negotiations; or
- disclose any non-public information relating to SunPharm.
However, SunPharm may engage in these acts, other than solicitation,
initiation or knowing encouragement, if all of the following occur:
- SunPharm's board of directors believes in good faith that a particular
acquisition proposal will result in a transaction more favorable to
SunPharm's stockholders than the merger;
- SunPharm's board of directors determines in good faith after consultation
with its outside counsel that taking such action is required to satisfy
the board's fiduciary duties under applicable law; and
- SunPharm provides written notice to GelTex of its intention to take such
action.
An "acquisition proposal" is any inquiry, proposal or offer, other than the
transactions contemplated by the merger agreement and other than in the ordinary
course of business, for any of the following:
- a merger, consolidation, recapitalization, liquidation or other direct or
indirect business combination involving SunPharm;
- the issuance or acquisition of 10% or more of the outstanding capital
stock or any class of equity securities of SunPharm;
- any tender offer or exchange offer, that, if completed, would result in
any person or party beneficially owning 10% or more of the outstanding
capital stock or any class of equity securities of SunPharm;
- the sale, lease, exchange, license or other disposition of a significant
portion of a material intellectual property right, or any significant
portion of the business or other assets of SunPharm; and
- any other transaction, the completion of which could reasonably be
expected to impede, interfere with, prevent or materially delay the
completion of the merger or which would reasonably be expected to
diminish significantly the benefits to GelTex or its affiliates of the
transactions contemplated by the merger agreement.
SunPharm's employees and employee benefit plans. Pursuant to the merger
agreement, SunPharm has agreed to use its commercially reasonable best efforts
to terminate all of its employee benefits plans as of the effective time of the
merger or as promptly as practicable thereafter. There is no obligation for
GelTex or SunPharm to continue the employment of any present SunPharm employee
or consultant following consummation of the merger, except that it is a
condition to completing the merger that:
- the consulting agreement between SunPharm and Dr. Raymond Bergeron of the
University of Florida will continue in full force and effect after the
effective time of the merger;
- SunPharm and Mr. Borg will enter into the consulting agreement described
in "Interests of Related Persons in the Merger -- Mr. Borg's Consulting
Agreement" on page 42; and
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<PAGE> 60
- Mr. Borg's employment agreement with SunPharm will have been amended in
the manner set forth in "Interests of Related Persons in the
Merger -- Amendment of Mr. Borg's Employment Agreement" on page 42.
Treatment of SunPharm stock options and warrants. Pursuant to the merger
agreement, SunPharm has notified the holders of the 1994 Plan options of the
accelerated vesting and cancellation of such options in accordance with the 1994
Plan. Following the execution of the merger agreement and as of the record date,
options issued under the 1994 Plan to acquire 10,000 shares of SunPharm common
stock were exercised, and options to acquire an additional 134,430 shares of
common stock will remain subject to exercise after the record date. The holders
of the remaining 1994 Plan options did not timely notify SunPharm of their
intent to exercise such options. As a result, and contingent upon completion of
the merger, the 1994 Plan has been terminated and each outstanding 1994 Plan
option has either been exercised or canceled, with the exception of the 134,430
options identified above, which options by their terms will either be exercised
prior to completion of the merger or canceled. See "Interests of Related Persons
in the Merger-Stock Options" on page 41. In addition to the 1994 Plan options as
described above, the following options and warrants to purchase SunPharm common
stock were issued and outstanding and had not been exercised as of the record
date:
<TABLE>
<CAPTION>
OPTIONS OR WARRANTS ISSUED AND OUTSTANDING
------------------- ----------------------
<S> <C>
1995 Plan options...................................... 324,271
Options outside of 1994 and 1995 Plans................. 80,860
Warrants............................................... 2,641,184
</TABLE>
The issued and outstanding warrants listed above include 1,585,119 warrants
being offered for exchange, as discussed below.
SunPharm's option agreements with non-employee directors pursuant to the
1995 Plan provide for accelerated vesting of options in the event that SunPharm
merges with another entity and survives the merger only as a wholly-owned entity
of a corporation other than SunPharm. SunPharm is required under the merger
agreement to use its commercially reasonable best efforts to cause the
termination or exercise of options under the 1995 Plan, options outside of the
1994 Plan and 1995 Plan and warrants to purchase SunPharm common stock as set
forth in "Interests of Related Persons in the Merger -- Stock Options" on page
41. SunPharm is not required to offer any incentives or other consideration for
the termination of these options and warrants. The chart below lists the shares
of SunPharm common stock underlying SunPharm options and warrants which,
subsequent to the signing of the merger agreement and as of the record date,
have been exercised to purchase shares of SunPharm common stock or have been
terminated contingent upon completion of the merger:
<TABLE>
<CAPTION>
SHARES UNDERLYING SHARES UNDERLYING
EXERCISED OPTIONS TERMINATED OPTIONS
OPTIONS OR WARRANTS OR WARRANTS OR WARRANTS
- ------------------- ----------------- ------------------
<S> <C> <C>
1994 Plan options.......................... 10,000 194,500
1995 Plan options.......................... 0 0
Options outside of 1994 and 1995 Plans..... 150,025 0
Warrants................................... 177,900 0
</TABLE>
With respect to any outstanding SunPharm options or warrants, SunPharm may
not permit the holders to exercise options or warrants by any means other than
payment of the exercise price in cash, unless SunPharm is contractually
obligated to do so. With respect to any option or warrant holder, SunPharm will
use its commercially reasonable best efforts to encourage the holder to exercise
the option or warrant only by payment in cash.
In addition, pursuant to the merger agreement, SunPharm is required to use
its commercially reasonable best efforts to cause the holders of warrants to
purchase 1,585,119 shares of SunPharm common stock issued by SunPharm under the
Unit Purchase Agreement dated March 28, 1997 to surrender such warrants in
exchange for a total of 158,512 shares of SunPharm common stock. SunPharm has
sent notice to these warrantholders requesting exchange of their warrants.
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<PAGE> 61
At the effective time, each SunPharm stock option or warrant to purchase
SunPharm common stock which is outstanding and has not been exercised, exchanged
or terminated will be assumed by GelTex and will be subject to the same terms
and conditions that it was originally subject to when issued by SunPharm,
subject to appropriate adjustments. Each outstanding option or warrant to
purchase common stock of SunPharm will, after the effective time of the merger,
constitute an option or warrant to purchase the number of shares of GelTex
common stock, rounded down to the nearest whole share, determined by
multiplying:
- the number of shares of SunPharm common stock subject to the option or
warrant immediately before the effective time of the merger by
- the common stock exchange ratio fraction.
The exercise price of each of these options and warrants will be a price
per share of GelTex common stock, rounded up to the nearest whole cent, equal
to:
- the per share exercise price for SunPharm common stock that otherwise
could have been purchased under the SunPharm option or warrant divided by
- the common stock exchange ratio fraction.
Registration rights. SunPharm has agreed to use its commercially
reasonable best efforts to terminate all agreements and arrangements pursuant to
which any person may be entitled to cause SunPharm to file a registration
statement under the Securities Act or which otherwise relate to securities of
SunPharm. In addition, GelTex has agreed to file with the SEC not later than 60
days after the effective time of the merger:
- a registration statement on Form S-8, or, if possible, a post-effective
amendment to an existing Form S-8, with respect to the shares of GelTex
common stock which may be issued upon the exercise of SunPharm options
assumed by GelTex, and to use its best efforts to have the registration
statement declared effective after its filing and kept effective as long
as any of the assumed options are outstanding; and
- a registration statement on Form S-3 with respect to the shares of GelTex
common stock which may be issued upon the exercise of SunPharm warrants
assumed by GelTex, and to use its best efforts to have the registration
statement declared effective within 180 days after the effective time of
the merger and kept effective until the earlier of:
- the expiration, exercise or termination of the assumed warrants, or
- two years following the effective time of the merger.
Conditions to completion of the merger. The parties' obligations to
complete the merger and the other transactions contemplated by the merger
agreement are subject to the satisfaction or waiver of each of the following
conditions:
- GelTex's registration statement on Form S-4, of which this proxy
statement/prospectus forms a part, must be effective;
- the merger agreement and the related transactions must be authorized by
the requisite vote of the stockholders of SunPharm;
- the shares of GelTex common stock to be issued in the merger must be
approved for listing, subject to official notice of issuance, on The
Nasdaq Stock Market;
- all applicable approvals and consents of applicable courts and/or
government authorities required to complete the merger must have been
received;
- no law, regulation, order or injunction must be enacted or issued which
has the effect of making the merger illegal or otherwise preventing
consummation of the merger; and
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<PAGE> 62
- GelTex must have received an opinion from its tax counsel, Mintz, Levin,
Cohn, Ferris, Glovsky and Popeo, P.C., and SunPharm must have received an
opinion from its tax counsel, Andrews & Kurth, L.L.P., that the merger
will constitute a "tax-free reorganization" under the tax code.
GelTex's obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
- SunPharm's representations and warranties must be true and correct as of
the date the merger is to be completed as if made at and as of such time
except to the extent that any such representations or warranties address
matters only as of a particular date;
- SunPharm must perform or comply in all material respects with all of its
agreements and covenants required by the merger agreement;
- GelTex must receive evidence that all licenses, permits, consents,
waivers, approvals, authorizations, qualifications or orders required to
be obtained from third parties in connection with the merger have been
obtained, except where the failure to obtain each will not have a
material adverse effect on SunPharm;
- certain SunPharm stockholders and directors and executive officers of
SunPharm must deliver an executed release agreement to GelTex, which is
in full force and effect;
- each of the other agreements related to the merger, including the
stockholders agreement, must be in full force and effect;
- no event or events must have occurred since the signing of the merger
agreement which has had or would reasonably be expected to have a
material adverse effect on SunPharm;
- GelTex must receive a copy of the confidentiality agreement and
consulting agreement between SunPharm and Dr. Raymond Bergeron, which
must be reasonably satisfactory and continue in full force and effect
following the merger;
- GelTex must receive a copy of the consulting agreement entered into by
SunPharm and Mr. Borg, and Mr. Borg's employment agreement with SunPharm
must have been amended in accordance with the merger agreement;
- SunPharm must terminate certain registration rights pursuant to which any
of its securityholders may be entitled, or by which such holders may
cause SunPharm to file a registration statement under the Securities Act,
except as otherwise permitted in the merger agreement;
- GelTex must receive evidence satisfactory to it that a security interest
identified in the merger agreement has been terminated or otherwise
expired;
- dissenting stockholders shall not have exercised dissenters' rights with
respect to any shares of oustanding SunPharm preferred stock or with
respect to more than 2% of the issued and outstanding SunPharm common
stock;
- SunPharm must execute the certificate of merger; and
- GelTex must receive an opinion of Andrews & Kurth, L.L.P., counsel to
SunPharm, with respect to certain matters.
SunPharm's obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
- GelTex's representations and warranties must be true and correct as of
the date the merger is to be completed as if made at and as of such time
except to the extent that any such representations or warranties address
matters only as of a particular date;
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<PAGE> 63
- GelTex must perform or comply in all material respects with all of its
agreements and covenants required by the merger agreement;
- the Merger Sub must execute the certificate of merger; and
- SunPharm must receive an opinion of Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C., counsel to GelTex, with respect to certain matters.
A "material adverse effect" is any fact, event, change, circumstance or
effect that is materially adverse to the business, condition (financial or
otherwise), operations, results of operations, assets, liabilities or prospects
of GelTex or SunPharm and their respective subsidiaries, taken as a whole,
subject to certain exceptions as stipulated in the merger agreement.
Termination of the merger agreement. The merger agreement may be
terminated at any time prior to completion of the merger, whether before or
after adoption of the merger agreement by SunPharm stockholders:
(1) by mutual consent of the boards of directors of GelTex and SunPharm;
(2) by GelTex or SunPharm, if:
- the merger is not completed before December 31, 1999 (the right to
terminate the merger agreement under this provision is not available
to any party whose failure to fulfill any obligation under the merger
agreement has been a cause of the failure to complete the merger on or
before such date);
- there is any final and nonappealable order, decree or ruling of a
court or governmental authority prohibiting the merger; or
- the merger agreement fails to receive the requisite vote for adoption
by the stockholders of SunPharm at the SunPharm special meeting;
(3) by GelTex, if SunPharm's board of directors:
- approves, recommends or proposes to approve or recommend any
acquisition proposal;
- fails to present and recommend adoption of the merger agreement and
the related transactions by the stockholders of SunPharm or withdraws,
modifies or proposes to withdraw or modify, in any adverse manner, its
approval or recommendation of the merger;
- fails to mail a proxy statement to its stockholders within five
business days of when the proxy statement was available for mailing or
which failed to include in the proxy statement such recommendation;
- fails to reaffirm its approval and recommendation of the merger within
two business days after GelTex's request to do so;
- enters into any letter of intent, merger agreement or similar
agreement with respect to SunPharm relating to an acquisition
proposal;
- solicits, facilitates, initiates or encourages an acquisition
proposal; or
- resolves or announces its intention to do any of the above (see the
definition of acquisition proposal on page 51 of this proxy
statement/prospectus);
(4) by Geltex:
- upon a breach at any time by SunPharm of its representations and
warranties or its covenants and agreements under the merger agreement
so that the corresponding condition to completion of the merger would
not be met, if such breach is not cured within 10 days after notice to
SunPharm. GelTex may not terminate the merger agreement under this
provision if it is in material breach of any of its obligations under
the merger agreement; or
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<PAGE> 64
- if any person or entity who is a party to the stockholders agreement
publicly announces or makes a public statement regarding the
stockholder's disapproval of the merger or otherwise encourages other
stockholders of SunPharm not to vote in favor of the merger;
(5) by SunPharm, upon a breach at any time by GelTex of its representations
and warranties or its covenants and agreements under the merger
agreement so that the corresponding condition to completion of the
merger would not be met, if such breach is not cured within 10 days
after notice to GelTex. SunPharm may not terminate the merger agreement
under this provision if it is in material breach of any of its
obligations under the merger agreement.
Payment of termination fee or topping fee. SunPharm will pay to GelTex a
termination fee of $500,000 plus expenses immediately upon termination of the
merger agreement if the merger agreement is terminated because:
- SunPharm's board of directors approves, recommends or proposes to approve
or recommend any acquisition proposal other than the merger, or resolves
to do so;
- SunPharm's board of directors fails to present and recommend adoption of
the merger agreement and the related transactions by the stockholders of
SunPharm or withdraws, modifies or proposes to withdraw or modify, in any
adverse manner, its approval or recommendation of the merger;
- SunPharm's board of directors fails to mail a proxy statement to its
stockholders within five business days of when the proxy statement was
available for mailing or which failed to include a recommendation to
adopt the merger agreement;
- SunPharm's board of directors fails to reaffirm its approval and
recommendation of the merger within two business days after GelTex's
request to do so;
- SunPharm's board of directors enters into any letter of intent, merger
agreement or similar agreement with respect to SunPharm or any subsidiary
relating to an acquisition proposal, or resolves to do so;
- SunPharm's board of directors solicits, facilitates, initiates or
encourages an acquisition proposal, or resolves to do so;
- any person or entity who is a party to the stockholders agreement
publicly announces or makes a public statement regarding the
stockholder's disapproval of the merger or otherwise encourages other
stockholders of SunPharm not to vote in favor of the merger; or
- SunPharm's stockholders do not authorize the merger agreement and at the
time of termination or prior to the special meeting, SunPharm makes,
proposes, communicates or discloses in a manner which becomes public an
intention to consummate an acquisition proposal whether or not the
acquisition proposal or any announcement or agreement relating to the
acquisition proposal has been rejected or withdrawn prior to the time of
termination or the special meeting.
In the alternative, SunPharm has agreed to pay GelTex a topping fee of
$1,000,000 plus expenses if the merger agreement is terminated by GelTex or
SunPharm because SunPharm's stockholders do not authorize the merger agreement
and SunPharm enters into a binding agreement in connection with an acquisition
proposal or an acquisition proposal involving SunPharm and a party other than
GelTex is consummated within 12 months of the termination of the merger
agreement.
The topping fee is payable upon consummation of the acquisition proposal
and the expenses incurred by GelTex in connection with the merger agreement are
payable upon termination of the merger agreement. Termination of the merger
agreement by SunPharm under circumstances where the topping fee is payable is
not effective until GelTex receives the topping fee.
In addition, if GelTex terminates the merger agreement because SunPharm is
in breach of its representations and warranties or its covenants and agreements
under the merger agreement and such breach is not cured within the required time
period, SunPharm will pay to GelTex the fees and expenses
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<PAGE> 65
incurred by GelTex in connection with the merger agreement within two business
days of termination of the merger agreement.
Extension, waiver and amendment of the merger agreement. The parties may
amend the merger agreement before completion of the merger. However, after the
SunPharm stockholders adopt the merger agreement, no change will be made to the
range of the exchange ratio fractions."
Either party may extend the other's time for the performance of any of the
obligations or other acts under the merger agreement, waive any inaccuracies in
the other's representations and warranties and waive compliance by the other
with any of the agreements or conditions contained in the merger agreement. If
any of either party's conditions or other obligations are waived, SunPharm will
consider the facts and circumstances at that time and make a determination as to
whether a resolicitation of proxies is appropriate.
THE STOCKHOLDERS AGREEMENT
GelTex required certain SunPharm stockholders to enter into a stockholders
agreement. The stockholders agreement requires these SunPharm stockholders to
vote all of the SunPharm common stock and preferred stock beneficially owned by
them in favor of the merger.
As of the record date, the SunPharm stockholders who entered into the
stockholders agreement collectively held approximately 37% of the outstanding
common stock and 86% of the outstanding preferred stock of SunPharm. None of the
stockholders who are parties to the stockholders agreement was paid additional
consideration in connection with the stockholders agreement.
The stockholders agreement will terminate upon the earliest to occur of
December 31, 1999 or the termination of the merger agreement.
OPERATIONS AFTER THE MERGER
Following the merger, SunPharm will continue its operations as a
wholly-owned subsidiary of GelTex. There are presently no arrangements to retain
the services of the current directors, executive officers, employees or
consultants of SunPharm following the merger, other than Mr. Borg and Dr.
Bergeron, pursuant to their respective consulting agreements. The stockholders
of SunPharm will become stockholders of GelTex, and their rights as stockholders
will be governed by the GelTex restated certificate of incorporation, as
currently in effect, the GelTex restated bylaws and the laws of the State of
Delaware. See "Comparison of Rights of Holders of SunPharm Capital Stock and
GelTex Common Stock" on page 83 of this proxy statement/prospectus.
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COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND INFORMATION
SunPharm common stock is traded on The Nasdaq SmallCap Market under the
symbol "SUNP." GelTex common stock is traded on The Nasdaq National Market under
the symbol "GELX." Because the market price of GelTex common stock that you will
receive in the merger may increase or decrease before the merger, you are urged
to obtain current market quotations from publicly available sources.
The following table sets forth, for the calendar quarters indicated, the
high and low sale prices per share of SunPharm common stock as reported on The
Nasdaq SmallCap Market and per share of GelTex common stock as quoted on The
Nasdaq National Market.
<TABLE>
<CAPTION>
SUNPHARM GELTEX
COMMON STOCK COMMON STOCK
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1997:
First Quarter......................................... $ 5.50 $ 3.75 $27.00 $18.25
Second Quarter........................................ 4.63 2.63 23.00 15.75
Third Quarter......................................... 4.06 2.63 27.00 17.50
Fourth Quarter........................................ 6.25 3.63 32.00 24.00
1998:
First Quarter......................................... $ 6.25 $ 4.13 $29.88 $25.63
Second Quarter........................................ 5.94 3.25 27.06 18.63
Third Quarter......................................... 3.38 1.50 24.75 14.63
Fourth Quarter........................................ 2.25 0.75 27.38 16.25
1999:
First Quarter......................................... $ 3.25 $ 0.75 $29.00 $13.50
Second Quarter........................................ 2.34 1.13 22.88 13.25
Third Quarter......................................... 2.50 1.00 18.13 10.00
Fourth Quarter (through October 4, 1999).............. 1.38 1.13 12.94 10.88
</TABLE>
The following table sets forth the closing prices per share of SunPharm as
reported on The Nasdaq SmallCap Market and the closing prices per share of
GelTex common stock as reported on The Nasdaq National Market on (1) August 13,
1999, the last business day preceding public announcement that GelTex and
SunPharm had entered into the merger agreement and (2) October 4, 1999.
The following table also sets forth the equivalent price per share of
GelTex of common stock and SunPharm common stock and preferred stock on those
dates. The equivalent price per share of GelTex common stock for SunPharm common
stock is equal to the closing price of a share of GelTex common stock on that
date multiplied by 0.13359, the number of shares of GelTex common stock to be
issued in exchange for each share of SunPharm common stock, assuming the
midpoint of the range of the exchange ratio fraction for the SunPharm common
stock. The equivalent price per share of GelTex common stock for SunPharm
preferred stock is equal to the closing price of a share of GelTex common stock
on that date multiplied by 0.20039, the number of shares of GelTex common stock
to be issued in exchange for each share of SunPharm preferred stock, assuming
the midpoint of the range of the exchange ratio fraction for the SunPharm
preferred stock. This equivalent per share price reflects the value of the
GelTex common stock you would receive for each share of SunPharm common stock or
preferred stock if the merger were closed on any of these dates.
<TABLE>
<CAPTION>
EQUIVALENT EQUIVALENT
PER SHARE PRICE PER SHARE PRICE
SUNPHARM GELTEX FOR SUNPHARM FOR SUNPHARM
COMMON STOCK COMMON STOCK COMMON STOCK PREFERRED STOCK
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
August 13, 1999..................... $ 1.75 $14.25 $ 1.90 $ 2.85
October 4, 1999..................... $ 1.38 $11.88 $ 1.59 $ 2.38
</TABLE>
Because the market price of GelTex common stock that you will receive in
the merger may increase or decrease before completion of the merger, you are
urged to obtain current market quotations for GelTex common stock from publicly
available sources.
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<PAGE> 67
Neither GelTex nor SunPharm has ever paid a cash dividend on its common
stock. Following the merger, it is expected that the GelTex board of directors
will continue the policy of not paying cash dividends in order to retain
earnings for reinvestment in the business of the combined companies.
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<PAGE> 68
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
have been prepared to give effect to the merger using the purchase method of
accounting.
The unaudited pro forma condensed combined balance sheet as of June 30,
1999 gives effect to the merger as if it had occurred on such date, and reflects
the allocation of the purchase price to the SunPharm assets acquired, including
in-process research and development, and liabilities assumed. The unaudited pro
forma condensed combined balance sheet includes an adjustment for severance
related liabilities of approximately $611,000.
The unaudited pro forma condensed combined statements of operations combine
the historical statements of operations for GelTex and SunPharm as if the merger
had occurred at the beginning of the earliest period presented. It is expected
that following the merger, GelTex will incur additional costs, which are not
expected to be significant to the combined results of operations, in connection
with integrating the operations of the two companies. Integration-related costs
are not included in the accompanying unaudited pro forma condensed combined
financial statements.
The GelTex statement of operations for the period in which the merger
occurs will include a significant charge for acquired in-process research and
development, currently estimated to be approximately $9.5 million, or 55% of the
purchase price. This amount represents the values determined by management,
using a discounted cash flow methodology, to be attributable to the in-process
research and development programs of SunPharm based on a valuation of such
programs. The charge relates to two specific on-going research and development
programs. Assuming both of these research programs continue through all stages
of clinical development, the projected future research and development
expenditures related to these programs is expected to aggregate $8.8 million. Of
this total, $5.0 million is expected to be funded by the existing corporate
partner for one of the programs and GelTex anticipates that it will also seek a
corporate partner and related reimbursement for the second program. The programs
are forecasted to be completed at various times between 2001 and 2002. If GelTex
had allocated less of the purchase price to these programs, the value would have
been recorded as goodwill on the balance sheet and amortized over the expected
benefit period, resulting in increased amortization expense during that period.
Management of GelTex believes that the allocation of the purchase price to
these programs is appropriate given the future potential of these programs to
contribute to the operations of GelTex. If, at a later date, management of
GelTex decides to no longer pursue one or all of these in-process programs,
decides to indefinitely postpone the research effort related to one or all of
the programs, or determines that the discounted cash flows will no longer meet
the projections underlying the valuations, it will disclose that fact to
investors in the appropriate Form 10-K or 10-Q explaining why it will not pursue
commercialization or why research has been postponed and when research is
expected to resume. In addition, should GelTex revise its estimate of the
anticipated date of regulatory approval for a particular product, this fact will
be disclosed in the appropriate Form 10-K or 10-Q and the reasons for, and
potential implications of, the change in estimate will be explained.
Unaudited pro forma condensed combined financial information is presented
for illustrative purposes only and is not necessarily indicative of the
financial position or results of operations that would have actually been
reported had the merger occurred at the beginning of the periods presented, nor
is it necessarily indicative of future financial position or results of
operations. These unaudited pro forma condensed combined financial statements
are based upon the respective historical financial statements of GelTex and
SunPharm and do not incorporate, nor do they assume, any benefits from cost
savings or synergies of operations of the combined company.
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<PAGE> 69
GELTEX PHARMACEUTICALS, INC. AND SUNPHARM CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA REFERENCES PRO FORMA
GELTEX SUNPHARM ADJUSTMENTS NOTE 2 COMBINED
------------ ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............... $ 7,814,696 $ 404,813 $ 8,219,509
Marketable securities................... 70,657,590 249,216 70,906,806
Prepaid expenses and other current
assets................................ 2,821,311 94,879 (22,547) A 2,893,643
Due from affiliates..................... 10,251,100 -- 10,251,100
Inventory............................... 3,186,113 -- 3,186,113
Due from Joint Venture.................. 444,679 -- 444,679
------------ ------------ ------------
Total current assets.................... 95,175,489 748,908 95,901,850
Long-term receivables, affiliates....... 470,000 129,656 (117,086) A 482,570
Long-term receivables................... 1,591 -- 1,591
Property and equipment, net............. 7,712,919 56,031 7,768,950
Intangible assets, net.................. 1,050,229 -- 1,050,229
Goodwill................................ -- -- 8,379,936 B 8,379,936
Other assets............................ -- 9,276 9,276
Investment in Joint Venture............. 9,064,919 -- 9,064,919
------------ ------------ ------------
$113,475,147 $ 943,871 $122,659,321
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses............................ $ 4,450,295 $ 564,981 $ 720,000 C $ 5,735,276
Obligations due upon close of
merger.............................. -- -- 471,608 D 471,608
Notes Payable......................... -- 43,124 43,124
Other................................. -- 92,961 92,961
Current portion of long-term
obligations......................... 840,808 -- 840,808
------------ ------------ ------------
Total current liabilities............... 5,291,103 701,066 7,183,777
Long term obligations, less current
portion............................... 5,206,180 -- 5,206,180
Commitments and contingencies........... -- -- --
Stockholders' equity.................... --
Series A preferred stock.............. -- 300 (300) E --
Series B preferred stock.............. -- 67 (67) E --
Common Stock.......................... 168,652 693 11,157 E, F 180,502
Additional paid-in capital............ 187,104,318 21,440,785 (4,631,135) F 203,913,968
Deferred compensation................. (457,620) -- (457,620)
Other comprehensive gain (loss)....... (159,819) -- (159,819)
Accumulated deficit during development
stage............................... -- (21,199,040) 21,199,040 E --
Accumulated deficit................... (83,677,667) -- (9,530,000) G (93,207,667)
------------ ------------ ------------
Total stockholders' equity.............. 102,977,864 242,805 110,269,364
------------ ------------ ------------
$113,475,147 $ 943,871 $122,659,321
============ ============ ============
</TABLE>
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<PAGE> 70
GELTEX PHARMACEUTICALS, INC. AND SUNPHARM CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA REFERENCES PRO FORMA
GELTEX SUNPHARM ADJUSTMENTS NOTE 2 COMBINED
------------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Collaborative Joint Venture project
reimbursement.................... $ 2,961,596 $ -- $ 2,961,596
Contract Revenue................... 1,751,670 -- 1,751,670
------------ ----------- ------------
Total Revenue...................... 4,713,266 -- 4,713,266
Costs and expenses:
Reseach and development.......... 13,890,501 1,130,526 15,021,027
Collaborative Joint Venture
project costs................. 2,961,596 -- 2,961,596
------------ ----------- ------------
Total research and development... 16,852,097 1,130,526 17,982,623
Amortization of purchased
goodwill...................... -- -- $598,567 H 598,567
General and administrative......... 3,134,576 833,528 3,968,104
------------ ----------- ------------
Total costs and expenses........... 19,986,673 1,964,054 22,549,294
Loss from operations............... (15,273,407) (1,964,054) (17,836,028)
Interest income, net............... 2,188,337 33,060 2,221,397
Other income....................... -- 2,400 2,400
Equity in loss of Renagel Joint
Venture.......................... (4,067,864) -- (4,067,864)
------------ ----------- ------------
Net loss........................... $(17,152,934) $(1,928,594) $(19,680,095)
------------ ----------- ------------
Basic and diluted net loss per
share............................ $ (1.02) $ (0.28) $ (1.09)
Shares used in computing basic and
diluted net loss per share....... 16,844,000 6,804,165 18,028,977
</TABLE>
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<PAGE> 71
GELTEX PHARMACEUTICALS, INC. AND SUNPHARM CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA REFERENCES PRO FORMA
GELTEX SUNPHARM ADJUSTMENTS NOTE 2 COMBINED
------------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Collaborative Joint Venture
project reimbursement........... $ 5,198,819 $ -- $ 5,198,819
------------ ----------- ------------
Total Revenue..................... 5,198,819 -- 5,198,819
Costs and expenses:
Research and development........ 11,608,472 1,164,798 12,773,270
Collaborative Joint Venture
project costs................ 5,198,819 -- 5,198,819
------------ ----------- ------------
Total research and
development................ 16,807,291 1,164,798 17,972,089
Amortization of purchased
goodwill..................... -- -- $598,567 H 598,567
General and administrative........ 2,573,035 1,019,213 3,592,248
------------ ----------- ------------
Total costs and expenses.......... 19,380,326 2,184,011 22,162,904
Loss from operations.............. (14,181,507) (2,184,011) (16,964,085)
Interest income, net.............. 1,591,354 96,031 1,687,385
Equity in loss of Renagel Joint
Venture......................... (2,924,553) -- (2,924,553)
------------ ----------- ------------
Net loss.......................... $(15,514,706) $(2,087,980) $(18,201,253)
------------ ----------- ------------
Basic and diluted net loss per
share........................... $ (0.97) $ (0.36) $ (1.06)
Shares used in computing basic and
diluted net loss per share...... 16,052,000 5,756,652 17,236,977
</TABLE>
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<PAGE> 72
GELTEX PHARMACEUTICALS, INC. AND SUNPHARM CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA REFERENCES PRO FORMA
GELTEX SUNPHARM ADJUSTMENTS NOTE 2 COMBINED
------------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
License fee and research
revenue........................ $ 25,000,000 $ 230,729 $ 25,230,729
Collaborative Joint Venture
project reimbursement.......... 7,658,232 -- 7,658,232
------------ ----------- ------------
Total Revenue.................... 32,658,232 230,729 32,888,961
Costs and expenses:
Reseach and development........ 27,904,064 2,509,561 30,413,625
Collaborative Joint Venture
project costs............... 7,658,232 -- 7,658,232
------------ ----------- ------------
Total research and
development............... 35,562,296 2,509,561 38,071,857
Amortization of purchased
goodwill.................... -- -- $1,197,134 H 1,197,134
General and administrative....... 5,583,361 1,651,686 7,235,047
------------ ----------- ------------
Total costs and expenses......... 41,145,657 4,161,247 46,504,038
Loss from operations............. (8,487,425) (3,930,518) (13,615,077)
Interest income, net............. 4,455,737 163,126 4,618,863
Equity in loss of Renagel Joint
Venture........................ (7,535,630) -- (7,535,630)
------------ ----------- ------------
Net loss......................... $(11,567,318) $(3,767,392) $(16,531,844)
------------ ----------- ------------
Basic and diluted net loss per
share.......................... $ (0.72) $ (0.64) $ (0.96)
Shares used in computing basic
and diluted net loss per
share.......................... 16,023,000 5,876,875 17,207,977
</TABLE>
64
<PAGE> 73
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
The unaudited pro forma combined financial information reflects the merger,
and gives effect to the following:
NOTE 1
The unaudited pro forma condensed combined financial statements reflect the
conversion of all of the outstanding shares of SunPharm common stock and
preferred stock into approximately 1,184,977 shares of GelTex common stock
pursuant to the merger. This calculation is based on GelTex's share price on or
about August 13, 1999, the date of the Merger Agreement. The number of shares
actually issued will depend on the average GelTex share price during the 20 day
period prior to the Effective Date of the merger.
The unaudited pro forma condensed combined financial statements assume that
options and warrants to purchase approximately 822,000 shares of SunPharm common
stock at an exercise price of $2.00 or less will be exercised prior to the
effective date of the merger. Additionally, the unaudited pro forma financial
statements provide that options and warrants to purchase approximately 1,880,736
shares of SunPharm common stock with an exercise price range of $3.00 to $7.50
will be assumed by GelTex pursuant to the merger and converted into options and
warrants to purchase approximately 273,589 shares of GelTex common stock. The
total cost of the proposed merger is estimated to be approximately $17,341,500,
determined as follows:
<TABLE>
<S> <C>
Fair value of GelTex shares (calculated using the per
share fair value on or about the date of the merger
agreement)............................................ $16,540,500
Value of SunPharm options and warrants assumed.......... 281,000
GelTex transaction costs, consisting primarily of
financial advisory, legal and accounting fees......... 520,000
-----------
$17,341,500
</TABLE>
Based upon a preliminary valuation of tangible and intangible assets
acquired and liabilities assumed, GelTex has allocated the total cost of the
merger to the net assets of SunPharm as follows:
<TABLE>
<S> <C>
Tangible assets acquired................................ $ 804,238
In-process research and development..................... 9,530,000
Intangible assets....................................... 8,379,936
Liabilities assumed (including SunPharm transaction
costs and other obligations due upon the close of the
merger)............................................... (1,372,674)
-----------
$17,341,500
</TABLE>
The SunPharm research and development programs currently in process were
valued as follows:
<TABLE>
<S> <C>
DENSPM-Solid Tumor Cancer................................ $8,750,800
DEHOP- AIDS Related Diarrhea............................. 779,200
----------
$9,530,000
</TABLE>
The in-process research and development has been written off against the
combined retained earnings. Because the charge is nonrecurring, it has not been
reflected in the pro forma condensed combined statements of operations. Such
charge will be included in the GelTex statement of operations in the quarter in
which the merger is completed. The intangible assets will be amortized over
their estimated useful lives of 7 years.
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<PAGE> 74
NOTE 2
The pro forma condensed combined balance sheets includes the adjustments
necessary to give effect to the merger as if it had occurred on June 30, 1999
and to reflect the allocation of the acquisition cost to the fair value of
tangible and intangible assets acquired and liabilities assumed as noted above,
including a charge to retained earnings for acquired in-process research and
development and the elimination of SunPharm's equity accounts. The pro forma
condensed combined statements of operations include the adjustments necessary to
give effect to the merger as if it had occurred at the beginning of the
respective periods. Adjustments included in the pro forma condensed combined
balance sheets and statements of operations are summarized as follows:
(A) Forgiveness of notes receivable from officers of approximately
$140,000.
(B) Valuation of purchased goodwill of $8,379,936.
(C) Accrual for transaction-related costs of approximately $720,000,
principally for valuation, legal, accounting services and an investment
advisory fee, incurred by GelTex and SunPharm.
(D) Accrual for severance and other payouts associated with pre-existing
severance plans of approximately $472,000.
(E) Elimination of the SunPharm equity accounts.
(F) Issuance of GelTex common stock, $0.01 par value. The value of GelTex
common stock is equal to the product of 1,184,977 shares multiplied by
$13.96 per share.
(G) Charge to operations for in-process research and development of
approximately $9,530,000.
(H) Amortization of purchased goodwill based upon the useful life of 7
years.
NOTE 3
Pro forma basic and diluted net loss per share amounts for the six month
periods ended June 30, 1999 and June 30, 1998, are based upon the historical
weighted-average number of shares of GelTex common stock outstanding adjusted to
reflect the issuance, as of January 1, 1998, of approximately 1,184,977 shares
of GelTex common stock, which amount excludes outstanding shares subject to
repurchase in accordance with SFAS No. 128. The impact of outstanding options,
including SunPharm options, is not included in the calculation of basic and
diluted net loss per share as the effect would be antidilutive.
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<PAGE> 75
SUNPHARM'S BUSINESS
BUSINESS OVERVIEW
SunPharm is a development-stage company. SunPharm designs and develops
small molecule pharmaceutical products, consisting of novel polyamine analogue
and metal chelator compounds invented at the University of Florida and licensed
exclusively worldwide to SunPharm. SunPharm currently has 9 compounds in various
stages of research or development, targeting 6 indications, or illnesses.
SunPharm focuses on the following disease areas:
- cancer
- refractory diarrhea associated with AIDS
- other gastrointestinal disorders
- systemic iron overload
SunPharm has advanced the following two polyamine analogue compounds to
Phase II clinical trials:
- DEHOP, a treatment for refractory AIDS-related diarrhea
- DENSPM, a treatment for various solid tumor cancers
DEHOP completed a Phase II clinical trial in 1997, and it is currently
undergoing additional evaluation for safety and efficacy. DENSPM is in Phase II
clinical trials directed by the Parke-Davis Pharmaceutical Research division of
Warner-Lambert Company, or Warner-Lambert, under a sublicense agreement with
SunPharm.
SunPharm conducts preclinical studies of several other potential lead
compounds and indications through a sponsored research agreement with the
University of Florida to prepare compounds for pilot studies in humans as soon
as possible. SunPharm intends to file an investigational new drug application
for each of the following compounds and indications within the next twelve
months:
- DENSPM, for HIV
- Topical DENSPM, for psoriasis
- DESPM, for a gastrointestinal disorder
- PCANMH, for ulcerative colitis
- Monosodium HBED, for Cooley's anemia and other systemic iron overload
disorders
In addition, SunPharm has a potential orally active analogue of the iron
chelator DFT, in preclinical development.
SunPharm develops products both independently and through strategic
alliances. Therefore, SunPharm seeks financial, preclinical and clinical trial
assistance from larger pharmaceutical and/or biotechnology companies for novel
drugs with broad market potential, but would prefer to retain manufacturing
and/or marketing rights for all or part of those products. As a result, SunPharm
sublicensed worldwide rights (excluding Japan) to manufacture and market DENSPM
for all cancer indications to Warner-Lambert in May 1993 and sublicensed those
rights in Japan to Nippon Kayaku in February 1994. Warner-Lambert and Nippon
Kayaku agreed to make staged payments to SunPharm for license fees and research
and development milestones, of which they paid an aggregate of $3.1 million to
date, and to pay royalties on sales of products incorporating DENSPM. In
addition, both partners agreed to fund and administer all further clinical
trials for DENSPM in cancer indications.
SunPharm was incorporated in Delaware in 1990 as Lexigen, Incorporated and
changed its name in 1991 to SunPharm Corporation. SunPharm has its principal
executive offices at The Veranda, Suite 301, 814 Highway A1A, Ponte Vedra Beach,
Florida 32082, and its telephone number is (904) 394-2800.
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<PAGE> 76
SunPharm supports a research facility at the University of Florida in
Gainesville, Florida, and maintains a quality assurance laboratory in Alachua,
Florida.
TECHNOLOGY OVERVIEW
- DEVELOPMENT OF POLYAMINE ANALOGUE TECHNOLOGY
For the past fifteen years, Dr. Raymond Bergeron, the inventor of
SunPharm's polyamine analogues, has conducted research at the University of
Florida for the development of polyamine analogues as potential anti-cancer
agents. Dr. Bergeron's research has been supported by over $6 million of funding
under National Cooperative Drug Discovery Group grants from the National Cancer
Institute and, since 1992, more than $6 million from SunPharm.
- CHARACTERISTICS AND FUNCTIONS OF POLYAMINES
Human cells contain three essential, naturally occurring polyamines:
putrescine, spermidine and spermine. In contrast to building blocks such as
amino acids, nucleotides and sugars, polyamines do not become macromolecules but
remain metabolically distinct entities within cells. Research indicates that
these polyamines bind to nucleic acids and promote the integrity and fidelity of
many of their functions, such as replication, supercoiling, ribonucleic acid, or
RNA, transcription and processing, and protein synthesis. These functions of
polyamines are necessary for cellular proliferation to occur.
Human cells employ a family of enzymes to maintain the proper balance of
polyamines. This family of enzymes includes ornithine decarboxylase, or ODC, and
S-adenosylmethionine decarboxylase, or SAMDC, which make polyamines for the
cell, and spermidine/spermine N(1)-acetyltransferase, or SSAT, which controls
the export and/or recycling of polyamines from the cell. All three of these are
short-lived, rapidly inducible proteins, and are tightly regulated by
intracellular polyamine pools. Together, these enzymes maintain polyamine pools
within a very narrow range of concentration inside the cell.
SunPharm's polyamine compounds are structurally similar to the cell's
naturally occurring polyamines. SunPharm calls its polyamine compounds
"analogues" because of this structural similarity. The cell's polyamine uptake
system recognizes SunPharm's analogues as natural polyamines, and these
analogues thereby gain entry into the cell. Once inside the cell, SunPharm's
analogues disrupt the cell's polyamine balance and biosynthetic network, causing
the cell to shut down the enzymes ODC and SAMDC, the polyamine producers, and to
increase production of SSAT, which is responsible for the breakdown and export
of natural polyamines from the cell. This combined effect causes a substantial
reduction in the amount of natural polyamines in the cell and a corresponding
increase in the amount of analogues in the cell. Because cancer cells have a
high rate of polyamine biosynthesis and contain higher concentrations of
essential polyamines than normal cells, SunPharm believes that substitution of
its analogues for the natural polyamines will counteract the increased level of
polyamines present in the cancer cells, thereby reducing the ability of the
cancer cells to proliferate.
SunPharm has discovered, through its sponsored research at the University
of Florida, that certain polyamine analogues modify other cell-related
activities besides cell proliferation. For example, work on uncovering the drug
candidate DEHOP's mechanism of action in arresting diarrhea suggests that DEHOP
interacts with several receptor complexes, including the N-methyl-D-aspartate,
or NMDA, receptor, which control neuromuscular function. Additional evidence
suggests that DEHOP also stimulates nitric oxide release, which could be
responsible for DEHOP's promotion of the relaxation of smooth muscles in the
gastrointestinal tract. This is consistent with studies which have indicated
that the smooth muscle relaxation promoted by DEHOP is inhibited by the nitric
oxide synthase inhibitor, L-NAME.
- DEVELOPMENT OF IRON CHELATOR TECHNOLOGY
SunPharm has received an exclusive license from the Foundation for a second
technology platform, consisting of proprietary iron chelator compounds invented
by Dr. Bergeron at the University of Florida. Metal chelators are compounds
which bind tightly to certain metals, such as iron, in the bloodstream and
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<PAGE> 77
inside cells, acting to eliminate quantities in excess of the body's needs.
These excess quantities damage vital organs such as the liver, heart and
pancreas. Chelators are administered to supplement the body's poorly developed
ability to get rid of excess metal concentrations.
PRODUCTS UNDER DEVELOPMENT
SunPharm has 9 compounds targeting 6 indications in various stages of
research or development, including two compounds which have reached Phase II
clinical trials. All of these compounds are based on the polyamine analogues and
metal chelators developed at the University of Florida and licensed exclusively
to SunPharm. The University of Florida, under SunPharm's sponsored research
agreement, will exclusively license to SunPharm, on a worldwide basis,
additional compounds and/or indications discovered by Dr. Bergeron and his
staff. The following table summarizes SunPharm's current product portfolio, or
pipeline, which has resulted from the license agreement and sponsored research
agreement with the University of Florida:
PRODUCT PIPELINE
<TABLE>
<CAPTION>
DISEASE AREA COMPOUND INDICATION STATUS
- ------------ -------- ---------- ------
<S> <C> <C> <C>
1. CANCER DENSPM cancer Phase II commenced 1st
Quarter 1998 by
Warner-Lambert Co.;
combination therapy trials
initiated June 1999
DPNSPM cancer Preclinical development
DENOHO cancer Preclinical development
DEHOHO cancer Preclinical development
2. AIDS DEHOP AIDS-related diarrhea Phase II completed 4th
Quarter 1997; further
evaluation for safety ongoing
DESPM anti-diarrheal Preclinical development
DENSPM HIV Investigational new drug
application filed
3. GASTROINTESTINAL DISORDERS PCANMH ulcerative colitis Preclinical development
4. DERMATOLOGY DENSPM psoriasis Preclinical development
5. IRON OVERLOAD HBED iron overload Preclinical development
DFT Analogue iron overload Preclinical development
</TABLE>
1. CANCER
- BACKGROUND. The American Cancer Society estimates that, in the US, more
than 1.2 million new cases of cancer will be diagnosed and more than 500,000
people will die of cancer in 1999. Currently, chemotherapy, surgery and
radiation are the major treatments for cancer. Chemotherapy is usually the
primary treatment for cancers such as hematologic malignancies, which cannot be
excised by surgery. In addition, physicians increasingly use chemotherapy as an
adjunct to radiation and surgery to improve efficacy and to address the spread
of cancer, and as primary therapy for some solid tumors. Chemotherapy attempts
to destroy the malignant cells by exposing them to as much drug as the patient
can tolerate. Clinicians design a combination of drugs, dosing schedule and
method of administration that increases the probability that malignant cells
will be destroyed and minimizes the harm to healthy cells.
Most current anti-cancer drugs have significant limitations. Certain
cancers, such as colon, lung, kidney and pancreatic cancers, are inherently
unresponsive to chemotherapeutic agents. Certain other cancers may initially
respond to a chemotherapeutic agent, but cease to respond as the cancer cells
acquire resistance to the drug during the course of therapy. As such cancer
cells develop resistance to a specific chemotherapeutic agent, they often
simultaneously become resistant to a wide variety of structurally
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<PAGE> 78
unrelated agents through a phenomenon known as "multi-drug resistance."
Additionally, current anti-cancer drugs generally are highly toxic, with effects
that may prevent their administration in therapeutic doses.
A. DENSPM. Phase I clinical trials for DENSPM in refractory solid-tumor
cancer commenced in January 1994 at the University of Florida, Johns Hopkins
University and Roswell Park Cancer Institute. The protocol allowed for dosing
regimens of one, two and three times per day at each center, respectively, in
order to determine DENSPM's maximum tolerated dose and side effects. Following
the Phase I trials, SunPharm and Warner-Lambert agreed that the maximum
tolerated dose had been determined at all dosage regimens. In December 1996,
SunPharm received the remaining $500,000 of the $1,000,000 milestone payment due
from Warner-Lambert upon reaching that milestone and transferred the
investigational new drug application for the clinical trial to Warner-Lambert.
In early 1998, Warner-Lambert commenced Phase II clinical trials of DENSPM in
six solid tumor cancers and will be responsible for all subsequent clinical
development of the compound (excluding Japan) in cancer applications. In May
1999, SunPharm announced that Warner-Lambert would expand the Phase II trials
following evidence of a modest degree of tumor shrinkage in patients with renal
cell carcinoma, and also that Warner-Lambert planned to begin studies of DENSPM
in combination with alpha interferon, an approved anti-tumor agent.
B. DEHOP. Researchers at the University of Florida first tested DEHOP in
five cancer patients during 1988 and 1989. They wanted to determine a safe
dosage for DEHOP in cancer patients. They observed no drug-related side effects,
except for constipation. This led SunPharm and its researchers at the University
of Florida to test DEHOP for use in treating AIDS patients who suffer from
chronic refractory diarrhea. Please read "-- AIDS" and "-- Gastrointestinal
Disorders" for a description of those trials.
Early studies conducted by SunPharm demonstrated that DEHOP may have
anti-proliferative properties. As a result, SunPharm filed an investigational
new drug application in March 1996 for a Phase I clinical trial to test DEHOP in
cancer patients. Dr. George Wilding at the University of Wisconsin Comprehensive
Cancer Center began the study in October 1996 with funding under a federal grant
from the National Cancer Institute. The study was a dose ranging trial conducted
in cancer patients to determine safety, pharmacokinetics, and maximum tolerated
dose. SunPharm observed an adverse event in this trial in 1997 at a dose level
five times higher than in the Phase II AIDS-related diarrhea trial. SunPharm
discussed safety data from the Phase II trial with the FDA to determine whether
to continue development of DEHOP for cancer indications as well as for trials
planned for other indications, including non-Hodgkin's lymphoma and ulcerative
colitis. In October 1998, SunPharm announced that the FDA required an additional
Phase II study of DEHOP to generate additional safety and pharmacokinetic data
before starting pivotal studies in refractory AIDS-related diarrhea. Please
refer to "Risk Factors -- GelTex's and SunPharm's Operations Depend on
Compliance with Complex Government Regulations" on page 23 for a discussion of
the potential impact of this requirement.
C. DEHOHO, DPNSPM AND DENOHO. Preclinical studies indicate that a
derivative of DEHOP, diethyldihydroxy-homospermine, or DEHOHO, may be useful in
treatment of pancreatic carcinoma. Several animal studies demonstrate that
DEHOHO concentrates in the exocrine cells of the pancreas and after a relatively
short use causes almost complete atrophy of these cells, while sparing the
insulin-producing endocrine cells. Because DEHOHO irreversibly alters pancreatic
cells, SunPharm expects this finding to be relevant in the treatment of
pancreatic carcinoma, a rapid and invariably fatal disease. SunPharm anticipates
the completion of preclinical in vitro and in vivo efficacy studies for this
indication by mid-year 1999, with preclinical safety studies to start shortly
thereafter. SunPharm plans preclinical work in 1999 for two other derivative
compounds, dipropylnorspermine, or DPNSPM and diethyldihydroxynorspermine, or
DENOHO, to explore additional cancer indications.
2. AIDS
- BACKGROUND. AIDS, a disease caused by HIV, is a devastating viral
infection that destroys the immune system of affected patients. The Centers for
Disease Control and Prevention, or CDC, estimate
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that HIV infects nearly one million people in the US, and over 30 million people
worldwide. Over 44,000 new AIDS cases were expected in the US in 1998, and
globally there are an estimated 16,000 new cases daily.
AIDS patients commonly experience disorders of the gastrointestinal tract.
Researchers estimate that between 50-80% of all AIDS patients and between 20-30%
of all HIV-positive patients suffer from chronic diarrhea during the course of
their disease. Most of these patients have periods of stable weight interspersed
with episodes of heavy diarrhea and rapid wasting that often occur while the
patient suffers from active secondary infections. Over time, the patient's
recovery from bouts of diarrhea is less complete, producing long-term loss of
body cell mass. Physicians do not yet fully understand the causes of AIDS-
related diarrhea and weight loss, and the condition is often unresponsive to
medical therapy. Of the HIV-positive patients with chronic diarrhea, a pathogen
can be identified as the cause in about 50% of the cases, and, among those
patients with this identifiable pathogen, about 50% (or only 25% of all HIV-
positive patients with chronic diarrhea) can be treated with antibiotic therapy.
Therefore, treatment is empiric and uses a combination of anti-diarrheal agents.
A. DEHOP. In January 1994, the FDA allowed Phase I clinical trials of
DEHOP as a possible treatment for chronic AIDS-related refractory diarrhea. In
June 1994, the University of Florida completed the first segment of the Phase I
clinical trial to determine side effects. Five AIDS patients, for whom
treatments with other anti-diarrheal medications had been unsuccessful, received
doses which were three to five times lower than those doses previously given to
cancer patients in a prior study of DEHOP for cancer conducted in 1989. All five
patients experienced a significant reduction in stool volume with no measurable
adverse side effects. In December 1995, the University completed an expanded
segment of the Phase I clinical trial in a total of nineteen evaluable patients,
to determine safety, route of administration and dosage regimen. Across the
three dose levels tested, ten patients responded positively. SunPharm conducted
a Phase II clinical trial of DEHOP on refractory AIDS-related diarrhea in
January 1996 to establish safety and appropriate dosing regiments for use in a
future pivotal clinical trial. In December 1997, SunPharm reported statistically
significant results of the Phase II multicenter clinical trial of DEHOP.
The Phase I and II clinical trials demonstrated positive response rates of
53% and 80%, respectively, in AIDS patients with very severe, refractory
diarrhea, that is, diarrhea which had failed to respond to all other approved
treatments for two weeks prior to initiating treatment with DEHOP. Although the
patients reported a small number of drug-related adverse events in each study,
SunPharm believes that the significant anti-diarrheal benefit of DEHOP observed
in its clinical trials outweighs the risks to patients associated with these
adverse events, and these adverse events do not preclude further development of
DEHOP for AIDS-related diarrhea. SunPharm is evaluating the impact of safety
data from its Phase I clinical trial of DEHOP for cancer on the development of
DEHOP for this indication. In October 1998, SunPharm announced that the FDA
required additional studies of DEHOP prior to initiating pivotal trials in
AIDS-related diarrhea. If or when initiated, SunPharm would design these studies
to generate additional safety and pharmacokinetic data on the compound. Please
read "-- Cancer -- DEHOP" for more information on DEHOP.
B. DENSPM FOR HIV. The HIV-1 virus has nine known genes that contain the
information for viral structural, enzymatic and regulatory proteins necessary
for intracellular viral replication and assembly. HIV drugs in use today are
directed toward the viral enzymes, reverse transcriptase and protease. These
enzymes are necessary both for conversion of viral RNA to DNA and assembly of
viral components into infective virus. Despite the effectiveness of currently
available HIV drugs in reducing HIV levels, progress of the disease continues to
occur in treated patients, with decreases in CD4+ T lymphocyte levels, the onset
of opportunistic infections, and ultimate progression to death. Experts have
several hypotheses for the ultimate failure of these drugs, which include: (i)
the amount of HIV present overwhelms the drugs; (ii) the virus develops
resistance to the drugs; and (iii) the inhibition of one or two molecular
targets (e.g. reserve transcriptase and/or protease) is insufficient to control
the virus. Although treatment with a combination of reverse transcriptase and
protease inhibitors has shown reduced levels of HIV mRNA in the blood to
undetectable levels in some patients, HIV DNA continues to persist in the
patients' tissues.
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Also, 25% of patients receiving combination therapy with reverse transcriptase
and protease inhibitors do not respond to the treatment, either because of the
patient's inability to take the combination therapy due to side effects or the
failure of the combination therapy to produce an antiviral effect.
Through its funded research at the University of Florida, SunPharm is
investigating another possible therapeutic approach to HIV involving the viral
rev gene, a regulatory gene required for the production of viral structural
components by the infected cell. The product of the viral rev gene combines in
the nucleus with the viral genetic message, HIV mRNA, and with cellular eIF-5A,
necessary for protein synthesis. This combination of rev, HIV mRNA and eIF-5A
then can be transported across the nuclear membrane to the cytoplasm. There, the
HIV genetic message can be translated to HIV protein, viral particles can
assemble, burst out of the cell and infect other cells.
SunPharm has funded research at the University of Florida to investigate
several proprietary analogue compounds that may alter eIF-5A to inhibit its
combination with the rev gene product or to inhibit the ability of the
combination to bind to the viral genetic message. DENSPM has been shown to
remove the substrate needed in an enzymatic reaction that converts a lysine
residue on eIF-5A to hypusine. SunPharm believes that a reduction in hypusine
will correlate with a reduction in viral load. SunPharm plans to test this
hypothesis in a pilot clinical trial scheduled to begin after an investigational
new drug application is filed in late 1999 or early 2000. SunPharm believes that
HIV cannot proliferate and infect new lymphocytes if it uses DENSPM to disrupt
this phase of the viral life-cycle. Although the HIV virus may mutate
significantly, this treatment may present the "Achilles heel" in the virus' life
cycle when mutation plays a less important role and may lead to new drug
treatment of AIDS.
3. GASTROINTESTINAL DISORDERS
- BACKGROUND. Ulcerative colitis is a form of inflammatory bowel disease
of unknown origin affecting approximately 500,000 Americans. Ulcerative colitis
consists of a diffuse, continuous, inflammatory process that almost always
involves the rectum, varies in its proximal extent, but rarely involves the
small intestines. The etiology of ulcerative colitis remains uncertain, but
genetic, infectious, immunological, and psychological factors have been
implicated as possible pathogenetic mechanisms in producing the chronic mucosal
inflammatory condition and the resulting ulcerative and hemorrhagic conditions.
Physicians treat the disease with sulfasalazine, other 5-aminosalicylic acid, or
ASA, compounds and/or rectal corticosteroids. None of these treatments are
totally effective in alleviating the signs and symptoms of ulcerative colitis.
A. DEHOP. Preclinical investigation with DEHOP in animals for inflammatory
bowel disease indicates that the compound exerts protective and
anti-inflammatory effects in the mucosa of the colon. SunPharm believes that
DEHOP, owing to its biochemical, anti-motility, anti-secretory and mucosal-
protective properties, may decrease colonic mucosal inflammatory infiltrates and
the signs and symptoms of mild to moderate ulcerative colitis. In March 1997,
the FDA allowed an investigational new drug application for a Phase I/II
clinical trial in patients with mild to moderate ulcerative colitis. Clinical
investigators at the University of Chicago conducted these trials, for which
patient enrollment began in November 1997. However, in 1998 SunPharm decided to
delay further enrollment to evaluate safety data from its Phase I clinical trial
of DEHOP for cancer, and also to discuss a pivotal trial of DEHOP for
AIDS-related diarrhea with the FDA. Please read "-- Cancer -- DEHOP" and
"-- AIDS -- DEHOP" for further discussions about the uses of DEHOP.
B. PCANMH. SunPharm has identified a metal chelator, PCANMH, which has
been encouraging in early preclinical studies. In two different models of
ulcerative colitis, PCANMH has shown a favorable impact on colon inflammation.
SunPharm reversed the beneficial effect by complexing PCANMH with iron before
administration, which demonstrated the importance of the actual chelator
capacity of the compound for its beneficial effect. SunPharm believes that iron
present in the inflamed bowel facilitates the production of free radicals which
intensifies the inflammation. The resulting oxidative stress may contribute to
the high incidence of colon carcinoma in these patients. SunPharm believes that
the local use
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of iron chelators may simultaneously eliminate the free iron catalyst and
scavenge free radicals, thereby minimizing the oxidative damage to the
intestinal lining.
4. DERMATOLOGY
- DENSPM. SunPharm believes that DENSPM may successfully treat psoriasis.
Patients with psoriasis show increased local ODC activity, elevated systemic
polyamine levels and increased urinary polyamine excretion. Studies conducted
ten years ago using mouse skin showed that the ODC-inhibitor,
difluoromethylornithine, or DFMO, administered systemically or topically,
prevented polyamine accumulation and inhibited tissue growth, indicating
potential use of DFMO in treating hyperproliferating disorders of human skin.
Seven of ten patients treated topically with DFMO for psoriasis in clinical
studies experienced moderate improvement. DFMO significantly reduced putrescine
and spermidine concentrations of the skin in these patients. However, the
overall clinical efficacy of this treatment has proven marginal, partly
resulting from poor permeability into human skin. Therefore, DFMO does not have
a foothold in psoriasis treatment. DENSPM, however, has been shown to penetrate
mouse skin and to have cytostatic properties, and SunPharm has sponsored
preclinical studies conducted at the University of Florida to investigate DENSPM
as a possible psoriasis treatment. SunPharm has completed skin safety and
hypersensitivity studies in animals and plans to conduct additional toxicity
studies in animals before filing an investigational new drug application to test
DENSPM against psoriasis in human clinical trials.
5. IRON OVERLOAD
A. HBED. In March 1998, the NIH issued a statement on research at the
University of Florida with the metal chelator compound, HBED. When tested in
rats and primates overloaded with iron, HBED removed up to 3 times more iron
than desferrioxamine, or DFO, by subcutaneous administration. The National
Institute of Diabetes and Digestive and Kidney Diseases partly funded the study,
which appeared in the February 15, 1998 issue of the science journal, Blood.
SunPharm believes that HBED may lead to a more effective and more easily
administered treatment of iron overload. Current treatment for excess iron
levels in disorders such as Cooley's anemia, sickle cell anemia and
hemochromatosis consists of a nine to twelve-hour infusion of DFO at least 5
days per week. Patients have great difficulty tolerating and complying with this
treatment regimen. Preclinical testing of HBED continues at the University of
Florida. SunPharm expects testing in human subjects to begin after the filing of
an investigational new drug application early in 2000.
B. DFT ANALOGUE. In January 1999, Dr. Bergeron and his collaborators at
the University of Florida reported progress in identifying and structuring an
orally effective iron clearing agent with a more acceptable level of toxicity
than DFO. The Journal of Medicinal Chemistry reported the results of their work.
SunPharm believes that one analogue compound, DFT, exhibits sufficient iron
chelation properties and an acceptable safety profile in animal models to
warrant further investigation in humans. SunPharm expects to file an
investigational new drug application for a pilot clinical trial in the year
2000.
STRATEGIC ALLIANCES
- WARNER-LAMBERT AGREEMENT
In May 1993, SunPharm entered into a sublicense agreement with
Warner-Lambert regarding DENSPM. SunPharm granted Warner-Lambert exclusive
worldwide rights (excluding Japan) to manufacture and market DENSPM for all
cancer indications in exchange for certain license fees, advance royalty
payments and development milestone payments. Warner-Lambert has paid SunPharm a
total of $2.9 million to date. Warner-Lambert also will pay SunPharm a royalty
on all sales of products incorporating this compound and indication. The
agreement provides for additional payments to SunPharm upon completion of Phase
II clinical trials, filing of a new drug application for DENSPM, and approval of
the new drug application for commercial sale of DENSPM. SunPharm's rights to
receive these payments depend on Warner-Lambert achieving these milestones, over
which SunPharm does not have control. Under the agreement, SunPharm conducts
Phase I clinical trials for DENSPM, and Warner-Lambert
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completes all remaining clinical trials at its expense. Warner-Lambert has a
right of first refusal to acquire the rights to DENSPM for other indications
should SunPharm elect to sublicense the development of DENSPM for those
indications. If Warner-Lambert elects to subcontract any portion of the
manufacturing of the compound to a third party, SunPharm has the right to match
the third party's offer under certain circumstances. The sublicense agreement
terminates on a country-by-country basis, upon the later of (i) the expiration
of the last-to-expire patent in such country or (ii) ten years after the
commencement of marketing of a product in that country.
In June 1996, Warner-Lambert acquired a 12-month option for other linear
polyamines for use in cancer indications in exchange for an early payment of
$500,000, one half of the milestone payment due upon completion of the Phase I
clinical study of DENSPM. In December 1996, Warner-Lambert agreed that SunPharm
met its obligations under the sublicense agreement for completion of the Phase I
study, and SunPharm transferred the investigational new drug application to
Warner-Lambert in exchange for the remaining portion of the $1,000,000 milestone
payment.
- NIPPON KAYAKU AGREEMENT
In February 1994, SunPharm entered into an agreement with Nippon Kayaku for
the Japanese marketing and development rights to DENSPM for cancer indications.
Nippon Kayaku committed to make staged payments to SunPharm for research and
development milestones and has paid $225,000 to date. Royalties are due on all
sales of products incorporating DENSPM. This agreement provides for additional
payments to SunPharm upon commencement of Phase I and Phase II clinical trials
in Japan, upon the submission of, and upon the approval of, a new drug
application in Japan, and upon the later to occur of product pricing approval or
patent approval in Japan. SunPharm's rights to receive additional payments from
Nippon Kayaku depend on Nippon Kayaku achieving these milestones. SunPharm does
not control achievement of these milestones. Nippon Kayaku will complete all
necessary Japanese clinical trials and associated regulatory submissions at its
expense. SunPharm has the right to supply Nippon Kayaku with all of its bulk
product requirements for marketing DENSPM in Japan.
- SCHEIN AGREEMENT
On September 30, 1999, SunPharm entered into an exclusive sub-license
agreement with Schein Pharmaceutical, Inc., or Schein, whereby Schein obtained
the rights to a proprietary injectable iron chelator for the U.S., European, and
certain Far East markets. Under the sub-license agreement, SunPharm is entitled
to receive payments upon reaching clinical, regulatory and manufacturing
milestones, as well as escalating royalties on sales. A payment of $625,000 was
made to SunPharm upon signing of the agreement.
LICENSED TECHNOLOGY AND SPONSORED RESEARCH
SunPharm holds an exclusive worldwide license to the commercial rights to
polyamine compounds and various iron chelators and their uses under more than 45
issued US and foreign patents and numerous pending patent applications held by
the Foundation through its sponsored research agreement and license agreement
with the Foundation. Under the agreements SunPharm must file and prosecute the
patents relating to the licensed technology, and pay the costs of doing so.
Further, SunPharm must take all necessary steps to defend these patent rights.
If SunPharm fails to take these actions, the Foundation has the right to defend
these rights at its own expense.
SunPharm cannot ensure that any existing patent application, or any future
patent applications, will be issued or that any patents, if issued, will provide
SunPharm adequate patent protection with respect to the covered products, their
uses, technology or processes. Also, under its license with the Foundation,
SunPharm must meet specified milestone and diligence requirements to retain its
license of these patents.
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- LICENSE AGREEMENT
In December 1991, SunPharm entered into a Patent License Agreement with
Research Component with the Foundation under which, as amended, the Foundation
granted to SunPharm a worldwide exclusive license to its rights under certain
patents and patent applications relating to polyamine and metal chelator
technology invented by Dr. Bergeron. Under this license agreement, SunPharm has
rights to all indications currently under development and, with respect to all
patent applications filed for inventions discovered during the term of our
sponsored research agreement, SunPharm obtains rights for all indications and
uses for humans and animals. SunPharm's license is subject to certain diligence
milestones related to product development and regulatory applications, product
marketing and certain other matters. The Foundation may terminate this license
agreement if SunPharm fails to meet certain milestones; provided, however,
termination will be limited to a particular compound if the default is related
to a particular compound only. The Foundation may terminate this license
agreement in its entirety if SunPharm defaults in its payment obligations under
the sponsored research agreement.
Under the license agreement, SunPharm must pay royalties on sales of
products, subject to certain annual minimum royalties and reimbursement of
patent costs incurred by the Foundation. These royalties include a royalty on
net sales of SunPharm's products of between five and six percent and a royalty
of 28% (increasing to 35% under certain circumstances) on royalty and license
payments made to SunPharm by its sublicensees. However, payments to the
Foundation on sales of products by sublicensees may not be less than two percent
of sublicensee sales. SunPharm must pay a minimum annual royalty of $100,000 on
each anniversary date of the license agreement, which is credited against
royalties and research payments due under its sponsored research agreement,
discussed below.
Under the license agreement, as amended, SunPharm issued to the Foundation
a total of 342,760 shares of SunPharm common stock, subject to certain
limitations on sales under an agreement with SunPharm. The license agreement
terminates when the last patent licensed to SunPharm expires, or on December 9,
2011, whichever is later.
- RESEARCH AGREEMENT
Also in December 1991, SunPharm and the Foundation entered into a Corporate
Research Agreement under which SunPharm has funded the research and development
work of Dr. Bergeron's laboratory at a current annual cost (including direct and
indirect costs) of $875,000. To date, SunPharm has made all required payments
under the research agreement. Under the research agreement, any new invention
covered by the license agreement will be licensed to SunPharm on the same terms
as the license agreement without any additional license fees to the Foundation.
SunPharm has a close working relationship with Dr. Bergeron at the
University of Florida, whom SunPharm engages as a consultant. SunPharm's
management and the University of Florida scientists meet regularly to review the
progress and direction of the University's efforts under the research agreement.
A total of 26 scientists and technicians at the University of Florida work on
SunPharm's products under Dr. Bergeron's supervision, seven of whom have Ph.D.
degrees. By utilizing the University's significant resources (including
state-of-the-art equipment, laboratory facilities for synthesis, analysis,
pharmacology, toxicology, in vitro and in vivo studies, and clinical and animal
facilities), SunPharm believes that it has accomplished much more in development
of its licensed compounds than it could have on its own, with an equivalent
amount of capital.
SunPharm incurred research and development costs of approximately
$2,228,000 for fiscal year 1996, $2,417,000 for fiscal year 1997 and $2,510,000
for fiscal year 1998. SunPharm incurred research and development costs of
approximately $12,496,000 for the period from its inception through December 31,
1998.
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PATENTS AND PROPRIETARY TECHNOLOGY
SunPharm's success depends, in part, on the validity and scope of the
patents and patent applications licensed from the Foundation, and on its ability
to operate without infringing on the proprietary rights of others. Other parties
have filed patent applications, and some patents may have been or may be issued
in the therapeutic areas in which SunPharm develop its products. If any of
SunPharm's proprietary technology in these areas conflicts with the rights of
others, its ability to commercialize products using these technologies could be
materially and adversely affected. Please read "Risk Factors -- Patents and
Proprietary Technology" on page 24 for more information about SunPharm's patents
and other proprietary technologies and risks associated with them.
GOVERNMENT REGULATION
In the US, the FDA's Center for Drug Evaluation and Research regulates
SunPharm's polyamine analogue and iron chelator products under the Federal Food,
Drug and Cosmetic Act. SunPharm must perform several steps before it may market
a product in the US, including:
1. preclinical laboratory evaluation of product chemistry and animal
studies to assess the purity, potency, stability, safety and efficacy of
the product and its formulation;
2. submission to the FDA of an investigational new drug application, which
includes the results of the preclinical studies and, unless the FDA
objects, becomes effective 30 days following its filing with the FDA
(and which must become effective before human clinical trials may
commence);
3. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug (and which provide data satisfying FDA
data integrity standards);
4. submission of a new drug application to the FDA; and
5. FDA review and subsequent approval of the new drug application prior to
any commercial sale or shipment of the drug.
In addition to this approval, each domestic drug manufacturing facility is
subject to inspections every two years by the FDA and must comply with the FDA's
Good Laboratory Practices and Good Manufacturing Practices.
In the US, human clinical trial programs generally involve a three-phase
process. Typically, Phase I trials are conducted in healthy volunteers to
determine the early side-effect profile and the pattern of drug distribution and
metabolism. Phase II trials are conducted in groups of patients afflicted with
the target disease to provide sufficient dose-response and safety data as
required by the FDA. If Phase II evaluations indicate that a product has shown
potential effectiveness and has an acceptable benefit-to-risk profile, Phase III
trials are undertaken to conclusively demonstrate clinical efficacy and safety
within an expanded population at multiple clinical study sites. Sometimes, the
FDA requires Phase IV studies to track patients after it approves a product for
commercial sale to identify side effects that may occur in a relatively small
percentage of patients.
For drugs used for cancer, AIDS and other life-threatening diseases,
initial human testing is generally done in patients rather than in healthy
volunteers. Because these patients are already afflicted with the target
disease, these studies may provide results traditionally obtained in Phase II
studies. Similarly, Phase II studies may be expanded to provide results
generally obtained in Phase III studies (such expanded studies are generally
referred to as Phase II/III studies). As a result, subject to obtaining the
necessary FDA approvals, the clinical trial process for cancer, AIDS and other
life-threatening diseases may be shortened compared to the process for non
life-threatening diseases. However, SunPharm cannot assure that the FDA will
grant such approvals.
SunPharm is also subject to widely varying foreign regulations governing
clinical trials and pharmaceutical sales. Regardless of FDA approval, SunPharm
must obtain approval of a product by the comparable regulatory authorities of
foreign countries prior to marketing the product in those countries.
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The approval process varies from country to country. The time may be shorter or
longer than FDA approval, and the regulatory authorities of other nations may
require additional clinical data. SunPharm intends to rely on licensees to
obtain regulatory approval for marketing its products in foreign countries.
From the time a new drug application is filed, regulatory review and
approval of a new pharmaceutical product may take two years for life-threatening
diseases and longer for non-life-threatening diseases, and may involve the
expenditure of substantial resources. Approval depends on a number of factors,
including the severity of the disease in question, the availability of
alternative treatments, and the risks and benefits demonstrated in clinical
trials.
During the development phase of its products or thereafter, SunPharm may
file for Treatment investigational new drug status under provisions of the
investigational new drug regulations. These regulations apply to products for
serious or life-threatening diseases and intend to facilitate the availability
of new products to desperately ill patients after clinical trials have shown
evidence of efficacy, but before the FDA has granted general marketing approval.
SunPharm may also seek designation for its products, where applicable, as
"Orphan Drugs" under the Orphan Drug Act of 1983. This Act generally provides
incentives for the development of drugs to treat diseases affecting fewer than
200,000 persons in the US. SunPharm intends to seek this designation for DEHOP
for AIDS-related diarrhea. A drug that receives Orphan Drug designation and is
the first product to receive FDA marketing approval for its product claim is
entitled to a seven-year exclusive marketing period in the U.S. for that product
claim. However, SunPharm believes that its patent position on DEHOP will afford
exclusivity for a longer period.
COMPETITION
SunPharm knows of various products which are under development or
manufactured and marketed by competitors. These products are used by competitors
for the prevention, diagnosis or treatment of certain diseases which SunPharm
has targeted for its own product development, and some use therapeutic
approaches that compete with certain of SunPharm's potential products. For
example, SunPharm believes that Novartis AG, a major international
pharmaceutical company, is developing a product which targets SAMDC, one of the
two enzymes responsible for the biosynthesis of polyamines in human cells.
Novartis AG also markets a natural form of DFO for treating iron overload,
Desferal(R), and has significantly greater resources than SunPharm. SunPharm
cannot be sure of the ultimate success or failure of Novartis AG in these
efforts.
To date, SunPharm has not managed a set of clinical trials to FDA product
approval. Accordingly, SunPharm's competitors may succeed in obtaining FDA
approval for products more rapidly than SunPharm, which could adversely affect
its ability to further develop and market its products. If SunPharm commences
significant commercial sales of its products, it will also be competing in
manufacturing efficiency and marketing capabilities, areas in which it has
limited or no experience.
EMPLOYEES
As of October 1, 1999, SunPharm had seven full-time employees and one
part-time employee. Preclinical and clinical testing is subcontracted and
performed at the University of Florida and at other sites. Although SunPharm has
obtained a $1,000,000 key person life insurance policy on the life of Stefan
Borg, and it is the sole beneficiary of that policy, the loss of his services
could have a material adverse effect on SunPharm.
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SUNPHARM MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in May 1990, SunPharm has devoted substantially all of
its efforts and resources to research and development of potential
pharmaceutical products. SunPharm conducts this research and development on its
own behalf and through collaborations with clinical institutions and other
pharmaceutical companies. SunPharm's drug development strategy includes research
and clinical activities at the University of Florida, through its sponsored
research agreement. Please read "SunPharm's Business -- Licensed Technology and
Sponsored Research" on page 74 for a more detailed discussion of this agreement.
SunPharm has incurred cumulative net losses of $21,199,000 from its inception
through June 30, 1999.
In January 1995, SunPharm completed its initial public offering which
resulted in net proceeds to SunPharm of approximately $7,200,000. These proceeds
financed SunPharm's operations through mid-1996, at which time SunPharm raised
$3,095,000 of net proceeds through a private placement financing and exercise of
warrants. Also in 1996, SunPharm recorded a $1,000,000 milestone payment from
Warner-Lambert. In subsequent private placements, SunPharm raised the following
net proceeds:
<TABLE>
<S> <C>
March 1997............................................... $6,116,500
November 1998............................................ $1,160,000
March 1999............................................... $485,000
</TABLE>
At the present time, SunPharm believes its cash resources to be sufficient to
fund its operations into the third quarter of 1999, at which time SunPharm will
require additional funding to continue its operations through the end of 1999.
SunPharm intends to obtain additional funds for research and development
through collaborative arrangements with corporate partners and from other
sources. SunPharm cannot assure that such arrangements will be concluded, if at
all, on terms favorable to it. SunPharm expects to incur additional significant
operating losses for the foreseeable future, principally through anticipated
expenditures for research and development and for clinical trials.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1999
Interest income decreased to $14,000 for the three months ended June 30,
1999 from $47,000 earned in the same period in 1998. The decrease resulted from
a lower average cash balance available for investment during the current
quarter.
SunPharm's research and development expenses totaled $547,000 for the
quarter, a decrease of 15% from the $642,000 recorded in the same period in
1998. The lower expenses in the current period were due to a decrease in
clinical expenses because SunPharm did not fund any clinical investigations
during the current period.
General and administrative expenses were $429,000 for the three months
ended June 30, 1999, as compared to $454,000 for the same period in 1998, a
decrease of 6%. This resulted from a decrease in employee costs, offset by
increases in corporate legal expenses and in lease expense for office space.
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
Interest income decreased to $33,000 for the six months ended June 30, 1999
from $96,000 earned in the same period in 1998. The decrease resulted from a
lower average cash balance available for investment.
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SunPharm's research and development expenses totaled $1,131,000 for the six
months ended June 30, 1999, a decrease of 3% from the $1,165,000 recorded in the
same period in 1998. The lower expenses in the current period were due to a
decrease in clinical expenses, as discussed above. SunPharm expects its research
and development expenses in 1999 to be roughly 10% higher than in 1998, in
anticipation of filing investigational new drug applications and initiating up
to three clinical trials for drug candidates during the second half of the year.
General and administrative expenses were $834,000 for the six months ended
June 30, 1999, as compared to $1,019,000 for the same period in 1998, a decrease
of 18%. This resulted from a decrease in employee costs, partly offset by
increases in corporate legal expenses and in lease expense for office space. In
recognition of the current trend, SunPharm expects general and administrative
expenses for the remainder of 1999 to remain lower than 1998 levels.
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
SunPharm recorded total revenues of $394,000 in 1998 compared to $280,000
in 1997 and $1,073,000 in 1996. 1998 revenues included $231,000 of sponsored
research, representing payments for preclinical work contracted with a corporate
partner, with an identical amount included in research and development expense.
SunPharm's 1997 revenues consisted solely of interest income on invested cash.
SunPharm's 1996 revenues included a $1,000,000 milestone payment under the
Warner-Lambert agreement for successful completion of DENSPM Phase I testing.
SunPharm expects to receive an additional milestone payment from Warner-Lambert
in late 1999, provided that the Phase II trials for DENSPM, which Warner-
Lambert is conducting, are successfully completed within this time frame.
SunPharm reported a net loss in 1998 of $3,767,000, which compares to net
losses of $3,906,000 in 1997 and $2,837,000 in 1996. Compared to 1997, the lower
net loss in 1998 was due to increased revenues, as discussed above. The lower
net loss in 1996 was impacted by higher revenues, as discussed above, and lower
expenses as discussed below.
Research and development expenses increased 4% from $2,417,000 in 1997 to
$2,510,000 in 1998. However, since $231,000 of the 1998 amount represents
sponsored research offset by an equal amount of revenue as discussed above,
actual research and development expenses in 1998 declined by roughly 6% from the
prior year. SunPharm's research and development expenses relate principally to
human clinical trials, sponsored research payments to the University of Florida,
expenses for screening and testing of drug compounds, salaries and benefits for
its employees engaged in research and development activities, and legal costs of
patent prosecution by retained counsel. The lower actual expenses in 1998, as
compared to 1997, were due to lower clinical investigator and monitoring costs.
Research and development expenses for 1997 were 8% higher than the $2,228,000
recorded in 1996. This increase reflected greater preclinical activity,
increased sponsored research payments made to the University of Florida,
expenses associated with an expanding patent portfolio, and expenses associated
with establishment of a quality assurance laboratory.
General and administrative expenses declined by 7% in 1998 to $1,652,000,
from $1,769,000 recorded in 1997. The decline reflected, in part, a
consolidation of investor relations activity. 1997 expenses were 26% higher than
the $1,401,000 recorded in 1996. Salaries, benefits and personnel recruiting
expenses associated with the addition of three management positions, beginning
in September 1996, contributed significantly to this increase.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, SunPharm has financed its operations primarily through
collaborative research and sublicense agreements with its strategic alliance
partners and the issuance of debt and equity securities. Through June 30, 1999,
SunPharm received $3,116,000 of cumulative sponsored research and sublicensing
revenues and $21,441,000 in consideration of the issuance of debt and equity
securities.
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<PAGE> 88
On January 12, 1995, SunPharm completed an initial public offering of
1,100,000 units at $7.00 per unit. Each unit consisted of one share of SunPharm
Common Stock and one warrant to purchase one share of SunPharm common stock at
$8.75 per share. The warrants expired on April 13, 1998. Additionally, on
February 16, 1995, Royce Investment Group, Inc., the lead underwriter of
SunPharm's initial public offering, exercised an option to purchase an
additional 165,000 units at $7.00 per unit. SunPharm received proceeds from the
initial public offering of approximately $7,200,000, net of underwriting and
other costs of $1,655,000. Of the net proceeds, SunPharm used approximately
$1,793,000 to repay its outstanding indebtedness (including accrued interest and
certain fees).
During the year ended December 31, 1996, SunPharm completed a private
placement of 537,623 units under Section 4(2) of the Securities Act for $5.50
per unit. Each unit consisted of one share of SunPharm common stock and one
warrant. These warrants expire four years from the date of issuance and have a
current exercise price of $7.50 per share. Additionally, SunPharm may redeem
these warrants at $0.01 per warrant if SunPharm common stock closes, for 20
consecutive days, at a price of $10.50 per share. Proceeds from this private
placement were approximately $2,636,000, net of placement agent and other costs
of approximately $321,000.
Also during 1996, SunPharm offered certain of its existing warrant holders
a 30% reduction in their exercise price if they exercised their warrants prior
to December 31, 1996. Additionally, for each four warrants exercised, SunPharm
issued participants a warrant identical to the warrants issued in the private
placement. Through this warrant exchange offer, 236,721 outstanding warrants
were exercised in exchange for 236,721 shares of SunPharm common stock and
59,178 new warrants. SunPharm received proceeds from the warrant exchange of
approximately $459,000, net of offering costs of approximately $34,000.
On March 28, 1997, SunPharm sold 1,828,286 units, each consisting of one
share of SunPharm common stock and one warrant, for $3.50 per unit. These
warrants expire five years from the date of issuance. In a "cashless exercise,"
the warrant exercise price is $4.00 per share plus forty percent of the
difference between the current trading price of SunPharm common stock and $4.00;
in all other cases, the warrant exercise price is $4.00 per share plus thirty
percent of the difference between the current trading price of SunPharm common
stock and $4.00. SunPharm may redeem these warrants at the exercise price if
SunPharm common stock closes, for 20 consecutive days, at a price of $16.00,
$20.00, $24.00, or $28.00 per share during the second, third, fourth or fifth
years, respectively, of these warrants. SunPharm received proceeds from this
private placement of $6,116,500, net of placement agent and other offering costs
of $282,500. During the nine months ended December 31, 1997, SunPharm sold an
additional 120,000 of these units and received proceeds of $378,000, net of
placement costs of $42,000.
On March 28, 1997, SunPharm amended the terms of the warrants issued in the
private placement of 537,623 units and in the warrant exchange to (i) reduce the
warrant exercise price to $3.00 per share, (ii) increase the price of SunPharm
common stock at which SunPharm can exercise the call feature, (iii) extend the
warrant expiration date to March 31, 2001, and (iv) provide that SunPharm would
use reasonable best efforts to register the resale of shares by June 30, 1997.
On November 13, 1998, SunPharm sold 300,000 shares of Series A preferred
stock and 853,565 of SunPharm common stock to certain institutions and other
accredited investors in a private placement under Regulation D of the Securities
Act. The purchase price for the preferred stock and common stock sold in the
private placement consisted of $1,200,000 in cash and the surrender by the
investors of approximately 347,000 warrants originally issued in SunPharm's
March 1997 private placement financing. Holders of Series A preferred stock may
convert to common stock on a 1-for-1 basis, subject to customary antidilution
adjustments. Dividends accrue on the Series A preferred stock at the rate of 8%
per annum. In the event of SunPharm's liquidation, dissolution, or winding up
or, at the option of the holders of the Series A preferred stock, SunPharm's
consolidation or merger or a sale of all or substantially all of SunPharm's
assets, the Series A preferred stock will be entitled to receive in preference
to SunPharm common stock an amount per share equal to the original purchase
price plus any accrued dividends per share. However, in the event that the
proposed merger of SunPharm with GelTex is consummated, and subject to the
consent of the holders of the SunPharm preferred stock, all outstanding shares
of preferred
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<PAGE> 89
stock will convert into shares of SunPharm common stock on a 1.5 for 1 basis,
and the holders of preferred stock will receive no further preference or
payment. Holders of at least 33% of the Series A preferred stock may have their
shares redeemed upon their request, which request may be made at any time two
years following closing of this private placement. In the event of such request,
SunPharm must redeem all of the Series A preferred stock held by the requesting
holders at a redemption price equal to $4.00 per share (subject to adjustment),
plus any accrued dividends per share. The redemption price may be paid, at
SunPharm's option, in cash or in shares of SunPharm common stock. SunPharm's
intention is to make such redemption in SunPharm common stock, and accordingly,
the Series A preferred stock has been included in stockholder's equity. Proceeds
to SunPharm from this private placement were $1,160,000, net of legal fees of
$40,000.
During the year ended December 31, 1998, net cash used in operating
activities was $4,023,000, as compared to $4,062,000 during the prior year.
SunPharm's lower usage of cash in 1998 was affected by the lower net loss, as
well as by changes in various asset and liability accounts during the course of
the year. SunPharm had net working capital of approximately $1,410,000 at
December 31, 1998, and SunPharm will require additional funds to continue
preclinical testing and clinical trials of its potential products.
On February 16, 1999, the underwriter of its initial public offering agreed
to surrender a purchase option for 110,000 shares of SunPharm common stock
exercisable at $11.20 per share, which it had acquired in connection with the
offering and which was due to expire on January 12, 2000. In exchange for
surrender of this option, SunPharm agreed to issue an equal number of shares to
the underwriter at $0.60 per share, for total proceeds of $66,000. Subsequent to
the date of the agreement and payment of proceeds to SunPharm, but prior to
surrender of the option, the underwriter determined that it had previously
disposed of a portion of the option. Accordingly, on August 11, 1999, SunPharm
refunded to the underwriter $43,200 and reduced the number of shares of SunPharm
common stock to be issued to 38,000 shares.
On March 31, 1999, SunPharm sold 66,667 shares of Series B preferred stock
and 183,333 shares of SunPharm common stock to an institutional investor in a
private placement under Regulation D of the Securities Act. Rights and
preferences of the Series B preferred stock were identical to the Series A
preferred stock. SunPharm received proceeds from this private placement of
approximately $485,000, net of legal costs. However, in the event that the
proposed merger of SunPharm with GelTex is consummated and, subject to the
consent of the holders of the SunPharm preferred stock, all outstanding shares
of preferred stock will convert into shares of SunPharm common stock on a 1.5
for 1 basis, and the holders of preferred stock will receive no further
preference or payment.
During the six months ended June 30, 1999, net cash used in operating
activities was $1,552,000, compared with $2,290,000 for the comparable period in
1998. The use of less cash in the current period was principally due to the
lower net loss as a result of lower expenses, as previously discussed, and also
due to an increase in accounts payable. The increase in accounts payable
resulted from the granting of an extension by the Foundation for SunPharm's
quarterly sponsored research payment from June 30 to August 16, 1999. At June
30, 1999, SunPharm had cash and investments totaling $679,000, compared with
$1,699,000 at December 31, 1998. SunPharm's use of cash to fund its operations
during this six month period was partially offset by the funding provided by the
March 1999 private placement financing discussed above.
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<PAGE> 90
Between August 4 and September 30, 1999, SunPharm received proceeds of
$273,503 from the exercise of 390,643 options and warrants by various holders as
follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICE PER SHARE PROCEEDS
----------------- ------------------------ --------
<C> <C> <C> <S>
202,743 $ 0.32 $ 64,878
10,000 $1.125 11,250
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF WARRANTS EXERCISE PRICE PER SHARE PROCEEDS
------------------ ------------------------ --------
<C> <C> <C> <S>
100,000 $ 1.00 $100,000
77,900 $ 1.25 97,375
--------
Total Proceeds $273,503
========
</TABLE>
On September 30, 1999, SunPharm entered into an exclusive sub-license
agreement with Schein Pharmaceutical, Inc., or Schein, whereby Schein obtained
the rights to a proprietary injectable iron chelator for the U.S., European, and
certain Far East markets. Under the sub-license agreement, SunPharm is entitled
to receive payments upon reaching clinical, regulatory and manufacturing
milestones, as well as escalating royalties on sales. A payment of $625,000 was
made to SunPharm upon signing of the agreement.
Nasdaq is aware that SunPharm is currently not in compliance with the
minimum net tangible asset requirement for continued listing on The Nasdaq
SmallCap Market. Pending completion of the proposed merger, Nasdaq has granted
SunPharm a waiver of the minimum net tangible asset requirement. However, Nasdaq
has informed SunPharm that if the merger is delayed or is not completed before
November 30, 1999, SunPharm's common stock may be immediately delisted from The
Nasdaq SmallCap Market, if SunPharm does not cure the current net tangible asset
deficiency.
SunPharm has incurred losses since inception and, therefore, has not been
subject to federal income taxes. As of December 31, 1998, SunPharm had net
operating loss and tax credit carry forwards for income tax purposes of
approximately $16,953,000 and $596,000, respectively, which may be available to
reduce future taxable income and future tax liabilities. These carry forwards
begin to expire in 2008. The Tax Reform Act of 1986 provides for an annual
limitation on the use of net operating loss and credit carry forwards (following
certain ownership changes) that could significantly limit SunPharm's ability to
utilize these carry forwards. SunPharm has made no determination concerning
whether there has been such a cumulative change in ownership. It is possible
that such a change in ownership occurred following the completion of SunPharm's
initial public offering, subsequent private placements, and subsequent exercise
of warrants. Accordingly, SunPharm's ability to utilize the aforementioned carry
forwards to reduce future taxable income and tax liabilities may be limited.
Additionally, because U.S. tax laws limit the time during which these carry
forwards may be applied against future taxes, SunPharm may not be able to take
full advantage of these attributes for federal income tax purposes.
Please read "Risk Factors" on page 15 and "SunPharm's Business" on page 67
for discussions regarding SunPharm's ability to:
- fund its expenditures;
- successfully market a product; and
- achieve its corporate objectives.
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<PAGE> 91
COMPARISON OF RIGHTS OF HOLDERS OF
SUNPHARM CAPITAL STOCK AND
GELTEX COMMON STOCK
Both GelTex and SunPharm are incorporated in the State of Delaware. If the
merger is completed, holders of SunPharm Series A and Series B preferred stock
and common stock will become holders of GelTex common stock and the rights of
former SunPharm stockholders will be governed by Delaware law and GelTex's
restated certificate of incorporation and amended and restated by-laws. The
rights of SunPharm stockholders under SunPharm's certificate of incorporation
and by-laws differ in limited respects from the rights of GelTex stockholders
under GelTex's restated certificate of incorporation and amended and restated
by-laws. The material differences are summarized in the table below. The summary
does not purport to be a complete discussion of, and is qualified in its
entirety by reference to, the DGCL as well as to the GelTex restated certificate
of incorporation, the GelTex amended and restated by-laws, the SunPharm
certificate of incorporation and the SunPharm by-laws, copies of which are on
file with the SEC.
<TABLE>
<CAPTION>
SUNPHARM STOCKHOLDER RIGHTS GELTEX STOCKHOLDER RIGHTS
--------------------------- -------------------------
<S> <C> <C>
CORPORATE The rights of SunPharm The rights of GelTex stockholders
GOVERNANCE: stockholders are currently are currently governed by
governed by Delaware law and the Delaware law and the restated
certificate of incorporation and certificate of incorporation and
by-laws of SunPharm. amended and restated by-laws of
GelTex. Upon consummation of the
Upon consummation of the merger, merger, the rights of GelTex
the rights of SunPharm stockholders will remain governed
stockholders will be governed by by Delaware law and the restated
Delaware law and the certificate certificate of incorporation and
of incorporation and by-laws of amended and restated by-laws of
GelTex. GelTex.
AUTHORIZED The authorized capital stock of The authorized capital stock of
CAPITAL STOCK: SunPharm consists of 25 million GelTex consists of 50 million
shares of common stock and shares of common stock and 5
2,500,000 shares of preferred million shares of preferred
stock. Of the authorized stock. Of the authorized
preferred stock, 300,000 shares preferred stock, 500,000 shares
are designated as "Series A are designated as Series A Junior
Redeemable Convertible Preferred Participating Preferred Stock.
Stock" (the "Series A Preferred")
and 200,000 shares are designated
as "Series B Redeemable
Convertible Preferred Stock" (the
"Series B Preferred").
NUMBER OF SunPharm's by-laws provide that GelTex's restated certificate of
DIRECTORS: the authorized number of incorporation provides that the
directors will be between one and number of directors will be
nine and will be determined by determined by the board of
the board of directors. The directors, but that the number
SunPharm board currently consists will be between three and
of seven directors. fifteen. The GelTex Board
currently consists of five
directors.
</TABLE>
83
<PAGE> 92
<TABLE>
<CAPTION>
SUNPHARM STOCKHOLDER RIGHTS GELTEX STOCKHOLDER RIGHTS
--------------------------- -------------------------
<S> <C> <C>
STOCKHOLDER SunPharm's by-laws do not According to the GelTex amended
NOMINATION OF expressly permit stockholder and restated by-laws, a
DIRECTORS: nomination of directors. stockholder's notice to the
chairman of the board of
directors nominating a person for
election as a director must be
received not less than fifty days
nor more than 75 days prior to
the stockholders meeting held for
the purpose of electing
directors. However, if less than
65 days notice of such
stockholders meeting is given to
GelTex stockholders, any notice
to GelTex nominating a person for
election as a director will be
considered timely so long as it
was received by GelTex not later
than the close of business on the
15th day following the day the
notice of the stockholders
meeting was mailed to GelTex
stockholders.
ELECTION OF So long as there are 100,000 Under the GelTex restated
DIRECTORS: shares of SunPharm Series A certificate of incorporation,
Preferred outstanding, the holders of GelTex common stock
holders of the SunPharm Series A elect the board of directors as a
Preferred, voting separately as a class.
class, are entitled to elect one
member of the SunPharm board.
So long as there are 100,000
shares of Series B Preferred
outstanding, the holders of the
Series B Preferred, voting
separately as a class, are
entitled to elect one member of
the SunPharm board.
CLASSIFICATION OF SunPharm's by-laws do not provide GelTex's restated certificate of
BOARD OF for a classified board of incorporation provides that the
DIRECTORS: directors; each director serves board of directors shall be
for a one-year term. divided into three classes as
nearly equal in number as
possible, with each class serving
a staggered three-year term.
REMOVAL OF Under SunPharm's by-laws, any Under GelTex's restated
DIRECTORS: director may be removed, with or certificate of incorporation, a
without cause, at any special director may be removed for cause
meeting of shareholders duly by a vote of the holders of a
called and held for such purpose majority of shares entitled to
by the holders of a majority of vote for the election of
shares then entitled to vote at directors.
the special meeting.
</TABLE>
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<PAGE> 93
<TABLE>
<CAPTION>
SUNPHARM STOCKHOLDER RIGHTS GELTEX STOCKHOLDER RIGHTS
--------------------------- -------------------------
<S> <C> <C>
STOCKHOLDER According to SunPharm's by-laws, According to GelTex's restated
ACTION BY WRITTEN any action required or permitted certificate of incorporation, the
CONSENT: to be taken at any annual or power of stockholders to act by
special stockholders meeting may consenting in writing without a
be taken without a meeting if a meeting is specifically denied.
consent in writing, setting forth
the action to be taken, is signed
by the holders of outstanding
stock having not less than the
minimum number of votes that
would be necessary to authorize
or take such an action at a
meeting in which all shares
entitled to vote were present and
voted.
NOTICE OF BUSINESS Under SunPharm's by-laws, written Under GelTex's amended and
AT ANNUAL notice of the purposes of annual restated by-laws, written notice
MEETINGS: meetings need not be given. of stockholders meetings,
including annual meetings, must
include a statement of the
purposes for which the meeting is
called. Also,
stockholder-proposed business may
only be transacted if the
proposing stockholder provides
timely written notice to an
officer of the corporation.
SPECIAL MEETINGS According to SunPharm's by-laws, According to GelTex's amended and
OF STOCKHOLDERS: SunPharm may call a special restated by-laws, GelTex may call
stockholders' meeting at the special stockholders meetings
written request of a majority of upon the written request of one
the board of directors or of the or more GelTex stockholders
SunPharm stockholders owning 10% holding at least two-thirds of
of the shares that would be the outstanding shares of GelTex
entitled to vote at such a stock that would be entitled to
meeting. vote at such a meeting.
</TABLE>
85
<PAGE> 94
<TABLE>
<CAPTION>
SUNPHARM STOCKHOLDER RIGHTS GELTEX STOCKHOLDER RIGHTS
--------------------------- -------------------------
<S> <C> <C>
AMENDMENT OF Subject to Delaware corporate Generally, GelTex's restated
CERTIFICATE OF law, SunPharm's certificate of certificate of incorporation may
INCORPORATION AND incorporation may be amended by be amended by the affirmative
BY-LAWS: the affirmative vote or written vote of the majority of the votes
consent of a majority of the cast by the holders of GelTex
outstanding voting stock of common stock entitled to vote on
SunPharm and of two-thirds of the a particular proposed amendment.
outstanding shares of SunPharm However, any amendments to the
Series A Preferred and SunPharm provisions relating to (a) the
Series B Preferred, each voting merger, consolidation or sale or
separately as a class. disposition of all or
substantially all of the assets
SunPharm's by-laws may be amended of GelTex, (b) the issuance or
by the affirmative vote or transfer of more than $500,000 of
written consent of two-thirds of securities of GelTex in exchange
the outstanding shares of for the securities or assets of
SunPharm Series A Preferred and another corporation or (c) the
SunPharm Series B Preferred, each prohibition of stockholder action
voting separately as a class. by written consent requires the
affirmative vote of two-thirds of
the shares of all classes of
stock of GelTex entitled to vote
for the election of directors,
voting as a single class.
GelTex's amended and restated by-
laws may be amended by the
affirmative vote of a majority of
directors present at any meeting
at which a quorum (consisting of
a majority of the board of
directors) is present. The GelTex
amended and restated by-laws may
also be amended by the
affirmative vote of the holders
of a majority of the shares of
capital stock of GelTex issued,
outstanding and entitled to vote
at any regular or special
stockholder meeting.
</TABLE>
86
<PAGE> 95
<TABLE>
<CAPTION>
SUNPHARM STOCKHOLDER RIGHTS GELTEX STOCKHOLDER RIGHTS
--------------------------- -------------------------
<S> <C> <C>
VOTING STOCK: The outstanding voting securities The outstanding voting securities
of SunPharm are the shares of of GelTex are the shares of
SunPharm common stock, Series A GelTex common stock. Holders of
Preferred and Series B Preferred. GelTex common stock have one vote
Holders of SunPharm common stock per share held by them.
have one vote per share held by
them. Holders of SunPharm Series
A Preferred or Series B Preferred
have the number of votes per
share of preferred stock as is
equal to the number of shares of
common stock into which each
share of preferred stock could be
converted. Currently the holders
of SunPharm Series A Preferred
and Series B Preferred have one
vote per share held by them.
AUTHORIZATION AND The SunPharm certificate of The GelTex restated certificate
ISSUANCE OF incorporation provides that of incorporation does not require
ADDITIONAL CLASSES SunPharm will not create, that a supermajority of its
OF CAPITAL STOCK: authorize or issue any other holders of common stock approve
class or series of capital stock the creation, authorization or
or security convertible into or issuance of any class or series
evidencing the right to purchase of capital stock or security
shares of any class or series of convertible into or evidencing
capital stock having any the right to purchase shares of
preference or priority superior any class or series of capital
to or on parity with the stock.
preferences of the Series A
Preferred and the Series B
Preferred.
STOCKHOLDER RIGHTS SunPharm does not have a GelTex has a stockholder rights
PLAN: stockholder rights plan. plan, which is described in
"Description of GelTex Capital
Stock -- GelTex Series A Junior
Participating Preferred Stock and
Stockholder Rights Agreement" on
page 92.
</TABLE>
87
<PAGE> 96
<TABLE>
<CAPTION>
SUNPHARM STOCKHOLDER RIGHTS GELTEX STOCKHOLDER RIGHTS
--------------------------- -------------------------
<S> <C> <C>
CERTAIN BUSINESS The SunPharm certificate of Under GelTex's restated
COMBINATIONS: incorporation provides that certificate of incorporation, the
SunPharm will not: a) liquidate, affirmative vote of two-thirds of
dissolve or wind up its affairs; the shares of all classes of
b) other than in connection with GelTex's stock voting as a single
the grant of a mortgage or class and entitled to vote for
security interest, sell, lease, the election of directors is
assign or transfer all or necessary to merge, consolidate
substantially of its assets; or or sell or dispose of all or
c) consolidate or merge itself substantially all of assets of
with or into another entity GelTex, to authorize the sale or
without the affirmative vote or transfer of more than $500,000 of
written consent of at least GelTex securities in exchange for
two-thirds of the voting power of the assets or securities of
the outstanding shares of each of another corporation or to engage
the Series A Preferred and Series in any transaction whose effect
B Preferred, voting as separate is to combine GelTex's assets and
classes. business with that of another
corporation that is the
beneficial owner of 5% or more of
the outstanding shares of GelTex
stock eligible to vote for the
election of directors. Two-thirds
stockholder approval is not
necessary, however, if the
combination is approved by a
majority of the board of
directors, so long as the
directors voting in favor of the
combination include a majority of
the persons who were duly elected
and acting members of the board
of directors prior to the time
the other corporation became a
beneficial owner of 5% or more of
the shares of GelTex stock
eligible to vote for the election
of directors.
</TABLE>
88
<PAGE> 97
<TABLE>
<CAPTION>
SUNPHARM STOCKHOLDER RIGHTS GELTEX STOCKHOLDER RIGHTS
--------------------------- -------------------------
<S> <C> <C>
LIQUIDATION In the event of the liquidation, Under GelTex's restated
RIGHTS: dissolution or winding up of the certificate of incorporation,
affairs of SunPharm, holders of holders of GelTex common stock
SunPharm Series A Preferred and are treated equally in terms of
Series B Preferred are entitled liquidation rights.
to be paid an amount equal to
four dollars per share for each
series of preferred stock plus an
amount equal to all accrued or
declared but unpaid dividends,
subject to an adjustment for
stock splits, stock dividends,
combinations, reclassifications
and other similar events before
any payment is made to the
holders of common stock.
Following payment in full to the
holders of each of the Series A
Preferred and Series B Preferred,
the remaining SunPharm assets
will be distributed to the
holders of the Series A Preferred
and the Series B Preferred as if
each series of preferred stock
was converted into common stock
and the holders of common stock,
all on a pro rata basis. If the
SunPharm assets are insufficient
to permit the payment in full to
the holders of the Series A
Preferred and the Series B
Preferred, then all of the
SunPharm assets will be
distributed ratably among the
holders of the Series A Preferred
and the Series B Preferred.
CONVERSION Each share of SunPharm Series A Holders of GelTex common stock
RIGHTS: Preferred and Series B Preferred have no conversion right under
is convertible at the option of the GelTex restated certificate
the holder into one share of of incorporation.
SunPharm common stock. The
conversion ratio is subject to
adjustment in the event of: an
issuance of certain diluting
options to purchase SunPharm
capital stock, convertible
securities, dividends or shares
of common stock; a consolidation
of outstanding shares of common
stock into lesser shares of
common stock; and a merger or
reorganization of SunPharm.
</TABLE>
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<PAGE> 98
<TABLE>
<CAPTION>
SUNPHARM STOCKHOLDER RIGHTS GELTEX STOCKHOLDER RIGHTS
--------------------------- -------------------------
<S> <C> <C>
REDEMPTION At any time after March 31, 2001 Under GelTex's restated
RIGHTS: with respect to the SunPharm certificate of incorporation,
Series B Preferred and November holders of common stock have no
30, 2000 with respect to the redemption rights.
SunPharm Series A Preferred, upon
notice to SunPharm by the holders
of a majority of the applicable
series of preferred stock,
SunPharm will redeem all of the
outstanding shares of the series
of preferred stock requesting
redemption at a redemption price
of $2.00 per share payable in
cash or common stock at
SunPharm's election, as adjusted
based on adjustments to the
conversion price of such series
of preferred stock, plus any
accrued or declared but unpaid
dividends.
DIVIDEND Under the SunPharm certificate of Under GelTex's restated
RIGHTS: incorporation, dividends accrue certificate of incorporation,
on each share of SunPharm Series holders of common stock are
A Preferred and Series B treated equally for the purpose
Preferred at an annual rate of of dividend rights.
$0.32 per share, whether or not
funds are legally available for
such dividends. Common stock
holders will not receive any
dividends until all accrued
dividends have been paid in full
to the holders of Series A
Preferred and Series B Preferred
and no shares of Series A
Preferred and Series B Preferred
are outstanding. The holders of
SunPharm Series A Preferred and
Series B Preferred may consent to
the declaration of dividends to
holders of SunPharm common stock.
</TABLE>
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<PAGE> 99
<TABLE>
<CAPTION>
SUNPHARM STOCKHOLDER RIGHTS GELTEX STOCKHOLDER RIGHTS
--------------------------- -------------------------
<S> <C> <C>
APPRAISAL RIGHTS: Under sec.262 of the DGCL, GelTex is incorporated under
SunPharm stockholders are Delaware law and the DGCL governs
entitled to an appraisal by the the availability of appraisal
Court of Chancery of the fair rights with respect to mergers
value of their shares, exclusive involving GelTex. Because the
any element of value arising from approval of the GelTex
the merger, if they: stockholders is not required to
complete the merger they are not
(1) file written notice with entitled to appraisal rights
SunPharm of their intention to under the DGCL in connection with
exercise such appraisal rights the merger.
prior to the SunPharm special
stockholders meeting; and
(2) do not vote in favor of the
merger.
Stockholders who follow the
procedures set forth in Section
262 are entitled to have their
SunPharm stock purchased by the
surviving corporation for cash at
the fair value of the shares of
SunPharm stock as determined by
the Delaware Court of Chancery.
Please read "The
Merger-Dissenters' and Appraisal
Rights" on page 47 for a more
complete description of appraisal
rights.
</TABLE>
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<PAGE> 100
DESCRIPTION OF GELTEX CAPITAL STOCK
The following summary of the current terms of the capital stock of GelTex
and the terms of the capital stock of GelTex to be in effect after completion of
the merger is not meant to be complete and is qualified by reference to the
GelTex charter and GelTex by-laws. Copies of the GelTex charter and GelTex
by-laws are incorporated by reference and will be sent to holders of shares of
SunPharm common stock and SunPharm preferred stock upon request. See "Where You
Can Find Additional Information" on page 99.
AUTHORIZED CAPITAL STOCK
Under the GelTex charter, GelTex's authorized capital stock consists of
50,000,000 shares of GelTex common stock, $0.01 par value per share, and
5,000,000 shares of preferred stock, $0.01 par value per share.
GELTEX COMMON STOCK
GelTex Common Stock Outstanding. The outstanding shares of GelTex common
stock are, and the shares of GelTex common stock issued pursuant to the merger
will be, duly authorized, validly issued, fully paid and nonassessable.
Voting Rights. Each holder of GelTex common stock is entitled to one vote
for each share of GelTex common stock held of record on the applicable record
date on all matters submitted to a vote of shareholders. There are no cumulative
voting rights.
Dividend Rights; Rights upon Liquidation. The holders of GelTex common
stock are entitled to receive, from funds legally available for the payment
thereof, dividends when and as declared by resolution of the GelTex board,
subject to any preferential dividend rights granted to the holders of any then
outstanding GelTex preferred stock. In the event of liquidation, each share of
GelTex common stock is entitled to share pro rata in any distribution of
GelTex's assets after payment or providing for the payment of liabilities and
the liquidation preference of any then outstanding GelTex preferred stock.
Preemptive Rights. Holders of GelTex common stock have no preemptive
rights to purchase, subscribe for or otherwise acquire any unissued or treasury
shares or other securities.
GELTEX PREFERRED STOCK
GelTex Preferred Stock Outstanding. There are no shares of preferred stock
issued or outstanding.
Blank Check Preferred Stock. Under the GelTex charter, the GelTex board
has the authority, without shareholder approval, to create one or more classes
or series within a class of preferred stock, to issue shares of preferred stock
in such class or series up to the maximum number of shares of the relevant class
or series of preferred stock authorized, and to determine the preferences,
rights, privileges, qualifications, limitations, and restrictions of any such
class or series, including the dividend rights, dividend rates, voting rights,
the rights and terms of redemption, redemption prices, the rights and terms of
conversion, liquidation preferences, sinking fund terms, the number of shares
constituting any such class or series, and the designation of such class or
series. GelTex believes that the power to issue preferred stock will provide
flexibility in connection with possible corporate transactions. The issuance of
preferred stock could adversely affect the voting power of the holders of common
stock and restrict their rights to receive payment upon liquidation and could
have the effect of delaying, deferring or preventing a change of control of
GelTex. See "-- Anti-Takeover Measures" on page 95. GelTex has no present plans
to issue any shares of preferred stock.
GELTEX SERIES A JUNIOR PARTICIPATING PREFERRED STOCK AND STOCKHOLDER RIGHTS
AGREEMENT
Under Delaware law, every corporation may create and issue rights entitling
the holders of such rights to purchase from the corporation shares of its
capital stock of any class or classes, subject to any provisions
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<PAGE> 101
in its certificate of incorporation. The price and terms of such shares must be
stated in the certificate of incorporation or in a resolution adopted by the
board of directors for the creation or issuance of such rights.
GelTex has entered into a stockholder rights agreement. As with most
stockholder rights agreements, the terms of GelTex's rights agreement are
complex and not easily summarized, particularly as they relate to the effects of
a significant acquisition of GelTex's common stock and to exercisability of such
rights. This summary may not contain all of the information that is important to
you. Accordingly, you should carefully read GelTex's rights agreement, which is
incorporated by reference into this proxy statement/prospectus, in its entirety.
The GelTex board of directors adopted a stockholder rights plan and
declared a dividend distribution of one share purchase right for each
outstanding share of GelTex common stock to stockholders of record at the close
of business on March 11, 1996. Each right entitles the GelTex stockholder to
purchase from GelTex one one-hundredth of a share of GelTex Series A Junior
Participating Preferred Stock, par value $0.01 per share, at a price of $100.00
per share, subject to adjustment. The description and terms of the rights are
set forth in a rights agreement between GelTex and American Stock Transfer &
Trust Company. The rights will expire on March 11, 2006, unless earlier redeemed
by GelTex.
Initially, the rights will be evidenced by the common stock certificates
representing shares then outstanding and GelTex will distribute no separate
rights certificates. The rights will become exercisable, and transferable apart
from the shares of GelTex common stock, on the distribution date, which will be
the earliest of:
- the date ten days after the date of a public announcement, or the Stock
Acquisition Date, that a person or group, or an Acquiring Person, has
acquired beneficial ownership of 20% or more of the outstanding shares of
GelTex common stock; or
- the close of business on the tenth business day after commencement of a
tender or exchange offer which, upon its completion, would result in a
person or group beneficially owning 20% or more of the outstanding shares
of GelTex common stock.
An Acquiring Person does not include the following:
- GelTex, any GelTex subsidiary or any employee benefit plan of GelTex or
any GelTex subsidiary;
- any person eligible to file a Schedule 13G with respect to ownership of
GelTex common stock who, prior to a distribution date, the GelTex board
of directors has determined by a majority vote of its Continuing
Directors (as defined in the rights agreement) is not an Acquiring
Person; or
- any person who becomes a beneficial owner of more than 20% of GelTex's
outstanding common stock solely because of a change in the number of
outstanding shares of GelTex common stock or if the person acquired
GelTex common stock in the good faith belief that the acquisition would
not cause the holder's beneficial ownership to exceed 20% or otherwise
cause a distribution date to occur.
Until the distribution date:
- the rights will be evidenced by the GelTex common stock certificates and
will be transferred only with the common stock certificates;
- new GelTex common stock certificates issued after March 11, 1996 will
contain a notation incorporating the rights agreement by reference; and
- the surrender for transfer of any certificate for GelTex common stock
outstanding will also constitute the transfer of the rights associated
with the common stock represented by such certificate. As soon as
practicable after the distribution date, the rights agent will send to
the record holders of the GelTex common stock on the distribution date
one or more rights certificates, which will thereafter evidence the
rights.
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<PAGE> 102
The GelTex board may redeem all but not less than all the rights at a
redemption price of $.001 per right at any time prior to the earliest of:
- the expiration of ten days after the Stock Acquisition Date and
- the final expiration date.
Upon redemption by the board, the rights will terminate and the only right of
the holders of the rights will be to receive the redemption price.
The rights are not exercisable until the distribution date, provided the
rights are no longer redeemable by the GelTex board of directors. Until a right
is exercised, the rightholder, as such, will have no rights as a stockholder of
GelTex, including, without limitation, the right to vote or receive dividends.
While the distribution of the rights will not be taxable to stockholders or to
GelTex, stockholders may, depending upon the circumstances, recognize taxable
income in the event that the rights become exercisable for stock or other
consideration of GelTex or for common stock of the acquiring company as set
forth below.
In the event that, after the distribution date, any person or group becomes
the beneficial owner of 20% or more of the outstanding GelTex common stock, then
each holder of a right other than an Acquiring Person will thereafter have the
right to receive, upon exercise, GelTex common stock (or, in certain
circumstances, cash, property or other securities of GelTex) having a value
equal to two times the purchase price of the right. These provisions providing
for the purchase of GelTex common stock are hereinafter referred to as "Flip-in
Provisions." However, holders of rights shall have no right to purchase shares
of GelTex common stock on terms described in the Flip-in Provisions when an
Acquiring Person has acquired shares of GelTex common stock:
- pursuant to a tender offer or exchange offer for all outstanding shares
of common stock at a price and on terms determined, by at least a
majority of GelTex "Continuing Directors" (as defined in the rights
agreement) who are not officers of GelTex and are not affiliated with the
Acquiring Person, after receiving advice from at least one investment
banking firm, to be fair to stockholders and in the interest of the
stockholders and GelTex; or
- pursuant to a tender offer by an Acquiring Person that is made in the
manner prescribed by Section 14(d) of the Exchange Act,
provided that such tender offer shall provide for the acquisition of all common
stock outstanding for cash, and when consummated, shall cause the Acquiring
Person to beneficially own 80% or more of the common stock then outstanding.
In addition, if, after the Stock Acquisition Date, GelTex is acquired in
certain specified mergers or other business combination transactions or if 50%
or more of the assets or earning power of GelTex and its subsidiaries are sold,
each holder of a right (except rights held by an Acquiring Person which
previously have been voided) shall thereafter have the right to receive, upon
exercise, shares of the common stock of the acquiring company, or the Acquiring
Company, having a value equal to two times the purchase price of the right.
These provisions providing for the purchase of common stock of the Acquiring
Company are hereinafter referred to as "Flip-over Provisions." However, holders
of rights shall have no right to purchase shares of common stock of an Acquiring
Company on terms described in the Flip-over Provisions if:
- the Acquiring Company has acquired shares of common stock pursuant to a
tender offer or exchange offer for all outstanding shares of common stock
at a price determined by at least a majority of GelTex "Continuing
Directors" (as defined in the rights agreement) after receiving advice
from at least one investment banking firm, to be fair to stockholders and
in the interest of stockholders;
- the price per share of common stock offered in such transaction is not
less than the price per share of common stock paid to all holders of
common stock whose shares were purchased pursuant to such tender offer or
exchange offer; and
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<PAGE> 103
- the form of consideration being offered to the remaining holders of
shares of common stock pursuant to such transaction is the same as the
form of consideration paid pursuant to such tender offer or exchange
offer.
The events referred to in the Flip-in Provisions and the Flip-over
Provisions are referred to as "Triggering Events."
For example, at a purchase price of $100.00, each right not owned by an
Acquiring Person following a Triggering Event would entitle the holder of the
right to purchase $200.00 worth of common stock under the Flip-in Provisions, or
$200.00 worth of stock of the Acquiring Company under the Flip-over Provisions,
for $100.00.
No supplement or amendment to the rights agreement may be made to change
the redemption price, the final expiration date, the purchase price or the
number of shares of common stock for which a right is exercisable. Prior to the
distribution date, however, GelTex may amend or supplement any other terms of
the rights agreement. After the distribution date, GelTex may amend or
supplement any other terms of the rights agreement, except that GelTex may not
amend the rights agreement to lengthen:
- a time period relating to when the rights may be redeemed at such time as
the rights are not then redeemable or
- other time period unless such lengthening is for the purpose of
protecting, enhancing or clarifying the rights or benefits of the of the
holders of the rights.
The purchase price payable, the number of preferred shares or other
securities or property issuable upon exercise of the rights and the number of
rights outstanding are subject to adjustment from time to time by GelTex to
prevent dilution:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of the preferred shares;
- upon the grant to holders of the preferred shares of certain rights or
warrants to subscribe for or purchase preferred shares at a price, or
securities convertible into preferred shares with a conversion price,
less than the then current market price of the preferred shares; or
- upon the distribution to holders of the preferred shares of evidences of
indebtedness or assets or of subscription rights or warrants (other than
those referred to above).
The number of outstanding rights and the number of one one-hundredths of a
preferred share issuable upon exercise of each right are also subject to
adjustment in the event of a stock split of the common stock or a stock dividend
on shares of common stock payable in shares of common stock, or consolidations
or combinations of the shares of common stock occurring prior to the
distribution date.
With certain exceptions, no adjustment in the purchase price will be
required until cumulative adjustments amount to at least 1% of the purchase
price.
ANTI-TAKEOVER MEASURES
In addition to the ability of the GelTex board of directors to issue
preferred stock, the restated charter and by-laws of GelTex contain several
other provisions that are commonly considered to discourage unsolicited takeover
bids. The restated charter divides the board of directors into three classes
with staggered three-year terms. It also prohibits stockholder action by written
consent, unless the law provides otherwise. Under the GelTex restated charter
and by-laws, the board of directors may enlarge the size of the board and fill
any vacancies in it. The restated charter also requires that holders of at least
66 2/3% of the outstanding capital stock of GelTex approve certain transactions
with entities that own 5% or more of the shares of GelTex stock entitled to vote
for the election of directors. These include:
- the merger of GelTex with or into such entity;
- the sale or disposal of all or substantially all of GelTex's assets to
such entity;
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<PAGE> 104
- GelTex's issuance or transfer of securities having a market value greater
than $500,000 to such entity; and
- engaging in any other business combination transaction with such entity.
The voting requirements described above do not apply to transactions
approved by a majority of the board of directors, if the directors voting to
approve the transaction include a majority of the persons who were directors
before such entity became a 5% stockholder. Furthermore, provisions of the
restated charter provide that the stockholders may amend that certain provisions
of the GelTex restated charter only if holders of at least 66 2/3% of GelTex's
capital stock approve the amendment.
The by-laws provide that a stockholder may not nominate a person as a
director at any annual or special meeting unless the stockholder who wishes to
make the nomination notifies GelTex within a specified period in advance of the
meeting and furnishes certain information to GelTex. The by-laws also provide
that special stockholder meetings may be called only if they are requested by
one or more stockholders holding at least 66 2/3% of the outstanding shares that
would be entitled to vote at the requested meeting and only by the President,
the Chairman of the Board, the board of directors, the Secretary or any other
officer. Finally, the by-laws also require advance notice of the business to be
brought by a stockholder before the annual meeting.
Section 203 of the DGCL, which regulates corporate takeovers, applies to
GelTex. In certain circumstances, Section 203 prevents certain Delaware
corporations, including those whose securities are listed on The Nasdaq National
Market, from engaging in a "business combination" with an "interested
stockholder" for three years after a stockholder becomes an "interested
stockholder", subject to certain exceptions. For purposes of the DGCL, a
"business combination" generally includes a merger or sale of more than 10% of
the corporation's assets and an "interested stockholder" is a stockholder who
owns 15% or more of the corporation's outstanding voting stock. A Delaware
corporation subject to Section 203 may engage in a business combination with an
interested stockholder if the transaction is approved by the board of directors
and at least 66 2/3% of the outstanding voting stock of the corporation,
excluding shares held by the interested stockholder. Additionally, Section 203
does not apply to a business combination with a stockholder if the closing of
the transaction makes the stockholder an interested stockholder who owns at
least 85% of the outstanding voting stock of the corporation, excluding shares
held by persons who are both directors and officers of the corporation or by
certain employee stock plans. A Delaware corporation subject to Section 203 may
opt out of it if it amends its certificate of incorporation or by-laws to opt
out of it and the amendment is approved by at least a majority of its
outstanding voting shares. Such an amendment becomes effective twelve months
after it is adopted. GelTex has not opted out of Section 203.
The provisions of the GelTex restated charter, by-laws and Delaware law
described above could have the effect of discouraging other companies from
attempting hostile takeovers of GelTex. Consequently, they may also inhibit the
temporary fluctuations in the market price of GelTex common stock that might
result from actual or rumored hostile takeover attempts. Furthermore, those same
provisions may prevent changes in the management of GelTex from occurring. Thus,
these provisions could make it more difficult to accomplish transactions which
GelTex stockholders may otherwise believe to be in their best interests.
TRANSFER AGENT
The transfer agent and registrar for the GelTex common stock is American
Stock Transfer and Trust Company. Its telephone number is (212) 936-5100.
STOCK EXCHANGE LISTING
It is a condition to the merger that the shares of GelTex common stock
issuable in the merger be approved for listing on The Nasdaq Stock Market at or
prior to the closing, subject to official notice of issuance.
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<PAGE> 105
SHARE OWNERSHIP BY PRINCIPAL
STOCKHOLDERS, MANAGEMENT AND DIRECTORS OF SUNPHARM(1)
The following table sets forth information concerning the beneficial
ownership of common stock and preferred stock of SunPharm as of September 1,
1999 for the following:
- each person or entity who is known by SunPharm to own beneficially more
than 5% of the outstanding common stock of SunPharm;
- each of SunPharm's current directors;
- the chief executive officer and certain other highly compensated officers
of SunPharm; and
- all directors and executive officers of SunPharm as a group.
<TABLE>
<CAPTION>
COMMON STOCK SERIES A PREFERRED STOCK SERIES B PREFERRED STOCK
------------------------ ------------------------ ------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
NUMBER OF BENEFICIALLY NUMBER OF BENEFICIALLY NUMBER OF BENEFICIALLY
NAME SHARES OWNED SHARES OWNED SHARES OWNED
- ---- --------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cross Atlantic Partners Funds(2)..... 1,428,572 18.6% -- -- -- --
New York Life Insurance Company(3)... 1,142,858 14.9% -- -- -- --
Pensionskassen for
Vaerkstedfunktionaerer i
Jernet(4).......................... 617,261 8.6% 123,375 41.1% -- --
Stefan Borg(5)....................... 522,973 7.3% -- -- -- --
Apoteksassistenternes
Pensionskasse(6)................... 474,404 6.6% 123,375 41.1% -- --
InterSouth Partners III, L.P.(7)..... 467,559 6.4% 25,000 8.3% -- --
Uni-invest(8)........................ 250,000 3.5% -- -- 66,667 100.0%
Philip R. Tracy(9)................... 74,167 1.0% -- -- -- --
Charles L. Dimmler, III(10).......... 1,477,108 20.8% 1,750 * -- --
Jerry T. Jackson(11)................. 35,833 * -- -- -- --
Robert S. Janicki(12)................ 189,230 2.7% -- -- -- --
Jay Moorin(13)....................... 30,833 * -- -- -- --
Robert A. Schoellhorn(14)............ 155,183 2.2% -- -- -- --
Michael T. Cullen(15)................ 16,667 * -- -- -- --
Paul M. Herron(16)................... 20,133 * -- -- -- --
Ronald W. Sanda(17).................. 52,200 * -- -- -- --
All executive officers and directors
as a group (11
persons)(5)(10)-(17)............... 2,639,551 34.8% 6,108 2.0% -- --
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares of
common stock beneficially owned by a person and the percentage ownership of
that person, shares of common stock subject to options or warrants held by
that person that are currently exercisable or exercisable within 60 days of
September 1, 1999, are deemed outstanding, as well as any shares of Series
A or Series B preferred stock held by that person, but shares subject to
options may have been terminated as described under "The Merger --
Interests of Related Persons in the Merger." Shares subject to options or
warrants, however, are not deemed outstanding for the purpose of computing
the percentage ownership of each other person. Except as indicated in the
footnotes to this table and pursuant to applicable community property laws,
each stockholder named in the table has sole voting and investment power
with respect to the shares set forth opposite such stockholder's name.
(2) The business address of the Cross Atlantic Partners Funds is 650 Madison
Avenue, 21st Floor, New York, NY 10022. Includes warrants to purchase
614,286 shares of common stock.
(3) The business address of New York Life Insurance Company is 51 Madison
Avenue, New York, NY 10010. Includes warrants to purchase 571,429 shares of
common stock.
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<PAGE> 106
(4) The business address of Pensionskassen for Vaerkstedfunktionaerer i Jernet
is 12 Sankt Annae Plads-DK 1250, Copenhagen K, Denmark. Includes 123,375
shares of Series A preferred stock.
(5) Mr. Borg's business address is The Veranda, Suite 301, 814 Highway AlA,
Ponte Vedra Beach, FL 32082. Includes options to purchase 57,573 shares of
common stock.
(6) The business address of Apoteksassistenternes Pensionskasse is Hojbro Plads
6-DK 1200, Copenhagen K, Denmark. Includes 123,375 shares of Series A
preferred stock.
(7) The business address of InterSouth Partners III, L.P. is One Copley
Parkway, Suite 102, Morrisville, NC 27560. Includes (i) warrants to
purchase 171,429 shares of common stock and (ii) 25,000 shares of Series A
preferred stock.
(8) The business address of Uni-invest is Nyropsgade 17, DK 1602, Copenhagen,
Denmark. Includes 66,667 shares of Series B preferred stock.
(9) Mr. Tracy's business address is 2500 First Union Capital Center, Raleigh,
NC 27602. Includes options to purchase 74,167 shares of common stock.
(10) Mr. Dimmler's business address is c/o Cross Atlantic Partners, Inc., 650
Madison Avenue, 21st Floor, New York, NY 10022. Includes (i) 3,592 shares
of common stock, warrants to purchase 790 shares of common stock, and 700
shares of Series A preferred stock held by Mr. Dimmler's children, (ii)
1,528,572 shares beneficially owned by Cross Atlantic Partners Funds
(including warrants to purchase 614,286 shares of common stock), of which
Mr. Dimmler is an affiliate, (iii) options to purchase 35,833 shares of
common stock, and (iv) 5,387 shares of common stock, warrants to purchase
1,184 shares of common stock, and 1,050 shares of Series A preferred stock
held jointly by Mr. Dimmler and his wife.
(11) Mr. Jackson's business address is 7212 N. Secret Canyon Drive, Tucson, AZ
85718. Includes options to purchase 35,833 shares of common stock.
(12) Dr. Janicki's business address is The Veranda, Suite 301, 814 Highway A1A,
Ponte Vedra Beach, FL 32082. Includes options to purchase 44,010 shares of
common stock and warrants to purchase 1,000 shares of common stock.
(13) Mr. Moorin's business address is One Palmer Square, Suite 425, Princeton,
NJ 08542. Includes options to purchase 30,833 shares of common stock.
(14) Mr. Schoellhorn's business address is 91333 Coburg Industrial Way, Coburg,
OR 97408. Includes options to purchase 20,833 shares of common stock and
warrants to purchase 79,400 shares of common stock. All shares and warrants
are held by The Robert A. Schoellhorn Trust dated June 26, 1989, of which
Mr. Schoellhorn serves as Trustee.
(15) Dr. Cullen's business address is The Veranda, Suite 301, 814 Highway A1A,
Ponte Vedra Beach, FL 32082. Includes options to purchase 11,667 shares of
common stock.
(16) Mr. Herron's business address is The Veranda, Suite 301, 814 Highway A1A,
Ponte Vedra Beach, FL 32082. Includes options to purchase 18,833 shares of
common stock.
(17) Mr. Sanda's business address is The Veranda, Suite 301, 814 Highway A1A,
Ponte Vedra Beach, FL 32082. Includes options to purchase 52,200 shares of
common stock.
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LEGAL MATTERS
The validity of the shares of GelTex common stock offered by this proxy
statement/prospectus will be passed upon for GelTex by Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C. It is a condition to completion of the merger
that Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. will provide an opinion
to GelTex, and that Andrews & Kurth, L.L.P. will provide an opinion to SunPharm,
as to the qualification of the merger as a tax-free reorganization under the
Internal Revenue Code.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of GelTex included in GelTex's Annual Report on Form 10-K
for the year ended December 31, 1998, as set forth in their report, which is
incorporated by reference in this proxy statement/prospectus and elsewhere in
the registration statement. The consolidated financial statements of GelTex are
incorporated by reference in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
The financial statements of RenaGel LLC as of December 31, 1998 and for the
year then ended included in GelTex's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated by reference in this proxy
statement/prospectus which is referred to and made a part of this registration
statement, have been audited by PricewaterhouseCoopers LLP, independent
accountants, given the authority of said firm as experts in auditing and
accounting.
The financial statements of SunPharm (a development stage company) as of
December 31, 1998 and 1997 and for the period from May 3, 1990 to December 31,
1998, except for the period from May 3, 1990 to December 31, 1994 which were
audited by other auditors, included in this proxy statement/prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and elsewhere in the registration statement, and have
been so included in reliance upon the reports of such firm upon their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED IN OR DELIVERED WITH THIS PROXY STATEMENT/ PROSPECTUS.
All documents filed by GelTex and SunPharm pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act after the date of this proxy
statement/prospectus and before the date of the special meeting are incorporated
by reference into and are to be a part of this proxy statement/prospectus from
the date of filing of those documents.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT
WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT.
The following documents, which have been filed by GelTex with the
Securities and Exchange Commission, are incorporated by reference into this
proxy statement/prospectus:
- GelTex's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, filed on March 31, 1999
- GelTex's Quarterly Report on Form 10-Q, for the quarterly period ended
March 31, 1999, filed on May 14, 1999
- GelTex's Quarterly Report on Form 10-Q, for the quarterly period ended
June 30, 1999, filed on August 16, 1999
- GelTex's Proxy Statement on Schedule 14A, filed on April 21, 1999
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- The description of GelTex common stock set forth in GelTex's Registration
Statement on Form 8-A filed on September 26, 1995, pursuant to Section 12
of the Exchange Act including any amendment or reports filed for the
purpose of updating such description
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this proxy statement/prospectus will be deemed to
be modified or superseded for purposes of this proxy statement/prospectus to the
extent that a statement contained in this proxy statement/prospectus or any
other subsequently filed document that is deemed to be incorporated by reference
into this proxy statement/prospectus modifies or supersedes the statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this proxy statement/ prospectus.
The documents incorporated by reference into this proxy
statement/prospectus are available from GelTex and SunPharm upon request. GelTex
and SunPharm will provide a copy of any and all of the information that is
incorporated by reference in this proxy statement/prospectus (not including
exhibits to the information unless those exhibits are specifically incorporated
by reference into this proxy statement/ prospectus) to any person, without
charge, upon written or oral request. ANY REQUEST FOR DOCUMENTS SHOULD BE MADE
BY NOVEMBER 10, 1999 TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS.
<TABLE>
<S> <C>
Requests for documents relating to SunPharm should be Requests for documents relating to GelTex
directed to: should be directed to:
SunPharm Corporation GelTex Pharmaceuticals, Inc.
The Veranda, Suite 301 153 Second Avenue
814 Highway A1A Waltham, Massachusetts 02154
Ponte Vedra Beach, Florida 32802 Attention: Priscilla English
</TABLE>
GelTex and SunPharm file reports, proxy statements and other information
with the SEC. Copies of such reports, proxy statements and other information may
be inspected and copied at the public reference facilities maintained by the SEC
at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
<TABLE>
<S> <C>
Reports, proxy statements and other information Reports, proxy statements and other information
concerning SunPharm may be inspected at: regarding GelTex may be inspected at:
The National Association of Securities Dealers The National Association of Securities Dealers
1735 K Street, N.W. 1735 K Street, N.W.
Washington, D.C. 20006 Washington, D.C. 20006
</TABLE>
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a Website that contains reports, proxy statements and other
information regarding each company. The address of the SEC website is
http://www.sec.gov.
GelTex has filed a registration statement on Form S-4 under the Securities
Act with the SEC with respect to GelTex's common stock to be issued to SunPharm
stockholders in the merger. This proxy statement/prospectus constitutes the
prospectus of GelTex filed as part of the registration statement. This proxy
statement/prospectus does not contain all of the information set forth in the
registration statement because certain parts of the registration statement are
omitted in accordance with the rules and regulations of the SEC. The
registration statement and its exhibits are available for inspection and copying
as set forth above.
100
<PAGE> 109
If you have any questions about the merger, please call SunPharm Investor
Relations at 1-904-394-2800.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY
STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER,
SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES
PURSUANT TO THIS PROXY STATEMENT/ PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH OR INCORPORATED INTO THIS PROXY STATEMENT/PROSPECTUS BY REFERENCE OR IN
OUR AFFAIRS SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS. THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS WITH RESPECT TO SUNPHARM WAS
PROVIDED BY SUNPHARM AND THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS WITH RESPECT TO GELTEX WAS PROVIDED BY GELTEX.
STOCKHOLDER PROPOSALS
SunPharm will hold a 2000 annual meeting of stockholders only if the merger
is not completed. If SunPharm does hold a 2000 annual meeting of stockholders,
any proposal of a stockholder intended to be presented at the annual meeting
must be received at SunPharm's principal executive offices no later than January
12, 2000, if the proposal is to be considered for inclusion in SunPharm's proxy
statement relating to the annual meeting.
101
<PAGE> 110
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUNPHARM CORPORATION
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report.............................. F-2
Balance Sheets as of December 31, 1997 and 1998........... F-3
Statements of Operations for the Years Ended December 31,
1997 and 1998 and for the period from inception (May 3,
1990) to December 31, 1998............................. F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1998 and for the period from
inception (May 3, 1990) to December 31, 1998........... F-5
Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and for the period from inception (May 3,
1990) to December 31, 1998............................. F-7
Notes to Financial Statements............................. F-8
UNAUDITED FINANCIAL STATEMENTS
Unaudited Balance Sheets as of June 30, 1999.............. F-21
Unaudited Statements of Operations for the Three Months
ended June 30, 1998 and 1999........................... F-22
Unaudited Statements of Operations for the Six Months
ended June 30, 1998 and 1999 and for the period from
inception (May 3, 1990) through June 30, 1999.......... F-23
Unaudited Statement of Stockholders' Equity for the Six
Months ended June 30, 1999............................. F-24
Unaudited Statements of Cash Flows for the Six Months
ended June 30, 1998 and 1999 and for the period from
inception (May 3, 1990) through June 30, 1999.......... F-25
Notes to Unaudited Financial Statements................... F-26
</TABLE>
F-1
<PAGE> 111
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
SunPharm Corporation:
We have audited the accompanying balance sheets of SunPharm Corporation (a
development stage company) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended, and for the period from May 3, 1990 (date of incorporation) to
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The Company's financial statements for
the period May 3, 1990 (date of incorporation) through December 31, 1994 were
audited by other auditors whose report, dated April 3, 1995, expressed an
unqualified opinion on those statements. The financial statements for the period
May 3, 1990 (date of incorporation) through December 31, 1994 reflect total
revenues and net loss of $1,885,000 and $4,390,367, respectively, of the related
totals. The other auditors' report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for such prior period, is based
solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of SunPharm as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the two years then ended, and for the period
from May 3, 1990 (date of incorporation) to December 31, 1998, in conformity
with generally accepted accounting principles.
The Company is in the development stage at December 31, 1998. As discussed
in Note 1 to the financial statements, successful completion of the Company's
development program and ultimately, the attainment of profitable operations is
dependent upon future events, including obtaining adequate financing to fulfill
its development activities, obtaining regulatory approval, and achieving a level
of sales adequate to support the Company's cost structure.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
February 12, 1999
F-2
<PAGE> 112
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ -- $ 356,969
Investments............................................... 1,699,200 4,268,566
Prepaid expenses and other................................ 162,734 206,024
------------ ------------
Total current assets.............................. 1,861,934 4,831,559
RECEIVABLE FROM STOCKHOLDER................................. 124,865 106,611
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$17,085 and $10,322....................................... 57,933 30,319
OTHER ASSETS................................................ 9,275 3,250
------------ ------------
TOTAL ASSETS................................................ $ 2,054,007 $ 4,971,739
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 213,627 $ 399,996
Accrued liabilities....................................... 135,580 231,754
Notes payable............................................. 102,706 155,271
------------ ------------
Total current liabilities......................... 451,913 787,021
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Undesignated serial preferred stock, $.001 par value,
2,200,000 and 2,500,000 shares authorized, none issued
and outstanding........................................ -- --
Series A redeemable convertible preferred stock, $.001 par
value, 300,000 and 0 shares authorized, issued and
outstanding (cumulative dividends in arrears of $12,887
at December 31, 1998).................................. 300 --
Common stock, $.0001 par value, 25,000,000 shares
authorized, 6,621,395 and 5,737,828 issued and
outstanding............................................ 662 574
Additional paid-in capital................................ 20,871,578 19,687,198
Deficit accumulated during development stage.............. (19,270,446) (15,503,054)
Accumulated other comprehensive income.................... -- --
------------ ------------
Total stockholders' equity........................ 1,602,094 4,184,718
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 2,054,007 $ 4,971,739
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 113
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 3, 1990
(DATE OF
YEARS ENDED INCORPORATION)
DECEMBER 31, TO
-------------------------- DECEMBER 31,
1998 1997 1998
----------- ----------- --------------
<S> <C> <C> <C>
SPONSORED RESEARCH/SUBLICENSING REVENUES........... $ 230,729 $ -- $ 3,115,729
INTEREST INCOME.................................... 163,126 280,045 678,433
----------- ----------- ------------
Total revenues........................... 393,855 280,045 3,794,162
----------- ----------- ------------
EXPENSES:
Research and development......................... 2,509,561 2,417,209 12,495,801
General and administrative....................... 1,651,686 1,769,261 10,078,807
Royalty.......................................... -- -- 490,000
----------- ----------- ------------
Total expenses........................... 4,161,247 4,186,470 23,064,608
----------- ----------- ------------
NET LOSS........................................... $(3,767,392) $(3,906,425) $(19,270,446)
=========== =========== ============
LOSS PER SHARE..................................... $ (0.64) $ (0.75)
=========== ===========
SHARES USED IN COMPUTING LOSS PER SHARE............ 5,876,875 5,214,733
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 114
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
----------------------------------------- ACCUMULATED
SERIES A SERIES B COMMON STOCK ADDITIONAL OTHER
------------------- ------------------- ------------------ PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME
-------- -------- ------- --------- --------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
services, October 1991 ($.0064
per share).................... 467,400 $ 47 $ 2,953
Issuance of common stock for
license agreement rights,
December 1991 ($.0064 per
share)........................ 311,600 31 1,969
Issuance of common stock for
cash, December 1991 ($.0064
per share).................... 148,010 15 935
-------- -------- ------- --------- --------- ---- ----------- ---------
BALANCE, DECEMBER 31, 1991........ 927,010 93 5,857
Issuance of Series A for cash,
February through November 1992
($1.67 per share)............. 307,500 $513,525
Issuance of Series B for cash,
October through December 1992
($5.00 per share)............. 32,500 $ 162,500
Issuance of common stock for
services, October 1992 ($.32
per share).................... 3,895 1,250
Issuance of Series B for
services, December 1992 ($5.00
per share).................... 5,000 25,000
Net loss........................
-------- -------- ------- --------- --------- ---- ----------- ---------
BALANCE, DECEMBER 31, 1992........ 307,500 513,525 37,500 187,500 930,905 93 7,107
Issuance of Series B for cash,
April through June 1993 ($5.00
per share).................... 57,500 287,500
Issuance of Series B for
services, June 1993 ($5.00 per
share)........................ 1,500 7,500
Issuance of common stock for
services, March 1993 ($.32 per
share)........................ 31,160 3 9,997
Issuance of common stock for
cash, December 1993 ($.32 per
share)........................ 15,580 2 4,998
Net loss........................
-------- -------- ------- --------- --------- ---- ----------- ---------
BALANCE, DECEMBER 31, 1993........ 307,500 513,525 96,500 482,500 977,645 98 22,102
<CAPTION>
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE
------------
<S> <C>
Issuance of common stock for
services, October 1991 ($.0064
per share)....................
Issuance of common stock for
license agreement rights,
December 1991 ($.0064 per
share)........................
Issuance of common stock for
cash, December 1991 ($.0064
per share)....................
------------
BALANCE, DECEMBER 31, 1991........
Issuance of Series A for cash,
February through November 1992
($1.67 per share).............
Issuance of Series B for cash,
October through December 1992
($5.00 per share).............
Issuance of common stock for
services, October 1992 ($.32
per share)....................
Issuance of Series B for
services, December 1992 ($5.00
per share)....................
Net loss........................ $ (998,004)
------------
BALANCE, DECEMBER 31, 1992........ (998,004)
Issuance of Series B for cash,
April through June 1993 ($5.00
per share)....................
Issuance of Series B for
services, June 1993 ($5.00 per
share)........................
Issuance of common stock for
services, March 1993 ($.32 per
share)........................
Issuance of common stock for
cash, December 1993 ($.32 per
share)........................
Net loss........................
------------
BALANCE, DECEMBER 31, 1993........ (2,231,356)
</TABLE>
F-5
<PAGE> 115
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
----------------------------------------- ACCUMULATED
SERIES A SERIES B COMMON STOCK ADDITIONAL OTHER
------------------- ------------------- ------------------ PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME
-------- -------- ------- --------- --------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Comprehensive income:
Deferred compensation......... 818,308 $(818,308)
Amortization of deferred
compensation................ 818,308
Exercise of stock options,
September 1994 ($.32 per
share)........................ 7,790 1 2,499
Issuance of warrants to purchase
common stock in connection
with the Bridge notes ($2.63
per share).................... 600,000
Net loss........................
-------- -------- ------- --------- --------- ---- ----------- ---------
BALANCE, DECEMBER 31, 1994........ 307,500 513,525 96,500 482,500 985,435 99 1,442,909
Compensation expense............ 28,188
Conversion of preferred stock to
common stock.................. (307,500) (513,525) (96,500) (482,500) 634,100 63 995,962
Initial public offering......... 1,265,000 126 7,175,375
Net loss........................
-------- -------- ------- --------- --------- ---- ----------- ---------
BALANCE, DECEMBER 31, 1995........ 2,884,535 288 9,642,434
Exercise of warrants............ 236,721 24 458,697
Issuance of common stock........ 537,623 54 2,636,195
Issuance of common stock for
settlement of litigation...... 50,000 5 324,995
Net loss........................
-------- -------- ------- --------- --------- ---- ----------- ---------
BALANCE, DECEMBER 31, 1996........ 3,708,879 $371 $13,062,321
Exercise of stock options....... 75,663 8 15,802
Issuance of common stock........ 1,953,286 195 6,519,055
Issuance of warrants for
service....................... 90,020
Net loss........................
-------- -------- ------- --------- --------- ---- ----------- ---------
BALANCE, DECEMBER 31, 1997........ 5,737,828 574 19,687,198
Exercise of stock options....... 30,002 3 17,582
Issuance of common stock........ 883,565 85 7,398
Issuance of preferred stock..... 300,000 $ 300 1,159,400
Net loss........................
-------- -------- ------- --------- --------- ---- ----------- ---------
BALANCE, DECEMBER 31, 1998........ 300,000 $ 300 $ 6,621,395 $662 $20,871,578 $ --
======== ======== ======= ========= ========= ==== =========== =========
<CAPTION>
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE
------------
<S> <C>
Other Comprehensive income:
Deferred compensation.........
Amortization of deferred
compensation................
Exercise of stock options,
September 1994 ($.32 per
share)........................
Issuance of warrants to purchase
common stock in connection
with the Bridge notes ($2.63
per share)....................
Net loss........................ (2,159,011)
------------
BALANCE, DECEMBER 31, 1994........ (4,390,367)
Compensation expense............
Conversion of preferred stock to
common stock..................
Initial public offering.........
Net loss........................ (4,369,653)
------------
BALANCE, DECEMBER 31, 1995........ (8,760,020)
Exercise of warrants............
Issuance of common stock........
Issuance of common stock for
settlement of litigation......
Net loss........................ (2,836,609)
------------
BALANCE, DECEMBER 31, 1996........ $(11,596,629)
Exercise of stock options.......
Issuance of common stock........
Issuance of warrants for
service.......................
Net loss........................ (3,906,425)
------------
BALANCE, DECEMBER 31, 1997........ (15,503,054)
Exercise of stock options.......
Issuance of common stock........
Issuance of preferred stock.....
Net loss........................ (3,767,392)
------------
BALANCE, DECEMBER 31, 1998........ $(19,270,446)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 116
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 3, 1990
(DATE OF
YEARS ENDED INCORPORATION)
DECEMBER 31, TO
---------------------------- DECEMBER 31,
1998 1997 1998
------------ ------------ --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $ (3,767,392) $ (3,906,425) $(19,270,446)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 8,282 5,692 85,680
Compensation expense related to options, warrants
and stock appreciation rights.................. -- 90,020 999,016
Amortization of deferred offering costs incurred
in connection with issuance of Bridge Notes.... -- -- 775,000
Write-off of patents.............................. -- -- 70,120
Increase in receivable from stockholder........... (18,254) (96,611) (124,865)
Decrease (increase) in prepaid expenses and other
assets......................................... 37,265 406,042 (170,400)
(Decrease) increase in accounts payable........... (186,369) 76,545 213,627
(Decrease) increase in accrued liabilities........ (96,174) (637,491) 141,830
Increase in accrued legal fees.................... -- -- 300,000
------------ ------------ ------------
Total adjustments............................ (255,250) (155,803) 2,290,008
------------ ------------ ------------
Net cash used in operating activities........ (4,022,642) (4,062,228) (16,980,438)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of short-term investments................. (8,553,779) (12,815,678) (26,488,831)
Sales and maturities of short-term investments...... 11,123,145 10,342,424 24,789,631
Purchases of property and equipment................. (35,896) (26,824) (79,918)
Payment of patent costs............................. -- -- (67,424)
------------ ------------ ------------
Net cash provided by (used in) investing
activities................................. 2,533,470 (2,500,078) (1,846,542)
------------ ------------ ------------
FINANCING ACTIVITIES:
(Repayments of) proceeds from notes payable......... $ (52,565) $ 43,070 $ 2,706
Issuance of Series A redeemable convertible
preferred stock................................... 1,159,700 -- 1,673,225
Issuance of Series B redeemable convertible
preferred stock................................... -- -- 450,000
Issuance of common stock............................ 25,068 6,535,060 17,298,397
Stock offering costs................................ -- -- (597,348)
Proceeds from payable to stockholders............... -- 542,500
Repayment of payable to stockholders................ -- -- (542,500)
------------ ------------ ------------
Net cash provided by financing activities.... 1,132,203 6,578,130 18,826,980
------------ ------------ ------------
NET CHANGE IN CASH.................................... (356,969) 15,824 --
CASH AT BEGINNING OF PERIOD........................... 356,969 341,145 --
------------ ------------ ------------
CASH AT END OF PERIOD................................. $ -- $ 356,969 $ --
============ ============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest.............................. $ 4,064 $ 2,512 $ 171,516
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
(Concluded)
F-7
<PAGE> 117
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
1. ORGANIZATION
SunPharm Corporation ("SunPharm" or the "Company"), formerly LexiGen,
Incorporated, was incorporated in the State of Delaware on May 3, 1990, issued
shares of its common stock in 1991, and commenced operations in February 1992.
The Company was formed to develop and commercialize unique and proprietary
polyamine analogs with antiproliferative and other therapeutic uses.
The Company is a development stage company which has devoted substantially
all of its efforts to research and product development and has not yet generated
any revenues from the sale of products. At this time, there can be no assurance
of future revenues. In addition, the Company expects to continue to incur losses
for the foreseeable future, and there can be no assurance that the Company will
successfully complete the transition from a development stage company to
successful operations. The research and development activities in which the
Company is engaged involve a high degree of risk and uncertainty. The ability of
the Company to successfully develop, manufacture and market its proprietary
products is dependent upon many factors. These factors include, but are not
limited to, the need for additional financing, the reliance on collaborative
arrangements for research and contractual agreements with corporate partners,
the Company's dependence on its exclusive license agreement with the University
of Florida, the ability to attract and retain key personnel and consultants,
including its founder, and the ability to develop manufacturing, sales and
marketing expertise. In addition, the Company's future success is affected by
the progress of the Company's research and development, the scope and results of
preclinical studies and clinical trials, the cost and timing of regulatory
approvals, the rate of technological advances, determinations as to the
commercial potential of the Company's products under development, the status of
competitive products, the establishment of manufacturing capacity or third-party
manufacturing arrangements, its reliance on research institutions and corporate
partners, the uncertainty of health care reform and the competitive environment
in which the Company operates. The Company's existing capital resources will not
be sufficient to fund the Company's operations to the point of introduction of a
commercially successful product, if and when that time should arrive. No
assurance can be given that additional funds will be available on acceptable
terms, if at all.
In order to continue its research and product development activities as
planned, the Company has raised equity through an initial public offering
("IPO") and various private placements of the Company's Common Stock and Series
A and Series B Redeemable Convertible Preferred Stock. Such offerings through
December 31, 1998 have resulted in proceeds of approximately $19,421,000. The
Company intends to obtain additional funds for research and development through
collaborative arrangements with corporate partners, additional financings, and
from other sources; however, there can be no assurance that the Company will be
able to obtain necessary financing when required or what the terms of any
financing, if obtained, might be. Accordingly, there can be no assurance of the
Company's future success.
In August 1994, the board of directors authorized a 1.558-for-1 stock split
of all outstanding stock, increased the number of shares of authorized common
stock to 25,000,000 and changed the par value of the common stock to $.0001 per
share, all of which was approved by the stockholders in October 1994. All share
and per share amounts have been retroactively restated to reflect the stock
split for all years presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The financial statements are presented in
accordance with generally accepted accounting principles, which require
management to make estimates that affect the reported amounts and contingency
disclosures in the financial statements. Actual results could differ from these
estimates.
F-8
<PAGE> 118
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
PATENT COSTS -- The Company reimburses the University of Florida Research
Foundation, Inc. ("UFRFI"), for direct expenses related to the Company's
licensed patents. Patent costs consist of legal fees and other direct costs
incurred in filing, prosecuting and maintaining the licensed patents. These
costs are charged directly to research and development expense.
RESEARCH AND DEVELOPMENT -- Sponsored research payments are recognized as
revenue when the research underlying such payments has been performed. Research
and development expenses are charged to operations as incurred. Research and
development expenses principally include, among other things, consulting fees
and cost reimbursements to UFRFI, preclinical and clinical testing of compounds
under investigation, and salaries and benefits of employees engaged in research
and development activities.
PROPERTY AND EQUIPMENT -- Office and laboratory equipment and leasehold
improvements are carried at cost less accumulated depreciation, which is
computed on a straight-line basis over the estimated useful lives of the related
assets. The useful lives generally fall between 5 and 10 years.
EARNINGS PER SHARE -- During the year ended December 31, 1997, the Company
adopted SFAS No. 128, "Earnings per Share" (SFAS 128). This Statement
establishes standards for computing and presenting earnings per share ("EPS")
and applies to all entities with publicly held common stock or potential common
stock. This Statement replaces the presentation of primary EPS and fully diluted
EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS
excludes dilution and is computed by dividing earnings available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Similar to fully diluted EPS, diluted EPS reflects the potential
dilution of securities that could share in the earnings. Since the Company has
experienced losses since inception, there is no dilutive effect of any of its
common stock equivalents. Accordingly, only basic EPS is shown.
STOCK OPTIONS, WARRANTS AND SARS -- Effective January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS
123 establishes a fair value based method of accounting for stock-based employee
compensation plans; however, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
The Company has elected to continue to account for its employee stock
compensation plans under APB Opinion No. 25 with pro forma disclosures of net
earnings and earnings per share, as if the fair value based method of accounting
defined in SFAS 123 has been applied.
RECENTLY ADOPTED ACCOUNTING STANDARDS -- In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 does not require
a specific format for that financial statement but requires that an entity
display an amount representing total comprehensive income for the period in that
statement. SFAS No. 130 requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency and unrealized gains and
losses on certain investments in debt and equity securities. In addition, the
accumulated balance of other comprehensive income must be displayed separately
from retained
F-9
<PAGE> 119
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
earnings and additional paid in capital in the equity section of a statement of
financial position. Adoption of SFAS No. 130 did not have a material impact on
the financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") effective for fiscal years beginning after December 15, 1997. SFAS No. 131
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. SFAS No. 131
requires reporting of segment profit or loss, certain specific revenue and
expense items and segment assets. It also requires reconciliations of total
segment revenues, total segment profit or loss, total segment assets, and other
amounts disclosed for segments to corresponding amounts reported in the
financial statements. The Company is in one business segment and follows the
requirements of SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information".
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"), effective
for fiscal years beginning after December 15, 1997. SFAS 132 revises employer
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. This statement
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures. Restatement of
disclosures for earlier periods is required. Adoption of SFAS No. 132 did not
have a material impact on the financial statements.
NEW ACCOUNTING STANDARDS -- In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. The Company has not determined
the effect of this statement on its financial statement disclosure.
3. INITIAL PUBLIC OFFERING AND SUBSEQUENT SECURITIES OFFERINGS
On January 12, 1995, the Company completed an IPO of 1,100,000 units
("Unit") at $7.00 per Unit. Each Unit consisted of one share of the Company's
common stock and one Redeemable Common Stock Purchase Warrant ("IPO Warrant"),
which entitled the holder to purchase one share of common stock at $8.75 per
share until expiration on April 13, 1998, as extended from the original
expiration of January 12, 1998. The IPO Warrants have been subject to redemption
by the Company commencing January 1996 at $.05 per Warrant, providing the
closing bid price of the Company's common stock exceeds $12.25 per share for 20
consecutive trading days ending within five days of the notice of redemption.
Additionally, on February 16, 1995, the underwriter of the offering (the
"Representative") exercised an option to purchase an additional 165,000 Units at
$7.00 per Unit (Representative's over-allotment option).
Proceeds from the Company's IPO were approximately $7,200,000 of cash, net
of underwriting costs and other offering costs of $1,655,000. Of such net
proceeds, approximately $1,793,000 were used to repay the outstanding
indebtedness (including accrued interest and certain fees) of the Company. In
addition,
F-10
<PAGE> 120
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
other expenses which were paid included approximately $310,000 for human
clinical trials of DEHOP and DENSPM, $150,000 for research and development of
other potential products, $240,000 for general corporate expenses, and
approximately $210,000 to pay royalties to UFRFI.
In connection with the IPO, the Company sold to the Representative, for
nominal consideration, a unit purchase option to purchase up to 110,000 Units
substantially identical to the Units sold in the offering in all respects,
except that each warrant included in the unit purchase option entitled the
holder to purchase one share of common stock at $11.375 per share. The unit
purchase option will be exercisable during the four-year period commencing
January 12, 1996, at an exercise price of $11.20 per Unit.
Also, during the five-year period from the date of the offering, in the
event the Representative originates a financing or a merger, acquisition, joint
venture, strategic alliance introduction or other similar transaction to which
the Company is a party, the Representative would be entitled to a finder's fee
in consideration of the origination of the transaction. The fee is based upon a
percentage of the consideration paid in the transaction or, in the case of an
introduction to a customer, a five-year royalty on sales. In both instances, the
consideration would consist of 5% of the first $1,000,000, 4% of the next
$1,000,000, and 3% of any amount in excess of $2,000,000.
Upon the closing of the IPO in January 1995, the Series A and Series B
Redeemable Convertible Preferred Stock outstanding automatically converted into
479,700 and 154,400 shares of common stock, respectively. The Company presently
has 2,200,000 shares of undesignated serial preferred stock authorized, with
none issued and outstanding.
During the year ended December 31, 1996, the Company completed a private
placement of 537,623 units pursuant to Regulation D of the Securities Act of
1933 for $5.50 per Unit. Each unit consists of one share of the Company's common
stock and one redeemable Common Stock Purchase Warrant ("1996 Warrant"). The
1996 Warrants included in these units expire four years from the date of
issuance and have exercise prices of $5.50 per share until the anniversary date,
$6.50 per share until the second anniversary date, and $7.50 per share
thereafter. The 1996 Warrants are subject to redemption by the Company at $.01
per 1996 Warrant, provided the Company's common stock closes at a price of
$8.50, $9.50 or $10.50 per share for twenty consecutive days during the second,
third or fourth years, respectively, of the term of the 1996 Warrant.
Proceeds from the private placement as well as proceeds from the warrant
exchange discussed in Note 7 were approximately $3,095,000 in cash, net of
placement agent and other offering costs of approximately $355,000.
During the year ended December 31, 1997, the Company sold 1,948,286 units,
each consisting of one share of the Company's common stock and one redeemable
Common Stock Purchase Warrant ("1997 Warrant") for $3.50 per unit. The 1997
Warrants included in the units expire five years from the date of issuance. In
case of a "cashless exercise," the 1997 Warrant exercise price is $4.00 per
share plus forty percent of the difference between the current trading price of
the Company's common stock and $4.00; in all other cases, the 1997 Warrant
exercise price is $4.00 per share plus thirty percent of the difference between
the current trading price of the Company's common stock and $4.00. The 1997
Warrants are subject to redemption by the Company at the exercise price,
provided the Company's common stock closes at a price of $16.00, $20.00, or
$28.00 per share for twenty consecutive days during the second, third, fourth or
fifth years, respectively, of the term of the 1997 Warrant. Proceeds from the
private placement were $6,519,250, net of placement agent and other offering
costs of $324,500.
F-11
<PAGE> 121
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
On November 12, 1998, the Company sold 300,000 shares of Series A
Redeemable Convertible Preferred Stock ("Preferred Stock") and 853,565 shares of
Common Stock to certain institutions and other accredited investors in a Private
Placement pursuant to Regulation D under the Securities Act of 1933. The
purchase price for the Preferred Stock and Common Stock sold in the Private
Placement consisted of $1,200,000 in cash and the surrender by the investors of
redeemable Common Stock Purchase Warrants originally issued in the Company's
March 1997 private placement financing (the "1997 Warrants"). Shares of Series A
Preferred Stock are initially convertible to Common Stock on a 1-for-1 basis,
subject to customary antidilution adjustments. Dividends shall accrue on the
Series A Preferred Stock at the rate of 8% per annum. In the event of
liquidation dissolution, or winding up of the Company, or, at the option of the
holders of the Preferred Stock, a consolidation or merger of the Company or a
sale of all or substantially all of its assets, the Preferred Stock will be
entitled to receive in preference to the Company's Common Stock an amount per
share equal to the original purchase price plus any accrued dividends per share.
Redemption of the Preferred Stock is at the request of holders of at least
33 1/3% of such shares outstanding, which request may be made at any time two
years following closing of the Private Placement. In the event of such request,
the Company shall be required to redeem all of the Series A Preferred Stock held
by the requesting holders at a redemption price equal to $4.00 per share
(subject to adjustment), plus any accrued dividends per share. The redemption
price may be paid, at the Company's option, in cash or in shares of the
Company's Common Stock. The Company's intention is to make such redemption in
Common Stock, and accordingly the Series A Preferred Stock has been included in
stockholders' equity. Proceeds to the Company from this Private Placement were
approximately $1,160,000, net of legal fees of $40,000.
4. INVESTMENTS
At December 31, 1998 and 1997, the Company's investments consisted
primarily of United States government agency obligations and high-grade
commercial paper. These investments were considered as available for sale, and
cost plus accrued interest approximated fair market value. At December 31, 1998
and 1997, these securities had maturities of less than one year.
5. NOTES PAYABLE
In January and March 1993, the Company issued notes payable in the
aggregate principal amount of $522,500 primarily to SunPharm Investors L.P., a
limited partnership in which 7% of the funds loaned to the Company were
contributed by existing stockholders of the Company. Costs associated with this
issuance totaled $57,500. There were also stock purchase warrants issued as
discussed in Note 7. The notes bore interest at 9.5% through January 1995, when
they were repaid.
In August and September 1994, two directors of the Company loaned $5,000
and $50,000, respectively, to the Company. The loans were repaid from the
proceeds of the Bridge Financing discussed below. In addition, the directors
were granted warrants to acquire 500 and 5,000 shares, respectively, of common
stock at an exercise price of $5.50.
On September 27, 1994, the Company issued notes totaling $1,000,000 as a
bridge financing for the IPO (the "Bridge Notes"). The holders of the Bridge
Notes also received warrants to purchase 228,573 shares of common stock at an
exercise price of $4.375 per share. The estimated value of $600,000 for the
warrants was recorded as additional paid-in capital and deferred offering costs
during 1994. Proceeds of the Bridge Notes were $825,000, net of a $100,000
placement fee paid to the placement agent and $75,000 of
F-12
<PAGE> 122
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
offering costs. The total deferred offering costs of $775,000 were charged to
expense upon repayment of the Bridge Notes in 1995. The Bridge Notes bore
interest at an annual rate of 10% and were repaid in January and February 1995
from the proceeds of the IPO.
In November and December 1994, two directors of the Company loaned $100,000
and $75,000, respectively, to the Company. The notes bore interest at 12% per
annum and were repaid from the proceeds of the Offering in January 1995. In
addition, the directors were granted 10,000 and 7,500 warrants, respectively, to
acquire shares of common stock at an exercise price of $7.00. The warrants were
not exercisable until the second anniversary of the completion of the IPO.
In January 1995, two directors of the Company loaned a total of $25,000 to
the Company. The notes bore interest at 12% per annum and were repaid from the
proceeds of the IPO. In addition, the directors were granted warrants to acquire
2,500 shares of common stock at an exercise price of $7.00. The warrants were
not exercisable until the second anniversary of the completion of the IPO.
At December 31, 1998 and 1997, notes payable as shown on the Company's
balance sheets represent obligations resulting from the financing of insurance
premiums.
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement with Dr. Raymond Bergeron,
inventor of the technology which the Company has licensed, under which the
Company is obligated to pay $8,000 per month for consulting services through
December 1999.
In March 1993, the Company entered into an employment agreement with Mr.
Stefan Borg. The agreement provides for an annual base salary of $120,000 for a
three-year period beginning April 1, 1993. The board of directors approved a
$30,000 bonus upon the closing of the bridge financing discussed in Note 5 and,
effective June 1, 1994, the annual base salary was increased to $132,000. In
March 1995, the board of directors approved a $35,000 bonus for services
performed during the preceding twelve months, extended the agreement to March
31, 1997 and agreed to increase the annual base salary to $150,000, effective
April 1, 1995. In August 1997, the board of directors approved a bonus of
$15,000, the grant of 25,000 incentive stock options (see "1994 Plan" in Note 7)
and an increase in annual base salary to $200,000 effective April 1, 1997. The
employment agreement with Mr. Borg continues in effect on a year-to-year basis
unless terminated.
On December 20, 1995, Dean L. Rider, M.D. ("Rider"), a stockholder of the
Company, filed suit against the Company and Stefan Borg in Superior Court for
the City and County of San Francisco, California, seeking compensatory damages
of over $41 million and punitive damages based upon an alleged agreement between
SunPharm and Rider. In June 1996, the Company settled this litigation with Rider
by issuing Rider 50,000 shares of SunPharm common stock. Such shares have
subsequently been registered for resale. The issuance of the shares was recorded
by a reduction in legal fees accrued at December 31, 1995, which approximated
the fair value of the shares issued. The Company believes that the claims made
by Rider were without merit, and did not admit to any wrongdoing in connection
with the settlement. The Company agreed to the settlement because it believed
the cost of the settlement to be more economical than the cost of continuing to
incur significant legal expenses to defend this matter.
F-13
<PAGE> 123
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
The Company leases office space, furniture and equipment under operating
leases. Lease expense for the years ended December 31, 1998 and 1997 was
approximately $83,400 and $75,500, respectively. Future minimum commitments on
operating leases at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999...................................................... $110,000
2000...................................................... 110,000
2001...................................................... 110,000
2002...................................................... 110,000
2003...................................................... 110,000
--------
$550,000
========
</TABLE>
The Company is subject to claims arising in the ordinary course of business
but does not believe that any such claims presently identified will have a
material adverse effect on its financial condition or results of operations.
7. STOCK OPTIONS, WARRANTS AND OTHER INCENTIVE COMPENSATION
In 1992, the Company issued warrants to a director to purchase 77,900
shares of the Company's common stock. The warrants are exercisable at $1.93 per
share. In connection with certain notes payable issued in 1993, the Company
issued warrants to purchase 155,021 shares and 133,234 shares of the Company's
common stock at exercise prices of $1.93 per share and $3.21 per share,
respectively. These warrants have been recorded at zero in the accompanying
financial statements as the value at the time of issuance was de minimus.
During 1996, the Company offered the Bridge Notes warrant holders discussed
in Note 5 and SunPharm Investors L.P. discussed above a thirty percent reduction
in their applicable exercise price if they exercised their warrants prior to
December 31, 1996. Additionally, for each four warrants exercised, a warrant
identical to those included in the units described in Note 2 would be issued. As
a result of this warrant exchange offer, 62,858 of the Bridge Note warrants and
173,863 of SunPharm L.P. warrants were exercised in exchange for 236,721 shares
of stock and 59,178 new warrants. Proceeds from this transaction were
approximately $459,000 of cash, net of offering costs of approximately $34,000.
The Company's board of directors granted stock options to employees and
other parties to purchase common stock. Employee options generally vest over a
sixty month period or over the term of an employment agreement. Options granted
to consultants generally vest over a particular service period or in connection
with certain milestones. Also, certain options previously granted had immediate
vesting provisions. Most options expire seven years from the date of grant if
not exercised.
In April 1994, the board of directors of the Company approved the 1994
Stock Option Plan (1994 Plan) and reserved 350,550 shares of common stock for
issuance of stock options to employees and consultants. In 1997, the board of
directors increased the number of shares reserved by the Plan to 750,000 shares.
The 1994 Plan is composed of incentive stock options and nonqualified stock
options. The options generally vest over a two- to five-year period, and the
incentive stock options expire 10 years from the date of grant. For the years
ended December 31, 1998 and 1997, there were 50,000 shares and 124,500 shares
granted from this plan, respectively.
F-14
<PAGE> 124
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
On July 10, 1995, the stockholders of the Company approved the SunPharm
Corporation 1995 Nonemployee Directors' Stock Option Plan (the "1995 Directors'
Plan"). The maximum number of shares of common stock with respect to which
options may be granted under this plan is 300,000 as amended in 1997, subject to
appropriate adjustment upon a reorganization, stock split, recapitalization or
other change in the Company's capital structure. Directors who are not employees
or consultants to the Company are eligible to receive nonqualified stock options
which, in accordance with the plan, must be issued at one hundred percent (100%)
of the fair market value of the common stock of the Company on the date of
grant. Directors who are eligible to receive options under the 1995 Directors'
Plan, will be entitled to receive an option to purchase 25,000 shares of common
stock on the date on which they become a director. Additionally, eligible
directors will be entitled to receive options annually on the date of their
reelection to the Board of Directors to purchase 5,000 shares (with an
additional 10,000 shares for the Chairman of the Board of Directors, if he is
eligible) of common stock. For the years ended December 31, 1998 and 1997,
options to purchase 40,000 and 125,000 shares of common stock were granted under
the 1995 Directors' Plan.
In August 1994, the Company elected a director of the Company, and engaged
him as a consultant to provide management, marketing, economic and strategic
planning services during a two-year period. The director was compensated under
such consulting agreement at a rate of $7,500 per month, and by the issuance of
a stock appreciation right ("SAR") for 150,000 common stock equivalents,
exercisable (commencing in 1996 with respect to 50% and in 1997 with respect to
the remainder) in an amount equal to the excess of the fair market value of the
Company's common stock on the date of exercise over the initial public offering
price of the Units. Such stock appreciation right terminates on January 1, 2000.
As consideration for his serving on the Board of Directors, the director was
granted a five-year stock purchase warrant ("Warrant") for 225,000 shares of
common stock of the Company, such warrant being exercisable at a price of $5.50
per share. In 1995, the Company recorded compensation expense of $18,750 and
$28,188 in connection with the SAR and the warrant, respectively, and due to the
terms, may incur additional non-cash charges in the future. No compensation
expense has been recorded since 1995 related to any options, warrants or SARs
based on the quoted market value of the Company's common stock.
During the year ended December 31, 1997, the Company issued warrants to two
investment companies to purchase 150,000 shares of the Company's common stock.
The warrants were valued at approximately $90,000 which represents the fair
value of the services provided. Such amount was expensed with a corresponding
increase to additional paid-in-capital during the year ended December 31, 1997.
SFAS NO. 123 REQUIRED DISCLOSURE
If compensation cost for stock option, SARs and warrant grants ("Grants")
had been determined based on the fair value at the grant dates for 1998 and 1997
consistent with the method prescribed by
F-15
<PAGE> 125
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
SFAS No. 123, the Company's net loss and loss per share would have been adjusted
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net loss
As reported..................................... $(3,767,392) $(3,906,425)
Pro forma....................................... (4,204,638) (4,464,082)
Loss per share
As reported..................................... (0.64) (0.75)
Pro forma....................................... (0.72) (0.86)
</TABLE>
Under SFAS No. 123, the fair value of each Grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997, respectively:
Dividend yield of 0% and 0%, expected volatility of 155.2% and 77.8%, risk-free
interest rates of 5.28% and 6.33%, and expected lives of 7 and 7 years.
A summary of the status of Grants under the Company's stock-based
compensation plans as of December 31, 1998 and 1997, and changes during the
years ending on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISED EXERCISED
GRANTS PRICE GRANTS PRICE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............. 1,561,390 $3.48 1,384,696 $3.25
Granted.................................... 90,000 3.19 249,500 3.79
Exercised.................................. (28,573) 0.40 (72,806) 0.10
Forfeited.................................. (80,000) 5.42
---------- ----------
Outstanding at end of year................... 1,542,817 3.42 1,561,390 3.48
========== ==========
Grants exercisable at year-end............... 1,298,384 1,205,703
========== ==========
Weighted-average fair value of Grants granted
during the year............................ $ 3.09 $ 2.88
========== ==========
</TABLE>
The following table summarizes information about the outstanding Grants at
December 31, 1998:
<TABLE>
<CAPTION>
GRANTS OUTSTANDING GRANTS EXERCISABLE
----------------------------------------- -------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
- --------------- ------------ ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$.0064 to $.32 364,873 2.04 $0.31 289,473 $0.31
$1.60 to $2.99 349,070 5.37 1.95 255,558 1.78
$3.00 to $4.50 178,374 8.56 3.74 119,353 3.71
$5.375 to $5.75 495,500 2.64 5.52 479,000 5.52
$6.54 to $8.75 155,000 5.81 7.19 155,000 7.19
--------- ---------
1,542,817 1,298,384
========= =========
</TABLE>
F-16
<PAGE> 126
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
Remaining non-exercisable Grants as of December 31, 1998 become available
as follows:
<TABLE>
<S> <C>
1999..................................................... 142,225
2000..................................................... 36,083
2001..................................................... 34,000
2002..................................................... 24,625
2003..................................................... 7,500
-------
244,433
=======
</TABLE>
8. FEDERAL INCOME TAXES
The Company has incurred losses since inception and, therefore, has not
been subject to federal income taxes. As of December 31, 1998, the Company has
net operating loss (NOL) and tax credit carryforwards for income tax purposes of
approximately $16,953,000 and $596,000, respectively, which may be available to
reduce future taxable income and future tax liabilities. These carryforwards
begin to expire in 2008.
The Tax Reform Act of 1986 provides for an annual limitation on the use of
NOL and tax carryforwards (following certain ownership changes) that could
significantly limit the Company's ability to utilize these carryforwards. The
Company has made no determination concerning whether there has been such a
cumulative change in ownership, and it is possible that such a change in
ownership occurred following the completion of the Company's IPO, subsequent
private placements, and subsequent exercise of the Warrants. Accordingly, the
Company's ability to utilize the aforementioned carryforwards to reduce future
taxable income and tax liabilities may be limited. Additionally, because United
States tax laws limit the time during which these carryforwards may be applied
against future taxes, the Company may not be able to take full advantage of
these attributes for federal income tax purposes.
As the Company has had cumulative losses and there is no assurance of
future taxable income, a valuation allowance has been established to fully
offset the deferred tax asset related to the net operating losses and other
items. The components of the Company's deferred tax assets at December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net operating loss carryforwards.................... $6,709,000 $4,997,000
Research and development tax credits................ 596,000 464,000
Deferred compensation............................... 326,000 326,000
---------- ----------
Total deferred tax assets................. 7,631,000 5,787,000
Less valuation allowance............................ 7,631,000 5,787,000
---------- ----------
Net deferred tax assets............................. $ -- $ --
========== ==========
</TABLE>
9. RESEARCH AND DEVELOPMENT
In 1991, the Company issued 311,600 shares of common stock to UFRFI,
recorded at $2,000, for exclusive, worldwide license agreement rights. The
Company also paid a maintenance fee to UFRFI in the amount of $50,000 which was
charged to research and development expense. This fee is credited toward
sponsored research payments and/or royalties. In March 1993, the license
agreement was amended to provide for additional patent rights for the Company in
exchange for the Company's payment of patent
F-17
<PAGE> 127
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
costs incurred by UFRFI prior to the amendment, a license fee of $40,000 payable
to UFRFI upon execution of the amendment, the issuance of 31,160 shares of
common stock valued at $10,000 and an increase in annual maintenance fee payable
to UFRFI from $50,000 to $100,000. In September 1996, this agreement was further
amended providing for more patent rights for the Company in exchange for the
Company's payment of a one-time license fee of $50,000 and an increase in the
annual maintenance to $200,000 beginning in 1997.
The Company has also entered into a research agreement with UFRFI. For the
years ended December 31, 1996 and 1995, the Company paid $535,000 and $869,000,
respectively, to UFRFI under the terms of the research agreement. The amount
paid in 1995 includes the maintenance fee of $100,000 for 1996. In September
1996, this agreement was amended concurrently with the license agreement
described above for increased sponsored research payments related to the
Company's products from $625,000 in 1995 to $641,000 in 1996, $854,250 in 1997
and $875,000 in 1998. These expenses are charged to operations as incurred.
Failure to pay such costs could result in termination of the license agreement
rights. If UFRFI were to terminate the license, the Company's rights to
manufacture and market the technology and related products would terminate and
such an event would have a material adverse effect on the Company. In 1995, the
Company paid $50,000 to UFRFI for an additional license, described below. The
Company also paid UFRFI $163,000 and $210,00 in 1998 and 1997, respectively, for
reimbursement of patent costs.
The Company agreed to pay a royalty on net sales of licensed products up to
6 percent of net sales for each product. A royalty of 28 percent of sublicensee
payments, but no less than 2 percent of net sales by such sublicensee, will also
be payable to UFRFI. The Company paid UFRFI $210,000 in royalties in 1995, which
were payable as a result of licensing fees received in 1993. At December 31,
1996 the Company had accrued an additional $280,000 liability to UFRFI for
sublicense payments related to the $1 million Warner Lambert milestone payment
earned in 1996. Such amount was paid in 1997.
On May 1, 1993, the Company entered into a sublicensing agreement with
Warner-Lambert. The agreement grants Warner-Lambert the right of first refusal
in the event the Company decides to develop certain other licensed products
under certain circumstances. Under the terms of the agreement, Warner-Lambert
paid the Company $100,000 in May 1993 upon the execution of the agreement and
$750,000 in October 1993 related to the filing of the investigational new drug
application. The payments were recognized as revenue when the payments were
received. Additional payments may be received for the completion of certain
scientific milestones. The agreement provides for Warner-Lambert to pay the
Company a royalty on net sales, as defined. On March 1, 1994, Warner-Lambert
paid the Company $750,000 in consideration for the Company's research and
development activities performed. In 1996, the Company earned an additional $1
million from Warner Lambert, of which $500,000 was receivable as of December
31,1996 and was collected in January, 1997. The agreement will terminate on the
later of the last expiration date of a licensed patent or 10 years from
Warner-Lambert's marketing of a licensed product.
In February 1994, the Company entered into an exclusive sublicense
agreement with Nippon Kayaku. Upon execution of the agreement, Nippon Kayaku
paid the Company $225,000 for research and development performed. The sponsored
research payment was recognized as revenue when the payment was received.
Additional payments may be payable to the Company for the completion of certain
scientific milestones. The agreement provides for Nippon Kayaku to pay the
Company a royalty on net sales, as defined.
F-18
<PAGE> 128
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
In addition, Nippon Kayaku will reimburse the Company for direct costs
incurred for preclinical studies performed prior to the agreement. Nippon Kayaku
will also pay a running royalty of 2 percent of net sales as defined for 10
years in the event that Nippon Kayaku elects to manufacture the product. The
agreement will terminate on the later of the last expiration of a licensed
patent or 10 years from Nippon Kayaku's marketing of a licensed product in
Japan.
A director was issued options with an exercise price of $.32 per share to
purchase 77,900 shares of common stock in connection with the exclusive
sublicense agreement with Nippon Kayaku. The original option agreement
stipulated that the options vested upon the completion of specified milestones
and, accordingly, compensation expense was recorded for the portion of the
options that had not vested through September 1994, at which time the Company
amended the agreement to reflect vesting based upon time or the completion of
specified milestones (see Note 7).
10. SUBSEQUENT EVENTS (UNAUDITED)
SURRENDER OF PURCHASE OPTION -- On February 16, 1999, the underwriter of
the Company's IPO agreed to surrender a purchase option for 110,000 shares of
Common Stock exercisable at $11.20 per share, which it had acquired in
connection with the IPO and which was due to expire on January 12, 2000. In
exchange for surrender of this option, the Company agreed to issue an equal
number of shares to the underwriter at $0.60 per share, for total proceeds of
$66,000.
PRIVATE PLACEMENT OF PREFERRED STOCK AND COMMON STOCK -- On March 31, 1999,
the Company sold 66,667 shares of Series B Redeemable Convertible Preferred
Stock at $4.00 per share, ("Series B Preferred") and 183,333 shares of Common
Stock at $1.273 per share to an institutional investor in a Private Placement
pursuant to Regulation D under the Securities Act of 1933. The shares of Series
B Preferred are initially convertible to Common Stock on a 1-for-1 basis,
subject to customary antidilution adjustments. Dividends shall accrue on the
Series B Preferred at the rate of 8% per annum. In the event of liquidation,
dissolution, or winding up of the Company, or, at the option of the holders of
the Series B Preferred, a consolidation or merger of the Company or a sale of
all or substantially all of its assets, the Series B Preferred Stock will be
entitled to receive in preference to the Company's Common Stock an amount per
share equal to the original purchase price plus any accrued dividends per share.
Redemption of the Series B Preferred is at the request of holders of at
least 33 1/3% of such shares outstanding, which request may be made at any time
two years following closing of the Private Placement. In the event of such
request, the Company shall be required to redeem all of the Series B Preferred
Stock held by the requesting holders at a redemption price equal to $4.00 per
share (subject to adjustment), plus any accrued dividends per share. The
redemption price may be paid, at the Company's option in cash or in shares of
the Company's Common Stock. The Company's intention is to make such redemption
in Common Stock, and accordingly the Series B Preferred has been included in
stockholder's equity. Net proceeds to the Company from this Private Placement
were $485,000, net of fees of approximately $15,000.
F-19
<PAGE> 129
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
Following is a condensed pro forma balance sheet of the Company as of
December 31, 1998, after giving effect to the transactions disclosed above.
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, 1998
-----------------
<S> <C>
ASSETS
Cash and short-term investments............................ $ 2,250,200
Other current assets....................................... 162,734
Property and equipment, net................................ 57,933
Other assets............................................... 134,140
------------
$ 2,605,007
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities........................................ $ 451,913
Stockholders' equity:
Undesignated Preferred Stock, par value $.001 per share;
2,000,000 shares authorized; 0 shares issued and
outstanding
Series A Preferred Stock, par value $.001 per share;
300,000 shares authorized; 300,000 shares issued and
outstanding.............................................. 300
Series B Preferred Stock, par value $.001 per share;
200,000 authorized; 66,667 shares issued and
outstanding.............................................. 67
Common Stock, par value $.0001 per share; 25,000,000 shares
authorized, 6,914,728 shares issued and outstanding...... 691
Additional paid-in capital................................. $ 21,422,482
Accumulated deficit during development stage............... (19,270,446)
------------
Total stockholders' equity............................... $ 2,153,094
============
$ 2,605,007
============
</TABLE>
* * *
F-20
<PAGE> 130
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 404,813 $ --
Short-term investments.................................... 249,216 1,699,200
Prepaid expenses and other................................ 94,879 162,734
------------ ------------
Total current assets.............................. 748,908 1,861,934
Receivable from stockholder................................. 129,656 124,865
Property and equipment, net................................. 56,031 57,933
Other assets................................................ 9,275 9,275
------------ ------------
$ 943,870 $ 2,054,007
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 452,623 $ 213,627
Accrued liabilities....................................... 112,358 135,580
Notes payable............................................. 43,124 102,706
Other..................................................... 92,961 --
------------ ------------
Total current liabilities......................... 701,066 451,913
STOCKHOLDERS' EQUITY:
Undesignated preferred stock, par value $0.001 per share;
2,000,000 shares authorized; 0 shares issued and
outstanding............................................... -- --
Series A preferred stock, par value $0.001 per share;
300,000 shares authorized; 300,000 shares issued and
outstanding............................................... 300 300
Series B preferred stock, par value $0.001 per share;
200,000 shares authorized; 66,667 and 0 shares issued and
outstanding............................................... 67 --
Common stock, par value $0.0001 per share; 25,000,000 shares
authorized; 6,930,598 and 6,621,395 shares issued and
outstanding............................................... 693 662
Additional paid-in capital.................................. 21,440,781 20,871,578
Accumulated deficit during development stage................ (21,199,037) (19,270,446)
------------ ------------
Total stockholders' equity........................ 242,804 1,602,094
------------ ------------
$ 943,870 $ 2,054,007
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 131
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
REVENUES:
Sponsored Research/Sublicensing Revenue................... $ -- $ --
Interest Income........................................... 14,097 47,093
Miscellaneous Income...................................... 2,400 --
---------- -----------
Total Revenues.................................... 16,497 47,093
EXPENSES:
Research and Development.................................. 547,124 641,512
General and Administrative................................ 428,802 454,434
Royalty Expense........................................... -- --
---------- -----------
Total Expenses.................................... 975,926 1,095,946
Net Loss.................................................... $ (959,429) $(1,048,853)
========== ===========
Net Loss per Share.......................................... $ (0.14) $ (0.18)
========== ===========
Shares used in computing loss per share..................... 6,929,726 5,765,919
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 132
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
SIX MONTHS ENDED JUNE 30, (MAY 3, 1990)
-------------------------- THROUGH
1999 1998 JUNE 30, 1999
----------- ----------- --------------
<S> <C> <C> <C>
REVENUES:
Sponsored Research/Sublicensing Revenue.......... $ -- $ -- $ 3,115,729
Interest Income.................................. 33,060 96,031 711,493
Miscellaneous Income............................. 2,400 -- 2,400
----------- ----------- ------------
Total Revenues........................... 35,460 96,031 3,829,622
EXPENSES:
Research and Development......................... 1,130,526 1,164,798 13,626,327
General and Administrative....................... 833,525 1,019,213 10,912,332
Royalty Expense.................................. -- -- 490,000
----------- ----------- ------------
Total Expenses........................... 1,964,051 2,184,011 25,028,659
----------- ----------- ------------
Net Loss........................................... $(1,928,591) $(2,087,980) $(21,199,037)
=========== =========== ============
Net Loss per Share................................. $ (0.28) $ (0.36)
=========== ===========
Shares used in computing loss per share............ 6,804,165 5,756,652
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 133
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
REDEEMABLE ACCUMULATED
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL DURING
SERIES A SERIES B ------------------ PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE
------- ------ ------ ------ --------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998....................... 300,000 $300 -- -- 6,621,395 $662 $20,871,578 $(19,270,446)
Issuance of Common Stock..... -- -- -- -- 309,203 31 302,602 --
Issuance of Preferred
Stock...................... -- -- 66,667 $67 -- -- 266,601 --
Net Loss..................... -- -- -- -- -- -- -- (1,928,591)
------- ---- ------ --- --------- ---- ----------- ------------
Balance at June 30, 1999..... 300,000 $300 66,667 $67 6,930,598 $693 $21,440,781 $(21,199,037)
======= ==== ====== === ========= ==== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 134
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FROM INCEPTION
SIX MONTHS ENDED JUNE 30, MAY 3, 1990
-------------------------- THROUGH
1999 1998 JUNE 30, 1999
----------- ----------- --------------
<S> <C> <C> <C>
Operating activities
Net loss......................................... $(1,928,591) $(2,087,980) $(21,199,037)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 5,177 3,911 90,857
Compensation expense related to options,
warrants and stock appreciation rights...... -- -- 999,016
Amortization of deferred offering costs
incurred in connection with issuance of
Bridge Notes................................ -- -- 775,000
Write-off of patents.......................... -- -- 70,120
Increase in receivable from stockholder....... (4,791) (8,331) (129,656)
Decrease (increase) in prepaid expenses and
other assets................................ 67,855 (3,393) (102,545)
Increase (decrease) in accounts payable....... 238,996 (123,672) 452,623
(Decrease) increase in accrued liabilities.... (23,222) (70,887) 418,608
Increase in other liabilities................. 92,961 -- --
----------- ----------- ------------
Total adjustments........................ 376,976 (202,372) 2,574,023
----------- ----------- ------------
Net cash used in operating activities.............. (1,551,615) (2,290,352) (18,625,014)
----------- ----------- ------------
Investing activities
Purchases of short-term investments.............. (3,134,940) (4,368,706) (29,623,771)
Sales and maturities of short-term investments... 4,584,924 6,584,033 29,374,555
Purchases of property and equipment.............. (3,275) (5,068) (83,193)
Payment of patent costs.......................... -- -- (67,424)
----------- ----------- ------------
Net cash provided by (used in) investing
activities....................................... 1,446,709 2,210,259 (399,833)
----------- ----------- ------------
Financing activities
Repayments of notes payable...................... (59,582) (117,025) (56,876)
Issuance of Series A preferred stock............. -- -- 1,673,225
Issuance of Series B preferred stock............. 266,668 -- 716,668
Issuance of common stock......................... 302,633 17,585 17,601,030
Stock offering costs............................. -- -- (597,348)
Repayment of payable to shareholders............. -- -- (542,500)
----------- ----------- ------------
Net cash provided by (used in) financing
activities....................................... 509,719 (99,440) 18,794,199
----------- ----------- ------------
Net change in cash................................. 404,813 (179,533) (230,648)
Cash at beginning of period........................ -- 356,969 --
----------- ----------- ------------
Cash at end of period.............................. $ 404,813 $ 177,436 $ (230,648)
=========== =========== ============
Supplemental information:
Cash paid for interest............................. $ 2,527 $ 3,550 $ 169,979
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 135
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The balance sheet at June 30, 1999, the related statements of operations
for the three- and six-month periods ended June 30, 1999 and 1998 and the period
from inception (May 3, 1990) through June 30, 1999, the statement of
stockholders' equity at June 30, 1999, and the statements of cash flows for the
six-month periods ended June 30, 1999 and 1998 and the period from inception
through June 30, 1999 are unaudited. These interim financial statements should
be read in conjunction with the financial statements and related notes included
in the 1998 Form 10-KSB. The unaudited interim financial statements included
herein reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of results for the interim periods presented, and
all such adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results for a full year.
NET LOSS PER SHARE
Net loss per share is computed based on the weighted-average number of
shares of Common Stock outstanding for the period.
PATENT COSTS
The Company reimburses the University of Florida Research Foundation, Inc.
("UFRFI") for direct expenses relating to the Company's patents. Patent costs
consist of legal fees and other direct costs incurred in filing, prosecuting,
and maintaining the licensed patents. These costs are charged to research and
development expense when incurred.
RESEARCH AND DEVELOPMENT
Sponsored research payments are recognized as revenue when the research
underlying such payments has been performed. Research and development expenses
are charged to operations when incurred. Research and development expenses
include consulting fees and cost of reimbursements to UFRFI, preclinical and
clinical testing of drug compounds under investigation, and salaries and
benefits of employees engaged in research and development activities.
SEGMENT INFORMATION
The Company is in one business segment and follows the requirements of SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. In May 1999, the Financial
Accounting Standards Board postponed the effective date for SFAS No. 133 to
fiscal years beginning after June 15, 2000. At this time, the Company has not
determined the effect of this statement on its financial statements.
F-26
<PAGE> 136
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
2. SUBSEQUENT EVENT -- SURRENDER OF PURCHASE OPTION
On February 16, 1999, the underwriter of the Company's initial public
offering ("IPO") agreed to surrender its option to purchase 110,000 shares of
Common Stock at $11.20 per share, which it had acquired in connection with the
IPO and which was due to expire on January 12, 2000. In exchange for surrender
of this option, the Company agreed to issue an equal number of shares of Common
Stock to the underwriter at $0.60 per share, for total proceeds of $66,000.
Subsequent to the date of the agreement and payment of proceeds to the Company,
but prior to the surrender of the underwriter's options, it was determined that
the underwriter had previously assigned or disposed of a portion of such option.
Accordingly, on August 11, 1999, the Company made a decision to refund to the
underwriter $43,200 of the $66,000 proceeds and reduce the number of shares of
Common Stock to be issued from 110,000 to 38,000.
3. SUBSEQUENT EVENT -- MERGER WITH GELTEX PHARMACEUTICALS, INC.
On August 13, 1999, the Company's Board of Directors approved the merger of
the Company with GelTex Pharmaceuticals, Inc., a publicly traded Delaware
corporation ("GelTex"), through a reverse triangular merger in which the Company
would merge with a wholly owned subsidiary of GelTex. The Company entered into a
merger agreement to effect such transaction on August 13, 1999. Both the merger
and the merger agreement are subject to approval by the Company's stockholders
at a special meeting to be held following approval of the proxy statement by the
SEC. In the merger, the Company's stockholders will receive shares of common
stock of GelTex for their shares of the Company's Common Stock and Preferred
Stock. If the stockholders approve the merger, the merger will be effected, and
the closing of the merger agreement will occur, immediately following the
special meeting.
4. SUBSEQUENT EVENT -- NASDAQ LISTING REQUIREMENTS
Nasdaq is aware that the Company is currently not in compliance with the
minimum net tangible asset requirement for continued listing on The Nasdaq
SmallCap Market pending completion of the proposed merger. Nasdaq has granted
the Company a waiver of the minimum net tangible asset requirement. However,
Nasdaq has informed the Company that if the merger is delayed or is not
completed before November 30, 1999, the Company's common stock may be
immediately delisted from The Nasdaq SmallCap Market, if the Company does not
cure the current net tangible asset deficiency.
5. SUBSEQUENT EVENT -- EXERCISE OF OPTIONS AND WARRANTS
Between August 4 and September 30, 1999, the Company received proceeds of
$273,503 from the exercise of 390,643 options and warrants by various holders as
follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICE PER SHARE PROCEEDS
----------------- ------------------------ --------
<C> <C> <C> <S>
202,743 $ 0.32 $ 64,878
10,000 $1.125 11,250
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF WARRANTS EXERCISE PRICE PER SHARE PROCEEDS
------------------ ------------------------ --------
<C> <C> <C> <S>
100,000 $ 1.00 $100,000
77,900 $ 1.25 97,375
--------
Total Proceeds $273,503
========
</TABLE>
F-27
<PAGE> 137
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
6. SUBSEQUENT EVENT -- LICENSING OF IRON CHELATOR COMPOUND
On September 30, 1999, the Company entered into an exclusive sub-license
agreement with Schein Pharmaceutical, Inc., or Schein, whereby Schein obtained
the rights to a proprietary injectable iron chelator for the U.S., European, and
certain Far East markets. Under the sub-license agreement, the Company is
entitled to receive payments upon reaching clinical, regulatory and
manufacturing milestones, as well as escalating royalties on sales. A payment of
$625,000 was made to the Company upon signing of the agreement.
F-28
<PAGE> 138
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
GELTEX PHARMACEUTICALS, INC.
SHINE ACQUISITION SUB, INC.
AND
SUNPHARM CORPORATION
DATED AS OF AUGUST 13, 1999
<PAGE> 139
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER............................................... A-1
1.1 The Merger.................................................. A-1
1.2 Effective Time.............................................. A-1
1.3 Effect of the Merger........................................ A-1
1.4 Certificate of Incorporation and By-Laws of Surviving
Corporation................................................. A-2
1.5 Directors and Officers...................................... A-2
1.6 Maximum Consideration; Conversion of Company Common Shares
and Company Preferred Shares................................ A-2
1.7 Cancellation of Treasury Shares............................. A-3
1.8 Stock Options and Warrants.................................. A-3
1.9 Capital stock of Merger Sub................................. A-5
1.10 Adjustments to Exchange Ratio............................... A-5
1.11 Fractional Shares........................................... A-5
1.12 Surrender of Certificates................................... A-5
1.13 Further Ownership Rights in Company Common Shares and
Company Preferred Shares.................................... A-6
1.14 Closing..................................................... A-6
1.15 Lost, Stolen or Destroyed Certificates...................... A-7
1.16 Tax Consequences............................................ A-7
1.17 Dissenters' Rights.......................................... A-7
1.18 Further Assurances.......................................... A-7
1.19 Closing of Company Transfer Books........................... A-8
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY........... A-8
2.1 Organization and Qualification; Subsidiaries................ A-8
2.2 Certificate of Incorporation and By-laws.................... A-8
2.3 Capitalization.............................................. A-9
2.4 Authority Relative to this Agreement; Required Vote......... A-9
2.5 No Conflict; Required Filings and Consents.................. A-10
2.6 Material Agreements......................................... A-11
2.7 Compliance with Agreements and Law.......................... A-11
2.8 SEC Filings; Financial Statements........................... A-12
2.9 Absence of Certain Changes or Events........................ A-12
2.10 No Undisclosed Liabilities.................................. A-13
2.11 Absence of Litigation....................................... A-13
2.12 Employee Benefit Plans...................................... A-13
2.13 Employment and Labor Matters................................ A-15
2.14 Registration Statement; Proxy Statement/Prospectus.......... A-15
2.15 Absence of Restrictions on Business Activities.............. A-16
2.16 Title to Assets; Leases..................................... A-16
2.17 Taxes....................................................... A-17
2.18 Environmental Matters....................................... A-18
2.19 Intellectual Property....................................... A-19
2.20 Insurance................................................... A-21
2.21 Brokers..................................................... A-21
2.22 Certain Business Practices.................................. A-21
2.23 Interested Party Transactions............................... A-21
2.24 Opinion of Financial Advisor................................ A-22
</TABLE>
i
<PAGE> 140
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
2.25 No Subsidiaries............................................. A-22
2.26 Disclosure.................................................. A-22
2.27 HSR Filing.................................................. A-22
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER
SUB............................................................... A-22
3.1 Organization and Qualification.............................. A-22
3.2 Capitalization.............................................. A-22
3.3 Authorization of Agreement.................................. A-23
3.4 Approvals................................................... A-23
3.5 No Violation................................................ A-23
3.6 Reports..................................................... A-23
3.7 Absence of Certain Changes or Events........................ A-24
3.8 Registration Statement; Proxy Statement/Prospectus.......... A-24
3.9 Absence of Litigation....................................... A-24
3.10 Compliance with Laws........................................ A-24
3.11 Taxes....................................................... A-25
3.12 Year 2000 Compliance........................................ A-25
3.13 Parent Intellectual Property Rights......................... A-25
ARTICLE IV CONDUCT OF BUSINESS PENDING THE MERGER.................. A-25
4.1 Conduct of Business by the Company Pending the Merger....... A-25
4.2 Solicitation of Other Proposals............................. A-27
ARTICLE V ADDITIONAL AGREEMENTS.................................... A-29
5.1 Proxy Statement/Prospectus; Registration Statement.......... A-29
5.2 Meeting of Company Stockholders............................. A-30
5.3 Access to Information; Confidentiality...................... A-30
5.4 All Reasonable Efforts; Further Assurances.................. A-30
5.5 Stock Options and Warrants.................................. A-31
5.6 Registration Rights......................................... A-32
5.7 Notification of Certain Matters............................. A-33
5.8 Listing on the NASDAQ....................................... A-33
5.9 Public Announcements........................................ A-33
5.10 Takeover Laws............................................... A-33
5.11 Accountant's Letters........................................ A-34
5.12 Indemnification of Directors and Officers................... A-34
5.13 Covenants for Tax-Free Status............................... A-34
5.14 Stockholder Agreement....................................... A-34
5.15 Release Agreements.......................................... A-34
5.16 Affiliate Agreements........................................ A-35
5.17 SEC Filings................................................. A-35
5.18 Maintenance, Prosecution and Filing Obligations............. A-35
ARTICLE VI CONDITIONS OF MERGER.................................... A-35
6.1 Conditions to Obligation of Each Party to Effect the
Merger...................................................... A-35
6.2 Additional Conditions to Obligations of Parent and Merger
Sub......................................................... A-36
6.3 Additional Conditions to Obligations of the Company......... A-38
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER...................... A-38
7.1 Termination................................................. A-38
7.2 Effect of Termination....................................... A-39
7.3 Fees and Expenses........................................... A-39
7.4 Amendment................................................... A-40
7.5 Waiver...................................................... A-40
ARTICLE VIII GENERAL PROVISIONS.................................... A-41
8.1 Survival of Representations and Warranties.................. A-41
8.2 Notices..................................................... A-41
8.3 Disclosure Schedules........................................ A-42
8.4 Certain Definitions......................................... A-42
8.5 Interpretation.............................................. A-45
8.6 Severability................................................ A-45
8.7 Entire Agreement............................................ A-45
8.8 Assignment.................................................. A-45
8.9 Parties in Interest......................................... A-45
8.10 Failure or Indulgence Not Waiver; Remedies Cumulative....... A-45
8.11 Governing Law............................................... A-45
8.12 Counterparts................................................ A-46
</TABLE>
<TABLE>
<S> <C> <C>
EXHIBIT A -- Form of Stockholder Agreement
EXHIBIT B -- Certificate of Merger
EXHIBIT C -- Form of Release Agreement
EXHIBIT D -- Form of Affiliate Agreement
EXHIBIT E -- Form of Opinion of Andrews & Kurth L.L.P.
EXHIBIT F -- Form of Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C.
</TABLE>
iii
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SCHEDULES
<TABLE>
<S> <C>
COMPANY AND COMPANY'S SUBSIDIARIES' SCHEDULES
2.1(c) Subsidiaries
2.3(a) Stock Appreciation Rights; Other Rights
2.3(b) Capitalization: Company and Subsidiaries, capital stock
2.5(a) Conflict; Required Filing
2.5(b) Company Approvals
2.6 Material Agreements
2.7 Permits
2.1 SEC Filings and Financial Statements
2.11 Litigation
2.12(a) Employee Benefit Plans
2.12(e) Benefits; Acceleration
2.12(g) Medical Benefits
2.12(i) Severance Payments
Holders of Option, Warrant or Other Right to Purchase
2.12(k) capital stock
2.13(a) Employment and Consultant Agreements
2.13(b) Employee Controversies
2.15 Restrictions of Business Activity
2.16 Real Property
2.17 Taxes
2.17(m) Net Operating Loss; Capital Loss Carry Forwards
2.17(n) Limitations of Net Operating Loss
2.18 Environmental Matters
2.19(a) Intellectual Property: Patents, Trademarks, Copyrights
Intellectual Property: Non-Exclusive Intellectual Property
2.19(b) Rights
2.19(c) Maintenance Fees
2.20 Insurance
2.21 Broker Agreements
2.23 Interested Parties
OTHER SCHEDULES
4.1(l) Related Party Agreements, Arrangements, Understandings
5.15 Release Agreements
5.16 Affiliates
8.4 Events, Changes, and Circumstances
</TABLE>
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AGREEMENT AND PLAN OF MERGER, dated as of August 13, 1999 (the "Agreement")
among GELTEX PHARMACEUTICALS, INC., a Delaware corporation ("Parent"), SHINE
ACQUISITION SUB, INC., a Delaware corporation and a wholly owned subsidiary of
Parent ("Merger Sub"), and SUNPHARM CORPORATION, a Delaware corporation (the
"Company").
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have
each determined that it is in the best interests of their respective
stockholders for Parent to acquire the Company upon the terms and subject to the
conditions set forth herein;
WHEREAS, in furtherance of such acquisition, the Boards of Directors of
Parent, Merger Sub and the Company have each approved the merger (the "Merger")
of Merger Sub with and into the Company, in accordance with the General
Corporation Law of the State of Delaware (the "DGCL") and subject to the
conditions set forth herein, which Merger will result in, among other things,
the Company becoming a wholly owned subsidiary of Parent, and all of the issued
and outstanding shares of the common stock of the Company, $.0001 par value per
share (the "Company Common Shares") and all of the issued and outstanding Series
A Redeemable Convertible Preferred Stock and Series B Redeemable Convertible
Preferred Stock of the Company, $.001 par value per share (collectively, the
"Company Preferred Shares") will be exchanged and converted into shares of
common stock, par value $0.01 per share, of Parent (the "Parent Common Stock")
with certain Parent Rights as described herein;
WHEREAS, as a condition to the willingness of, and as an inducement to,
Parent and Merger Sub to enter into this Agreement, contemporaneously with the
execution and delivery of this Agreement, certain holders of Company Common
Shares and Company Preferred Shares are entering into agreements (the
"Stockholder Agreements") in the form of Exhibit A attached hereto, providing
for certain actions relating to the transactions contemplated by this Agreement,
including their agreement to vote Company Common Shares and Company Preferred
Shares in favor of the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization within the meaning of Section 368(a)
of the Code and the United States Treasury Regulations promulgated thereunder;
and
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements herein contained, and
intending to be legally bound hereby, Parent, Merger Sub and the Company hereby
agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
provisions of the DGCL, Merger Sub shall be merged with and into the Company,
the separate corporate existence of Merger Sub shall cease and the Company
shall, as the surviving corporation in the Merger, continue its existence under
the provisions of the DGCL as a wholly owned subsidiary of Parent. The Company
as the surviving corporation after the Merger is hereinafter sometimes referred
to as the "Surviving Corporation."
1.2 Effective Time. As promptly as practicable after the satisfaction or,
to the extent permitted hereunder, waiver of the conditions set forth in Article
VI of this Agreement, the parties hereto shall cause the Merger to be
consummated by filing the Certificate of Merger substantially in the form of
Exhibit B (the "Certificate of Merger"), along with a certified copy of this
Agreement, if required, with the Secretary of State of the State of Delaware,
executed in accordance with the relevant provisions of the DGCL (the date and
time of such filing, or such later date and time as may be specified in the
Certificate of Merger by mutual agreement of Parent, Merger Sub and the Company,
being the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of the DGCL. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time all
the property, rights, privileges, powers and franchises of the Company
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and Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation and By-Laws of Surviving
Corporation. Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time the Certificate of Incorporation of the Company, as
amended by the Certificate of Merger, shall be the Certificate of Incorporation
of the Surviving Corporation until thereafter amended as provided by the DGCL.
The by-laws of the Merger Sub shall be the by-laws of the Surviving Corporation
until thereafter amended as provided by the DGCL.
1.5 Directors and Officers. The directors of Merger Sub immediately prior
to the Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation of the Surviving Corporation. The officers of the Merger Sub
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, in each case until their respective successors are duly
elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and by-laws. Prior to the Effective Time, the Company shall
deliver to Parent resignation letters of each of the directors of the Company to
be effective as of such Effective Time.
1.6 Maximum Consideration; Conversion of Company Common Shares and Company
Preferred Shares. Notwithstanding anything in this Agreement to the contrary,
the maximum consideration payable by Parent with respect to the Company Common
Shares and Company Preferred Shares issued and outstanding immediately prior to
the Effective Time shall be an aggregate of the number of shares of Parent
Common Stock, subject to adjustment as hereinafter provided in this Section 1.6,
as is obtained by dividing (A) the Acquisition Amount by (B) the Closing
Average, as adjusted pursuant to Section 1.6(c) hereof, rounded to the nearest
whole share. For purposes of this Agreement, "Acquisition Amount" shall mean the
result of (x) $16,540,462, minus (y) the product of (1) $2.00 times (2) the
number of shares covered by options or warrants (other than those warrants
issued or to be issued to Petkevich & Partners, L.L.C. for the purchase of
200,000 Company Common Shares), which options or warrants are vested and
exercisable at an exercise price or strike price of $2.00 or less per share and
are not exercised immediately prior to the Effective Time.
At the Effective Time, by virtue of the Merger and without any action on
the part of the parties hereto or the holders of the following securities:
(a) Subject to the other provisions of this Article I, each share of
Series A Redeemable Convertible Preferred Stock, par value $.001 per share
(the "Series A Preferred Stock") and each share of Series B Redeemable
Convertible Preferred Stock, par value $.001 per share (the "Series B
Preferred Stock") issued and outstanding immediately prior to the Effective
Time (other than any Company Preferred Shares to be canceled pursuant to
Section 1.7 and any Dissenting Shares (as defined in Section 1.17)) shall
be converted automatically into the right to receive one hundred fifty
percent (150%) of the Exchange Ratio Fraction of a fully paid and
nonassessable share of Parent Common Stock, together with cash, if any, in
lieu of any fraction of a share of Parent Common Stock, pursuant to Section
1.11 (collectively, the "Preferred Merger Consideration").
(b) Subject to the other provisions of this Article I, each Company
Common Share issued and outstanding immediately prior to the Effective Time
(other than any Company Common Shares to be canceled pursuant to Section
1.7 and any Dissenting Shares (as defined in Section 1.17)) shall be
converted automatically into the right to receive the Exchange Ratio
Fraction of a fully paid and nonassessable share of Parent Common Stock,
together with cash, if any, in lieu of any fraction of a share of Parent
Common Stock, pursuant to Section 1.11 the ("Common Merger Consideration"
and, together with the Preferred Merger Consideration, the "Merger
Consideration").
(c) For purposes of this Agreement, the "Exchange Ratio Fraction"
shall mean the quotient (calculated to the nearest five (5) decimal places)
obtained by dividing (x) the Acquisition Amount by (y) the Closing Average,
and by dividing the quotient computed thereby by the Company Shares Number
(as defined below). As used herein, the "Closing Average" shall be the
average closing price
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per share of Parent Common Stock (rounded to the nearest cent) on the
NASDAQ National Market ("NASDAQ") (as reported in the Wall Street Journal,
or, if not reported therein, any other authoritative source selected by
Parent) for the twenty (20) consecutive trading days ending on the second
trading day immediately prior to the Effective Time; provided, however,
that if (A) such average is $13.80 or less, then the Closing Average shall
be $13.80 and (B) such average is $16.36 or more, then the Closing Average
shall be $16.36. As used herein, "Company Shares Number" means the sum of
(A) (i) all Company Common Shares outstanding immediately prior to the
Effective Time (including all Company Common Shares issued upon the
exercise or cancellation of any options to purchase Company Common Shares
or any warrants to purchase Company Common Shares or upon the conversion or
exchange of any Company Preferred Shares), minus (ii) Company Common Shares
to be canceled pursuant to Section 1.7 and any Dissenting Shares (as
defined in Section 1.17), plus (B) an amount equal to the product obtained
by multiplying (i) one hundred fifty percent (150%), by (ii) the number of
Company Preferred Shares outstanding immediately prior to the Effective
Time (other than the Company Preferred Shares to be canceled pursuant to
Section 1.7). As used herein, the "Measurement Date Average" shall be the
average closing price per share of Parent Common Stock on NASDAQ for the
twenty (20) consecutive trading days ending on August 11, 1999.
(d) Each share of Parent Common Stock to be issued upon conversion of
Company Common Shares and Company Preferred Shares in accordance with this
Section 1.6 shall include the corresponding percentage of a Series A-1
Junior Participating Preferred Stock Purchase Right of Parent (a "Parent
Right") issued pursuant to the Rights Agreement dated as of March 1, 1996
between the Company and American Stock Transfer & Trust Company, as amended
(as so amended, the "Parent Rights Agreement"). Prior to the Distribution
Date (as defined in the Parent Rights Agreement), all references in this
Agreement to the Parent Common Stock issued in connection with the Merger
shall be deemed to include Parent Rights.
(e) As of the Effective Time, all Company Common Shares and all
Company Preferred Shares issued and outstanding immediately prior to the
Effective Time shall no longer be outstanding and all Company Common Shares
and all Company Preferred Shares shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate
representing any such Company Common Shares and all Company Preferred
Shares shall cease to have any rights with respect thereto, except the
right to receive the Merger Consideration and any cash in lieu of
fractional shares of Parent Common Stock to be issued or paid in
consideration therefor upon surrender of such certificate in accordance
with Section 1.12 hereof, without interest.
1.7 Cancellation of Treasury Shares. Each share of Company Common Shares
or Company Preferred Shares held in the treasury of the Company and each share
of Company Common Shares or Company Preferred Shares, if any, owned by Merger
Sub or Parent, immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof.
1.8 Stock Options and Warrants.
(a) As soon as practicable after the execution of this Agreement, the
Company shall, pursuant to the Company's Amended and Restated 1994 Stock Option
Plan (the "1994 Plan"), (i) notify each holder of an outstanding option issued
pursuant to the 1994 Plan of the proposed Merger, (ii) provide for the
accelerated vesting of each outstanding option so that each such option shall
become fully exercisable, (iii) notify each such holder that each option shall,
unless exercised by the holder in accordance with its terms, be canceled and
terminate on the date which is fifteen (15) days from the date of such notice,
and (iv) cause the 1994 Plan to be terminated. As soon as practicable after the
execution of this Agreement, the Company shall use commercially reasonable best
efforts to cause the exercise or termination of all other then outstanding
employee and consultant stock options and all non-employee director stock
options, including without limitation, the incentive stock options and
non-qualified stock options issued pursuant to the Company's 1995 Non-employee
Director's Stock Option Plan (the "1995 Plan") and all stock options granted
pursuant to resolutions of the Company's Board of Directors outside of any
option plan.
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Notwithstanding the foregoing, under no circumstances shall the Company be
required to offer any incentives or other consideration for the termination of
such options.
(b) Subject to Section 1.8(a) of this Agreement, at the Effective Time,
each of the Company's then outstanding employee and consultant stock options and
non-employee director stock options (collectively the "Company Options") which
are outstanding and have not been terminated, exercised or otherwise converted
as of the Effective Time shall cease to represent the right to acquire Company
Common Shares, and shall, by virtue of the Merger and without any further action
on the part of any holder thereof, be converted into and become the right to
acquire a number of shares of Parent Common Stock determined by multiplying the
number of shares of Company Common Stock covered by such Company Option
immediately prior to the Effective Time by the Exchange Ratio Fraction (rounded
down to the nearest whole number of shares), at an exercise price per share of
Parent Common Stock equal to the exercise price in effect under such Company
Option immediately prior to the Effective Time divided by the Exchange Ratio
Fraction (rounded up to the nearest cent), which option to purchase Parent
Common Stock shall contain the same term, vesting schedule and otherwise be on
substantially the same terms and conditions as set forth in the assumed Company
Option, except that any Company Option qualifying or intended to qualify as an
"incentive stock option" under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code") shall not qualify as an "incentive stock option" under
Section 422 of the Code (any such assumed Company Option being herein referred
to as an "Assumed Option").
(c) The Company shall take all actions necessary or reasonably requested by
Parent to ensure that following the Effective Time no holder of any Company
Options or rights pursuant to, nor any participant in, the 1994 Plan, the 1995
Plan or any other plan, program or arrangement providing for the issuance or
grant of any interest in respect of the capital stock of the Company and any of
its Subsidiaries will have any right thereunder to acquire equity securities, or
any right to payment in respect of the equity securities, of the Company, any of
its Subsidiaries or the Surviving Corporation, except as provided in subsection
(b) above.
(d) Parent shall take all corporate action necessary (i) to reserve for
issuance, and (ii) to register under the Securities Act of 1933 (the "Securities
Act") the issuance of, a sufficient number of shares of Parent Common Stock for
delivery upon exercise of the Assumed Options in accordance with this Section
1.8.
(e) As soon as practicable after the execution of this Agreement, the
Company shall use commercially reasonable best efforts to cause the exercise or
termination of all then issued and outstanding warrants to acquire shares of
Company Common Stock or securities convertible into Common Stock (collectively,
the "Company Warrants"). At the Effective Time, each Company Warrant that is
outstanding and has not been terminated, exercised or otherwise converted as of
the Effective Time shall be assumed by Parent; provided that such Company
Warrants shall by their express terms reflect, or shall be amended by the
Company and the holder thereof to reflect, the different security and the number
of shares of such security covered by such agreement based on the conversion of
Company Common Shares into Parent Common Stock. All of the holders of such
Company Warrants issued and outstanding as of the date of this Agreement are
listed on Section 2.3(b) of the Company Disclosure Schedule attached hereto. The
Company shall take all actions necessary or reasonably requested by Parent to
ensure that following the Effective Time no holder of any Company Warrant will
have any right thereunder to acquire equity securities of the Company or any of
its Subsidiaries, or any right to payment in respect of the equity securities of
the Company, any of its Subsidiaries or the Surviving Corporation, except as
provided in this subsection (e).
(f) As soon as practicable after the execution of this Agreement, the
Company shall use its commercially reasonable best efforts to cause the holders
of warrants or warrant certificates issued pursuant to that Unit Purchase
Agreement dated March 28, 1997 (the "1997 Unit Purchase Agreement") to (i)
surrender such warrants or warrant certificates (the "1997 Warrants") in
exchange for an aggregate of 158,512 Company Common Shares and (ii) agree to
terminate the 1997 Unit Purchase Agreement.
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(g) Parent shall take all corporate action necessary (i) to reserve for
issuance, and (ii) to register under the Securities Act, a sufficient number of
shares of Parent Common Stock for delivery upon exercise of the Company Warrants
in accordance with this Section 1.8.
1.9 Capital stock of Merger Sub. Each share of common stock, par value
$.01 per share, of Merger Sub (the "Merger Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and nonassessable share of Common
Stock, par value $.01 per share, of the Surviving Corporation. Each stock
certificate of Merger Sub evidencing ownership of any Merger Sub Common Stock
shall continue to evidence ownership of such shares of capital stock of the
Surviving Corporation.
1.10 Adjustments to Exchange Ratio Fraction. Without limiting any other
provision of this Agreement, the Exchange Ratio Fraction shall be
correspondingly adjusted to reflect fully the effect of any stock split, reverse
split, stock dividend (including any dividend or distribution of securities
convertible into Parent Common Stock or Company Common Shares), reorganization,
recapitalization, reclassification, conversion, consolidation, contribution or
exchange of shares or other like change with respect to Parent Common Stock or
Company Common Shares occurring after the date hereof and prior to the Effective
Time.
1.11 Fractional Shares. No fraction of a share of Parent Common Stock
will be issued hereunder, but in lieu thereof each holder of Company Common
Shares who would otherwise be entitled to a fraction of a share of Parent Common
Stock (after aggregating all fractional shares of Parent Common Stock to be
received by such holder) shall receive from Parent an amount of cash (rounded
down to the nearest whole cent) equal to the product of such fraction multiplied
by the Closing Average.
1.12 Surrender of Certificates.
(a) Exchange Agent. Prior to the Effective Time, Parent shall designate
one or more Persons, to act as Exchange Agent hereunder.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent for exchange in accordance
with this Article I, through such reasonable procedures as Parent may adopt, the
shares of Parent Common Stock issuable pursuant to Section 1.6 in exchange for
outstanding Company Common Shares and outstanding Company Preferred Shares,
together with an estimated amount of cash to be paid pursuant to Section 1.11 in
lieu of fractional shares.
(c) Exchange Procedures. Promptly after the Effective Time, the Surviving
Corporation shall cause the Exchange Agent to mail to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Time represented outstanding Company Common Shares and Company
Preferred Shares whose shares were converted into the right to receive shares of
Parent Common Stock pursuant to Section 1.6, a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Parent may
reasonably specify) and instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Parent Common
Stock and cash in lieu of the fraction of a share of Parent Common Stock, if
any, pursuant to Section 1.11 hereof. Upon surrender of a Certificate for
cancellation to the Exchange Agent, together with such letter of transmittal,
duly completed and validly executed in accordance with the instructions thereto,
the holder of such Certificate shall be entitled to receive in exchange
therefor, a certificate representing the number of whole shares of Parent Common
Stock and payment in lieu of fractional shares which such holder has the right
to receive pursuant to Section 1.11, and the Certificate so surrendered shall
forthwith be canceled. Until so surrendered, each outstanding Certificate that,
prior to the Effective Time, represented Company Common Shares or Company
Preferred Shares will be deemed from and after the Effective Time, for all
corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full shares of Parent Common Stock into which such
Company Common Shares and Company Preferred Shares shall have been so converted
and the right to receive an amount in cash in lieu of the issuance of any
fractional shares in accordance
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with Section 1.11. Any portion of the shares of Parent Common Stock deposited
with the Exchange Agent pursuant to this Section 1.12(c) which remains
undistributed to the holders of the Certificates representing Company Common
Shares or Company Preferred Shares for twelve (12) months after the Effective
Time shall be delivered to Parent, upon demand, and any holders of Company
Common Shares or Company Preferred Shares who have not theretofore complied with
this Article I shall thereafter look only to Parent for Parent Common Stock, any
cash in lieu of fractional shares of Parent Common Stock and any dividends or
distributions with respect to Parent Common Stock to which such holders may be
entitled.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby until the holder of record of such Certificate
shall surrender such Certificate. Subject to applicable escheat Law, following
surrender of any such Certificate, there shall be paid to the record holder of
the certificates representing whole shares of Parent Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the amount
of dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the Person requesting such
exchange will have paid to Parent, or any agent designated by it, any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Agreement, none of the Exchange Agent, Parent, Merger Sub or the Surviving
Corporation shall be liable to a holder of Company Common Shares or Company
Preferred Shares for any Parent Common Stock or any amount properly paid to a
public official pursuant to any applicable abandoned property, escheat or
similar Law.
(g) Withholding of Tax. Parent or the Exchange Agent will be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of Company Common Shares or any holder of Company
Preferred Shares, as the case may be, such amounts as Parent (or any Affiliate
thereof) or the Exchange Agent are required to deduct and withhold with respect
to the making of such payment under the Code, or any provision of federal,
state, local or foreign tax law. To the extent that amounts are so withheld by
Parent or the Exchange Agent, such withheld amounts will be treated for all
purposes of this Agreement as having been paid to the holder of the Company
Common Shares or Company Preferred Shares, as the case may be, in respect of
whom such deduction and withholding were made by Parent.
1.13 Further Ownership Rights in Company Common Shares and Company
Preferred Shares. All shares of Parent Common Stock issued upon the surrender
for exchange of Company Common Shares and Company Preferred Shares in accordance
with the terms of this Article I (including any cash paid in respect thereof)
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such Company Common Shares and Company Preferred Shares under this
Article I, and there shall be no further registration of transfers on the
records of the Surviving Corporation of Company Common Shares and Company
Preferred Shares which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article I.
1.14 Closing. Unless this Agreement shall have been terminated and the
transactions contemplated by this Agreement abandoned pursuant to the provisions
of Article VII, and subject to the provisions of Article VI, the closing of the
Merger (the "Closing") will take place at 10:00 a.m. (Eastern time) on a date
(the "Closing Date") to be mutually agreed upon by the parties, which date shall
be not later than
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the third Business Day after all the conditions set forth in Article VI shall
have been satisfied (or waived in accordance with Section 7.5, to the extent the
same may be waived), unless another time and/or date is agreed to in writing by
the parties. The Closing shall take place at the offices of Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C., One Financial Center, Boston, Massachusetts,
unless another place is agreed to in writing by the parties.
1.15 Lost, Stolen or Destroyed Certificates. In the event any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares of Parent
Common Stock and cash for fractional shares, if any, as may be required pursuant
to Section 1.11; provided, however, that Parent may, as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificates to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Parent or the Exchange
Agent with respect to the Certificates alleged to have been lost, stolen or
destroyed.
1.16 Tax Consequences. For federal income tax purposes, the parties
intend that the Merger be treated as a reorganization within the meaning of
Section 368(a)(1)(A) and 368(a)(2)(E) of the Code, and that this Agreement shall
be, and is hereby, adopted as a plan of reorganization for purposes of Section
368 of the Code. The parties shall not take a position on any Tax Return
inconsistent with this Section 1.16.
1.17 Dissenters' Rights. All of the Persons who have executed and
delivered a Stockholder Agreement shall have consented to the Merger and shall
have delivered their stock certificates in accordance with the terms hereof.
Holders of 100% of the Company Preferred Shares and holders of the requisite
number of the Company Common Shares shall have consented to the Merger and
delivered all of their capital stock to the Parent or the Exchange Agent in
accordance with the terms hereof, and the holders of not more than 2% of the
issued and outstanding Company Common Shares shall have exercised, or shall have
any continued right to exercise, appraisal or dissenter's rights.
Notwithstanding anything in this Agreement to the contrary, any Company Common
Shares or Company Preferred Shares outstanding immediately prior to the
Effective Time and held by a holder who has not voted in favor of the Merger or
delivered a valid, unrevoked proxy in favor of the Merger, or consented thereto
in writing and who has delivered written notice to the Company objecting to the
Merger and demanding payment for his shares as required in accordance, and has
otherwise complied, with the applicable provisions of the DGCL ("Dissenting
Shares"), shall not be converted into the right to receive the Parent Common
Stock, unless and until such holder fails to elect to dissent from the Merger or
effectively withdraws or otherwise loses his right to payment of the fair value
of his shares under the provisions of the DGCL. If, after the Effective Time,
any such holder fails to perfect or effectively withdraws or loses his right to
such payment, such Dissenting Shares shall thereupon be treated as if they had
been converted as of the Effective Time into the right to receive Parent Common
Stock to which such holder is entitled, without interest or dividends thereon.
Any amounts paid to holders of Dissenting Shares in an appraisal proceeding will
be paid by the Surviving Corporation out of its own funds and will not be paid
by Parent or Merger Sub. The Company shall not, except with the prior written
consent of Parent, make any payment with respect to any such demands or offer to
settle or settle any such demands.
1.18 Further Assurances. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation its right, title or interest in, to or under any of
the rights, privileges, immunities, powers, purposes, franchises, properties or
assets of the Company or Merger Sub, or (b) otherwise to carry out the purposes
of this Agreement, the Surviving Corporation and its proper officers and
directors or their designees shall be authorized to solicit in the name of the
Company or Merger Sub any third party consents or other documents required to be
delivered by any third party, to execute and deliver, in the name and on behalf
of the Company or Merger Sub, all such deeds, bills of sale, assignments and
assurances and do, in the name and on behalf of the Company or Merger Sub, all
such other acts and things necessary, desirable or proper to vest, perfect or
confirm its right, title or interest in, to or under any
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of the rights, privileges, immunities, powers, purposes, franchises, properties
or assets of the Company or Merger Sub and otherwise to carry out the purposes
of this Agreement.
1.19 Closing of Company Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of Company Common
Shares or Company Preferred Shares shall thereafter be made. If, after the
Effective Time, certificates representing shares of Company Common Shares or
Company Preferred Shares are presented to the Surviving Corporation, they shall
be canceled and presented to the Exchange Agent in accordance with Section 1.12.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub that
the statements contained in this Article II are correct and complete as of the
date of this Agreement and will be correct and complete on the Closing Date,
except as disclosed in the disclosure schedule dated the date hereof, certified
by the President and Chief Executive Officer of the Company and delivered by the
Company to Parent and Merger Sub simultaneously herewith (which disclosure
schedule shall contain specific references to the representations and warranties
to which the disclosures contained therein relate and an item on such disclosure
schedule shall be deemed to qualify only the particular subsection or
subsections specified for such item) (the "Company Disclosure Schedule") as
follows:
2.1 Organization and Qualification; Subsidiaries.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation. The Company
has all the requisite corporate power and authority and is in possession of all
franchises, grants, authorizations, licenses, permits, easements, consents,
certificates, approvals and Orders ("Company Approvals") necessary to own, lease
and operate its properties and to carry on its business as it is now being
conducted, except where the failure to have such power, authority and Company
Approvals would not, individually or in the aggregate, have a Material Adverse
Effect. The Company is duly qualified or licensed as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its activities
makes such qualification or licensing necessary, except in such instances where
the failure to be so duly qualified, or licensed and in good standing or to have
such power, authority and Company Approvals would not, individually or in the
aggregate, have a Material Adverse Effect.
(b) Each Subsidiary of the Company is a legal entity, duly organized,
validly existing and in good standing under the laws of its respective
jurisdiction of incorporation or organization and has all the requisite power
and authority, and is in possession of all franchises, grants, authorizations,
licenses, permits, easements, consents, certificates, approvals and Orders (with
respect to each such Subsidiary, "Subsidiary Approvals") necessary to own, lease
and operate its properties and to carry on its business as it is now being
conducted. Each Subsidiary is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary.
(c) Section 2.1(c) of the Company Disclosure Schedule sets forth, as of the
date hereof, a true and complete list of all of the Company's directly and
indirectly owned Subsidiaries, together with the jurisdiction of incorporation
or organization of each Subsidiary and the percentage of each Subsidiary's
outstanding capital stock or other equity or other interest owned by the Company
or another direct or indirect Subsidiary of the Company. Except as set forth in
Section 2.1(c) of the Company Disclosure Schedule, neither the Company nor any
of its Subsidiaries owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, directly or indirectly, any
equity or similar interest in, any Person.
2.2 Certificate of Incorporation and By-laws. The Company has heretofore
furnished to Parent a complete and correct copy of each of its and each of its
Subsidiaries' Certificates of Incorporation and by-
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laws or equivalent organizational documents, as amended or restated to the date
hereof. Such Certificates of Incorporation and by-laws, as amended, and
equivalent organizational documents of the Company and each of its Subsidiaries
are in full force and effect. Neither the Company nor any of its Subsidiaries is
in violation of any of the provisions of its Certificate of Incorporation or
by-laws or equivalent organizational documents.
2.3 Capitalization.
(a) The authorized capital stock of the Company is 25,500,000 shares
divided into 25,000,000 Company Common Shares and 300,000 shares of Series A
Preferred Stock and 200,000 shares of Series B Preferred Stock. As of the date
hereof, (i) 6,911,316 Company Common Shares were issued and outstanding and
366,667 Company Preferred Shares were issued and outstanding; (ii) no Company
Common Shares were held in the treasury of the Company; (iii) 1,073,965 Company
Common Shares were duly reserved for future issuance pursuant to stock options
granted and outstanding pursuant to the 1994 Plan, 1995 Plan and options issued
outside of any plan and (v) 2,939,443 Company Common Shares were duly reserved
for future issuance pursuant to issued and outstanding warrants to purchase
Company Common Shares. Except as set forth above, as of the date hereof, no
shares of voting or non-voting capital stock, other equity interests, or other
voting securities of the Company were issued, reserved for issuance or
outstanding. All options to purchase Company Common Shares were granted under
the Company's 1994 Plan or the Company's 1995 Plan, except for outstanding
options to purchase an aggregate of 400,035 Company Common Shares. Except as set
forth in Section 2.3(a) of the Company Disclosure Schedule, there are no
outstanding stock appreciation rights of the Company and no outstanding limited
stock appreciation rights or other rights to redeem for cash options or warrants
of Company. All outstanding shares of capital stock of the Company are, and all
shares which may be issued upon the exercise of stock options will be, when
issued, duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights. There are no bonds, debentures, notes or other
indebtedness of the Company with voting rights (or convertible into, or
exchangeable for, securities with voting rights) on any matters on which
stockholders of the Company may vote.
(b) Section 2.3(b) of the Company Disclosure Schedule sets forth the number
of authorized and outstanding shares of capital stock and the names of the
beneficial owners of such capital stock of each of the Company's Subsidiaries as
of August 11, 1999. Except as set forth in Section 2.3(b) of the Company
Disclosure Schedule, as of the date hereof, there are no outstanding securities,
options, warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind (contingent or otherwise) to which the Company or any
of its Subsidiaries is a party or by which any of them is bound obligating the
Company or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other voting
securities of the Company or of any of its Subsidiaries or obligating the
Company or any of its Subsidiaries to issue, grant, extend or enter into any
such security, option, warrant, call, right, commitment, agreement, arrangement
or undertaking. There are no outstanding contractual obligations of the Company
or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares
of capital stock (or options to acquire any such shares) of the Company or its
Subsidiaries, except for the Series A Preferred Stock and the Series B Preferred
Stock. There are no agreements, arrangements or commitments of any character
(contingent or otherwise) pursuant to which any person is or may be entitled or
to cause the Company or any of its Subsidiaries to file a registration statement
under the Securities Act or which otherwise relate to the registration of any
securities of the Company, except as disclosed in Section 2.3(b) of the Company
Disclosure Schedule.
(c) There are no voting trusts, proxies or other agreements, commitments or
understandings of any character to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound with
respect to the voting of any shares of capital stock of the Company or any of
its Subsidiaries, except for the Stockholder Agreements.
2.4 Authority Relative to this Agreement; Required Vote.
(a) Subject to the approval of this Agreement by the Company's
stockholders, the Company has all necessary corporate power and authority to
execute and deliver this Agreement, and each instrument
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required to be executed and delivered by it at the Closing, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery by the Company of
this Agreement, the performance of its obligations hereunder, and the
consummation by the Company of the transactions contemplated hereby, have been
duly and validly authorized by all corporate action and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate the transactions so contemplated (other than, with respect to
the Merger, the approval and authorization of this Agreement by votes of the
holders of at least majority of the outstanding Company Common Shares and the
Company Preferred Shares (voting together as one class), holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of the
Company's Series A Preferred Stock (voting as a single class) and holders of at
least sixty-six and two-thirds percent (66 2/3%) of the outstanding Series B
Preferred Stock (voting as a single class) in accordance with the applicable
provisions of the DGCL and the Company's Certificate of Incorporation and
by-laws. This Agreement has been duly and validly executed and delivered by the
Company and, assuming the due authorization, execution and delivery hereof and
thereof by Parent and Merger Sub, constitutes the legal, valid and binding
obligation of the Company, subject to the approval of the Company's stockholders
and assuming Board of Directors' approval by Parent and Merger Sub, in each case
except to the extent the enforcement thereof may be limited by (A) bankruptcy,
insolvency, reorganization, moratorium or other similar law now or hereafter in
effect relating to creditor's rights generally and (B) general principles of
equity (regardless of whether enforceability is considered in a proceeding in
equity or at law).
(b) The Board of Directors of the Company has directed that this Agreement
be submitted to the stockholders of the Company for their approval and
authorization. The affirmative votes of holders of at least a majority of all
outstanding Company Common Shares and Company Preferred Shares (voting together
as one class), holders of at least sixty-six and two-thirds percent (66 2/3%) of
all outstanding shares of Series A Preferred Stock (voting as a single class),
and holders of at least sixty-six and two-thirds percent (66 2/3%) of all
outstanding shares of Series B Preferred Stock (voting as a single class) are
the only votes of the holders of any class or series of capital stock of the
Company necessary to approve and authorize this Agreement, the Merger, the
Related Agreements and the other transactions contemplated hereby and thereby.
The holders of the Company Common Shares and Company Preferred Shares that are
parties to the Stockholder Agreements beneficially own and have the right to
vote, in the aggregate, approximately 34% of the total issued and outstanding
Company Common Shares and 82% of the total issued and outstanding Company
Preferred Shares.
2.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery by the Company of this Agreement or any
instrument required by this Agreement to be executed and delivered by the
Company or any of its Subsidiaries at the Closing do not, and the performance by
the Company or any of its Subsidiaries of their obligations under this Agreement
or any instrument required by this Agreement to be executed and delivered by the
Company or any of its Subsidiaries at the Closing, shall not, (i) conflict with
or violate the Certificate of Incorporation or by-laws or equivalent
organizational documents of the Company or any of its Subsidiaries, (ii)
conflict with or violate any Law, Regulation or Order in each case applicable to
the Company or any of its Subsidiaries or by which its or any of their
respective properties is bound or affected, or (iii) result in any breach or
violation of or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or impair the Company's or any of
its Subsidiaries' rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien or encumbrance on any of
the properties or assets of the Company or any of its Subsidiaries pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or its or any of their respective properties is bound or affected,
except (A) as set forth in Section 2.5(a) of the Company Disclosure Schedule or
(B) in the case of clause (ii) or (iii) above, for any such conflicts, breaches,
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violations, defaults or other occurrences that would not (x) individually, or in
the aggregate, have a Material Adverse Effect or (y) prevent or materially
impair or delay the consummation of the Merger.
(b) The execution and delivery by the Company of this Agreement or any
instrument required by this Agreement to be executed and delivered by the
Company or any of its Subsidiaries at Closing do not, and the performance by the
Company or any of its Subsidiaries of their obligations under this Agreement and
any instrument required by this Agreement to be executed and delivered by the
Company or any of its Subsidiaries at Closing, shall not, require the Company or
any of its Subsidiaries to obtain any consent or waiver of any Person or the
consent, approval, authorization or action by, license, waiver, qualification,
Order or Permit, observe any waiting period imposed by, or make any filing with
or notification to, any Court or Governmental Authority, domestic or foreign,
except for (A) valid approval of the Agreement by the Company's stockholders,
which approval has or will be obtained prior to the Effective Time, (B)
compliance with applicable requirements, if any, of the Securities Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), state
securities laws ("Blue Sky Laws"), (C) the filing of this Agreement or (D) other
documents as required by applicable provisions of the DGCL and such other third
party consents, approvals, authorization, licenses, waivers, qualifications,
Orders or Permits set forth in Section 2.5(a) of the Company Disclosure
Schedule.
2.6 Material Agreements. Section 2.6 of the Company Disclosure Schedule
sets forth a true and complete list of all contracts, licenses, agreements,
permits and instruments to which the Company or any of its Subsidiaries is a
party or by which any of them or any of their properties or assets may be bound
which is material to the Company and/or its Subsidiaries and including without
limitation all agreements pursuant to which the Company or any of its
Subsidiaries has granted exclusive rights or have terms of one year or longer
(collectively, the "Material Agreements"). Complete copies of all Material
Agreements have been provided by the Company to Parent and no oral Material
Agreements exist. Each such Material Agreement is in full force and effect, is a
valid and binding obligation of the Company or such Subsidiary and is
enforceable against the Company or such Subsidiary in accordance with its terms
and the Company does not have Knowledge that any Material Agreement is not a
valid and binding agreement of the other parties thereto. Except as set forth in
Section 2.6 of the Company Disclosure Schedule, each Material Agreement is
enforceable in each case except to the extent the enforcement thereof may be
limited by (A) bankruptcy, insolvency, reorganization, moratorium or other
similar law now or hereafter in effect relating to creditors' rights generally
and (B) general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law). Except as set forth on Section
2.6 of the Company Disclosure Schedule, no condition exists or, to the Company's
Knowledge, event has occurred which (whether with or without notice or lapse of
time or both, or the happening or occurrence of any other event) would result in
a loss of rights or an acceleration of an obligation or result in the creation
of any Lien thereunder or pursuant thereto, or would constitute a default by the
Company or any of its Subsidiaries or, to the Company's Knowledge, any other
party thereto under, or result in a right in termination of, any Material
Agreement. The Company and its Subsidiaries are in compliance in all material
respects with the terms of the Company Approvals, except as set forth in Section
2.6 of the Company Disclosure Schedule. The continuation, validity,
enforceability and effectiveness of each Material Agreement will not be affected
by the consummation of the transactions contemplated by this Agreement, except
as set forth on Section 2.5(a) of the Company Disclosure Schedule. Furthermore,
no party to a Material Agreement has repudiated any provision thereof and
communicated such repudiation to the Company, and there are no negotiations
pending or in progress to revise any material terms of any Material Agreement.
2.7 Compliance with Agreements and Law. Neither the Company nor any of
its Subsidiaries is in conflict with, or in default or violation of, any Law,
Regulation or Order applicable to the Company or such Subsidiary or by which its
or any of their respective properties is bound or affected. The Company has all
requisite licenses, permits, certificates, authorizations and approvals
including environmental, health and safety and employee health and safety
permits, from foreign, federal, state and local authorities necessary to conduct
the business as currently conducted (collectively, the "Permits"), all of which
Permits are set forth in Section 2.7 of the Company Disclosure Schedule. All of
the Permits identified in
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Section 2.7 of the Company Disclosure Schedule are in full force and effect, and
to the Company's Knowledge, no party thereto is in default under any of such
Permits and no event has occurred and no condition exists which, with the giving
of notice, the passage of time, or both, would constitute a default thereunder.
No action or claim is pending or, to the Company's Knowledge, threatened to
revoke or terminate any Permit identified in Section 2.7 of the Company
Disclosure Schedule. Except as set forth in Section 2.7 of the Company
Disclosure Schedule, the Company is not nor has it been in violation of any Law,
rule, Regulation, ordinance or court or administrative order (including, without
limitation, those relating to building, zoning, environmental, disposal or
hazardous substances, land use, health and safety and employee health and safety
matters). Except as set forth on Section 2.7 of the Company Disclosure Schedule,
neither the Company nor its Subsidiaries has received any notice or
communication from any foreign, federal, state or local governmental or
regulatory authority or otherwise of any such violation and, to the Company's
Knowledge, no such notice or communication is threatened. The Company's and, to
the Company's Knowledge, its vendors' production and documentation procedures
are in all material respects consistent and in compliance with Good
Manufacturing Practices as prescribed by the United States Food and Drug
Administration as applicable to a supplier to the pharmaceutical industry.
2.8 SEC Filings; Financial Statements.
(a) The Company has previously furnished or made available to Parent true,
complete and accurate copies, as amended or supplemented, of its (a) Annual
Reports on Form 10-KSB for the calendar years ended December 31, 1996, 1997 and
1998 and Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999,
as filed with the Securities and Exchange Commission (the "SEC"), (b) proxy
statements relating to all meetings of its stockholders (whether annual or
special) since January 1, 1998 and (c) all other reports or registration
statements, other than Registration Statements on Form S-8, filed by the Company
with the SEC since January 1, 1998. Except as set forth in Section 2.8 of the
Company Disclosure Schedule, the Company has timely filed all reports and
schedules required to be filed with the SEC (collectively, the "Company SEC
Reports") required to be filed by it pursuant to the Exchange Act and the SEC
Regulations promulgated thereunder. Except as set forth in Section 2.8 of the
Company Disclosure Schedule, the Company SEC Reports were prepared in
accordance, and complied as of their respective dates in all material respects,
with the requirements of the Exchange Act and the SEC Regulations promulgated
thereunder and did not as of their respective dates (or if amended by a filing
prior to the date hereof, then as of the date of such amendment) 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 therein, in the
light of the circumstances under which they were made, not misleading, except to
the extent superseded by a Company SEC Report filed subsequently and prior to
the date hereof.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Company SEC Reports (i) complied in
all material respects with applicable accounting requirements and the published
SEC Regulations with respect thereto, (ii) were prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved (except as may be expressly described in the
notes thereto) and (iii) fairly present the consolidated financial position of
the Company and its Subsidiaries as of the respective dates thereof and the
consolidated results of its operations and cash flows for the periods indicated,
except that the unaudited interim financial statements included in the Company's
Form 10-QSB reports were or are subject to normal year-end adjustments that are
neither individually or in the aggregate material.
2.9 Absence of Certain Changes or Events.
(a) Since December 31, 1998, the Company and its Subsidiaries have
conducted their businesses only in the ordinary and usual course and in a manner
consistent with past practice and, since such date, there has not been any
change, event, development or circumstance affecting the Company or any of its
Subsidiaries which, individually or in the aggregate, has or is reasonably
likely to have, a Material Adverse Effect.
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(b) Since December 31, 1998, there has not been any change by the Company
in its accounting methods, principles or practices, any revaluation by the
Company of any of its assets, including, writing down the value of inventory or
writing off notes or accounts receivable other than in the ordinary course of
business, and there has not been any other action or event, and neither the
Company nor any of its Subsidiaries has agreed in writing or otherwise to take
any other action, that would have required the consent of Parent pursuant to
Section 4.1 had such action or event occurred after the date hereof and prior to
the Effective Time, or any condition, event or occurrence which could reasonably
be expected to prevent, hinder or materially delay the ability of the Company to
consummate the transactions contemplated by this Agreement.
2.10 No Undisclosed Liabilities. Neither the Company nor any of its
Subsidiaries has any liabilities or obligations of any nature (whether absolute,
accrued, fixed, contingent or otherwise), except (a) liabilities or obligations
reflected in the Company SEC Reports through the date of the filing of the
Company's Quarterly Report on Form 10-QSB in respect of the fiscal quarter
ending March 31, 1999, (b) liabilities or obligations incurred in the ordinary
course of business consistent with past practice since March 31, 1999 which are
not, and will not have, individually or in the aggregate, a Material Adverse
Effect on the Company and (c) liabilities or obligations which are not and will
not have, individually or in the aggregate, a Material Adverse Effect on the
Company.
2.11 Absence of Litigation.
Except as described in Section 2.11 of the Company Disclosure Schedule,
there is no Litigation pending or, to the Company's Knowledge, threatened
against the Company or any Subsidiary of the Company, that would be or have a
Material Adverse Effect on the Company. Neither the Company nor any of its
Subsidiaries is subject to any outstanding Claim or Order which, individually or
in the aggregate, has, or in the future might have, a Material Adverse Effect or
would prevent, hinder or delay the Company from consummating the transactions
contemplated by this Agreement.
2.12 Employee Benefit Plans.
(a) Section 2.12(a) of the Company Disclosure Schedule contains a true and
complete list of each deferred compensation, incentive compensation, stock
purchase, restricted stock option and other equity compensation plan, "welfare"
plan, fund or program (within the meaning of Section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")); each "pension"
plan, fund or program (within the meaning of Section 3(2) of ERISA); and each
other material employee benefit plan, fund, program, agreement or arrangement,
including but not limited to vacation plans, cafeteria plans, educational
assistance or reimbursement plans, spending account plans (for medical expenses,
dependent care expenses, or other expenses), severance, golden parachute,
termination, supplemental unemployment, plant closing or similar benefits,
active health or life or other post-employment welfare or insurance plans, bonus
or performance based compensation plans or arrangements, supplemental executive
retirement plans or other supplemental or excess benefit plans in each case,
that is sponsored, maintained or contributed to or required to be contributed to
by the Company or any entity, or any of its Subsidiaries, any trade or business
(whether or not incorporated) which is a member of a controlled group or which
is under common control with the Company within the meaning of Section 414 of
the Code or which could be deemed a "single employer" within the meaning of
Section 4001(b) of ERISA (an "ERISA Affiliate"), or to which the Company or an
ERISA Affiliate is a party, whether written or oral, for the benefit of any
officer, director, employee or former employee of the Company or any of its
ERISA Affiliates, whether or not such plan has been terminated (the "Company
Plans"). Except as set forth in Section 2.12(a) of the Company Disclosure
Schedule, there are no restrictions on the ability of the Company, its
Subsidiaries or any of its ERISA Affiliates to amend, modify or terminate any
Company Plan and each Company Plan is fully and readily assignable and
transferable by its sponsor to either the Parent or the Merger Sub.
(b) With respect to each Company Plan, the Company has heretofore made
available to Parent true and complete copies of the Company Plan and any
amendments thereto (or if the Company Plan is not a written Company Plan, a
description thereof), any related trust or other funding vehicle, the summary
plan description and any summaries of material modifications, the three (3) most
recent annual reports (with
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all schedules) or summaries required under ERISA or the Code, the most recent
audited financial statements and most recent determination letter received from
the Internal Revenue Service with respect to each Company Plan intended to
qualify under Section 401 of the Code.
(c) No material liability under Title IV or Section 302 of ERISA has been
incurred by the Company or any ERISA Affiliate that has not been satisfied in
full, and no condition exists that presents a material risk to the Company or
any ERISA Affiliate of incurring any such liability.
(d) No Company Plan is subject to Title IV of ERISA or Section 412 of the
Code, nor is any Company Plan a "multiemployer pension plan", as defined in
Section 3(37) of ERISA, or subject to Section 302 of ERISA. No Company Plan is a
"single-employer plan under multiple controlled groups" as described in Section
4063 of ERISA.
(e) Each Company Plan has been operated and administered in all respects in
accordance with its terms and applicable law, including ERISA and the Code.
There has been no "prohibited transaction," as such term is defined in Section
406 of ERISA or Section 4975 of the Code, with respect to any Company Plan;
there are no claims pending (other than routine claims for benefits) or, to the
Company's Knowledge, threatened against any Company Plan or against the assets
of any Company Plan, nor are there any current or, to the Company's Knowledge,
threatened Liens on the assets of any Company Plan or on the assets of the
Company under any provision of ERISA. The Company and its ERISA Affiliates have
performed all obligations required to be performed by them under, are not in
default under or violation of, and have no Knowledge of any default or violation
by any other party with respect to, any of the Company Plans. All contributions
required to be made to any Company Plan under applicable law or the terms of the
respective Company Plan have been made on or before their due dates and a
reasonable amount has been accrued for contributions to each Company Plan for
the current plan years; except as disclosed on Section 2.12(e) of the Company
Disclosure Schedule, the transaction contemplated herein will not directly or
indirectly result in an increase of benefits, acceleration of vesting or
acceleration of timing for payment of any benefit to any participant or
beneficiary under any Company Plan.
(f) Each Company Plan intended to be "qualified" within the meaning of
Section 401(a) of the Code and the trusts maintained thereunder that are
intended to be exempt from taxation under Section 501(a) of the Code have
received a favorable determination or opinion letter indicating that they are so
qualified, and no event has occurred since the date of said letter(s) that will
adversely affect the qualification of such Company Plan.
(g) Except as set forth in Section 2.12(g) of the Company Disclosure
Schedule, no Company Plan or written or oral agreement provides medical,
surgical, hospitalization, death or similar benefits (whether or not insured)
for directors, employees or former employees of the Company or any of its
Subsidiaries or ERISA Affiliates for periods extending beyond their retirement
or other termination of service, other than (i) coverage mandated by applicable
Law, (ii) death benefits under any "pension plan" or (iii) benefits the full
cost of which is borne by the current or former employee (or his beneficiary).
(h) No amounts payable under any Company Plan will fail to be deductible
for federal income Tax purposes by virtue of Section 280G of the Code.
(i) Except as set forth in Section 2.12(i) of the Company Disclosure
Schedule, the execution, delivery and performance of, and consummation of the
transactions contemplated by, this Agreement, or the Stockholder Agreements will
not (i) entitle any current or former employee or officer of the Company or any
ERISA Affiliate to severance pay, unemployment compensation or any other
payment, except as expressly provided in this Agreement, (ii) accelerate the
time of payment or vesting, or increase the amount of compensation due any such
employee or officer, or (iii) assuming the Parent takes the action specified in
Section 5.5(a), accelerate the vesting of any stock option or of any shares of
restricted stock.
(j) Except as would not be material in any respect to the Company, there
are no pending or, to the Company's Knowledge, threatened or anticipated claims
by or on behalf of any Company Plan, by any employee or beneficiary covered
under any such Company Plan or otherwise involving any such Company Plan (other
than routine claims for benefits).
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(k) Section 2.12(k) of the Company Disclosure Schedule sets forth a true
and complete list of each current or former employee, officer, director or
investor of the Company or any of its Subsidiaries who holds, as of the date
hereof, any option, warrant or other right to purchase Company Common Shares or
Company Preferred Shares, if any, together with the number of Company Common
Shares or Company Preferred Shares, if any, subject to such option, warrant or
right, the date of grant or issuance of such option, warrant or right, the
extent to which such option, warrant or right is vested and/or exercisable, the
exercise price of such option, warrant or right, whether such option is intended
to qualify as an incentive stock option within the meaning of Section 422(b) of
the Code, and the expiration date of each such option, warrant and right.
Section 2.12(k) of the Company Disclosure Schedule also sets forth the total
number of such options, warrants and rights. True and complete copies of each
agreement (including all amendments and modifications thereto) between the
Company and each holder of such options, warrants and rights relating to the
same have been furnished to Parent and are listed in Section 2.12(k) of the
Company Disclosure Schedule.
2.13 Employment and Labor Matters.
(a) Section 2.13(a) of the Company Disclosure Schedule identifies all
employees and consultants employed or engaged by the Company and sets forth each
such individual's rate of pay or annual compensation (and the portions thereof
attributable to salary and bonuses, respectively), job title and date of hire.
Except as set forth in Section 2.13(a) of the Company Disclosure Schedule, there
are no employment, consulting, severance pay, continuation pay, termination or
indemnification agreement or other similar agreements of any nature (whether in
writing or not) between the Company or any Subsidiary and any current or former
stockholder, officer, director, employee, or any consultant. Except as set forth
in Section 2.13(a), Section 2.12(i) or Section 2.12(g) of the Company Disclosure
Schedule, no individual will accrue or receive additional benefits, service or
accelerated rights to payments under any Company Plan or any of the agreements
set forth in Section 2.13(a) of the Company Disclosure Schedule, including the
right to receive any parachute payment, as defined in Section 280G of the Code,
or become entitled to severance, termination allowance or similar payments as a
result of the transaction contemplated herein that could result in the payment
of any such benefits or payments. Neither the Company nor any Subsidiary is
delinquent in payments to any of its employees or consultants for any wages,
salaries, commissions, bonuses or other compensation for any services. None of
the Company's or any Subsidiary's employment policies or practices is currently
being audited or investigated by any Governmental Authority. There are no
pending, or to the Company's Knowledge, threatened claims, charges, actions,
lawsuits or proceedings alleging claims against the Company or any Subsidiary
brought by or on behalf of any employee or other individual or any Governmental
Authority with respect to employment practices, and to the Company's Knowledge,
no facts or circumstances exist that could give rise to any such claims,
charges, actions, lawsuits or proceedings.
(b) Except as set forth in Section 2.13(b) of the Company Disclosure
Schedule, there are no controversies pending or, to the Company's Knowledge,
threatened between the Company or any of its Subsidiaries and any of their
respective employees and employee relations are, in general, considered to be
good; neither the Company nor any of its Subsidiaries is a party to any
collective bargaining agreement or other labor union contract applicable to
persons employed by the Company or its Subsidiaries nor are there any activities
or proceedings of any labor union or by any employees to organize any such
employees of the Company or any of its Subsidiaries; during the past five years
there have been no strikes, slowdowns, work stoppages, lockouts, or threats
thereof, by or with respect to any employees of the Company or any of its
Subsidiaries. The Company does not have nor at the Closing will the Company have
any obligation under the Worker Adjustment and Retraining Notification Act (the
"WARN Act"). The Company and each of its Subsidiaries is in material compliance
with all applicable provisions of applicable state, local, federal and foreign
employment, wage and hour, labor and other applicable laws.
2.14 Registration Statement; Proxy Statement/Prospectus. The information
supplied by the Company or required to be supplied by the Company (except to the
extent revised or superseded by amendments or supplements) for inclusion in the
registration statement on Form S-4, or any amendment or supplement thereto,
pursuant to which the shares of Parent Common Stock to be issued in the Merger
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will be registered with the SEC (including any amendments or supplements, the
"Registration Statement") shall not, at the time such documents are filed and at
the time the Registration Statement (including any amendments or supplements
thereto) is declared effective by the SEC, 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 light of the
circumstances under which they were made, not misleading. The information
supplied by the Company for inclusion in the proxy statement/prospectus to be
sent to the stockholders of the Company in connection with the meeting of the
stockholders of the Company to consider the Merger (the "Company Stockholders'
Meeting") (such proxy statement/prospectus, as amended or supplemented, the
"Proxy Statement") will not, on the date the Proxy Statement (or any amendment
thereof or supplement thereto) is first mailed to the stockholders of the
Company, at the time of the Company Stockholders' Meeting and at the Effective
Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements made therein not false or misleading in light of the
circumstances under which they were made, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Company Stockholders' Meeting which has
become materially false or misleading. If at any time prior to the Effective
Time any event relating to the Company or any of its respective Affiliates,
officers or directors is discovered by the Company which should be set forth in
an amendment to the Registration Statement or an amendment or supplement to the
Proxy Statement, the Company shall promptly inform Parent and Merger Sub.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to any information supplied by Parent or Merger Sub which is
contained in any of the foregoing documents. The Proxy Statement shall comply as
to form in all material respects with the requirements of the Exchange Act and
the Regulations promulgated thereunder.
2.15 Absence of Restrictions on Business Activities. Except as set forth
in Section 2.15 of the Company Disclosure Schedule or as set forth in this
Agreement, there is no Material Agreement or Order binding upon the Company or
any of its Subsidiaries or any of their properties which has had or could
reasonably be expected to have the effect of prohibiting or materially impairing
any business practice of the Company or any of its Subsidiaries or the conduct
of business by the Company or any of its Subsidiaries as currently conducted or
as proposed to be conducted by the Company or any of its Subsidiaries. Neither
the Company nor any of its Subsidiaries is subject to any non-competition or
similar restriction on their respective businesses. Neither the Company nor any
of its Subsidiaries has at any time entered into, or agreed to enter into, any
interest rate swaps, caps, floors or option agreements or any other interest
rate risk management arrangement or foreign exchange contracts.
2.16 Title to Assets; Leases. Except as described in Section 2.16 of the
Company Disclosure Schedule, the Company owns no real property. Section 2.16 of
the Company Disclosure Statement sets forth a true and complete list of all real
property leased by the Company or any of its Subsidiaries, and the aggregate
monthly rental or other fee payable under such lease. Except as described in
Section 2.16 of the Company Disclosure Schedule, the Company and each of its
Subsidiaries has good and marketable title to all of their properties and
assets, free and clear of all Liens, charges and encumbrances, except Liens for
Taxes (as defined below) not yet due and payable and such Liens or other
imperfections of title, if any, as do not materially detract from the value of
or interfere with the present use of the property affected thereby. All leases
pursuant to which the Company or any of its Subsidiaries lease real or personal
property from others are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing material default
or event of material default (or event which with notice or lapse of time, or
both, would constitute a material default and in respect of which the Company or
such Subsidiary has not taken adequate steps to prevent such a default from
occurring or to cure such default) by the Company or its Subsidiaries or, to the
Company's Knowledge, any third party.
The Company or its Subsidiaries, individually or together, have good and
marketable title to or a valid leasehold interest in all of the properties and
assets that are necessary to the conduct of the business of the Company and its
Subsidiaries as it is currently being conducted, including all of the properties
and assets
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reflected in the Company's consolidated balance sheet as of December 31, 1998,
which was filed with the SEC as part of its report on Form 10-KSB, other than
any such properties or assets that have been sold or otherwise disposed of in
the ordinary course of business since December 31, 1998.
2.17 Taxes. For purposes of this Agreement, "Tax" or "Taxes" shall mean
taxes and governmental impositions of any kind in the nature of (or similar to)
taxes, payable to any federal, state, local or foreign taxing authority,
including but not limited to those on or measured by or referred to as income,
franchise, profits, gross receipts, capital ad valorem, custom duties,
alternative or add-on minimum taxes, estimated, environmental, disability,
registration, value added, sales, use, service, real or personal property,
capital stock, license, payroll, withholding, employment, social security,
workers' compensation, unemployment compensation, utility, severance,
production, excise, stamp, occupation, premiums, windfall profits, transfer and
gains taxes, and interest, penalties and additions to tax imposed with respect
thereto; and "Tax Returns" shall mean returns, reports and information
statements, including any schedule or attachment thereto, with respect to Taxes
required to be filed with the Internal Revenue Service or any other governmental
or taxing authority or agency, domestic or foreign, including consolidated,
combined and unitary tax returns. Except as set forth in Section 2.17 of the
Company Disclosure Schedule:
(a) All federal, state, local and foreign Tax Returns required to be
filed (taking into account extensions) by or on behalf of the Company, each
of its Subsidiaries, and each affiliated, combined, consolidated or unitary
group of which the Company or any of its Subsidiaries is or has been a
member have been timely filed, and all such Tax Returns are true, complete
and correct, except to the extent that any failure to file or any
inaccuracies in filed Tax Returns would not, individually or in the
aggregate, have a Material Adverse Effect.
(b) All Taxes payable by or with respect to the Company and each of
its Subsidiaries have been timely paid, or are adequately reserved for
(other than a reserve for deferred Taxes established to reflect timing
differences between book and Tax treatment) in accordance with GAAP on the
respective company's Balance Sheet, except to the extent that such amount
would not, individually or in the aggregate, have a Material Adverse
Effect. No deficiencies for any Taxes have been proposed, asserted or
assessed either orally or in writing against the Company or any of its
Subsidiaries that are not adequately reserved for in accordance with GAAP
on the respective company's Balance Sheet. All assessments for Taxes due
and owing by or with respect to the Company and each of its Subsidiaries
with respect to completed and settled examinations or concluded litigation
have been paid. Neither the Company nor any of its Subsidiaries has
incurred a Tax liability from the date of the latest Balance Sheet other
than a Tax liability in the ordinary course of business.
(c) Neither the Company nor any of its Subsidiaries has requested, or
been granted any waiver of any federal, state, local or foreign statute of
limitations with respect to, or any extension of a period for the
assessment of, any Tax. No extension or waiver of time within which to file
any Tax Return of, or applicable to, the Company or any of its Subsidiaries
has been granted or requested, except as set forth in Section 2.17 of the
Company Disclosure Schedule which has not since expired.
(d) Other than with respect to its Subsidiaries the Company is not and
has never been (nor does the Company have any liability for unpaid Taxes
because it once was) a member of an affiliated, consolidated, combined or
unitary group, and neither the Company nor any of its Subsidiaries is a
party to any Tax allocation or sharing agreement or is liable for the Taxes
of any other party, as transferee or successor, by contract, or otherwise.
(e) Prior to the date hereof, the Company has provided Parent with
written schedules setting forth the taxable years of the Company for which
the statutes of limitations with respect to foreign, federal and material
state income Taxes have not expired and with respect to foreign, federal
and material state income Taxes, those years for which examinations have
been completed and those years for which examinations are presently being
conducted.
(f) The Company is not presently and has not been a "foreign
investment company" as such term is defined in Section 1246(b) of the Code.
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(g) The Company is not presently and has not been a "passive foreign
investment company" as such term is defined in Section 1297(a) of the Code.
(h) The Company is not presently and has not been at any time during
the last five years a "controlled foreign corporation" as such term is
defined in Section 957(a) of the Code.
(i) The Company and its Subsidiaries have not made any payments, are
not obligated to make any payments, and are not a party to any agreements
that under any circumstances could obligate any of them to make any
payments that will not be deductible under Section 280G of the Code.
(j) No unsatisfied deficiency, delinquency or default for any Tax has
been claimed, proposed or assessed against or with respect to the Company
or any Subsidiary, nor has the Company or any Subsidiary received notice of
any such deficiency, delinquency or default which, in any such case, may
have a Material Adverse Effect.
(k) The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(l) The Company and each of its Subsidiaries have complied with all
applicable Laws relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Sections
1441, 1442 and 3406 of the Code or similar provisions under any foreign
Laws) and have, within the time and in the manner required by Law, withheld
from employee wages and paid over to the proper Governmental Authorities
all amounts required to be so withheld and paid over under all applicable
Laws.
(m) Section 2.17(m) of the Company Disclosure Schedule sets forth: (i)
the net operating loss ("NOL") and (ii) capital loss carry forwards for
foreign, federal income Tax purposes of each of the Company and its
Subsidiaries through the taxable year ended December 31, 1998.
(n) Except as described in Section 2.17(n) of the Company Disclosure
Schedule, the NOLs of the Company or any Subsidiary are not, as of the date
hereof, subject to Section 382 or 269 of the Code, Treasury Regulation
Section 1.1502-21T(c), or any similar provisions or regulations otherwise
limiting the use of the NOLs of the Company or any of its Subsidiaries.
(o) No property of the Company or any of its Subsidiaries is
"tax-exempt use property" as such term is defined in Section 168 of the
Code.
(p) Neither the Company nor any of its Subsidiaries has made an
election under Section 341(f) of the Code.
2.18 Environmental Matters. Except as described in Section 2.18 of the
Company Disclosure Schedule:
(a) the Company and its Subsidiaries are and have been in compliance
in all material respects with all applicable Environmental Laws;
(b) the Company and its Subsidiaries have obtained all Permits
relating to the business required by any applicable Environmental Law and
all environmental permits relating to the business of the Company and all
such permits are in full force and effect in all material respects; the
environmental permits do not materially limit or affect the processes,
methods, capacity or operating hours of the persons carrying on the
business of the Company as it is currently carried on;
(c) neither the Company nor any of its Subsidiaries has, and the
Company has no Knowledge of any other Person who has, caused any unlawful
or improper release, threatened release or disposal of any Hazardous
Material at any properties or facilities previously or currently owned,
leased or occupied by the Company or its Subsidiaries;
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(d) the Company has no Knowledge that any of its or its Subsidiaries'
properties or facilities are adversely affected by any release, threatened
release or disposal of a Hazardous Material originating or emanating from
any other property;
(e) neither the Company nor any of its Subsidiaries (i) has any
liability for response or corrective action, natural resources damage, or
any other harm pursuant to any Environmental Law, (ii) is subject to, has
notice or Knowledge of, or is required to give any notice of any
Environmental Claim involving an allegation against the Company or any
Subsidiary or any properties or facilities of the Company or (iii) has
Knowledge of any condition or occurrence which could reasonably be expected
to form the basis of an Environmental Claim against the Company, any of its
Subsidiaries or any of their properties or facilities;
(f) the Company and its Subsidiaries' properties and facilities are
not subject to any, and the Company has no Knowledge of any, imminent
restriction on the ownership, occupancy, use or transferability of their
properties and facilities arising from any (i) Environmental Law or (ii)
release, threatened release or disposal of any Hazardous Material; and
(g) there is no Environmental Claim pending, or, to the Company's
Knowledge, threatened, against the Company or, to the Company's Knowledge,
against any Person whose liability for any Environmental Claim the Company
has or may have retained or assumed either contractually or by operation of
law. No material capital expenditure is currently required for the Company
in relation to environmental matters in order to comply with, extend, renew
or obtain any environmental permit or comply with Environmental Laws.
Copies of all environmental audits and other assessments, reviews and
reports have been previously provided to the Parent.
2.19 Intellectual Property.
(a) Section 2.19(a) of the Company Disclosure Schedule sets forth a true,
correct and complete list of all United States and foreign (i) patents and
patent applications, (ii) registered and unregistered trademarks and trademark
applications (including material Internet domain name registrations), (iii)
service marks and service mark applications, (iv) trade names, (v) copyright
registrations, and copyright applications, and (vi) licenses presently used by
the Company and/or its Subsidiaries, indicating for each, the applicable
jurisdiction, registration number (or applicable number), and date issued or
filed, as applicable with respect to (i), (ii), (iii), and (v) above and
including the terms of such licenses (all of which, together with patent rights,
trade secrets, confidential business information, formulas, processes, invention
records, procedures, research and development activity reports, laboratory
notebooks, copyrights, license rights and trademark rights which relate to or
are used or held for use in connection with the business of the Company, are
collectively referred to as, the "Intellectual Property Rights"). Copies of such
licenses have been previously provided to Parent. To the Company's Knowledge,
the Intellectual Property Rights are sufficient for the conduct of the Company's
business as presently conducted and as proposed to be conducted.
(b) Section 2.19(b) of the Company Disclosure Schedule sets forth a true,
correct and complete list, and where appropriate, a description of all
Intellectual Property Rights set forth in Section 2.19(a) of the Company
Disclosure Schedule to which neither the Company's nor its Subsidiary's rights
are exclusive, excluding all Intellectual Property Rights which the Company has
the right to use under a shrinkwrap or similar mass marketing license. Except as
otherwise disclosed in Section 2.19(b) of the Company Disclosure Schedule and
excluding all Intellectual Property Rights subject to a shrinkwrap or similar
mass marketing license, the Company exclusively owns or has the exclusive right
to use all of the Intellectual Property Rights listed in Section 2.19(a) of the
Company Disclosure Schedule. The Company does not believe it is or will be
necessary to utilize any inventions of any of its employees or consultants (or
individuals it currently intends to hire) made prior to their employment by the
Company.
(c) All trademarks, patents and copyrights are currently in compliance with
all legal requirements (including the timely post-registration filing of
affidavits of use and incontestability and renewal applications with respect to
trademarks, and the payment of filing, examination and maintenance fees and
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proof of working or use with respect to patents), are, to the Company's
Knowledge, valid and enforceable. Section 2.19(c) of the Company Disclosure
Schedule sets forth the maintenance fees due on or before December 31, 1999. No
trademark has been or is now involved in any cancellation and, to the Company's
Knowledge and its Subsidiaries, no such action is threatened with respect to any
of the trademarks. Except as disclosed set forth on Section 2.19(c) of the
Company Disclosure Schedule, no patent has been or is now involved in any
interference, reissue, re-examination or opposing proceeding. To the Company's
Knowledge, there are no potentially conflicting trademarks or potentially
interfering patents of any third party. The Company has made available to Parent
all opinions, reviews, assessments or analyses (whether written or oral) of the
Company's ability to use patents whether owned or licensed.
(d) Except as would not be materially adverse to the Company and each of
its Subsidiaries:
(i) The Company or a Subsidiary of the Company owns free and clear of
all Liens, all owned Intellectual Property Rights used in the Company's
business, and has a valid and enforceable right to use in accordance with
the applicable license agreement, if any, all of the Intellectual Property
Rights licensed to the Company and used in the Company's business;
(ii) The Company and each of its Subsidiaries have taken reasonable
steps to protect and preserve the Intellectual Property Rights which the
Company or such Subsidiary owns;
(iii) The conduct of the Company's and its Subsidiaries' businesses as
currently conducted or contemplated does not, to the Company's Knowledge,
infringe upon any intellectual property rights owned or controlled by any
third party;
(iv) There is no Litigation pending or, to the Company's Knowledge,
threatened nor has Company received any written communication of, and the
Company has no Knowledge of any basis for a claim against it (a) alleging
that the Company's activities, products, publications or the conduct of its
businesses or that of any of its Subsidiaries infringes upon, violates, or
constitutes the unauthorized use of the intellectual property rights of any
third party or (b) challenging the ownership, use, validity or
enforceability of any Intellectual Property Rights of the Company or any of
its Subsidiaries;
(v) To the Company's Knowledge, no third party is misappropriating,
infringing, diluting, or violating any Intellectual Property Rights owned
by the Company or any of its Subsidiaries and no such claims have been
brought against any third party by the Company or any of its Subsidiaries,
and the Company has not knowingly misappropriated the trade secrets of any
third party;
(vi) Except as set forth in Section 2.5(a) of the Company Disclosure
Schedule, the execution, delivery and performance by the Company of this
Agreement, and the consummation of the transactions contemplated hereby
will not result in the loss or impairment of or give rise to any right of
any third party to terminate any of the Company's or any of its
Subsidiaries' right to own any of the Intellectual Property Rights owned by
the Company or any of its Subsidiaries or to use any Intellectual Property
Rights licensed to the Company or any of its Subsidiaries pursuant to the
license Agreements, nor require the consent of any Governmental Authority
or third party in respect of any such Intellectual Property Rights;
(e) All trademarks and trademark applications of the Company and its
Subsidiaries have been in continuous use by the Company or its Subsidiaries. To
the Company's Knowledge (i) there has been no prior use of such trademarks by
any third party which would confer upon said third party superior rights in such
trademarks, and (ii) the registered trademarks have been continuously used in
the form appearing in, and in connection with the goods and services listed in,
their respective registration certificates.
(f) The Company and/or its Subsidiaries have taken all reasonable steps in
accordance with normal industry practice to protect the Company's and its
Subsidiaries' rights in confidential information and trade secrets of the
Company and/or its Subsidiaries. Without limiting the foregoing and except as
would not be materially adverse to the Company, the Company and its Subsidiaries
have and enforce a policy of requiring each employee, consultant and contractor
to execute proprietary information, confidentiality and
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assignment agreements substantially consistent with the Company's standard forms
thereof. Except under confidentiality obligations, to the Knowledge of the
Company, there has been no material disclosure by the Company or any Subsidiary
of the Company of material confidential information or trade secrets.
(g) The Company has undertaken the review and assessment of the business
and operations of itself and its Subsidiaries that could be adversely affected
by its or their failure to be Year 2000 Compliant. The Company has requested
certification from the outside vendors listed in the Company Disclosure Schedule
that the computer system, hardware, software, database, device and/or equipment
purchased from each such vendor and used internally by the Company, or used by
such vendor in the performance of work for the Company, is or prior to and after
January 1, 2000 will be Year 2000 Compliant, and has provided copies of all such
certification received to date to Parent. Based on its review and assessment,
the Company has no reason to believe any material liability or expense will
result from or arise out of failure of any of its or its Subsidiaries, computer
systems, hardware, software, databases, devices and/or equipment to be Year 2000
Compliant.
2.20 Insurance. Section 2.20 of the Company Disclosure Schedule sets
forth a true and complete list of all material insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company and its Subsidiaries. There is
no claim by the Company or any of its Subsidiaries pending under any of such
policies or bonds as to which coverage has been questioned, denied or disputed
by the underwriters of such policies or bonds. All premiums payable under all
such policies and bonds have been paid and the Company and its Subsidiaries are
otherwise in full compliance with the terms of such policies and bonds (or other
policies and bonds providing substantially similar insurance coverage), and the
Company shall, and shall cause its Subsidiaries to, maintain in full force and
effect all such insurance during the period from the date hereof through the
Closing Date. Such policies of insurance and bonds are of the type and in
amounts customarily carried by Persons conducting businesses similar to those of
the Company and its Subsidiaries and reasonable in light of the assets of the
Company and its Subsidiaries. As of the date hereof, the Company has not
received notice of any, and to Company's Knowledge there is no threatened,
termination of or material premium increase with respect to any of such policies
or bonds.
2.21 Brokers. No broker, financial advisor, finder or investment banker
or other Person (other than Petkevich & Partners, L.L.C.) is entitled to any
broker's, financial advisor's, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company. The Company has heretofore furnished to
Parent a complete and correct copy of all agreements set forth in Section 2.21
of the Company Disclosure Schedule between the Company and financial advisor
pursuant to which such firm would be entitled to any payment relating to the
transactions contemplated hereunder.
2.22 Certain Business Practices. As of the date hereof, neither the
Company nor any of its Subsidiaries nor any director, officer, employee or agent
of the Company or any of its Subsidiaries has (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful payments relating to
political activity, (ii) made any unlawful payment to any foreign or domestic
government official or employee or to any foreign or domestic political party or
campaign or violated any provision of the Foreign Corrupt Practices Act of 1977,
as amended, (iii) consummated any transaction, made any payment, entered into
any agreement or arrangement or taken any other action in violation of Section
1128B(b) of the Social Security Act, as amended, or (iv) made any other unlawful
payment.
2.23 Interested Party Transactions. Except as disclosed in the Company
SEC Reports or except as set forth in Section 2.23 of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is indebted to any
director, officer, employee or agent of the Company or any of its Subsidiaries
(except for amounts due as normal salaries and bonuses and in reimbursement of
ordinary expenses), and no such Person is indebted to the Company or any of its
Subsidiaries, and there have been no other transactions of the type required to
be disclosed pursuant to Items 402 and 404 of Regulation S-K under the
Securities Act and the Exchange Act.
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2.24 Opinion of Financial Advisor. The Company has received the written
opinion of its financial advisor, Petkevich & Partners, L.L.C., to the effect
that, in its opinion, as of the date hereof, the aggregate consideration to be
received in the Merger is fair to the holders of the capital stock of the
Company from a financial point of view, and the Company has provided copies of
such opinion to Parent.
2.25 No Subsidiaries. The Company has no Subsidiaries.
2.26 Disclosure. The representations and warranties and statements of the
Company contained in this Agreement (including the Company Disclosure Schedule)
do not contain, and will not contain at the Closing Date, any untrue statement
of a material fact, and do not omit, and will not omit at the Closing Date, to
state any material fact necessary to make such representations, warranties and
statements, in light of the circumstances under which they are made, not
misleading. There is no fact known to the Company that has not been disclosed to
the Parent in this Agreement (including in the Company SEC Filings or the
Company Disclosure Schedule) that is reasonably likely to have a Material
Adverse Effect on the Company.
2.27 HSR Filing. No filing under the HSR Act is required in connection
with the Merger, because the Company does not have annual net sales or total
assets greater than or equal to $10,000,000.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby, jointly and severally, represent and warrant
to the Company that:
3.1 Organization and Qualification. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of its respective jurisdiction of incorporation or organization and Parent has
all the requisite corporate power and authority, and is in possession of all
franchises, grants, authorizations, licenses, permits, easements, consents,
certificates, approvals and Orders ("Parent Approvals") necessary to own, lease
and operate its properties and to carry on its business as it is now being
conducted, except where the failure to be so qualified, existing and in good
standing or to have such power, authority and Parent Approvals would not,
individually or in the aggregate, have a Material Adverse Effect. Each of Parent
and Merger Sub is duly qualified or licensed as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its activities
makes such qualification or licensing necessary, except for such failures to be
so duly qualified or licensed and in good standing that would not, either
individually or in the aggregate, have a Material Adverse Effect. Merger Sub is
a newly-formed single purpose entity which has been formed solely for the
purposes of the Merger, has carried on no business to date and will not carry on
any business or engage in any activities other than those necessary to the
Merger.
3.2 Capitalization.
(a) As of the date hereof, the authorized capital stock of Parent consists
of (i) 50,000,000 shares of Parent Common Stock of which 16,881,800 shares of
Parent Common Stock were issued and outstanding as of July 28, 1999, and
2,178,517 shares of Parent Common Stock as of August 1, 1999, were reserved for
future issuance pursuant to outstanding employee stock options or other
outstanding stock options and (ii) 5,000,000 shares of preferred stock, par
value $.01 per share, of which 500,000 shares have been designated as Series A-1
Junior Participating Preferred Stock and reserved for issuance under the
Parent's Rights Agreement, of which none are issued or outstanding. Parent has
no warrants outstanding as of the date of this Agreement. All of the outstanding
shares of Parent Common Stock are, and all shares to be issued as part of the
Common Merger Consideration and the Preferred Merger Consideration will be, when
issued in accordance with the terms hereof, duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights.
(b) As of the date hereof, the authorized capital stock of Merger Sub
consists of 3,000 shares of Merger Sub Common Stock, of which 100 shares of
Merger Sub Common Stock are outstanding. All of the outstanding shares of Merger
Sub Common Stock are owned by Parent.
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3.3 Authorization of Agreement. Each of Parent and Merger Sub has all
requisite corporate power and authority to execute and deliver this Agreement
and each instrument required hereby to be executed and delivered by it at the
Closing, to perform its obligations hereunder and thereunder and to consummate
the transactions contemplated hereby and thereby. The execution and delivery by
each of Parent and Merger Sub of this Agreement and each instrument required
hereby to be executed and delivered by it at the Closing, the performance of
obligations hereunder and thereunder and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by the
Board of Directors of each of Parent and Merger Sub and by Parent as the sole
stockholder of Merger Sub and except for filing of the Certificate of Merger, no
other corporate proceedings on the part of Parent or Merger Sub are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby.
This Agreement has been duly executed and delivered by each of Parent and Merger
Sub and, assuming due authorization, execution and delivery hereof by the
Company, constitutes a legal, valid and binding obligation of each of Parent and
Merger Sub, enforceable against each of Parent and Merger Sub in accordance with
its terms, in each case except to the extent that the enforcement hereof may be
limited by (A) bankruptcy, insolvency, reorganization, moratorium or other
similar law now or hereafter in effect relating to creditors' rights generally
and (B) general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law). No other corporate proceedings
are required by Parent other than the approval of the Board of Directors of
Parent and Merger Sub.
3.4 Approvals. The execution and delivery by Parent and Merger Sub of
this Agreement or any instrument required by this Agreement to be executed and
delivered by Parent or Merger Sub at the Closing do not, and the performance by
each of Parent and Merger Sub of its respective obligations under this Agreement
or any instrument required by this Agreement to be executed and delivered by
Parent or Merger Sub at the Closing shall not, require Parent or Merger Sub to
obtain any consent, approval, authorization, license, waiver, qualification,
Order or permit of, observe any waiting period imposed by, or require Parent or
Merger Sub to make any filing with or notification to, any Court or Governmental
Authority, except for (A) compliance with applicable requirements, if any, of
the Securities Act, the Exchange Act or Blue Sky Laws, (B) the filing of
appropriate Merger or other documents as required by Delaware Law, (C) the
filing of appropriate Merger or other documents as required by the NASDAQ or (D)
where the failure to obtain such consents, approvals, authorizations, licenses,
waivers, qualifications, Orders or permits, or to make such filings or
notifications, would not have, in the aggregate, a Material Adverse Effect.
3.5 No Violation. Assuming effectuation of all filings, notifications,
and registrations with, termination or expiration of any applicable waiting
periods imposed by and receipt of all permits or Orders of Courts and/or
Governmental Authorities set forth in Section 3.4(A), (B) or (C) above, the
execution and delivery by Parent and Merger Sub of this Agreement or any
instrument required by this Agreement to be executed and delivered by Parent or
Merger Sub at the Closing do not, and the performance of this Agreement by each
of Parent or Merger Sub of its respective obligations under this Agreement or
any instrument required by this Agreement to be executed and delivered by Parent
or Merger Sub at the Closing will not, (i) conflict with or violate the
Certificate of Incorporation or By-laws of Parent or the Certificate of
Incorporation or By-laws of Merger Sub, (ii) conflict with or violate any Law,
Order or Regulation in each case applicable to Parent or Merger Sub or by which
either of its respective properties is bound or affected, or (iii) result in any
breach or violation of or constitute a default (or an event that with notice or
lapse of time or both would become a default) under any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Parent or Merger Sub is a party or by
which Parent or Merger Sub or any of their respective properties is bound or
affected, except in the case of clause (ii) or (iii) above, for any such
conflicts, breaches, violations, defaults or other occurrences that would not
(a) individually, or in the aggregate, have a Material Adverse Effect or (b)
prevent or materially impair or delay the consummation of the Merger.
3.6 Reports.
(a) As of the date of this Agreement, Parent has timely filed all reports
and schedules required to be filed with the SEC (collectively, the "Parent SEC
Reports") pursuant to the Exchange Act and the SEC
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Regulations promulgated thereunder. The Parent SEC Reports were prepared in
accordance, and complied as of their respective dates in all material respects,
with the requirements of the Exchange Act and the SEC Regulations promulgated
thereunder and did not as of their respective dates (or if amended by a filing
prior to the date hereof, then as of the date of such amendment) 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 therein, in the
light of the circumstances under which they were made, not misleading, except to
the extent superseded by a Parent SEC Report filed subsequently and prior to the
date hereof.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in Parent SEC Reports (i) complied in all
material respects with applicable accounting requirements and the published SEC
Regulations with respect thereto, (ii) were prepared in accordance with GAAP
(except in the case of interim balance sheets, as permitted by Regulation S-X
promulgated by the SEC) applied on a consistent basis throughout the periods
involved (except as may be expressly described in the notes thereto) and (iii)
fairly presents the consolidated financial position of the Parent as at the
respective dates thereof and the consolidated results of its operations and cash
flows for the periods indicated, except that the unaudited interim financial
statements included in the Company's Form 10-Q reports were or are subject to
normal year-end adjustments that have not been and are not expected to be
material in amount to Parent.
3.7 Absence of Certain Changes or Events. Since December 31, 1998, Parent
has conducted its business only in the ordinary and usual course and in a manner
consistent with past practice and, since such date, there has not occurred any
event, development or change which, individually or in the aggregate, has
resulted in or is reasonably likely to result in a Material Adverse Effect.
3.8 Registration Statement; Proxy Statement/Prospectus. The information
supplied by Parent for inclusion in the Registration Statement shall not, at the
time it is filed with the SEC and at the time the Registration Statement
(including any amendments or supplements thereto) is declared effective by the
SEC, 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 light of the circumstances under which they were made,
not misleading. The information supplied by Parent for inclusion in the Proxy
Statement shall not, on the date the Proxy Statement is first mailed to the
stockholders of the Company, at the time of the Company Stockholders' Meeting
and at the Effective Time, contain any statement which, at such time, is false
or misleading with respect to any material fact, or omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which they are made, not false or misleading or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Stockholders' Meeting which has become materially false or misleading. If at any
time prior to the Effective Time any event relating to Parent or Merger Sub or
any of their respective affiliates, officers or directors is discovered by
Parent which should be set forth in an amendment to the Registration Statement
or an amendment or supplement to the Proxy Statement, Parent shall promptly
inform the Company. The Registration Statement will comply as to form in all
material respects with the requirements provisions of the Securities Act and the
SEC Regulations promulgated thereunder. Notwithstanding the foregoing, Parent
makes no representation, warranty or covenant with respect to any information
supplied by the Company which is contained in any of the foregoing documents.
3.9 Absence of Litigation. Except as set forth in the Parent SEC Reports,
there is no Litigation pending, or to the Parent's Knowledge, threatened against
the Parent or Merger Sub, that would be or have a Material Adverse Effect on the
Parent. Neither the Parent nor the Merger Sub is subject to any outstanding
Claim or Order other than as set forth in the Parent SEC Reports, which,
individually or in the aggregate, has, or in the future might have, a Material
Adverse Effect on the business or results of operations of the Parent.
3.10 Compliance with Laws.
(a) Each of Parent and Merger Sub has all Permits necessary to conduct the
business of the Parent and Merger Sub as currently conducted, respectively; such
Permits are in full force and effect; and all
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applications for renewal necessary to maintain any Permit in effect have been
filed, except, in each case, where the failure to own, maintain or renew such
Permits would not, individually or in the aggregate, have a Material Adverse
Effect on Parent or Merger Sub. No proceeding is pending, or to the best
Knowledge of the Parent, threatened to revoke or limit any Permit.
(b) Neither Parent nor Merger Sub is in violation of any applicable law,
ordinance or regulation or any order, judgment, injunction, decree or other
requirement of any court, arbitrator or governmental or regulatory body, except
for violations that would not, in the aggregate, have a Material Adverse Effect
on Parent or Merger Sub.
(c) To the best Knowledge of Parent, there is no investigation or review
pending by any governmental body or authority with respect to Parent.
3.11 Taxes. Each of the Parent and Merger Sub has filed all Tax Returns
required to be filed by it and has paid all Taxes and other charges shown as due
on such Tax Returns. All positions taken in such Tax Returns that could give
rise to a substantial understatement penalty within the meaning of Section 6662
of the Code have been disclosed therein. Neither the Parent nor Merger Sub is
delinquent in any material Tax assessment or other governmental charge
(including without limitation applicable withholding taxes). Any provision for
Taxes reflected in the Parent financial statements is adequate for payment of
any and all Tax liabilities for periods ending on or before December 31, 1998
and there are no Tax Liens on any assets of the Parent or Merger Sub for periods
ending on or before March 31, 1999.
3.12 Year 2000 Compliance. Parent has undertaken the review and
assessment of its business and operations that could be adversely affected by
its failure to be Year 2000 Compliant. Based on its review and assessment,
Parent has no reason to believe any material liability or expense will result
from or arise out of failure of any of its computer systems, hardware, software,
databases, devices and/or equipment to be Year 2000 Compliant.
3.13 Parent Intellectual Property Rights. To the Parent's Knowledge, no
third party is misappropriating, infringing, diluting, or violating any of the
Parent Intellectual Property Rights and no such claims have been brought against
any third party by the Parent, and the Parent has not knowingly misappropriated
the trade secrets of any third party. For purposes of this Section 3.13, "Parent
Intellectual Property Rights" shall mean all of the Parent's United States and
foreign (i) patents and patent applications, (ii) registered and unregistered
trademarks and trademark applications (including material Internet domain name
registrations), (iii) service marks and service mark applications, (iv) trade
names, (v) copyright registrations, and copyright applications, and (vi)
licenses presently used by Parent and/or its Subsidiaries, excluding all Parent
Intellectual Property Rights subject to a shrinkwrap or similar mass marketing
license.
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
4.1 Conduct of Business by the Company Pending the Merger. The Company
covenants and agrees that, between the date hereof and the Effective Time,
except as expressly required or permitted by this Agreement or unless Parent
shall otherwise agree in writing, the Company shall conduct and shall cause the
businesses of each of its Subsidiaries to be conducted only in, and the Company
and its Subsidiaries shall not take any action except in, the ordinary course of
business and in a manner consistent with past practice. The Company shall use
its best efforts to preserve intact the business organization and assets of the
Company and each of its Subsidiaries, and to operate, and cause each of its
Subsidiaries to operate, according to plans and budgets provided to Parent, to
keep available the services of the present officers, employees and consultants
of the Company and each of its Subsidiaries, to maintain in effect Material
Agreements and to preserve the present relationships of the Company and each of
its Subsidiaries with advertisers, sponsors, customers, licensees, suppliers and
other Persons with which the Company or any of its Subsidiaries has business
relations. By way of amplification and not limitation, except as expressly
permitted by this Agreement, neither the Company nor any of its Subsidiaries
shall, between the date
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hereof and the Effective Time, directly or indirectly do, or propose to do, any
of the following without the prior written consent of Parent:
(a) amend or otherwise change the Certificate of Incorporation or
By-laws or equivalent organizational document of the Company or any of its
Subsidiaries or alter through merger, liquidation, reorganization,
restructuring or in any other fashion the corporate structure or ownership
of the Company or any of its Subsidiaries;
(b) issue, sell, transfer, pledge, dispose of or encumber, or
authorize the issuance, sale, transfer, pledge, disposition or encumbrance
of, any shares of capital stock of any class, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
capital stock, or any other ownership interest of the Company, any of its
Subsidiaries or Affiliates (except for the issuance of Company Common
Shares issuable pursuant to employee stock options granted prior to the
date hereof under the 1994 Plan, 1995 Plan, or outside of any plan, which
options are outstanding on the date hereof or pursuant to Company Warrants
outstanding on the date hereof); or sell, transfer, pledge, dispose of or
encumber, or authorize the sale, transfer, pledge, disposition or
encumbrance of any assets of the Company or any of its Subsidiaries (except
for sales of assets in the ordinary course of business and in a manner
consistent with past practice) or redeem, purchase or otherwise acquire,
directly or indirectly, any of the capital stock of the Company or interest
in or securities of any Subsidiary;
(c) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of any of its capital stock (except that a wholly owned Subsidiary of the
Company may declare and pay a dividend to its parent); split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or amend the terms of,
repurchase, redeem or otherwise acquire, or permit any Subsidiary to
repurchase, redeem or otherwise acquire, any of its securities or any
securities of its Subsidiaries, or propose to do any of the foregoing;
(d) sell, transfer, lease, license, sublicense, mortgage, pledge,
dispose of, encumber, grant or otherwise dispose of any Intellectual
Property Rights, or amend or modify in any material way any existing
agreements with respect to any Intellectual Property Rights, except as set
forth in Section 4.1(l) of the Company Disclosure Schedule.
(e) acquire (by merger, consolidation, acquisition of stock or assets
or otherwise) any corporation, limited liability company, partnership,
joint venture or other business organization or division thereof; incur any
indebtedness for borrowed money or issue any debt securities (other than a
debt financing of up to $1,000,000 (the "Bridge Loan"), which Bridge Loan
shall not include in its terms any form of equity to be issued to the
lender(s) of the Bridge Loan) or assume, guarantee (other than guarantees
of bank debt of the Company's Subsidiaries entered into in the ordinary
course of business) or endorse or otherwise as an accommodation become
responsible for, the obligations of any Person, or make any loans, advances
or enter into any financial commitments, except in the ordinary course of
business consistent with past practice and as otherwise permitted under any
loan or credit agreement to which the Company is a party; authorize any
capital expenditures which are, in the aggregate, in excess of $100,000 for
the Company and its Subsidiaries taken as a whole; or enter into or amend
in any material respect any contract, agreement, commitment or arrangement
with respect to any of the matters set forth in this Section 4.1(e);
(f) hire or terminate any employee or consultant, except in the
ordinary course of business consistent with past practice; increase the
compensation (including, without limitation, bonus) payable or to become
payable to its officers or employees, except for increases in salary or
wages of employees of the Company or its Subsidiaries who are not officers
of the Company in the ordinary course of business consistent with past
practices, or grant any severance or termination pay or stock options to,
or enter into any employment or severance agreement with any director,
officer or other employee of the Company or any of its Subsidiaries, or
establish, adopt, enter into or amend any collective bargaining, bonus,
profit sharing, thrift, compensation, stock option, restricted stock,
pension,
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retirement, deferred compensation, employment, termination, severance or
other plan, agreement, trust, fund, policy or arrangement for the benefit
of any current or former directors, officers or employees;
(g) change, any accounting policies or procedures (including
procedures with respect to reserves, revenue recognition, payments of
accounts payable and collection of accounts receivable) unless required by
statutory accounting principles or GAAP;
(h) create, incur, suffer to exist or assume any Lien on any of their
material assets other than Liens outstanding on the date hereof;
(i) except as set forth in Section 4.1(l) of the Company Disclosure
Schedule, other than in the ordinary course of business consistent with
past practice, (A) enter into any material agreement, (B) modify, amend or
transfer in any material respect or terminate any material agreement to
which the Company or any of its Subsidiaries is a party or waive, release
or assign any material rights or claims thereto or thereunder or (C) enter
into or extend any lease with respect to real property with any third
party;
(j) make any Tax election or settle or compromise any federal, state,
local or foreign income tax liability or agree to an extension of a statute
of limitations;
(k) settle any material Litigation or waive, assign or release any
material rights or claims except, in the case of Litigation, any Litigation
which settlement would not (A) impose either material restrictions on the
conduct of the business of the Company or any of its Subsidiaries or (B)
for any individual Litigation item settled, exceed $50,000 in cost or value
to the Company or any of its Subsidiaries. The Company and its Subsidiaries
shall not pay, discharge or satisfy any liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise),
except in the ordinary course of business consistent with past practice in
an amount or value not exceeding $100,000 in any instance or series of
related instances or $100,000 in the aggregate or in accordance with their
terms as in effect as of the date hereof;
(l) engage in any transaction, or enter into any agreement,
arrangement, or understanding with, directly or indirectly, any related
party, other than those contemplated pursuant to the terms of this
Agreement and those existing as of the date hereof which are listed in
Section 4.1(l) of the Company Disclosure Schedule;
(m) fail to renew or maintain in full force and effect all insurance
policies, as the case may be, currently in effect or fail to pay any
insurance premiums thereon; and
(n) authorize, recommend, propose or announce an intention to do any
of the foregoing, or agree or enter into any agreement, contract commitment
or arrangement to do any of the foregoing.
4.2 Solicitation of Other Proposals.
(a) From the date hereof until the earlier of the Effective Time or
the termination of this Agreement in accordance with its terms, the Company
shall not, nor shall it permit any of its Subsidiaries or any of its or
their respective officers, directors, employees, representatives or agents
(collectively, the "Company Representatives") to, and the Company shall use
its best efforts to cause its stockholder Affiliates not to, directly or
indirectly, (i) solicit, facilitate, initiate or encourage, or take any
action to solicit, facilitate, initiate or encourage, any inquiries or the
making of any proposal or offer that constitutes an Acquisition Proposal or
(ii) participate or engage in discussions or negotiations with, or provide
any information to, any Person concerning an Acquisition Proposal or which
might reasonably be expected to result in an Acquisition Proposal.
For purposes of this Agreement, the term "Acquisition Proposal" shall mean
any inquiry, proposal or offer from any person (other than Parent, Merger Sub or
any of their Affiliates) relating to:
(1) any merger, consolidation, recapitalization, liquidation or other
direct or indirect business combination, involving the Company or any
Subsidiary or the issuance or acquisition of shares of
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capital stock or other equity securities of the Company or any Subsidiary
representing 10% or more of the outstanding capital stock of the Company or
such Subsidiary or any tender or exchange offer that if consummated would
result in any Person, together with all Affiliates thereof, beneficially
owning shares of capital stock or other equity securities of the Company or
any Subsidiary representing 10% or more of the outstanding capital stock of
the Company or such Subsidiary, or
(2) the sale, lease, exchange, license (whether exclusive or not), or
any other disposition of any significant portion of a material Intellectual
Property Right (other than as permitted pursuant to Section 4.1(d) hereof),
or any significant portion of the business or other assets of the Company
or any Subsidiary, or any other transaction, the consummation of which
could reasonably be expected to impede, interfere with, prevent or
materially delay the consummation of the transactions contemplated hereby
or which would reasonably be expected to diminish significantly the
benefits to Parent or its Affiliates of the transactions contemplated
hereby.
The Company shall immediately cease and cause to be terminated and shall cause
all Company Representatives (and shall use its best efforts to cause its
non-officer and non-director Affiliates) to terminate all existing discussions
or negotiations with any Persons conducted heretofore with respect to, or that
could reasonably be expected to lead to, an Acquisition Proposal. The Company
shall promptly notify all Company Representatives and non-officer and
non-director Affiliates of its obligations under this Section 4.2.
(b) Neither the Board of Directors of the Company nor any committee thereof
shall:
(1) approve or recommend, or propose to approve or recommend, any
Acquisition Proposal other than the Merger,
(2) withdraw or modify or propose to withdraw or modify in a manner
adverse to Parent or Merger Sub its approval or recommendation of the
Merger, this Agreement or the transactions contemplated hereby,
(3) upon a request by Parent to reaffirm its approval or
recommendation of this Agreement or the Merger, fail to do so within two
(2) Business Days after such request is made,
(4) enter, or cause the Company or any Subsidiary to enter, into any
letter of intent, agreement in principle, acquisition agreement or other
similar agreement related to any Acquisition Proposal, or
(5) resolve or announce its intention to do any of the foregoing.
The immediately preceding sentence notwithstanding, in the event that prior to
the Company Stockholders' Meeting the Board of Directors of the Company receives
a Superior Proposal, the Board of Directors of the Company may:
(i) approve or recommend, or propose to approve or recommend, such
Superior Proposal,
(ii) withdraw or modify, or propose to withdraw or modify, in a manner
adverse to Parent or Merger Sub its recommendation of the Merger, this
Agreement or the transactions contemplated hereby,
(iii) fail to reaffirm its recommendation of this Agreement or the
Merger after a request by Parent to do so, or
(iv) resolve or announce its intention to do any of the actions set
forth in the preceding clauses (i) through (iii),
if (1) such Board of Directors determines in good faith, after consultation with
its outside counsel that taking such action is required to satisfy the fiduciary
duties of such directors and (2) the Company furnishes Parent two Business Days'
prior written notice of the taking of such action (which notice shall include a
description of the material terms and conditions of the Superior Proposal).
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For purposes of the Agreement, the term "Superior Proposal" means any bona fide
Acquisition Proposal to (A) effect a merger, consolidation or sale of all or
substantially all of the assets or capital stock of the Company or (B) license
or otherwise dispose of any material Intellectual Property Right (other than as
permitted pursuant to Section 4.1(d)) which is on terms which the Board of
Directors of the Company determines by a majority vote of its directors in their
good faith judgment (based on the written opinion, with only customary
qualifications, of a financial advisor reasonably acceptable to the Parent that
the consideration provided in such Acquisition Proposal likely exceeds the value
of the consideration provided for in the Merger), after taking into account all
relevant factors, including any conditions to such Acquisition Proposal, the
timing of the closing thereof, the risk of nonconsummation, the ability of the
person making the Acquisition Proposal to finance the transaction contemplated
thereby and any required governmental or other consents, filings and approvals,
to be more favorable to the stockholders of the Company than the Merger (or any
revised proposal made by Parent).
(c) In addition to the other obligations of the Company set forth in this
Section 4.2, the Company shall immediately advise Parent orally and in writing
of any request for information with respect to any Acquisition Proposal, or any
inquiry with respect to or which could result in an Acquisition Proposal, the
material terms and conditions of such request, Acquisition Proposal or inquiry.
The Company shall inform Parent on a prompt and current basis of the status and
content of any discussions regarding any Acquisition Proposal with a third party
and as promptly as practicable of any change in the price, structure or form of
the consideration or material terms of and conditions regarding any Acquisition
Proposal or of any other developments or circumstances which could reasonably be
expected to culminate in the taking of any of the actions referred to in Section
4.2(b). Nothing contained in this Section 4.2(c) shall prevent the Board of
Directors of the Company from complying with Rule 14d-9 and Rule 14e-2
promulgated under the Exchange Act.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement.
(a) As promptly as practicable following the date of this Agreement, Parent
shall prepare and file with the SEC the Registration Statement on Form S-4, in
which the Proxy Statement shall be included as a prospectus, and shall use
reasonable efforts to have the Registration Statement declared effective by the
SEC as promptly as practicable. Parent shall obtain and furnish the information
required to be included in the Registration Statement and, after consultation
with the Company respond promptly to any comments made by the SEC with respect
to the Registration Statement (which comments shall promptly be furnished to the
Company) and cause the prospectus included therein, including any amendment or
supplement thereto, to be mailed to the stockholders of the Company at the
earliest practicable date after the Registration Statement is declared effective
by the SEC, provided that no amendment or supplement to the Registration
Statement will be made by Parent without consultation with the Company and its
counsel. Parent shall also take any action required to be taken under Blue Sky
or other securities Laws in connection with the issuance of Parent Common Stock
in the Merger.
(b) The Company shall (i) as promptly as practicable following the date
hereof prepare a preliminary proxy or information statement relating to the
Merger and this Agreement, (ii) obtain and furnish the information required to
be included by the SEC in the Proxy Statement, (iii) cause the Proxy Statement
and the prospectus to be included in the Registration Statement, including any
amendment or supplement thereto, to be mailed to its stockholders at the
earliest practicable date after the Registration Statement is declared effective
by the SEC, and (iv) use all reasonable efforts to obtain the necessary approval
of the Merger and this Agreement by its stockholders. The Company shall not file
with or supplementally provide to the SEC or mail to its stockholders the Proxy
Statement or any amendment or supplement thereto without Parent's prior consent.
The Company shall allow Parent's full participation in the preparation of the
Proxy Statement and any amendment or supplement thereto and shall consult with
Parent and its advisors concerning any comments from the SEC with respect
thereto.
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(c) The Proxy Statement shall include the recommendation of the Board of
Directors of the Company in favor of approval and adoption of this Agreement and
the Merger, except to the extent that the Company shall have withdrawn or
modified its recommendation of this Agreement or the Merger as permitted by
Section 4.2(b).
(d) Parent and the Company shall, as promptly as practicable, make all
necessary filings with respect to the Merger under the Securities Act and the
Exchange Act and the rules and Regulations thereunder and under applicable Blue
Sky or similar securities laws, rules and Regulations, and shall use all
reasonable efforts to obtain required approvals and clearances with respect
thereto.
5.2 Meeting of Company Stockholders. The Company shall promptly after the
date hereof take all action necessary in accordance with the provisions of the
DGCL and the Company's Certificate of Incorporation and By-laws to duly call,
give notice of and (unless Parent requests otherwise) hold the Company
Stockholders' Meeting as soon as practicable following the date upon which the
Registration Statement becomes effective and shall consult with Parent in
connection therewith. Once the Company Stockholders Meeting has been called and
noticed, the Company shall not postpone or adjourn (other than for the absence
of a quorum and then only to a future date specified by Parent) the Company
Stockholders' Meeting without the consent of Parent. The Board of Directors of
the Company shall declare that this Agreement is advisable and, subject to
Section 4.2(b), recommend that this Agreement and the transactions contemplated
hereby be approved and authorized by the stockholders of the Company and include
in the Registration Statement and Proxy Statement a copy of such
recommendations; provided, however, that the Board of Directors of the Company
shall submit this Agreement to the stockholders of the Company whether or not
the Board of Directors of the Company at any time subsequent to making such
recommendation takes any action permitted by Section 4.2(b). The Company shall
solicit from stockholders of the Company proxies in favor of the Merger and
shall take all other action necessary or advisable to secure the vote or consent
of stockholders required by the DGCL to authorize the Merger; provided, however,
that this provision shall not prohibit the Board of Directors from taking any
action permitted by Section 4.2(b).
5.3 Access to Information; Confidentiality.
(a) Upon reasonable notice, the Company shall (and shall cause each of its
Subsidiaries to) afford to the officers, employees, accountants, counsel and
other representatives of Parent, reasonable access, during the period prior to
the Effective Time, to all its properties, books, contracts, commitments and
records and, during such period, the Company shall (and shall cause each of its
Subsidiaries to) furnish promptly to the other all information concerning its
business, properties, books, contracts, commitments, records and personnel as
such other party may reasonably request, and each party shall make available to
the other party the appropriate individuals for discussion of such party's
business, properties and personnel as the other party may reasonably request. No
investigation pursuant to this Section 5.3(a) shall affect any representations
or warranties of the parties herein or the conditions to the obligations of the
parties hereto.
(b) The Parent shall keep all information obtained pursuant to Section
5.3(a) confidential in accordance with the terms of the confidentiality
agreement, dated February 11, 1999 (the "Confidentiality Agreement"), between
Parent and the Company. Anything contained in the Confidentiality Agreement to
the contrary notwithstanding, the Company and Parent hereby agree that each such
party may issue press release(s) or make other public announcements in
accordance with Section 5.9.
5.4 All Reasonable Efforts; Further Assurances.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each party hereto shall use all reasonable efforts to take, or cause
to be taken, all appropriate actions, and do, or cause to be done, and to assist
and cooperate with the other party or parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated hereby.
The Company and Parent shall use all reasonable efforts to:
(i) obtain all licenses, permits, consents, waivers, approvals,
authorizations, qualifications or Orders (including all United States and
foreign governmental and regulatory rulings and approvals),
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required to be obtained by Parent or the Company or any of their respective
Subsidiaries, and the Company and Parent shall make all filings (including,
without limitation, all filings with United States and foreign governmental
or regulatory agencies) under applicable Law required in connection with
the authorization, execution and delivery of this Agreement by the Company
and Parent and the consummation by them of the transactions contemplated
hereby and thereby, including the Merger (in connection with which Parent
and the Company will cooperate with each other in connection with the
making of all such filings, including providing copies of all such
documents to the non-filing party and its advisors prior to filings and, if
requested, will accept all reasonable additions, deletions or changes
suggested in connection therewith);
(ii) furnish all information required for any application or other
filing to be made pursuant to any applicable law or any applicable
Regulations of any Governmental Authority (including all information
required to be included in the Proxy Statement or the Registration
Statement) in connection with the transactions contemplated by this
Agreement; and (iii) lift, rescind or mitigate the effects of any
injunction, restraining order or other order adversely affecting the
ability of any party hereto to consummate the transactions contemplated
hereby and thereby and to prevent, with respect to any threatened
injunction, restraining order or other Order, the issuance or entry
thereof,
provided, however, that neither Parent nor any of its Affiliates shall be under
any obligation to (x) make proposals, execute or carry out agreements or submit
to Orders providing for the sale or other disposition or holding separate
(through the establishment of a trust or otherwise) of any assets or categories
of assets material (in nature or amount) of Parent, any of its Affiliates, the
Company or the holding separate of the Company Common Shares or Company
Preferred Shares or imposing or seeking to impose any material limitation on the
ability of Parent or any of its Subsidiaries or Affiliates to conduct their
business or own such assets or to acquire, hold or exercise full rights of
ownership of the Company Common Shares or Company Preferred Shares or (y)
otherwise take any step to avoid or eliminate any impediment which may be
asserted under any Law governing competition, monopolies or restrictive trade
practices which, in the reasonable judgment of Parent, might result in a
limitation of the benefit expected to be derived by Parent as a result of the
transactions contemplated hereby or might adversely affect the Company or Parent
or any of Parent's Affiliates. Neither party hereto will take any action which
results in any of the representations or warranties made by such party pursuant
to Articles II or III, as the case may be, becoming untrue or inaccurate in any
material respect.
(b) Parent and the Company shall use all reasonable efforts to satisfy or
cause to be satisfied all of the conditions precedent that are set forth in
Article VI, as applicable to each of them, and to cause the transactions
contemplated by this Agreement to be consummated. Each party hereto, at the
reasonable request of another party hereto, shall execute and deliver such other
instruments and do and perform such other reasonable acts and things as may be
necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
5.5 Stock Options and Warrants.
(a) As soon as practicable after the execution of this Agreement, the
Company shall, pursuant to the Company's 1994 Plan, (i) notify each holder of an
outstanding option issued pursuant to the 1994 Plan of the proposed Merger, (ii)
provide for the accelerated vesting of each outstanding option so that each such
option shall become fully exercisable, (iii) notify each such holder that each
option shall, unless exercised by the holder in accordance with its terms, be
canceled and terminate on the date which is fifteen (15) days from the date of
such notice, and (iv) cause the 1994 Plan to be terminated. As soon as
practicable after the execution of this Agreement, the Company shall use its
commercially reasonable best efforts to cause the exercise or termination of all
other then outstanding employee and consultant stock options and all
non-employee director stock options, including without limitation, the incentive
stock options and non-qualified stock options issued pursuant to the Company's
1995 Plan and all stock options granted pursuant to resolutions of the Company's
Board of Directors outside of any option plan. Notwithstanding the foregoing,
under no circumstances shall the Company be required to offer any incentives or
other consideration for the termination of such options.
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(b) As soon as practicable after the execution of this Agreement, the
Company shall use commercially reasonable best efforts to cause the exercise or
termination of all then issued and outstanding Company Warrants. Notwithstanding
the foregoing, under no circumstances shall the Company be required to offer any
incentives or other consideration for the termination of such Company Warrants.
At the Effective Time, each Company Warrant that is outstanding and has not been
terminated, exercised or otherwise converted as of the Effective Time shall be
assumed by Parent; provided that such Company Warrants shall by their express
terms reflect, or shall be amended by the Company and the holder thereof to
reflect, the different security and the number of shares of such security
covered by such agreement based on the conversion of Company Common Shares into
Parent Common Stock. All of the holders of such Company Warrants issued and
outstanding as of the date of this Agreement are listed on Section 2.12(k) of
the Company Disclosure Schedule attached hereto. The Company shall take all
actions necessary or reasonably requested by Parent to ensure that following the
Effective Time no holder of any Company Warrant will have any right thereunder
to acquire equity securities of the Company or any of its Subsidiaries, or any
right to payment in respect of the equity securities of the Company, any of its
Subsidiaries or the Surviving Corporation, except as provided in Section 1.8(e).
(c) As soon as practicable after the execution of this Agreement, the
Company shall use its commercially reasonable best efforts to cause the holders
of warrants or warrant certificates issued pursuant to the 1997 Unit Purchase
Agreement to (i) surrender the 1997 Warrants in exchange for an aggregate of
158,512 Company Common Shares, and (ii) agree to terminate the 1997 Unit
Purchase Agreement.
(d) The Company shall use its commercially best efforts to terminate all
Company Plans as of the Effective Time or as promptly as practicable thereafter.
(e) With respect to any Company Options and Company Warrants, the Company
shall not permit any holder thereof to exercise such Company Option or Company
Warrant by any means other than payment of the exercise price thereof in cash,
unless the Company is contractually obligated to do so. With respect to any such
holder, the Company shall use its commercially reasonable best efforts to
encourage such holder to exercise such Company Option and/or Company Warrant by
payment in cash.
5.6 Registration Rights.
(a) As soon as practicable after the execution of this Agreement, the
Company shall use commercially reasonable best efforts to terminate all
agreements, arrangements or commitments of any character (contingent or
otherwise) pursuant to which any person is or may be entitled or to cause the
Company or any of its Subsidiaries to file a registration statement under the
Securities Act, or which otherwise relate to the registration of any securities
of the Company, except as permitted in the following sentence. The Company shall
use its commercially reasonable best efforts to ensure that following the
Effective Time no holder of any voting or non-voting capital stock, other equity
interests, or other voting securities of the Company, or debt or other
instrument convertible or exchangeable for any voting or non-voting capital
stock, other equity interests, or other voting securities of the Company, will
have any right thereunder or with respect thereto to cause the Company or any of
its Subsidiaries to file a registration statement under the Securities Act, or
which otherwise relate to the registration of any securities of the Company.
(b) Parent shall, as soon as practicable after the Closing, but not later
than sixty (60) days following the Effective Time, prepare and file with the SEC
a registration statement on Form S-8 (or any successor form thereto) (or, if
possible, amend an effective Form S-8 by filing a post-effective amendment
thereto) with respect to the shares of Parent Common Stock which are to be
issuable upon the exercise of the Assumed Options (the "S-8") and shall use its
best efforts to have the S-8 declared effective as soon as practicable and kept
effective as long as any Assumed Options are outstanding. In addition, Parent
shall, as soon as practicable after the Closing, but not later than sixty (60)
days following the Effective Time, prepare and file with the SEC a registration
statement on Form S-3 (or any successor form thereto) to register the resale of
the shares of Parent Common Stock underlying the Company Warrants (the "S-3")
and shall use its best efforts to have the S-3 declared effective within 180
days after the Effective Time
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and kept effective until the earlier of (x) the exercise, expiration or
termination of all such Company Warrants or (z) two (2) years following the
Effective Time.
5.7 Notification of Certain Matters.
(a) The Company shall give prompt notice to Parent, and Parent shall give
prompt notice to the Company, of the occurrence, or non-occurrence, of any event
the occurrence, or non-occurrence, of which results in any representation or
warranty contained in this Agreement to be untrue or inaccurate in any material
respect (or, in the case of any representation or warranty qualified by its
terms by materiality or Material Adverse Effect, then untrue or inaccurate in
any respect) and any failure of the Company, Parent or Merger Sub, as the case
may be, to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section 5.7
shall not limit or otherwise affect the remedies available hereunder to the
party receiving such notice.
(b) Each of the Company and Parent shall give prompt notice to the other of
(i) any notice or other communication from any Person alleging that the consent
of such Person is or may be required in connection with the Merger, (ii) any
notice or other communication from any Governmental Authority in connection with
the Merger, (iii) any Litigation, relating to or involving or otherwise
affecting the Company or its Subsidiaries or the Parent that relates to the
consummation of the Merger; (iv) the occurrence of a default or event that, with
notice or lapse of time or both, will become a default under any contract which
is material to Parent or any Material Agreement of the Company; and (v) any
change that is reasonably likely to have a Material Adverse Effect on the
Company or Parent or is likely to delay or impede the ability of either Parent
or the Company to consummate the transactions contemplated by this Agreement or
to fulfill their respective obligations set forth herein.
(c) Each of the Company and Parent shall give (or shall cause their
respective Subsidiaries to give) any notices to third Persons, and use, and
cause their respective Subsidiaries to use, all reasonable efforts to obtain any
consents from third Persons (i) necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, (ii) otherwise required under any
contracts, licenses, leases or other agreements in connection with the
consummation of the transactions contemplated hereby or (iii) required to
prevent a Material Adverse Effect on the Company or Parent from occurring. If
any party shall fail to obtain any such consent from a third Person, such party
shall use all reasonable efforts, and will take any such actions reasonably
requested by the other parties, to limit the adverse effect upon the Company and
Parent, their respective Subsidiaries, and their respective businesses
resulting, or which would result after the Effective Time, from the failure to
obtain such consent.
5.8 Listing on the NASDAQ. Parent shall use its reasonable best efforts
to cause the Parent Common Stock to be issued in the Merger to be approved for
listing on NASDAQ, subject to official notice of issuance, prior to the
Effective Time.
5.9 Public Announcements. Parent and the Company shall consult with and
obtain the approval of the other party before issuing any press release or other
public announcement with respect to the Merger or this Agreement and shall not
issue any such press release prior to such consultation and approval, except as
may be required by applicable law or any listing agreement related to the
trading of the shares of either party on any national securities exchange or
national automated quotation system, in which case the party proposing to issue
such press release or make such public announcement shall use reasonable efforts
to consult in good faith with the other party before issuing any such press
release or making any such public announcement. Notwithstanding the foregoing,
in the event the Company's Board of Directors withdraws its recommendation of
this Agreement in compliance herewith, the Company will no longer be required to
consult with or obtain the agreement of Parent in connection with any press
release or public announcement.
5.10 Takeover Laws. If any form of anti-takeover statute, regulation or
Certificate of Incorporation provision or contract is or shall become applicable
to the Merger or the transactions contemplated hereby, the Company and the Board
of Directors of the Company shall grant such approvals and take such actions
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as are necessary under such laws and provisions so that the transactions
contemplated hereby and thereby may be consummated as promptly as practicable on
the terms contemplated hereby and thereby and otherwise act to eliminate or
minimize the effects of such statute, regulation, provision or contract on the
transactions contemplated hereby or thereby.
5.11 Accountant's Letters. Upon reasonable notice from the other, the
Company and Parent shall use reasonable efforts to cause their respective
independent public accountants to deliver to Parent or the Company, as the case
may be, a letter covering such matters as are requested by Parent or the
Company, as the case may be, and as are customarily addressed in accountant's
"comfort" letters in connection with registration statements similar to Form
S-4.
5.12 Indemnification of Directors and Officers.
(a) From and after the Effective Time, Parent shall cause the Surviving
Corporation to, and Surviving Corporation shall, fulfill and honor in all
material respects the indemnification obligations of the Company contained in
the Certificate of Incorporation or by-laws or any equivalent organizational
document of the Company as in effect immediately prior to the Effective Time.
(b) For a period of six years after the Effective Time, the Parent shall
cause the Surviving Corporation to, and the Surviving Corporation shall,
maintain in effect, if available, directors' and officers' liability insurance
covering those Persons who, as of immediately prior to the Effective Time, are
covered by the Company's directors' and officers' liability insurance policy
(the "Insured Parties") on terms no less favorable to the Insured Parties than
those of the Company's present directors' and officers' liability insurance
policy; provided, however, that in no event will Parent or the Surviving
Corporation be required to expend in excess of 150% of the annual premium
currently paid by the Company for such coverage (or such coverage as is
available for 150% of such annual premium).
(c) The provisions of this Section 5.12 are intended to be for the benefit
of, and shall be enforceable by, each Person entitled to indemnification
hereunder and the heirs and representatives of such Person. Parent shall not
permit the Surviving Corporation to merge or consolidate with any other Person
unless the Surviving Corporation ensures that the surviving or resulting entity
will assume the obligations imposed by this Section 5.12.
5.13 Covenants for Tax-Free Status. Prior to the Effective Time, each
party shall use all reasonable commercial efforts to cause the Merger to qualify
as a reorganization within the meaning of Section 368 (a) of the Code, and will
not take any action reasonably likely to cause the Merger not to so qualify.
5.14 Stockholder Agreements. The Company shall use its reasonable best
efforts, on behalf of Parent and pursuant to the request of Parent, to cause
each stockholder designated by the Parent (a "Consenting Stockholder") to
execute and deliver to Parent a Stockholder Agreement in the form of Exhibit A
attached hereto, concurrently with the execution of this Agreement. The Company
acknowledges and agrees to be bound by and comply with the provisions of
paragraph 2 of each of the Stockholder Agreements as if a party thereto with
respect to transfers of record of ownership of shares of the Company Common
Shares and Company Preferred Shares, and agrees to notify the transfer agent for
any Company Common Shares and provide such documentation and do such other
things as may be necessary to effectuate the provisions of such Stockholder
Agreements.
5.15 Release Agreements. The Company shall use its best efforts, on
behalf of Parent and pursuant to the request of Parent, to cause each Person
identified in Section 5.15 of the Company Disclosure Schedule to execute and
deliver to Parent a written release and waiver satisfactory in form and
substance to Parent in its sole discretion and in substantially the form
attached hereto as Exhibit C (the "Release Agreements") prior to the Effective
Time, providing for, among other things, release of the Company, Parent and the
Surviving Corporation and their respective Affiliates from any and all claims,
known and unknown, that such Person has or may have against such Persons through
the Effective Time.
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5.16 Affiliate Agreements.
(a) Identified in Section 5.16 of the Company Disclosure Schedule is a list
of those persons who are, in the Company's reasonable judgment, "affiliates" of
the Company, within the meaning of Rule 145 promulgated under the Securities Act
("Rule 145"). The Company shall provide such information and documents as Parent
shall reasonably request for purposes of reviewing such list and shall notify
Parent in writing regarding any change in the identity of its affiliates prior
to the Closing Date. The Company shall use its best efforts to deliver or cause
to be delivered to Parent by September 15, 1999 (and in any case prior to the
Effective Time) from the Company's affiliates, an executed Affiliate Agreement,
in substantially the form attached hereto as Exhibit D, by which each affiliate
of the Company agrees to comply with the applicable requirements of Rule 145 and
other applicable securities laws. Parent shall be entitled to place appropriate
legends on the certificates evidencing any Parent Common Stock to be received by
such affiliates of the Company pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for the
Parent Common Stock, consistent with the terms of the Affiliate Agreements
(provided that such legends or stop transfer instructions shall be promptly
removed, after the required restricted period).
(b) Parent shall, at all times during the two (2) year period beginning on
the Closing Date, whether or not it is subject to the reporting requirements of
Section 13 or Section 15(d) of the Exchange Act, comply with the current public
information requirements of Rule 144(c)(1) promulgated under the Securities Act.
5.17 SEC Filings.
(a) Company SEC Filings. Prior to the Effective Time, the Company shall
furnish the Parent with a copy of each periodic or current report filed by it
under the Exchange Act promptly after filing the same. All filings made by the
Company after the date hereof pursuant to the Exchange Act will be made in
timely fashion, will comply as to form in all material respects with the
applicable provisions of the Exchange Act and the rules and regulations
thereunder and will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
(b) Parent SEC Filings. Prior to the Effective Time, the Parent shall
furnish the Company with a copy of each periodic or current report filed by it
under the Exchange Act promptly after filing the same. All filings made by the
Parent after the date hereof pursuant to the Exchange Act will be made in timely
fashion, will comply as to form in all material respects with the applicable
provisions of the Exchange Act and the rules and regulations thereunder and will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading.
5.18 Maintenance, Prosecution and Filing Obligations. The Company shall
pay the costs of preparation for filing, prosecution, and maintenance of all
Intellectual Property Rights as required and shall not permit the lapse of any
filings following the execution of this Agreement. The Company shall provide
copies of all filings and evidence of payments under this Section 5.18 to
Parent.
ARTICLE VI
CONDITIONS OF MERGER
6.1 Conditions to Obligation of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions,
any or all of which may be waived by the party entitled to the benefit thereof,
in whole or in part, the extent permitted by applicable Law:
(a) Effectiveness of the Registration Statement. The Registration
Statement shall have been declared effective; no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
SEC and no proceedings for that purpose shall have been initiated; and no
similar
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proceeding in respect of the Proxy Statement shall have been initiated or,
to the Knowledge of Parent or the Company, threatened by the SEC.
(b) Stockholder Approval. This Agreement and the Merger shall have
been authorized by the requisite vote of the stockholders of the Company in
accordance with the provisions of the DGCL and the Certificate of
Incorporation and by-laws of the Company.
(c) NASDAQ. The shares of Parent Common Stock issuable to the
stockholders of the Company pursuant to this Agreement shall have been
approved for listing on NASDAQ subject to official notice of issuance.
(d) Regulatory Approvals. All approvals and consents of applicable
Courts and/or Governmental Authorities required to consummate the Merger
shall have been received, except for such approvals and consents, the
failure of which to have been so received, shall not have a Material
Adverse Effect.
(e) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other Order
(whether temporary, preliminary or permanent) issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger shall be in effect
which is non-appealable, nor shall any proceeding brought by any
administrative agency or commission or other Governmental Authority,
domestic or foreign, seeking any of the foregoing be pending, and there
shall not be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger, which makes
the consummation of the Merger illegal.
(f) No Order. No Court or Governmental Authority having jurisdiction
over the Company or Parent shall have enacted, issued, promulgated,
enforced or entered any Law, Regulation or Order (whether temporary,
preliminary or permanent) which is then in effect and which has the effect
of making the Merger illegal or otherwise prohibiting consummation of the
Merger substantially on the terms contemplated by this Agreement without an
opportunity for appeal by either party.
(g) Tax Opinions. Parent and the Company shall have received written
opinions of, respectively, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. and Andrews & Kurth, L.L.P., in form and substance reasonably
satisfactory to them to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. The
issuance of each of such opinions shall be conditioned on the receipt by
such tax counsel of representation letters from each of Parent, Merger Sub,
the Company and each stockholder of the Company who or which is a signatory
to the Stockholders Agreement. The specific provisions of each such
representation letter shall be in form and substance reasonably
satisfactory to such tax counsel, and each such representation letter shall
be dated on or before the date of such opinion and shall not have been
withdrawn or modified in any material respect.
6.2 Additional Conditions to Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to effect the Merger are also subject to
the following conditions, any or all of which may be waived by Parent and Merger
Sub, in whole or in part, to the extent permitted by applicable Law:
(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement and the Related
Agreements shall be true and correct in all material respects on and as of
the Effective Time, except for changes contemplated by this Agreement
(together with the Company Disclosure Schedule) (except for those (x)
representations and warranties that are qualified by materiality or
Material Adverse Effect, in which case such representations and warranties
shall be true and correct in all respects and (y) representations and
warranties which address matters only as of a particular date (in which
case such representations and warranties qualified as to materiality or
Material Adverse Effect shall be true and correct in all respects, and
those not so qualified shall be true and correct in all material respects,
on and as of such particular date), with the same force and effect as if
made on and as of the Effective Time, and
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Parent and Merger Sub shall have received a certificate to such effect
signed by the Chief Executive Officer and Chief Financial Officer of the
Company and of each of the Subsidiaries.
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement and the Related Agreements to be performed or
complied with by it on or prior to the Effective Time. Parent and Merger
Sub shall have received a certificate to such effect signed by the Chief
Executive Officer and Chief Financial Officer of the Company.
(c) Third Party Consents. Parent shall have received evidence, in
form and substance reasonably satisfactory to it, that those licenses,
Permits, consents, waivers, approvals, authorizations, qualifications or
Orders (including all United States and foreign governmental and regulatory
rulings and approvals) of Governmental Authorities and other third parties
described in Section 2.5(a) of the Company Disclosure Schedule (or not
described in Section 2.5(a) of the Company Disclosure Schedule but required
as described in Section 2.5(a) and (b) of this Agreement) have been
obtained, except where failure to have been so obtained, either
individually or in the aggregate, shall not have a Material Adverse Effect.
(d) Related Agreements. Each of the Related Agreements shall be in
full force and effect as of the Effective Time and become effective in
accordance with the respective terms thereof and the actions required to be
taken thereunder by the parties thereto immediately prior to the Effective
Time shall have been taken, and each Person who or which is required or
contemplated by the parties hereto to be a party to any Related Agreement
who or which did not theretofore enter into such Related Agreement shall
execute and deliver such Related Agreement.
(e) Consulting Agreements. Parent shall have received a copy of the
Consulting Agreement and Confidentiality Agreement between Ray Bergeron and
the Company, which Agreement is reasonably satisfactory to Parent and which
will continue in full force and effect after the Effective Time. Parent
shall have received a copy of the Consulting Agreement between Stefan Borg
and the Company, and Mr. Borg's Employment Agreement with the Company shall
have been amended to be consistent with the terms set forth on Section
2.12(i) of the Company Disclosure Schedule.
(f) Release Agreements. Parent shall have received Release Agreements
substantially in the form of Exhibit C executed and delivered by each
Person identified on Schedule 5.15 of the Company Disclosure Schedule.
(g) No Material Adverse Effect. From and including the date hereof,
there shall not have occurred any event and no circumstance shall exist
which, alone or together with any one or more other events or circumstances
has had, is having or would reasonably be expected to have a Material
Adverse Effect on the Company.
(h) Dissenting Shares. The Dissenting Shares shall comprise not more
than 2% of the issued and outstanding Company Common Shares and no Company
Preferred Shares.
(i) Merger Certificate. The Company shall have executed and delivered
the Merger Certificate.
(j) Opinion of Counsel to the Company. Parent shall have received the
opinion of Andrews & Kurth, L.L.P. dated the Closing Date, substantially in
the form of Exhibit E.
(k) Termination of Registration Rights. The Company shall have
terminated all agreements, arrangements or commitments of any character
(contingent or otherwise) pursuant to which any person is or may be
entitled, or to cause the Company or any of its Subsidiaries to file a
registration statement under the Securities Act, or otherwise relate to the
registration of any securities of the Company, except as permitted under
Section 5.6 hereof.
(l) Termination of Lien. Parent shall have received evidence
satisfactory to Parent that the security interest referenced on Section
2.16 of the Company Disclosure Schedule has been terminated or otherwise
expired.
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6.3 Additional Conditions to Obligations of the Company. The obligation of
the Company to effect the Merger is also subject to the following conditions,
any or all of which may be waived by Company, in whole or in part, to the extent
permitted by applicable Law:
(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub contained in this Agreement and the
Related Agreements shall be true and correct in all material respects on
and as of the Effective Time, except for changes contemplated by this
Agreement, (except for those (x) representations and warranties that are
qualified by materiality or Material Adverse Effect, in which case such
representations and warranties shall be true and correct in all respects
and (y) representations and warranties which address matters only as of a
particular date (in which case such representations and warranties
qualified as to materiality or Material Adverse Effect shall be true and
correct in all respects, and those not so qualified shall be true and
correct in all material respects, on and as of such particular date), with
the same force and effect as if made on and as of the Effective Time, and
the Company shall have received a certificate to such effect signed by the
Chief Financial Officer of Parent, with respect to Parent and the Chief
Financial Officer of Merger Sub, with respect to Merger Sub.
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by
them on or prior to the Effective Time, and the Company shall have received
a certificate to such effect signed by the Chief Financial Officer of
Parent, with respect to Parent and the Chief Financial Officer of Merger
Sub, with respect to the Merger Sub.
(c) Merger Certificate. Merger Sub shall have executed and delivered
the Merger Certificate.
(d) Opinion of Counsel to Parent. Company shall have received the
opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. dated
Closing Date, substantially in form of Exhibit F.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time,
notwithstanding approval thereof by the stockholders of the Company:
(a) By mutual written consent duly authorized by the Boards of
Directors of Parent and the Company; or
(b) By either Parent or the Company if the Merger shall not have been
consummated on or before December 31, 1999; provided, that the right to
terminate this Agreement under this Section 7.1 shall not be available to
any party whose willful failure to fulfill any material obligation under
this Agreement has been the cause of, or resulted in, the failure of the
Merger to have been consummated on or before such date; or
(c) By either Parent or the Company, if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action, in each case which has become final and non-appealable which
prohibits the Merger; or
(d) By either Parent or the Company, if, at the Company Stockholders'
Meeting (including any adjournment or postponement thereof), the requisite
vote of the stockholders of the Company to authorize this Agreement shall
not have been obtained; or
(e) By Parent, if the Board of Directors of the Company or any
committee thereof shall have (1) approved or recommended, or proposed to
approve or recommend, any Acquisition Proposal other than the Merger (2)
failed to present and recommend the authorization of this Agreement and the
Merger to the stockholders of the Company, or withdrawn or modified, or
proposed to withdraw or
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modify, in a manner adverse to Parent or Merger Sub, its recommendation of
the Merger, this Agreement or the transactions contemplated hereby, (3)
failed to mail the Proxy Statement to its stockholders within five (5)
Business Days of when the Proxy Statement was available for mailing or
failed to include therein such approval and recommendation (including the
recommendation that the stockholders of the Company vote in favor of the
Merger), (4) upon a request by Parent to reaffirm the approval and
recommendation of the Merger, failed to do so within two (2) Business Days
after such request is made, (5) entered, or caused the Company or any
Subsidiary to enter, into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement related to any Acquisition
Proposal, (6) taken any action prohibited by Section 4.2, or (7) resolved
by the Board or announced its intention to do any of the foregoing; or
(f) By Parent, if neither Parent nor Merger Sub is in material breach
of its obligations under this Agreement, and if (i) there has been a breach
at any time by the Company of any of its representations and warranties
hereunder such that Section 6.2(a) would not be satisfied (treating such
time as if it were the Effective Time for purposes of this Section 7.1(g))
or (ii) there has been the willful breach on the part of the Company of any
of its covenants or agreements contained in this Agreement such that
Section 6.2(b) will not be satisfied (treating such time as if it were the
Effective Time for purposes of this Section 7.1(g)), and, in both case (i)
and case (ii), such breach (if curable) has not been cured within 10 days
after written notice to the Company; or
(g) By the Company, if it is not in material breach of its obligations
under this Agreement, and if (i) there has been a breach at any time by
Parent or Merger Sub of any of their respective representations and
warranties hereunder such that Section 6.3(a) would not be satisfied
(treating such time as if it were the Effective Time for purposes of this
Section 7.1(g)), or (ii) there has been the willful breach on the part of
Parent or Merger Sub of any of their respective covenants or agreements
contained in this Agreement such that Section 6.3(b) would not be satisfied
(treating such time as if it were the Effective Time for purposes of this
Section 7.1(g)), and, in both case (i) and case (ii), such breach (if
curable) has not been cured within 10 days after written notice to Parent
and Merger Sub; or
(h) By Parent, if any Consenting Stockholder publicly announces or
makes a public statement of such Consenting Stockholder's disapproval of
the Merger or otherwise encourages other stockholders of the Company not to
vote in favor of the Merger.
7.2 Effect of Termination. Except as provided in this Section 7.2, in the
event of the termination of this Agreement pursuant to Section 7.1, this
Agreement (other than this Section 7.2 and Sections 5.3(b), 5.12, 7.3 and
Article VIII, which shall survive such termination) will forthwith become void,
and there will be no liability on the part of Parent, Merger Sub or the Company
or any of their respective officers or directors to the other and all rights and
obligations of any party hereto will cease, except that nothing herein will
relieve any party from liability for any breach, prior to termination of this
Agreement in accordance with its terms, of any representation, warranty,
covenant or agreement contained in this Agreement.
7.3 Fees and Expenses.
(a) Except as set forth in this Section 7.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that Parent and the Company shall share equally
all fees and expenses, other than attorneys' fees, incurred in relation to the
printing and filing of the Proxy Statement (including any preliminary materials
related thereto), the Registration Statement (including financial statements and
exhibits) and any amendments or supplements thereto.
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(b) In the event that any of the following occurs:
(i) Parent terminates this Agreement pursuant to Section 7.1(e) or
Section 7.1(h);
(ii) Parent or the Company terminates this Agreement pursuant to
Section 7.1(d) hereof and, at the time of such termination or prior to the
Company Stockholders' Meeting, the Company shall have made, or proposed,
communicated or disclosed in a manner which is or otherwise becomes public
(including being known by stockholders of the Company) an intention to
consummate an Acquisition Proposal (whether or not such Acquisition
Proposal or any announcement or agreement relating to such Acquisition
Proposal shall have been rejected or shall have been withdrawn prior to the
time of such termination or of the Company Stockholders' Meeting); or
(iii) Parent or the Company terminates this Agreement pursuant to
Section 7.1(d) hereof and the Company shall have entered into a binding
agreement in connection with an Acquisition Proposal or an Acquisition
Proposal shall be consummated within twelve (12) months following
termination of this Agreement; then, the Company shall pay to Parent, in
the case of a termination described in clause (i) or (ii) above,
simultaneously with such termination of this Agreement, a fee in cash equal
to $500,000, plus the amount of Parent Stipulated Expenses (the
"Termination Fee"), which Termination Fee shall be payable by wire transfer
of immediately available funds; provided that, if within twelve (12) months
of a termination described in clause (iii) above, the Company has entered
into a binding agreement in connection with an Acquisition Proposal or an
Acquisition Proposal is consummated, the Company shall pay to Parent a fee
in cash equal to $1,000,000 (the "Topping Fee") plus the amount of Parent
Stipulated Expenses, which Topping Fee shall be payable by wire transfer of
immediately available funds upon consummation of the Acquisition Proposal
and which Parent Stipulated Expenses shall be payable upon such termination
of this Agreement. Termination by the Company pursuant to Section 7.1(d)
under circumstances where the Topping Fee is payable pursuant to clause
(iii) above shall not be effective until receipt of the Topping Fee by
Parent.
(c) If this Agreement is terminated pursuant to Section 7.1(f), then the
Company shall reimburse Parent for all Parent Stipulated Expenses not later than
two (2) Business Days after the date of such termination.
(d) As used in this Agreement, the term "Parent Stipulated Expenses" shall
mean those reasonable fees and expenses actually incurred by Parent in
connection with this Agreement, the Related Agreements and the transactions
contemplated hereby and thereby, including fees and expenses of counsel,
investment bankers, accountants, experts, consultants and other Representatives,
including (x) Parent's efforts to acquire the Company, (y) steps taken after the
date hereof to take operational control of the Company and (z) salaries, travel
costs and expenses incurred by Parent as a result of changes to its business
plan in contemplation of the Merger.
(e) Nothing in this Section 7.3 shall be deemed to be exclusive of any
other rights or remedies Parent may have hereunder or under any Related
Agreement or at law or in equity for any breach of this Agreement or any of the
Related Agreements.
7.4 Amendment. This Agreement may be amended by the parties hereto by
action taken by or on behalf of their respective Boards of Directors at any time
prior to the Effective Time; provided, however, that, after approval of the
Merger by the stockholders of the Company, no amendment may be made which would
reduce the amount or change the type of consideration into which each share of
Company Common Shares and Company Preferred Shares shall be converted upon
consummation of the Merger. This Agreement may not be amended except by an
instrument in writing signed by all of the parties hereto.
7.5 Waiver. At any time prior to the Effective Time, any party hereto may
extend the time for the performance of any of the obligations or other acts
required hereunder, waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and waive
compliance with any of the agreements or conditions contained herein. Any such
extension or waiver shall be valid if set forth in an instrument in writing
signed by the party or parties to be bound thereby.
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ARTICLE VIII
GENERAL PROVISIONS
8.1 Survival of Representations and Warranties.
(a) Except as set forth in Section 8.1(b) of this Agreement, the
representations, warranties and agreements of each party hereto will remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any Person controlling any such party or
any of their officers, directors, representatives or agents whether prior to or
after the execution of this Agreement.
(b) The representations and warranties in this Agreement will terminate at
the Effective Time; provided, however, this Section 8.1(b) shall in no way limit
any covenant or agreement of the parties which by its terms contemplates
performance after the Effective Time or after the termination of this Agreement
pursuant to Article VII.
8.2 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by nationally-recognized overnight courier or by registered or certified
mail, postage prepaid, return receipt requested, or by electronic mail, with a
copy thereof to be delivered by mail (as aforesaid) within 24 hours of such
electronic mail, or by telecopier, with confirmation as provided above addressed
as follows:
(a) If to Parent or Merger Sub:
GelTex Pharmaceuticals, Inc.
9 Fourth Avenue
Waltham, Massachusetts 02154
Telephone: (781) 290-5888
Telecopier: (781) 672-5822
Attention: Mark Skaletsky
With copies to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Telephone: (617) 542-6000
Telecopier: (617) 542-2241
Attention: Lewis J. Geffen, Esq.
(b) If to the Company:
SunPharm Corporation
The Veranda, Suite 301
814 Highway A-1A
Ponte Vedra Beach, Florida 32082
Telephone: (904) 394-2800
Telecopier: (904) 394-2727
Attention: Stefan Borg
And a copy to:
Andrews & Kurth, L.L.P.
2170 Buckthorne Place, Suite 150
The Woodlands, Texas 77380
Telephone: (713) 220-4801
Telecopier: (713) 220-4815
Attention: Jeffrey R. Harder, Esq.
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or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. All such notices
or communications shall be deemed to be received (a) in the case of personal
delivery, on the date of such delivery, (b) in the case of nationally-recognized
overnight courier, on the next Business Day after the date when sent (c) in the
case of facsimile transmission or telecopier or electronic mail, upon confirmed
receipt, and (d) in the case of mailing, on the third Business Day following the
date on which the piece of mail containing such communication was posted.
8.3 Disclosure Schedules. The Company Disclosure Schedule shall be divided
into sections corresponding to the sections and subsections of this Agreement.
Disclosure of any fact or item in any section of the Company Disclosure Schedule
shall not, should the existence of the fact or item or its contents be relevant
to any other section of the Company Disclosure Schedule, be deemed to be
disclosed with respect to such sections.
8.4 Certain Definitions. For purposes of this Agreement, the term:
(a) "Affiliates" means, with respect to any Person, any other Person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the first mentioned Person;
including, without limitation, any partnership or joint venture in which the
Company (either alone, or through or together with any other Subsidiary) has,
directly or indirectly, an interest of 5% or more of the issued and outstanding
capital stock of such Person;
(b) "Balance Sheet" means the balance sheet of the Company contained in the
Company's Form 10-KSB for the year ended December 31, 1998.
(c) "Beneficial Owner" or "beneficially own" with respect to a Person's
ownership of any securities means
(i) such Person or any of such Person's Affiliates or associates (as
defined in Rule 12b-2 under the Exchange Act) is deemed to beneficially
own, directly or indirectly, within the meaning of Rule 13d-3 under the
Exchange Act;
(ii) such Person or any of such Person's Affiliates or associates has
(A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding, or upon the exercise of
conversion rights, exchange rights, right, warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the
beneficial owner of, or to beneficially own, (x) securities tendered
pursuant to a tender or exchange offer made by or on behalf of such
Person or any of such Person's Affiliates or associates until such
tendered securities are accepted for purchase; and
(B) the right to vote pursuant to any agreement, arrangement or
understanding; provided, however, that a Person shall not be deemed the
beneficial owner of, or to beneficially own, any security by reason of
such agreement, arrangement or understanding if the agreement,
arrangement or understanding to vote such security (1) arises solely
from a revocable proxy or consent given to such Person in response to a
public proxy or consent solicitation made pursuant to, and in accordance
with, the applicable rules and regulations promulgated under the
Exchange Act and (2) is not also then reportable on Schedule 13D under
the Exchange Act (or any comparable or successor report); or
(iii) such securities which are beneficially owned, directly or
indirectly, by any other Person with which such Person or any of such
Person's Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of
any securities of the Company;
(d) "Business Day" means any day other than a Saturday, Sunday or day on
which banks are permitted to close in the State of New York or in the State of
Delaware.
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(e) "Company Disclosure Schedule" means a schedule of even date herewith
delivered by the Company to the Parent concurrently with the execution of this
Agreement, which, among other things, will identify exceptions to the Company's
representations and warranties contained in Article II by specific section and
subsection references;
(f) "Control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of stock, as trustee or
executor, by contract or credit arrangement or otherwise;
(g) "Court" means any court or arbitration tribunal of the United States,
any domestic state, or any foreign country, and any political subdivision
thereof.
(h) "Environmental Claim" means any claim, action, cause of action,
investigation or notice by any Person alleging potential liability (including,
without limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on or resulting from (a)
the presence, release or disposal of any Hazardous Materials at any location,
whether or not owned or operated by the Company, or (b) circumstances forming
the basis of any violation, or alleged violation, of any Environmental Law.
(i) "Environmental Laws" means any Law pertaining to: (i) the protection of
health, safety and the indoor or outdoor environment; (ii) the conservation,
management or use of natural resources and wildlife; (iii) the protection or use
of surface water and ground water; (iv) the management, manufacture, possession,
presence, use, generation, transportation, treatment, storage, disposal,
release, threatened release, abatement, removal, remediation or handling of, or
exposure to, any Hazardous Material; or (v) pollution (including any release to
air, land, surface water and ground water); and includes, without limitation,
the Comprehensive Environmental, Response, Compensation, and Liability Act of
1980, as amended, and the Regulations promulgated thereunder and the Solid Waste
Disposal Act, as amended, 42 U.S.C. ss. 6901 et seq.
(j) "Exchange Agent" means any bank or trust company organized under the
Laws of the United States or any of the states thereof and having a net worth in
excess of $100 million designated and appointed to act in the capacities
required under Section 1.12(a).
(k) "Governmental Authority" means any governmental agency or authority
(other than a Court) of the United States, any domestic state, or any foreign
country, and any political subdivision or agency thereof, and includes any
authority having governmental or quasi-governmental powers.
(l) "Hazardous Material" means any substance, chemical, compound, product,
solid, gas, liquid, waste, by-product, pollutant, contaminant or material which
is hazardous or toxic and is regulated under any Environmental Law, and includes
without limitation, asbestos or any substance containing asbestos,
polychlorinated biphenyls or petroleum (including crude oil or any fraction
thereof).
(m) "Intellectual Property Right" has the meaning ascribed to such term in
Section 2.19 of this Agreement.
(n) "Knowledge" means (i) in the case of an individual, knowledge of a
particular fact or other matter deemed to be possessed by the individual if (a)
such individual, after making due inquiry, is actually aware of such fact or
other matter or (ii) in the case of an entity (other than an individual) such
entity will be deemed to have "Knowledge" of a particular fact or other matter
if any individual who is serving, or has at any time served, as a director,
officer, partner, in-house counsel, patent counsel (with respect to Intellectual
Property Rights only), executor, or trustee of such Person (or in any similar
capacity) has, or at any time had, Knowledge of such fact or other matter.
(o) "Law" means all laws, statutes and ordinances of any Governmental
Agency including all decisions of Courts having the effect of law in each such
jurisdiction;
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(p) "Lien" means any mortgage, pledge, security interest, attachment,
encumbrance, lien (statutory or otherwise), option, conditional sale agreement,
right of first refusal, first offer, termination, participation or purchase or
charge of any kind (including any agreement to give any of the foregoing);
provided, however, that the term "Lien" shall not include (i) statutory liens
for Taxes, which are not yet due and payable or are being contested in good
faith by appropriate proceedings, (ii) statutory or common law liens to secure
landlords, lessors or renters under leases or rental agreements confined to the
premises rented, (iii) deposits or pledges made in connection with, or to secure
payment of, workers' compensation, unemployment insurance, old age pension or
other social security programs mandated under applicable Laws, (iv) statutory or
common law liens in favor of carriers, warehousemen, mechanics and materialmen,
to secure claims for labor, materials or supplies and other like liens, and (v)
restrictions on transfer of securities imposed by applicable state and federal
securities Laws;
(q) "Litigation" means any suit, action, arbitration, cause of action,
claim, complaint, criminal prosecution, investigation, demand letter,
governmental or other administrative proceeding, whether at law or at equity,
before or by any Court or Governmental Authority, before any arbitrator or other
tribunal;
(r) "Material Adverse Effect" means any fact, event, change, circumstance
or effect that is materially adverse to the business, condition (financial or
otherwise), operations, results of operations, assets, liabilities or prospects
of the (1) Company and its Subsidiaries, taken as a whole when such term, is
used in relation to the Company and/or the Subsidiaries or the context otherwise
so requires, provided that, the facts, events, changes, circumstances or effects
described in Section 8.4 of the Company Disclosure Schedule shall not constitute
a material adverse effect as to the Company or (2) the Parent and its
Subsidiaries, taken as a whole, when such term is used in relation to the Parent
or the context otherwise so requires.
(s) "Order" means any judgment, order, writ, injunction or decree of any
Court or Governmental Authority.
(t) "Person" means an individual, corporation, partnership, association,
trust, unincorporated organization, limited liability company, other entity or
group (as defined in Section 13(d)(3) of the Exchange Act);
(u) "Regulation" means any rule or regulation of any Governmental Authority
having the effect of Law.
(v) "Related Agreements" means the Stockholder Agreements, Release
Agreements, Consulting Agreements and Confidentiality Agreements.
(w) "Subsidiary" or "Subsidiaries" of the Company, the Surviving
Corporation, Parent or any other Person means any corporation, partnership,
joint venture, limited liability company or other legal entity of which the
Company, the Surviving Corporation, Parent or such other Person, as the case may
be, (either alone or through or together with any other Subsidiary) owns,
directly or indirectly, 50% or more of the stock or other equity interests the
holders of which are generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal entity.
(x) "Year 2000 Compliant" shall mean the design, writing and testing of
software owned or licensed by a Person (including existing products and owned
software and technology currently under development) used in the operation of
such Person's business as presently conducted , such that such software will at
all times (i) record, store, process, calculate, manage, manipulate and present
calendar dates falling before, on and after (and if applicable, spans of time
including) December 31, 1999, including, without limitation, single-century
formulas and multi-century formulas and (ii) create, calculate, recognize,
accept, display, store, retrieve, accent, compare, sort, manipulate, or process
any information dependent on or relating to such dates or otherwise provide use
of dates or date-dependent or date-related data, including, but not limited to,
century recognition, day-of-the week recognition, leap years, date values and
interfaces of date functionalities, without loss of accuracy, functionality,
data integrity and performance and will provide that all date-related data and
user interface functionalities and data fields include the indication of
century.
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8.5 Interpretation. When a reference is made in this Agreement to
Sections, subsections, Schedules or Exhibits, such reference shall be to a
Section, subsection, Schedule or Exhibit to this Agreement unless otherwise
indicated. The words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without limitation."
The word "herein" and similar references mean, except where a specific Section
or Article reference is expressly indicated, the entire Agreement rather than
any specific Section or Article. The table of contents and the headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
8.6 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
8.7 Entire Agreement. This Agreement (including all exhibits and schedules
hereto) constitutes the entire agreement and supersedes all prior agreements and
undertakings (other than the Confidentiality Agreement), both written and oral,
among the parties, or any of them, with respect to the subject matter hereof
and, except as otherwise expressly provided herein, are not intended to confer
upon any other Person any rights or remedies hereunder.
8.8 Assignment. This Agreement shall not be assigned by operation of law
or otherwise, except that Parent and Merger Sub may assign all or any of their
rights hereunder to any Affiliate provided that no such assignment shall relieve
the assigning party of its obligations hereunder.
8.9 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto, and other than with respect to
Section 5.13 which the parties hereto intend to establish third party
beneficiary rights, nothing in this Agreement, express or implied, is intended
to or shall confer upon any other Person any right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement.
8.10 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or
delay on the part of any party hereto in the exercise of any right hereunder
will impair such right or be construed to be a waiver of, or acquiescence in,
any breach of any representation, warranty or agreement herein, nor will any
single or partial exercise of any such right preclude other or further exercise
thereof or of any other right. All rights and remedies existing under this
Agreement are cumulative to, and not exclusive to, and not exclusive of, any
rights or remedies otherwise available.
8.11 Governing Law. This agreement and the agreements, instruments and
documents contemplated hereby will be governed by and construed in accordance
with the Law of the State of Delaware (exclusive of conflicts of law principles)
("Delaware Law"). Delaware Courts within the State of Delaware and, more
particularly to the fullest extent such Court shall have subject matter
jurisdiction over the matter, the Court of Chancery of the State of Delaware,
will have exclusive jurisdiction over any and all disputes between the parties
hereto, whether in law or equity, arising out of or relating to this Agreement
and the agreements, instruments and documents contemplated hereby. The parties
consent to and agree to submit to the jurisdiction of such Courts, provided,
however, that such consent to jurisdiction is solely for the purpose referred to
in this Section 8.11 and shall not be deemed to be a general submission to the
jurisdiction of such Courts or in the State of Delaware other than for such
purpose. Each of the parties hereby waives, and agrees not to assert in any such
dispute, to the fullest extent permitted by applicable Delaware Law, any claim
that (i) such party is not personally subject to the jurisdiction of such
Courts, (ii) such party and such party's property is immune from any legal
process issued by such Courts or (iii) any Litigation commenced in such Courts
is brought in an inconvenient forum.
A-45
<PAGE> 188
8.12 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 189
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement and Plan of Merger to be executed as of the date first written above
by their respective officers thereunto duly authorized.
GELTEX PHARMACEUTICALS, INC.
By /s/ MARK SKALETSKY
------------------------------------
Name: Mark Skaletsky
Title: President and Chief
Executive Officer
SHINE ACQUISITION SUB, INC.
By /s/ MARK SKALETSKY
------------------------------------
Name: Mark Skaletsky
Title: President and Chief
Executive Officer
SUNPHARM CORPORATION
By /s/ STEFAN BORG
------------------------------------
Name: Stefan Borg
Title: President and Chief
Executive Officer
A-47
<PAGE> 190
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Acquisition Amount.......................................... 1.6
Acquisition Proposal........................................ 4.2(a)
Affiliates.................................................. 8.4(a)
Agreement................................................... Caption
Assumed Option.............................................. 1.8(b)
Balance Sheet............................................... 8.4(b)
Beneficial owner or "beneficially own"...................... 8.4(c)
Blue Sky Laws............................................... 2.5(b)
Bridge Loan................................................. 4.1(e)
Business Day................................................ 8.4(d)
DGCL........................................................ Preamble
Certificate of Merger....................................... 1.2
Certificates................................................ 1.12(c)
Code........................................................ 1.8(b)
Closing..................................................... 1.14
Closing Average............................................. 1.6
Closing Date................................................ 1.14
Common Merger Consideration................................. 1.6(b)
Company..................................................... Caption
Company Approvals........................................... 2.1(a)
Company Common Shares....................................... Preamble
Company Disclosure Schedule................................. Article II Caption
Company Employee............................................ 5.6(a)
Company Options............................................. 1.8(b)
Company Plan(s)............................................. 2.12(a)
Company Preferred Shares.................................... Preamble
Company Representatives..................................... 4.2(a)
Company SEC Reports......................................... 2.8(a)
Company Shares Number....................................... 1.6(c)
Company Warrants............................................ 1.8(d)
Company Stockholders' Meeting............................... 2.14
Confidentiality Agreement................................... 5.3(b)
Consenting Stockholder...................................... 5.13
Consulting Agreements....................................... 6.2(e)
Control..................................................... 8.4(f)
Court....................................................... 8.4(g)
Delaware Law................................................ 8.11
DGCL........................................................ Preamble
Dissenting Shares........................................... 1.17
Distribution Date........................................... 1.6(d)
Effective Time.............................................. 1.2
Environmental Claim......................................... 8.4(g)
Environmental Laws.......................................... 8.4(h)
ERISA....................................................... 2.12(a)
ERISA Affiliate............................................. 2.12(a)
Exchange Act................................................ 2.5(b)
Exchange Agent.............................................. 8.4(j)
</TABLE>
A-48
<PAGE> 191
<TABLE>
<S> <C>
Exchange Ratio Fraction..................................... 1.6(c)
GAAP........................................................ 2.7(b)
Governmental Authority...................................... 8.4(k)
Hazardous Material.......................................... 8.4(l)
HSR Act..................................................... 2.5(b)
Injunction.................................................. 6.1(e)
Insured Parties............................................. 5.12(b)
Intellectual Property Rights................................ 2.19(a)
Knowledge................................................... 8.4(n)
Law......................................................... 8.4(o)
Lien........................................................ 8.4(p)
Litigation.................................................. 8.4(q)
Material Adverse Effect..................................... 8.4(r)
Material Agreements......................................... 2.6(a)
Subsidiary.................................................. 8.4(x)
Measurement Date Average.................................... 1.6(b)
Merger...................................................... Preamble
Merger Consideration........................................ 1.6(b)
Merger Sub.................................................. Caption
Merger Sub Common Stock..................................... 1.9
NOL......................................................... 2.17(m)
NASDAQ...................................................... 1.6(b)
Order....................................................... 8.4(s)
Parent...................................................... Caption
Parent Approvals............................................ 3.1
Parent Common Stock......................................... Preamble
Parent Right................................................ 1.6(d)
Parent Rights Agreement..................................... 1.6(d)
Parent SEC Reports.......................................... 3.6(a)
Parent Stipulated Expenses.................................. 7.3(d)
Permits..................................................... 2.7
Person...................................................... 8.4(x)
Preferred Exchange Ratio.................................... 1.6(a)
Preferred Merger Consideration.............................. 1.6(a)
Proxy Statement............................................. 2.14
Registration Statement...................................... 2.14
Regulation.................................................. 8.4(u)
Related Agreements.......................................... 8.4(v)
Release Agreements.......................................... 5.15
Rule 145.................................................... 5.16
SEC......................................................... 2.7(a)
Securities Act.............................................. 2.3(b)
Series A Preferred Stock.................................... 1.6(a)
Series B Preferred Stock.................................... 1.6(a)
Series A-1 Junior Participating Preferred Stock............. 1.6(d)
Stockholder Agreements...................................... Preamble
Subsidiaries................................................ 8.4(w)
Subsidiary.................................................. 8.4(w)
Subsidiary Approvals........................................ 2.1(b)
</TABLE>
A-49
<PAGE> 192
<TABLE>
<S> <C>
Superior Proposal........................................... 4.2(b)
Surviving Corporation....................................... 1.1
Tax......................................................... 2.17
Tax Returns................................................. 2.17
Taxes....................................................... 2.17
Termination Fee............................................. 7.3(b)(ii)
Topping Fee................................................. 7.3(b)(iii)
Warrants.................................................... 2.3(a)
WARN Act.................................................... 2.13(b)
Year 2000 Compliant......................................... 8.4(x)
1994 Plan................................................... 1.8(a)
1995 Plan................................................... 1.8(a)
1997 Unit Purchase Agreement................................ 1.8(f)
1997 Warrants............................................... Preamble
</TABLE>
A-50
<PAGE> 193
EXHIBIT A
FORM OF STOCKHOLDER AGREEMENT
, 1999
GelTex Pharmaceuticals, Inc.
9 Fourth Avenue
Waltham, Massachusetts 02154
Attention: Mark Skaletsky
Re: Stockholder Agreement
Gentlemen:
The undersigned (the "Stockholder") owns of record and beneficially the
number of shares (the "Shares") of common stock and/or preferred stock of
SunPharm Corporation, a Delaware corporation ("Company"), as set forth below. On
even date herewith, Company, GelTex Pharmaceuticals, Inc., a Delaware
corporation ("Parent") and Shine Acquisition Sub, Inc., a Delaware corporation
and a newly organized wholly owned subsidiary of Company ("Merger Sub"), entered
into an Agreement and Plan of Merger (the "Agreement") with respect to the
merger (the "Merger") of Merger Sub with and into Company. Such Company common
stock and preferred stock will be converted in the Merger into shares of the
common stock, $.01 par value per share, of Parent (the "Parent Common Stock").
The Stockholder wishes to facilitate the proposed Merger and acknowledge that
the proposed Merger will benefit the Stockholder.
In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, the Stockholder agrees as follows:
1. Standstill. Except in connection with the Merger, the Stockholder will
not offer, sell, contract to sell, transfer or otherwise dispose of, or grant
any option to purchase, or convert, any of the Shares until the earlier of
December 31, 1999, or the termination of the Agreement in accordance with its
terms. As security for the Stockholder's obligations under this paragraph, the
Stockholder hereby assigns to and grants to Parent a lien upon and a security
interest in the Shares.
2. Proxy.
(a) As further security for the Stockholder's obligations under paragraph
1, the Stockholder hereby revokes any previous proxies relating to the Shares
and irrevocably appoints Mark Skaletsky, President and Chief Executive Officer
of Parent and Paul J. Mellett, Jr., Vice President and Chief Financial Officer
of Parent, and each of them, attorneys and proxies, with power of substitution
in each of them, of the Stockholder to attend, represent, vote the Shares and
act on behalf of the Stockholder in favor of the Merger on the terms set forth
in the Agreement as executed (with such changes as are not material to the
rights of the Stockholder in the Merger), and with respect to other matters in
connection therewith, at any meeting (and at all adjournments, continuations or
postponements, thereof) (the "Meeting") of the stockholders of Company at which
the Merger is presented for approval of such stockholders (including executing
waivers and consents in connection with the Merger), and otherwise to act for
the Stockholder in the same manner and with the same effect as if the
Stockholder were personally present at such Meeting and voting the Shares or
personally acting on any matters in connection with the Merger submitted to the
stockholders of Company for approval or consent.
(b) The Stockholder authorizes such proxies to substitute any other person
or persons to act hereunder, to revoke any such substitution and to file this
proxy and any such substitution or revocation with the Secretary of Company.
(c) THIS PROXY IS IRREVOCABLE AND COUPLED WITH AN INTEREST AND SHALL
TERMINATE ON THE EARLIER OF DECEMBER 31, 1999 OR THE TERMINATION OF THE
AGREEMENT PURSUANT TO THE TERMS THEREOF.
A-A-1
<PAGE> 194
3. Representations and Warranties by Stockholder. The Stockholder
represents and warrants to Parent that:
(a) the Stockholder has all necessary power and authority to execute
this letter agreement including the proxy appointment contained herein;
(b) this letter agreement and proxy has been duly executed and
delivered by the Stockholder and constitutes a valid and binding agreement
of the Stockholder, enforceable in accordance with its terms; and
(c) neither the execution nor delivery of this letter agreement and
proxy by the Stockholder will (i) require the consent, waiver, approval,
license or authorization, or any filing with, any person or public
authority, (ii) with or without the giving of notice or the lapse of time,
or both, conflict with or constitute a violation of, or default under, or
give rise to any right of acceleration under any indenture, contract,
commitment, agreement, arrangement or other instrument of any kind to which
the Stockholder is a party or by which the Stockholder is bound, or (iii)
violate any applicable law, rule, regulation, judgment, order or degree of
any governmental instrumentality or court having jurisdiction over the
Stockholder.
4. Miscellaneous.
(a) The Stockholder will not take any action that would prevent or
frustrate Parent's rights hereunder.
(b) The Stockholder acknowledges receipt of the following documents: (i)
Parent's Annual Report on Form 10-K for the year ended December 31, 1998; and
(ii) Parent's 1999 Annual Report to Stockholders.
IN WITNESS WHEREOF, the Stockholder has executed this agreement and proxy
as of the date and year first above written.
STOCKHOLDER:
--------------------------------------
Number of Shares of
Common Stock
--------------------------------------
Number of Shares of Series A
Preferred Stock
--------------------------------------
Number of Shares of Series B
Preferred Stock
--------------------------------------
A-A-2
<PAGE> 195
EXHIBIT B
FORM OF
CERTIFICATE OF MERGER
OF
SHINE ACQUISITION SUB, INC., A DELAWARE CORPORATION
WITH AND INTO
SUNPHARM CORPORATION, A DELAWARE CORPORATION
* * *
Pursuant to Section 251 of the General Corporation Law of the State of
Delaware, the undersigned corporations organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DO HEREBY
CERTIFY:
FIRST: That the name and state of incorporation of each of the
constituent corporations are as follows:
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
---- -------------
<S> <C>
1. Shine Acquisition Sub, Inc........................... Delaware
2. SunPharm Corporation................................. Delaware
</TABLE>
SECOND: That an Agreement and Plan of Merger dated August 13, 1999 by
and among GelTex Pharmaceuticals, Inc., Shine Acquisition Sub, Inc. and
SunPharm Corporation has been approved, adopted, certified, executed and
acknowledged by each of the constituent corporations in accordance with the
requirements of Section 251 of the General Corporation Law of the state of
Delaware.
THIRD: The name of the surviving corporation of the merger is
SunPharm Corporation (the "Surviving Corporation").
FOURTH: The Certificate of Incorporation of the Surviving Corporation
shall be Amended and Restated in its entirety to read as set forth in
Exhibit A attached hereto.
FIFTH: That the executed copy of the Agreement and Plan of Merger is
on file at the principal place of business of the Surviving Corporation.
The address of the principal place of business of the Surviving Corporation
is:
The Veranda, Suite 301
814 Highway A-1A
Ponte Vedra Beach, Florida 32082
SIXTH: That a copy of the Agreement and Plan of Merger will be
furnished by the Surviving Corporation, on request and without cost, to any
stockholder of the constituent corporations.
A-B-1
<PAGE> 196
IN WITNESS WHEREOF, the undersigned, being the President of Shine
Acquisition Sub, Inc., does hereby execute this Certificate of Merger and so
certifies, affirms and acknowledges under penalties of perjury that this is his
free act and deed and that the facts stated herein are true, this ,
1999.
SHINE ACQUISITION SUB, INC.
By:
------------------------------------
Mark Skaletsky, President
IN WITNESS WHEREOF, the undersigned, being the President of SunPharm
Corporation, does hereby execute this Certificate of Merger and so certifies,
affirms and acknowledges under penalties of perjury that this is his free act
and deed and that the facts stated herein are true, this , 1999.
SUNPHARM CORPORATION
By:
------------------------------------
Stefan Borg, President
A-B-2
<PAGE> 197
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SUNPHARM CORPORATION
FIRST: The name of the corporation (hereinafter called the "Corporation")
is SunPharm Corporation.
SECOND: The address, including street, number, city, and county, of the
registered office of the corporation in the State of Delaware is 1013 Centre
Road, Wilmington, Delaware, New Castle County 19801; and the name of the
registered agent of the corporation in the State of Delaware at such address is
Corporation Service Company.
THIRD: The nature of the business and the purposes to be conducted and
promoted by the Corporation, shall be any lawful business, to promote any lawful
purpose, and to engage in any lawful act or activity for which corporations may
be organized under the General Corporation law of the State of Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is as follows:
3,000 shares of Common Stock, $0.01 par value.
FIFTH: The Corporation shall have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
SEVENTH: For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition, limitation and regulation
of the powers of the Corporation and of its directors and of its stockholders or
any class thereof, as the case may be, it is further provided that:
1. The business of the Corporation shall be conducted by the officers
of the Corporation under the supervision of the Board of Directors.
2. The number of directors which shall constitute the whole Board of
Directors shall be fixed by, or in the manner provided in, the By-Laws. No
election of Directors need be by written ballot.
3. The Board of Directors of the Corporation may adopt, amend or
repeal the By-Laws of the Corporation at any time after the original
adoption of the By-Laws according to Section 109 of the General Corporation
Law of the State of Delaware; provided, however, that any amendment to
A-B-3
<PAGE> 198
provide for the classification of directors of the corporation for
staggered terms pursuant to the provisions of subsection (d) of Section 141
of the General Corporation Law of the State of Delaware shall be set forth
in an amendment to this Certificate of Incorporation, in an initial By-Law,
or in a By-Law adopted by the stockholders of the Corporation entitled to
vote.
EIGHTH: (a) The Corporation may, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify (and advance expenses to) any and all
persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said section, and the indemnification provided for herein shall
not be deemed exclusive of any other rights to which a person indemnified may be
entitled under any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be director, officer, employee or agent and shall inure
to the benefit of the heirs, executors and administrators of such a person. No
amendment to or repeal of this paragraph (a) of this Article Eight shall
adversely affect any right or protection of a person existing at the time of, or
increase the liability of any person with respect to any acts or omissions of
such person occurring prior to such amendment or repeal.
(b) No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing sentence, a director shall
be liable to the extent provided by applicable law (i) for breach of the
director's duty of loyalty of the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit. No amendment to or repeal of this paragraph (b) of
this Article Eight shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
NINTH: From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
Certificate of Incorporation are granted subject to the provisions of this
Article Nine.
A-B-4
<PAGE> 199
EXHIBIT C
FORM OF RELEASE AGREEMENT
Reference is made to the Agreement and Plan of Merger dated as of August
13, 1999 (the "Merger Agreement") by and among GelTex Pharmaceuticals, Inc., a
Delaware corporation ("Parent"), Shine Acquisition Sub, Inc., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub") and SunPharm
Corporation, a Delaware corporation (the "Company"). All capitalized terms used,
but not defined herein shall have the meanings ascribed to such terms in the
Merger Agreement.
As an inducement for Parent and Merger Sub to consummate the transactions
contemplated by the Merger Agreement and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged,
effective as of the Effective Time, the undersigned (the "Releasor") on his, her
or its behalf and on behalf of his, her or its (i) heirs, executors,
administrators, agents, successors and assigns or (ii) predecessors, parents,
subsidiaries, affiliates and other related entities, as well as any current or
former benefit plan administrators, and their respective trustees, officers,
directors, stockholders or members (whether their ownership interests are held
directly or indirectly), partners, agents, attorneys, employees, successors and
assigns (the "Releasor Persons"), as applicable, hereby irrevocably and
unconditionally releases, waives and discharges the Company, Parent and Merger
Sub and their predecessors, parents, subsidiaries, affiliates and other related
entities, and all of their respective, past, present and future officers,
directors, stockholders, affiliates, agents, representatives, successors and
assigns, other than the Releasor and any Releasor Person (collectively, the
"Released Parties"), from any and all actions, causes of action, suits, debts,
dues, sums of money, accounts, bonds, bills, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages, judgments,
executions, claims and demands of every type and nature whatsoever, known or
unknown, in law or equity (each a "Claim" and collectively, the "Claims")
relating to, arising out of or in connection with the Company, its business
and/or assets, including any Claims relating to, arising out of or resulting
from the Releasor's status, relationship, affiliation, rights, obligations
and/or duties as a director, officer, employee or securityholder of the Company,
for all periods through the time immediately prior to the Effective Time.
The undersigned hereby represents and warrants that in his, her or its
capacity as a securityholder of the Company, he, she or it has no knowledge of
any claims that he, she or it may have against the Released Parties.
This Release shall terminate upon the termination of the Merger Agreement
pursuant to the terms thereof.
IN WITNESS WHEREOF, the undersigned has duly executed this Release and
Waiver as of this day of , 1999.
--------------------------------------
Name:
--------------------------------------
Print
A-C-1
<PAGE> 200
EXHIBIT D
FORM OF AFFILIATE AGREEMENT
, 1999
GelTex Pharmaceuticals, Inc.
Shine Acquisition Sub, Inc.
9 Fourth Avenue
Waltham, Massachusetts 02154
Attention: Mark Skaletsky
SunPharm Corporation
The Veranda, Suite 301
814 Highway A-1A
Ponte Vedra Beach, Florida 32082
Attention: Stefan Borg
Ladies and Gentlemen:
I/We have been advised that I/we might be considered to be an "affiliate"
of SunPharm Corporation (the "Company") for purposes of Rule 145 ("Rule 145")
under the Securities Exchange Act of 1933, as amended (the "Securities Act"), as
promulgated by the Securities and Exchange Commission (the "SEC").
GelTex Pharmaceuticals, Inc. ("Parent"), Shine Acquisition Sub, Inc.
("Merger Sub") and the Company have entered into an Agreement and Plan of Merger
dated as of the 13th day of August, 1999 (the "Plan of Merger"). Upon
consummation of the transactions contemplated by the Plan of Merger (the
"Merger"), I/we will receive shares of capital stock of Parent for all of the
shares of capital stock of the Company owned by me/us or as to which I/we may be
deemed a beneficial owner. I/We own shares of the common stock,
$.0001 par value per share, of the Company (the "Company's Common Stock") and/or
shares of Series A Redeemable Convertible Preferred Stock, $.001
par value per share and/or shares of Series B Redeemable
Convertible Preferred Stock, $.001 par value per share (collectively, the
"Preferred Stock"). The Company's Common Stock and the Company's Preferred Stock
will be converted in the Merger into shares of the common stock, $.01 par value
per share, of Parent (the "Parent Common Stock") as described in the Plan of
Merger. The shares of Parent Common Stock received by me/us in the Merger are
hereinafter collectively referred to as the "Exchange Stock". This agreement is
hereinafter referred to as the "Affiliate Agreement".
I/We represent and warrant to, and agree with, Parent, Merger Sub and the
Company that:
A. I/We have read this Affiliate Agreement and the Plan of Merger and
have discussed their requirements and other applicable limitations upon
my/our ability to sell, transfer or otherwise dispose of the Exchange
Stock, to the extent I/we felt necessary, with my/our counsel or counsel
for the Company.
B. I/We understand that my/our resale of Exchange Stock issued to
me/us in the Merger will be subject to certain restrictions on transfer in
accordance with Rule 145 under the Securities Act, and in connection
therewith I/we agree not to offer, sell, pledge, transfer or otherwise
dispose of any of such shares of Exchange Stock unless at such time either:
(i) such transaction shall be permitted pursuant to the provisions of Rule
145; (ii) I/we shall have furnished to the Parent an opinion of counsel,
satisfactory to the Parent, to the effect that no registration under the
Securities Act would be required in connection with the proposed offer,
sale, pledge transfer or other disposition; (iii) a registration statement
under the Securities Act covering the proposed offer, sale, pledge,
transfer or other disposition shall be effective under the Securities Act;
or (iv) an authorized representative of the SEC shall have rendered written
advice to me/us to the effect that the SEC will take no action, or that the
staff of the SEC will not recommend that the SEC take action, with respect
to the proposed offer, sale, pledge transfer or other disposition if
consummated.
A-D-1
<PAGE> 201
C. I/We understand that all certificates representing the Exchange
Stock delivered to me/us pursuant to the Merger shall, until the occurrence
of one of the events referred to in paragraph B. above, bear a legend
substantially as follows:
"The shares represented by this certificate may not be offered, sold,
pledged, transferred or otherwise disposed of except in accordance with the
requirements of Rule 145 of the Securities Act of 1933, as amended."
D. I/We also understand and agree that the Parent, in its discretion
and in a manner consistent with the legend set forth above, may cause stop
transfer orders to be placed with its transfer agent with respect to the
certificates for the shares of Exchange Stock which are required to bear
the foregoing legend.
E. To the extent I/we am/are an "affiliate" of the Company solely by
virtue of reasons other than being an officer or a director of the Company,
I/we agree to comply with the prohibition described in Section 4.2 of the
Agreement.
It is understood and agreed that this Affiliate Agreement shall terminate
and be of no further force and effect if the Plan of Merger is terminated
pursuant to the terms thereof.
The agreements made by me/us in the foregoing paragraphs are on the
understanding that Parent has agreed, in Section 5.16(b) of the Plan of Merger,
that at all times during the two (2) year period beginning on the Closing Date
(as such term is defined in the Plan of Merger) to file with the SEC or
otherwise make publicly available all information required under Rule 144(c)(1)
promulgated under the Securities Act, to the extent available to you without
unreasonable effort or expense, necessary to enable me/us to resell shares under
the provisions of paragraph (d) of Rule 145.
This Affiliate Agreement shall be binding on my/our heirs, legal
representatives and successors.
Very truly yours,
Name:
A-D-2
<PAGE> 202
EXHIBIT E
FORM OF OPINION OF COUNSEL TO SUNPHARM CORPORATION
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation, and has the
corporate power and authority to enter into and perform the Agreement. The
Company is duly qualified and in good standing as a foreign corporation
authorized to transact business in the State of Florida. The Company has all
requisite corporate power and authority to own or lease and to operate its
properties and assets and to conduct its business as presently conducted.
2. The execution and delivery of the Agreement and the consummation of the
transactions contemplated thereby have been duly authorized by all necessary
corporate action on the part of the Company. The Company has duly executed and
delivered the Agreement, and the Agreement constitutes the valid and binding
obligation of the Company, enforceable against it in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws of general application affecting the
rights and remedies of creditors and by general principles of equity.
3. At , 1999, the authorized capital stock of the Company
consisted solely of: (i) shares of Preferred Stock, $.001 par value
per share, of which (a) shares have been designated Series A Preferred
Stock, shares of which are issued and outstanding and (b)
shares have been designated Series B Preferred Stock, shares of which
are issued and outstanding, and (ii) shares of the Company Common
Stock, $.0001 par value per share, of which shares are issued and
outstanding. All warrants issued by the Company (the "Warrants") pursuant to
that Unit Purchase Agreement dated March 28, 1997 (the "1997 Unit Purchase
Agreement") have been exchanged for shares of the Company Common Stock and the
Warrant Agreement has been terminated prior to the date hereof, and no holder or
record or beneficial owner of any such Warrant has any basis for a claim or
cause of action against the Company by reason of such exchange of Warrants and
termination of the Warrant Agreement. All stock options granted by the Company
under its Amended and Restated 1994 Stock Option Plan (the "1994 Plan") have
either been exercised or terminated in accordance with the provisions of the
1994 Plan and the option agreements thereunder, and no option holder or
participant in the 1994 Plan has any basis under the 1994 Plan or the relevant
option agreement for a claim or cause of action against the Company by reason of
such termination. To our knowledge, except as set forth in the Agreement or the
Company Disclosure Schedule, there are no (i) outstanding or authorized
subscriptions, warrants, options or other rights granted by the Company to
purchase or acquire, or preemptive rights with respect to the issuance or sale
of, the capital stock of the Company or which obligate the Company to issue any
additional shares of its capital stock or any securities convertible into or
evidencing the right to subscribe for any shares of its capital stock, (ii)
other securities of the Company directly or indirectly convertible into or
exchangeable for shares of capital stock of the Company, (iii) restrictions on
the transfer of the Company's capital stock (other than those imposed by
relevant state and federal securities laws), (iv) special voting rights with
respect to the capital stock of the Company, or (v) stock appreciation, phantom
stock or similar rights granted by the Company. To our knowledge, except as set
forth in the Agreement or the Company Disclosure Schedule, no holders of
securities of the Company have rights to require the Company to register such
securities for sale.
4. Except as set forth in the Agreement or the Company Disclosure Schedule,
to the best of our knowledge, there are no claims, actions, suits, arbitrations,
proceedings or investigations pending or threatened against or involving the
Company.
5. Except for (i) the filing of the Certificate of Merger and other
appropriate merger documents, if any, as required by the DGCL and (ii) such
filings, notices, permits, consents and approvals as have been made, given or
obtained, the execution, delivery and performance of the Agreement by the
Company will not: (a) violate any provision of the Certificate of Incorporation
or by-laws of the Company; (b) violate, conflict with, result in modification of
the effect of, or otherwise give any other contracting party the right to
terminate, or constitute (or with notice or lapse of time or both constitute) a
default under, any
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agreement or instrument known to us to which the Company is a party or to which
it may be subject; (c) violate any law or regulation or, to the best of our
knowledge, any judgment, decree or order of any court, arbitrator or
governmental or regulatory body applicable to the Company; or (d) require any
filing with, notice to, or permit, consent or approval of, any governmental or
regulatory body, excluding from the foregoing clauses (b), (c) and (d) any
exceptions to the foregoing that, in the aggregate, would not have a material
adverse effect on the business of the Company or on the ability of the Company
to consummate the transactions contemplated by the Agreement.
6. Assuming that Merger Sub has complied with all relevant provisions of
the DGCL, upon the filing and acceptance of the Certificate of Merger with the
Secretary of State of the State of Delaware, the Merger will become effective
under the DGCL at the time specified in the Certificate of Merger.
7. The Registration Statement has become effective under the Securities Act
and, to the best of our knowledge, no stop order suspending the effectiveness of
the Registration Statement or preventing the use of the Proxy Statement has been
issued and no proceedings for that purpose have been instituted or are pending
or threatened.
We have acted as counsel to the Company in connection with the preparation
of the Registration Statement of Parent filed with the Securities and Exchange
Commission under the Securities Act and the proxy statement/prospectus contained
therein. The Registration Statement in the form in which it was declared
effective under the Securities Act and the proxy statement/prospectus in the
form filed pursuant to Rule 424(b) under the Securities Act are herein referred
to as the "Registration Statement" and "proxy statement/prospectus",
respectively. We have not verified, and are not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the proxy statement/prospectus, and
we have not participated in the preparation of the documents incorporated by
reference therein. We have, however, generally reviewed and discussed such
statements with certain officers of the Company and with you and your counsel.
In the course of this review and discussion, and solely with respect to the
Company, no facts have come to our attention which have caused us to believe
that: (i) the Registration Statement, at the time it became effective or on the
date hereof contained or contains an untrue statement of a material fact
relating to the Company or omitted or omits to state a material fact relating to
the Company required to be stated therein or necessary to make the statements
therein relating to the Company not misleading or (ii) the proxy statement/
prospectus at the time the Registration Statement became effective, included or
includes an untrue statement of a material fact relating to the Company or
omitted or omits to state a material fact relating to the Company necessary to
make the statements therein relating to the Company, in the light of the
circumstances under which they were made, not misleading, it being understood
that we do not express any opinion or confirmation with respect to the operating
statistics, financial statements, schedules and other financial and statistical
data included in the Registration Statement or proxy statement/prospectus or
omitted therefrom, or any information or its compliance as to form concerning or
furnished by Parent or Merger Sub.
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EXHIBIT F
FORM OF OPINION OF COUNSEL TO GELTEX PHARMACEUTICALS, INC. AND
SHINE ACQUISITION SUB, INC.
1. Each of Parent and Merger Sub is a corporation duly incorporated,
validly existing and in good standing under the laws of its state of
incorporation, and has the corporate power and authority to enter into and
perform the Agreement.
2. The execution and delivery of the Agreement and the consummation of the
transactions contemplated thereby have been duly authorized by all necessary
corporate action on the part of Parent and Merger Sub. Each of Parent and Merger
Sub has duly executed and delivered the Agreement, and the Agreement constitutes
the valid and binding obligation of Parent and Merger Sub, enforceable against
each in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws of general
application affecting the rights and remedies of creditors and by general
principles of equity.
3. The shares of Parent Common Stock to be issued in the Merger have been
duly authorized by all necessary corporate action on the part of Parent and,
when issued in the Merger pursuant to the terms of the Agreement, such shares
will be validly issued, fully paid and nonassessable and not subject to any
preemptive rights or to any restriction on transfer imposed by the Certificate
of Incorporation or by-laws of Parent.
4. Based solely on the SEC Reports of Parent, there are no claims, actions,
suits, arbitrations, proceedings or investigations pending or threatened against
or involving Parent or Merger Sub that individually or in the aggregate which,
if adversely determined, are reasonably likely to: (i) materially restrict or
interfere with the Agreement or any transaction contemplated thereby or (ii)
materially impair or preclude the ability of Parent or Merger Sub to consummate
the Merger or the transactions contemplated by the Agreement.
5. Except for (i) the filing of the Certificate of Merger and other
appropriate merger documents, if any, as required by the DGCL and (ii) such
filings, notices, permits, consents and approvals as have been made, given or
obtained, the execution, delivery and performance of the Agreement by each of
Parent and Merger Sub will not: (a) violate any provision of the Certificate of
Incorporation or by-laws of Parent or Merger Sub; (b) violate, conflict with,
result in modification of the effect of, or otherwise give any other contracting
party the right to terminate, or constitute (or with notice or lapse of time or
both constitute) a default under, any agreement or instrument known to us to
which either of Parent or Merger Sub is a party or to which either of them may
be subject; (c) violate any law or regulation or, to the best of our knowledge,
any judgment, decree or order of any court, arbitrator or governmental or
regulatory body applicable to either of Parent or Merger Sub; or (d) require any
filing with, notice to, or permit, consent or approval of, any governmental or
regulatory body, excluding from the foregoing clauses (b), (c) and (d) any
exceptions to the foregoing that, in the aggregate, would not have a material
adverse effect on the ability of Parent or Merger Sub to consummate the
transactions contemplated by the Agreement.
6. Assuming that the Company has complied with all relevant provisions of
the DGCL, upon the filing and acceptance of the Certificate of Merger with the
Secretary of State of the State of Delaware, the Merger will become effective
under the DGCL at the time specified in the Certificate of Merger.
7. The Registration Statement has become effective under the Securities Act
and, to the best of our knowledge, no stop order suspending the effectiveness of
the Registration Statement or preventing the use of the Proxy Statement has been
issued and no proceedings for that purpose have been instituted or are pending
or threatened.
We have acted as counsel to Parent and Merger Sub in connection with the
preparation of the Registration Statement of Parent filed with the Securities
and Exchange Commission under the Securities Act and the proxy
statement/prospectus contained therein. The Registration Statement in the form
in
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which it was declared effective under the Securities Act and the proxy
statement/prospectus in the form filed pursuant to Rule 424(b) under the
Securities Act are herein referred to as the "Registration Statement" and "proxy
statement/prospectus", respectively. We have not verified, and are not passing
upon and do not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and the proxy
statement/prospectus, and we have not participated in the preparation of the
documents incorporated by reference therein. We have, however, generally
reviewed and discussed such statements with certain officers of Parent and
Merger Sub and with you and your counsel. In the course of this review and
discussion, and solely with respect to Parent and Merger Sub, no facts have come
to our attention which have caused us to believe that: (i) the Registration
Statement, at the time it became effective or on the date hereof contained or
contains an untrue statement of a material fact relating to Parent or Merger Sub
or omitted or omits to state a material fact relating to Parent or Merger Sub
required to be stated therein or necessary to make the statements therein
relating to Parent or Merger Sub not misleading or (ii) the proxy
statement/prospectus at the time the Registration Statement became effective,
included or includes an untrue statement of a material fact relating to Parent
or Merger Sub or omitted or omits to state a material fact relating to Parent or
Merger Sub necessary to make the statements therein relating to Parent or Merger
Sub, in the light of the circumstances under which they were made, not
misleading, it being understood that we do not express any opinion or
confirmation with respect to the operating statistics, financial statements,
schedules and other financial and statistical data included in the Registration
Statement or proxy statement/prospectus or omitted therefrom, or any information
or its compliance as to form concerning or furnished by the Company.
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ANNEX B
STOCKHOLDERS AGREEMENT DATED AS OF AUGUST 9, 1999
BY AND AMONG GELTEX PHARMACEUTICALS, INC.
AND CERTAIN STOCKHOLDERS OF SUNPHARM CORPORATION
August 9, 1999
GelTex Pharmaceuticals, Inc.
9 Fourth Avenue
Waltham, MA 02154
Re: Stockholder Agreement
Gentlemen:
The undersigned (the "Stockholder") owns of record and beneficially the
number of shares (the "Shares") of common stock and/or preferred stock of
SunPharm Corporation, a Delaware corporation ("Target"), as set forth below. It
is contemplated that SunPharm, GelTex Pharmaceuticals, Inc., a Delaware
corporation ("Acquiror") and Shine Acquisition Sub, Inc., a Delaware corporation
and a newly organized wholly owned subsidiary of Acquiror ("Merger Sub"), will
enter into an Agreement and Plan of Merger (the "Agreement") with respect to the
merger (the "Merger") of Merger Sub with and into SunPharm. Pursuant to the
Merger, each outstanding share of SunPharm common stock and preferred stock will
be converted into the right to receive shares of Acquiror's common stock, all as
more specifically provided in the Agreement. The Stockholder wishes to
facilitate the proposed Merger and acknowledges that the proposed Merger will
benefit the Stockholder.
In consideration of the foregoing, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, the Stockholder agrees as follows:
1. Standstill. Except in connection with the Merger, the Stockholder will
not offer, sell, contract to sell, transfer or otherwise dispose of, or grant
any option to purchase, or convert, any of the Shares until the earlier of the
Effective Time (as defined in the Agreement), or the termination of the
Agreement in accordance with its terms. As security for the Stockholder's
obligations under this paragraph, the Stockholder hereby assigns to and grants
to Acquiror a lien upon and a security interest in the Shares.
2. Proxy.
(a) As further security for the Stockholder's obligations under paragraph
1, the Stockholder hereby revokes any previous proxies relating to the Shares
and irrevocably appoints Mark Skaletsky, President and Chief Executive Officer
of Acquiror and Paul J. Mellett, Jr., Vice President and Chief Financial Officer
of Acquiror, and each of them, attorneys and proxies, with power of substitution
in each of them, of the Stockholder to attend, represent, vote the Shares and
act on behalf of the Stockholder in favor of the Merger on the terms set forth
in the Agreement as executed (with such changes as are not material to the
rights of the Stockholder in the Merger), and with respect to other matters in
connection therewith, at any meeting (and at all adjournments, continuations or
postponements, thereof) (the "Meeting") of the stockholders of SunPharm at which
the Merger is presented for approval of such stockholders (including executing
waivers and consents in connection with the Merger), and otherwise to act for
the Stockholder in the same manner and with the same effect as if the
Stockholder were personally present at such Meeting and voting the Shares or
personally acting on any matters in connection with the Merger submitted to the
stockholders of SunPharm for approval or consent.
(b) The Stockholder authorizes such proxies to substitute any other person
or persons to act hereunder, to revoke any such substitution and to file this
proxy and any such substitution or revocation with the Secretary of SunPharm.
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(c) THIS PROXY IS IRREVOCABLE AND COUPLED WITH AN INTEREST AND SHALL
TERMINATE ON THE EARLIER OF THE EFFECTIVE TIME OR THE TERMINATION OF THE
AGREEMENT PURSUANT TO THE TERMS THEREOF.
3. Representations and Warranties by Stockholder. The Stockholder
represents and warrants to Acquiror that:
(a) the Stockholder has all necessary power and authority to execute this
letter agreement including the proxy appointment contained herein;
(b) this letter agreement and proxy has been duly executed and delivered by
the Stockholder and constitutes a valid and binding agreement of the
Stockholder, enforceable in accordance with its terms; and
(c) neither the execution nor delivery of this letter agreement and proxy
by the Stockholder will (i) require the consent, waiver, approval, license or
authorization, or any filing with, any person or public authority, (ii) with or
without the giving of notice or the lapse of time, or both, conflict with or
constitute a violation of, or default under, or give rise to any right of
acceleration under any indenture, contract, commitment, agreement, arrangement
or other instrument of any kind to which the Stockholder is a party or by which
the Stockholder is bound, or (iii) violate any applicable law, rule, regulation,
judgment, order or degree of any governmental instrumentality or court having
jurisdiction over the Stockholder.
4. Miscellaneous.
(a) The Stockholder will not take any action that would prevent or
frustrate Acquiror's rights thereunder.
(b) The Stockholder acknowledges receipt of the following documents: (i)
Acquiror's Annual Report on Form 10-K for the year ended December 31, 1998; and
(ii) Acquiror's 1999 Annual Report to Stockholders.
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<PAGE> 208
IN WITNESS WHEREOF, the Stockholder has executed this agreement and proxy
as of the date and year first above written.
STOCKHOLDER:
(Individual)
--------------------------------------
Print Name:
--------------------------------------
(Entity)
By:
--------------------------------------
Name:
------------------------------------
Title:
------------------------------------
Number of Shares of
Common Stock
--------------------------------------
Number of Shares of Series A
Redeemable
Convertible Preferred Stock
--------------------------------------------------------------------
Number of Shares of Series B
Redeemable
Convertible Preferred Stock
--------------------------------------------------------------------
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<PAGE> 209
ANNEX C
OPINION OF PETKEVICH & PARTNERS, L.L.C.
AUGUST 13, 1999
LETTER TO THE BOARD OF DIRECTORS
Members of the Board:
You have asked our opinion with respect to the fairness to holders of
capital stock of SunPharm Corporation ("SunPharm"), from a financial point of
view as of the date hereof, of the aggregate consideration to be paid in the
Merger (as defined below) (the "Merger Consideration").
Under the terms set forth in a draft of the Agreement and Plan of Merger
dated as of August 13, 1999 (the "Agreement") by and among GelTex
Pharmaceuticals, Inc. ("GelTex"), Shine Acquisition Sub, Inc. ("Sub") and
SunPharm, Sub will merge with and into SunPharm (the "Merger") and, upon
consummation of the Merger, SunPharm will become a wholly-owned subsidiary of
GelTex. As more fully described in the Agreement, pursuant to the terms and
subject to the conditions set forth in the Agreement, at the effective time of
the Merger ("Effective Time") all of the outstanding shares of Common Stock, par
value $0.0001 per share, and Preferred Stock, par value $0.001 per share, of
SunPharm (the "SunPharm capital stock"), other than dissenting shares (as
defined in the Agreement), shares of SunPharm capital stock held by SunPharm as
treasury stock and shares of SunPharm capital stock held by GelTex or any
subsidiary of GelTex or SunPharm, will be converted into the common stock, par
value $0.01 per share, of GelTex (the "GelTex Common stock") pursuant to the
exchange formula provided for in the Agreement (the "Exchange Ratio"). Pursuant
to the terms of the Agreement SunPharm will (i) notify the holders of
outstanding options issued pursuant to the Amended and Restated 1994 Stock
Option Plan of the proposed transaction, (ii) provide for the accelerated
vesting and immediate exercise of such options, and (iii) notify each holder of
such options that each such option will, unless exercised, be canceled and
terminate on the date which is fifteen (15) days after the date of notice. The
Agreement further provides that the outstanding options to acquire SunPharm
capital stock issued as stand alone options and issued pursuant to the SunPharm
Directors Plan will, unless otherwise exercised or terminated prior to the
Effective Time, be assumed by GelTex and converted into options to acquire
GelTex Common Stock. The Agreement also provides that unless the warrants issued
by SunPharm are exercised or otherwise terminated prior to the Effective Time,
the warrants outstanding at the Effective Time will be assumed and converted
into warrants to acquire GelTex Common Stock. The Merger is intended to qualify
as a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and be accounted for as a "purchase"
transaction pursuant to U.S. generally accepted accounting principles. The terms
and conditions of the Merger are set out more fully in the Agreement.
For purposes of this opinion, we have: (i) reviewed financial information
relating to SunPharm and GelTex disclosed to us by each company, including
certain financial analyses and other information and data prepared by the
respective managements of SunPharm and GelTex; (ii) reviewed publicly available
information concerning SunPharm and GelTex; (iii) held discussions with
management of GelTex and SunPharm concerning the business, past and current
business operations, financial conditions and future prospects of both
companies, independently and combined, including discussions with the
managements of SunPharm and GelTex concerning their views regarding the
strategic rationale of the Merger; (iv) reviewed the Agreement; (v) reviewed the
stock prices and trading histories of SunPharm and GelTex; (vi) reviewed the
contribution by each company to pro forma combined revenue, operating income and
net income; (vii) reviewed the valuations of publicly traded companies which we
deemed comparable to SunPharm; (viii) compared the financial terms of the Merger
with other transactions which we have deemed relevant; (ix) analyzed the pro
forma earnings per share of the combined company; and (x) made such other
studies and inquiries, and reviewed such other data, as we deemed relevant.
In our review and analysis, and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available
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and have neither attempted independently to verify nor assumed responsibility
for verifying any of such information. We have relied upon the assurances of the
managements of SunPharm and GelTex, that they are not aware of any facts that
would make such information inaccurate or misleading. Furthermore, we did not
obtain or make, or assume responsibility for obtaining or making, any
independent evaluation or appraisal of any of the properties or assets and
liabilities (contingent or otherwise) of SunPharm or GelTex, nor were we
furnished with any such evaluations or appraisals. We have not conducted any
evaluation or analyses of the technology underlying the products of SunPharm or
GelTex. With respect to the financial information (and the assumptions and bases
therefor) of SunPharm and GelTex which we have discussed with the managements of
SunPharm and GelTex, upon the advice of SunPharm and GelTex, we have assumed
that such information has been reasonably prepared in good faith on the basis of
reasonable assumptions, reflects the best currently available estimates and
judgments of the managements of SunPharm and GelTex and that such information
(and the technological milestones necessary to achieve such results) will be
realized in the amounts and in the time periods currently estimated by the
managements of SunPharm and GelTex. We have assumed that the Merger will be
consummated upon the terms set forth in the Agreement without material
alterations thereof and that the Merger will qualify for the tax and accounting
treatment described above. We have relied as to all legal matters relevant to
rendering our opinion on the advice of counsel.
This opinion is necessarily based upon market, economic, and other
conditions as in effect on, and the information available to us as of, the date
hereof. You should understand that subsequent developments may affect the
conclusion expressed in this opinion, and that we disclaim any undertaking or
obligation to advise you or any other person of any change in any fact or matter
affecting this opinion which may come or be brought to our attention after the
date of this opinion. Our opinion is limited to the fairness, from a financial
point of view, to the holders of capital stock of SunPharm of the Merger
Consideration. We do not express any opinion as to (i) the value of any employee
agreements or other arrangements entered into in connection with the Merger,
(ii) any tax or other consequences that might result from the Mergers, (iii) the
price at which the shares of GelTex Common Stock will be traded in the future or
(iv) the division of the Merger Consideration among holders of different classes
of capital stock of SunPharm. Our opinion does not address the relative merits
of the Merger and the other business strategies that the Board of Directors of
SunPharm has considered or may be considering, nor does it address the Board of
Directors' decision to proceed with the Merger.
We are acting as financial advisor to SunPharm in connection with the
Merger and will receive (i) a fee upon delivery of this opinion and (ii) an
additional fee upon the consummation of the Merger. In addition, SunPharm has
agreed to indemnify us for certain liabilities arising out of our engagement.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of SunPharm in its evaluation of the
Merger, and this opinion is not intended to be and does not constitute a
recommendation to any shareholder of SunPharm as to how such shareholder should
vote on, or take any other actions with respect to, the Merger. This opinion may
be included in the proxy statement/prospectus of GelTex and SunPharm distributed
in connection with the Merger, provided that this opinion is included therein in
full and any description of, or reference to, Petkevich & Partners, LLC or any
summary of this opinion included therein is in form and substance acceptable to
us and our legal counsel. Except as provided in the preceding sentence, this
opinion shall not be reproduced, summarized, described or referred to, or
furnished to any party, without our prior written consent.
Based upon and subject to the foregoing considerations, it is our opinion
that, as of the date hereof, the Merger Consideration is fair to holders of
capital stock of SunPharm from a financial point of view.
Very truly yours,
PETKEVICH & PARTNERS, LLC
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<PAGE> 211
ANNEX D
SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW
SEC. 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to (S)
251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S) 264 of
this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
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d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
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need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date.
If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow
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money during the pendency of the proceeding. Upon application by the surviving
or resulting corporation or by any stockholder entitled to participate in the
appraisal proceeding, the Court may, in its discretion, permit discovery or
other pretrial proceedings and may proceed to trial upon the appraisal prior to
the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the General Corporation Law of the State of Delaware
("Delaware Corporation Law") provides, in general, that a corporation shall have
the power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), because the person is or was a director
or officer of the corporation. Such indemnity may be against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such action, suit or
proceeding, if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation and if, with respect to any criminal action or proceeding, the
person did not have reasonable cause to believe the person's conduct was
unlawful.
Section 145(b) of the Delaware Corporation Law provides, in general, that a
corporation shall have the power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor because the person is or was a director or officer of the corporation,
against any expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of such
action or suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation.
Section 145(g) of the Delaware Corporation Law provides, in general, that a
corporation shall have the power to purchase and maintain insurance on behalf of
any person who is or was a director or officer of the corporation against any
liability asserted against the person in any such capacity, or arising out of
the person's status as such, whether or not the corporation would have the power
to indemnify the person against such liability under the provisions of the law.
Section 102 of the Delaware Corporation Law permits a Delaware corporation
to include a provision in its certificate of incorporation eliminating or
limiting the personal liability of any director to the corporation or its
stockholders for monetary damages for a breach of the director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware Corporation Law, which concerns
unlawful payments of dividends, stock purchases of redemptions or (iv) for any
transaction from which the director derived an improper personal benefit.
Article Eighth of the Registrant's Restated Certificate of Incorporation
(incorporated by reference herein) provides as follows:
"A director shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that the elimination or limitation of liability is not
permitted under the General Corporation Law of the State of Delaware as in
effect when such liability is determined. No amendment or repeal of this
provision shall deprive a director of the benefits hereof with respect to any
act or omission occurring prior to such amendment or repeal."
Article Ninth of the Registrant's Restated Certificate of Incorporation
(incorporated by reference herein) provides for indemnification of directors,
officers and other persons as follows:
"The Corporation shall, to the fullest extent permitted by Section 145 of
the General Corporation Law of the State of Delaware, as amended from time to
time, indemnify each person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was, or has agreed to serve, at the request of the Corporation, as
a director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise (including
attorney's
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fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom.
Indemnification may include payment by the Corporation of expenses in
defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of any undertaking by the person indemnified
to repay such payment if it is ultimately determined that such person is not
entitled to indemnification under this Article, which undertaking may be
accepted without reference to the financial ability of such person to make such
repayments.
The Corporation shall not indemnify any such person seeking indemnification
in connection with a proceeding (or part thereof) initiated by such person
unless the initiation thereof was approved by the Board of Directors of the
Corporation.
The indemnification rights provided in this Article (i) shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any law, agreement or vote of stockholders or disinterested directors or
otherwise, and (ii) shall inure to the benefit of the heirs, executors and
administrators of such persons. The Corporation may, to the extent authorized
from time to time by its Board of Directors, grant indemnification rights to
other employees or agents of the Corporation or other persons serving the
Corporation and such rights may be equivalent to, or greater or less than, those
set forth in this Article."
Article Five of the Registrant's Restated By-Laws (incorporated by
reference herein) provides that:
"The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of the General
Corporation Law of the State of Delaware."
Under Section 5.12 of the merger agreement, the Registrant shall cause
SunPharm Corporation ("SunPharm") to, and SunPharm shall, fulfill and honor in
all material respects the indemnification obligations provided under SunPharm's
certificate of incorporation, by-laws or equivalent organizational document as
in effect immediately prior to the effective time of the merger. In addition,
for a period of six years after the effective time of the merger, the Registrant
shall cause SunPharm to, and SunPharm shall, maintain in effect, if available,
directors' and officers' liability insurance covering those persons who, as of
immediately prior to the effective time of the merger, are covered by SunPharm's
directors' and officers' liability insurance policy on terms no less favorable
to the covered persons than those of SunPharm's present directors' and officers'
liability insurance policy.
The directors and officers of the Registrant are covered by a policy of
liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
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<S> <C>
2 Agreement and Plan of Merger, dated as of August 13, 1999,
by and among GelTex Pharmaceuticals, Inc., Shine Acquisition
Sub, Inc. and SunPharm Corporation. Included as Annex A to
the proxy statement/prospectus forming a part of this
Registration Statement and incorporated herein by reference.
3.1 Restated Certificate of Incorporation of GelTex
Pharmaceuticals, Inc., dated June 4, 1996. Filed as Exhibit
3.1 to GelTex Pharmaceuticals, Inc.'s Registration Statement
on Form S-3 (No. 333-45151) and incorporated herein by
reference.
3.2 Amended and Restated By-Laws of GelTex Pharmaceuticals, Inc.
Filed as Exhibit 3.3 to GelTex Pharmaceuticals, Inc.'s
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and incorporated herein by reference.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
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<S> <C>
4.1 Specimen certificate for shares of common stock of GelTex
Pharmaceuticals, Inc. Filed as Exhibit 4.1 to GelTex
Pharmaceuticals, Inc.'s Registration Statement on Form S-1
(File No. 33-97322) and incorporated herein by reference.
4.2 Rights Agreement dated as of March 1, 1996, between GelTex
Pharmaceuticals, Inc. and American Stock Transfer and Trust
Company. Filed as Exhibit 1 to GelTex Pharmaceuticals,
Inc.'s Registration Statement on Form 8-A dated March 1,
1996 and incorporated herein by reference.
4.3 First Amendment to Rights Agreement between GelTex
Pharmaceuticals, Inc. and American Stock Transfer and Trust
Company, dated as of July 29, 1997. Filed as Exhibit 4.3 to
GelTex Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 and incorporated herein
by reference.
4.4 Amended and Restated Facility One Term Note issued by GelTex
Pharmaceuticals, Inc. to Fleet National Bank, dated as of
May 21, 1997. Filed as Exhibit 4.1 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference.
4.5 Security Agreement (Equipment) between GelTex
Pharmaceuticals, Inc. and Fleet National Bank, dated May 21,
1997. Filed as Exhibit 4.4 to GelTex Pharmaceuticals, Inc.'s
Registration Statement on Form S-3 (No. 333-45151) and
incorporated herein by reference.
4.6 Letter Agreement between GelTex Pharmaceuticals, Inc. and
Fleet National Bank, dated May 21, 1997. Filed as Exhibit
4.5 to GelTex Pharmaceuticals, Inc.'s Registration Statement
on Form S-3 (No. 333-45151) and incorporated herein by
reference.
4.7 Promissory Note, dated October 31, 1997, issued by GelTex
Pharmaceuticals, Inc. to Fleet National Bank. Filed as
Exhibit 4.6 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-3 (No. 333-45151) and incorporated
herein by reference.
4.8 Loan Modification Agreement between GelTex Pharmaceuticals,
Inc. and Fleet National Bank, dated October 31, 1997. Filed
as Exhibit 4.7 to GelTex Pharmaceuticals, Inc.'s
Registration Statement on Form S-3 (No. 333-45151) and
incorporated herein by reference.
4.9 Second Loan Modification Agreement between GelTex
Pharmaceuticals, Inc. and Fleet National Bank, dated as of
June 30, 1998. Filed as Exhibit 4.2 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form l0-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference.
5 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. regarding validity of securities being registered.
Filed herewith.
8.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. regarding certain tax aspects of the merger. Filed
herewith.
8.2 Opinion of Andrews & Kurth, L.L.P. regarding certain tax
aspects of the merger. Filed herewith.
10.l# GelTex Pharmaceuticals, Inc. Amended and Restated 1992
Equity Incentive Plan. Filed as Exhibit 10.1 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 and incorporated herein by
reference.
10.2 Express Master Lease Agreement with Equipment Schedule No.
VL-l between GelTex Pharmaceuticals, Inc. and Comdisco,
Inc., dated September 27, 1993. Filed as Exhibit 10.5 to
GelTex Pharmaceuticals, Inc.'s Registration Statement on
Form S-1 (File No. 33-97322) and incorporated herein by
reference.
10.3 Promissory Note executed by GelTex Pharmaceuticals, Inc. in
favor of Silicon Valley Bank, dated December 9, 1993 with
Commercial Security Agreement attached thereto. Filed as
Exhibit 10.7 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-l (File No. 33-97322) and incorporated
herein by reference.
10.4* License Agreement between GelTex Pharmaceuticals, Inc. and
Chugai Pharmaceutical Co., Ltd., dated December 26, 1994.
Filed as Exhibit 10.14to GelTex Pharmaceuticals, Inc.'s
Registration Statement on Form S-1 (File No. 33-97322) and
incorporated herein by reference.
10.5 Promissory Note executed by GelTex Pharmaceuticals, Inc. in
favor of Silicon Valley Bank, dated February 2, 1995. Filed
as Exhibit 10.15 to GelTex Pharmaceuticals, Inc.'s
Registration Statement on Form S-l (File No. 33-97322) and
incorporated herein by reference.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
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<S> <C>
10.6 Form of Common Stock Purchase Agreement. Filed as Exhibit
10.17 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-1 (File No. 33-97322) and incorporated
herein by reference.
10.7 Form of Restricted Common Stock Purchase Agreement. Filed as
Exhibit 10.18 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-1 (File No. 33-97322) and incorporated
herein by reference.
10.8# Form of Incentive Stock Option Certificate. Filed as Exhibit
10.19 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-1 (File No. 33-97322) and incorporated
herein by reference.
10.9# Form of Nonstatutory Stock Option Certificate. Filed as
Exhibit 10.20 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-1 (File No. 33-97322) and incorporated
herein by reference.
10.10# GelTex Pharmaceuticals, Inc. Amended and Restated 1995
Director Stock Option Plan. Filed as Exhibit 10.2 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 and incorporated herein by
reference.
10.11# GelTex Pharmaceuticals, Inc. 1995 Employee Stock Purchase
Plan. Filed as Exhibit 99.1 to GelTex Pharmaceuticals,
Inc.'s Registration Statement on Form S-8 (File No.
333-00864) and incorporated herein by reference.
10.12 Lease Agreement dated February 28, 1997, between GelTex
Pharmaceuticals, Inc. and J.F. White Properties, Inc. Filed
as Exhibit 10.16 to GelTex Pharmaceuticals, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997.
10.13* Contract Manufacturing Agreement between GelTex
Pharmaceuticals, Inc. and The Dow Chemical Company. Filed as
Exhibit 10.17 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997 and
incorporated herein by reference.
10.14* Collaboration Agreement among GelTex Pharmaceuticals, Inc.,
Genzyme Corporation and RenaGel LLC dated as of June 17,
1997. Filed as Exhibit 10.18 to GelTex Pharmaceuticals,
Inc.'s Quarterly Report on Form l0-Q for the quarter ended
June 30, 1997 and incorporated herein by reference.
10.15 Purchase Agreement between GelTex Pharmaceuticals, Inc. and
Genzyme Corporation, dated as of June 17, 1997. Filed as
Exhibit 10.19 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference.
10.16* Operating Agreement of RenaGel LLC, dated as of June 17,
1997. Filed as Exhibit 10.20 to GelTex Pharmaceuticals,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference.
10.17* License Agreement between GelTex Pharmaceuticals, Inc. and
Nitto Boseki Co., Ltd., dated as of June 9, 1997. Filed as
Exhibit 10.21 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference.
10.18# Letter Agreement between GelTex Pharmaceuticals, Inc. and
Paul J. Mellett, Jr., dated March 11, 1997. Filed as Exhibit
10.19 to GelTex Pharmaceuticals, Inc.'s Annual Report on
Form 10-K for the year ended 1997 and incorporated herein by
reference.
10.19# Letter Agreement between GelTex Pharmaceuticals, Inc. and
Edmund J. Sybertz, Jr., dated November 17, 1997. Filed as
Exhibit 10.20 to GelTex Pharmaceuticals, Inc.'s Annual
Report on Form 10-K for the year ended 1997 and incorporated
herein by reference.
10.20# Promissory Note in favor of GelTex Pharmaceuticals, Inc.
executed by Edmund J. Sybertz, Jr., dated June 30, 1998.
Filed as Exhibit 10.3 to GelTex Pharmaceuticals, Inc.'s
Quarterly Report on Form l0-Q for the quarter ended June 30,
1998 and incorporated herein by reference.
10.21 Purchase and Sale Agreement between Sodexho USA, Inc.,
Service Supply Corporation and GelTex Pharmaceuticals, Inc.,
dated as of August 4, 1998. Filed as Exhibit 10.5 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form l0-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference.
10.22 Agency Agreement by and between First Security Bank, N.A.
and GelTex Pharmaceuticals, Inc., dated October 21, 1998.
Filed as Exhibit 10.1 to GelTex Pharmaceuticals, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 and incorporated herein by reference.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
10.23 Lease Agreement by and between First Security Bank, N.A. and
GelTex Pharmaceuticals, Inc., dated October 21, 1998. Filed
as Exhibit 10.2 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form l0-Q for the quarter ended September 30, 1998
and incorporated herein by reference.
10.24* Manufacturing and Supply Agreement (United States) between
RenaGel LLC and Circa Pharmaceuticals, Inc., dated as of
July 31, 1998. Filed as Exhibit 10.4 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form l0-Q for
the quarter ended June 30, 1998.
10.25# Letter Agreement between GelTex Pharmaceuticals, Inc. and
Dr. Douglas Reed, dated as of September 4, 1998. Filed as
Exhibit 10.1 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form l0-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
10.26# Promissory Note in favor of GelTex Pharmaceuticals, Inc.
executed by Dr. Douglas Reed, dated December 1, 1998. Filed
as Exhibit 10.2 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form l0-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
10.27# Promissory Note in favor of GelTex Pharmaceuticals, Inc.
executed by Dr. Douglas Reed, dated December 31, 1998. Filed
as Exhibit 10.3 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form l0-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
10.28# Promissory Note in favor of GelTex Pharmaceuticals, Inc.
executed by Dr. Douglas Reed and Linda Reed, dated December
31, 1998. Filed as Exhibit 10.4 to GelTex Pharmaceuticals,
Inc.'s Quarterly Report on Form l0-Q for the quarter ended
March 31, 1999 and incorporated herein by reference.
10.29 Purchase and Sale Agreement between Barry L. Solar and
Robert L. Solar as Trustees of 211 Second Avenue Realty
Trust and GelTex Pharmaceuticals, Inc., dated as of July 26,
1999. Filed as Exhibit 10.4 to GelTex Pharmaceuticals,
Inc.'s Quarterly Report on Form l0-Q for the quarter ended
June 30, 1999 and incorporated herein by reference.
23.1 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. Included as part of its opinions filed as Exhibit 5 and
Exhibit 8.1, respectively, and incorporated herein by
reference.
23.2 Consent of Andrews & Kurth, L.L.P. Included as part of its
opinion filed as Exhibit 8.2 and incorporated herein by
reference.
23.3 Consent of Ernst & Young LLP. Filed herewith.
23.4 Consent of Deloitte & Touche LLP. Filed herewith.
23.5 Consent of PricewaterhouseCoopers, LLP. Filed herewith.
23.6 Consent of Petkevich & Partners, L.L.C. Included as part of
its opinion included as Annex C to the proxy
statement/prospectus forming a part of this Registration
Statement and incorporated herein by reference.
24.1 Power of Attorney. Included on the signature page of this
Form S-4 and incorporated herein by reference.
99.1 Form of Proxy of SunPharm Corporation.
</TABLE>
- ---------------
* Certain confidential material contained in Exhibits 10.4, 10.13, 10.14, 10.16,
10.17 and 10.24 has been omitted and filed separately with the Securities and
Exchange Commission.
# Identifies a management contract or compensatory plan or agreement in which an
executive officer or director of GelTex Pharmaceuticals, Inc. participates.
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ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(2) That before any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(3) That every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
Form S-4 under the Securities Act of 1933, within one business day of
receipt of any such request, and to send the incorporated documents by
first class mail or other equally prompt means, including information
contained in documents filed after the effective date of the registration
statement through the date of responding to such request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. If a claim of
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in a successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-6
<PAGE> 221
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waltham, Commonwealth of
Massachusetts, on October 4, 1999.
GELTEX PHARMACEUTICALS, INC.
BY: /s/ MARK SKALETSKY
--------------------------------------
NAME: MARK SKALETSKY
TITLE: PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
Know all those by these presents, that each person whose signature appears
below constitutes and appoints each of Mark Skaletsky, Paul Mellett and
Elizabeth Grammer, or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for such person and in his name, place and stead, in any and all capacities, in
connection with the Registration Statement on Form S-4 of GelTex
Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, including
without limitation of the generality of the foregoing, to sign the Registration
Statement in the name and on behalf of GelTex Pharmaceuticals, Inc., or on
behalf of the undersigned as a director or officer of GelTex Pharmaceuticals,
Inc., and any and all amendments or supplements to the Registration Statement,
including any and all stickers and post-effective amendments to the Registration
Statement, and to sign any and all additional Registration Statements relating
to the same offering of Securities as the Registration Statement that are filed
pursuant to Rule 462 under the Securities Act of 1933, as amended, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the SEC and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ MARK SKALETSKY Director, President and October 4, 1999
- ------------------------- Chief Executive Officer
Mark Skaletsky (principal executive officer)
/s/ PAUL MELLETT Vice President, Administration October 4, 1999
- ------------------------- and Finance (principal financial
Paul Mellett and accounting officer)
/s/ ROBERT CARPENTER Chairman of the Board and October 4, 1999
- ------------------------- Director
Robert Carpenter
Director
- -------------------------
J. Richard Crout
/s/ HENRI TERMEER Director October 4, 1999
- -------------------------
Henri Termeer
/s/ JESSE TREU Director October 4, 1999
- -------------------------
Jesse Treu
II-7
<PAGE> 222
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
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<C> <S>
2 Agreement and Plan of Merger, dated as of August 13, 1999,
by and among GelTex Pharmaceuticals, Inc., Shine Acquisition
Sub, Inc. and SunPharm Corporation. Included as Annex A to
the proxy statement/prospectus forming a part of this
Registration Statement and incorporated herein by reference.
3.1 Restated Certificate of Incorporation of GelTex
Pharmaceuticals, Inc., dated June 4, 1996. Filed as Exhibit
3.1 to GelTex Pharmaceuticals, Inc.'s Registration Statement
on Form S-3 (No. 333-45151) and incorporated herein by
reference.
3.2 Amended and Restated By-Laws of GelTex Pharmaceuticals, Inc.
Filed as Exhibit 3.3 to GelTex Pharmaceuticals, Inc.'s
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and incorporated herein by reference.
4.1 Specimen certificate for shares of common stock of GelTex
Pharmaceuticals, Inc. Filed as Exhibit 4.1 to GelTex
Pharmaceuticals, Inc.'s Registration Statement on Form S-1
(File No. 33-97322) and incorporated herein by reference.
4.2 Rights Agreement dated as of March 1, 1996, between GelTex
Pharmaceuticals, Inc. and American Stock Transfer and Trust
Company. Filed as Exhibit 1 to GelTex Pharmaceuticals,
Inc.'s Registration Statement on Form 8-A dated March 1,
1996 and incorporated herein by reference.
4.3 First Amendment to Rights Agreement between GelTex
Pharmaceuticals, Inc. and American Stock Transfer and Trust
Company, dated as of July 29, 1997. Filed as Exhibit 4.3 to
GelTex Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 and incorporated herein
by reference.
4.4 Amended and Restated Facility One Term Note issued by GelTex
Pharmaceuticals, Inc. to Fleet National Bank, dated as of
May 21, 1997. Filed as Exhibit 4.1 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference.
4.5 Security Agreement (Equipment) between GelTex
Pharmaceuticals, Inc. and Fleet National Bank, dated May 21,
1997. Filed as Exhibit 4.4 to GelTex Pharmaceuticals, Inc.'s
Registration Statement on Form S-3 (No. 333-45151) and
incorporated herein by reference.
4.6 Letter Agreement between GelTex Pharmaceuticals, Inc. and
Fleet National Bank, dated May 21, 1997. Filed as Exhibit
4.5 to GelTex Pharmaceuticals, Inc.'s Registration Statement
on Form S-3 (No. 333-45151) and incorporated herein by
reference.
4.7 Promissory Note, dated October 31, 1997, issued by GelTex
Pharmaceuticals, Inc. to Fleet National Bank. Filed as
Exhibit 4.6 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-3 (No. 333-45151) and incorporated
herein by reference.
4.8 Loan Modification Agreement between GelTex Pharmaceuticals,
Inc. and Fleet National Bank, dated October 31, 1997. Filed
as Exhibit 4.7 to GelTex Pharmaceuticals, Inc.'s
Registration Statement on Form S-3 (No. 333-45151) and
incorporated herein by reference.
4.9 Second Loan Modification Agreement between GelTex
Pharmaceuticals, Inc. and Fleet National Bank, dated as of
June 30, 1998. Filed as Exhibit 4.2 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference.
5 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. regarding validity of securities being registered.
Filed herewith.
8.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. regarding certain tax aspects of the merger. Filed
herewith.
</TABLE>
<PAGE> 223
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
8.2 Opinion of Andrews & Kurth, L.L.P. regarding certain tax
aspects of the merger. Filed herewith.
10.l# GelTex Pharmaceuticals, Inc. Amended and Restated 1992
Equity Incentive Plan. Filed as Exhibit 10.1 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 and incorporated herein by
reference.
10.2 Express Master Lease Agreement with Equipment Schedule No.
VL-l between GelTex Pharmaceuticals, Inc. and Comdisco,
Inc., dated September 27, 1993. Filed as Exhibit 10.5 to
GelTex Pharmaceuticals, Inc.'s Registration Statement on
Form S-1 (File No. 33-97322) and incorporated herein by
reference.
10.3 Promissory Note executed by GelTex Pharmaceuticals, Inc. in
favor of Silicon Valley Bank, dated December 9, 1993 with
Commercial Security Agreement attached thereto. Filed as
Exhibit 10.7 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-l (File No. 33-97322) and incorporated
herein by reference.
10.4* License Agreement between GelTex Pharmaceuticals, Inc. and
Chugai Pharmaceutical Co., Ltd., dated December 26, 1994.
Filed as Exhibit 10.14 to GelTex Pharmaceuticals, Inc.'s
Registration Statement on Form S-1 (File No. 33-97322) and
incorporated herein by reference.
10.5 Promissory Note executed by GelTex Pharmaceuticals, Inc. in
favor of Silicon Valley Bank, dated February 2, 1995. Filed
as Exhibit 10.15 to GelTex Pharmaceuticals, Inc.'s
Registration Statement on Form S-l (File No. 33-97322) and
incorporated herein by reference.
10.6 Form of Common Stock Purchase Agreement. Filed as Exhibit
10.17 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-1 (File No. 33-97322) and incorporated
herein by reference.
10.7 Form of Restricted Common Stock Purchase Agreement. Filed as
Exhibit 10.18 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-1 (File No. 33-97322) and incorporated
herein by reference.
10.8# Form of Incentive Stock Option Certificate. Filed as Exhibit
10.19 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-1 (File No. 33-97322) and incorporated
herein by reference.
10.9# Form of Nonstatutory Stock Option Certificate. Filed as
Exhibit 10.20 to GelTex Pharmaceuticals, Inc.'s Registration
Statement on Form S-1 (File No. 33-97322) and incorporated
herein by reference.
10.10# GelTex Pharmaceuticals, Inc. Amended and Restated 1995
Director Stock Option Plan. Filed as Exhibit 10.2 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 and incorporated herein by
reference.
10.11# GelTex Pharmaceuticals, Inc. 1995 Employee Stock Purchase
Plan. Filed as Exhibit 99.1 to GelTex Pharmaceuticals,
Inc.'s Registration Statement on Form S-8 (File No.
333-00864) and incorporated herein by reference.
10.12 Lease Agreement dated February 28, 1997, between GelTex
Pharmaceuticals, Inc. and J.F. White Properties, Inc. Filed
as Exhibit 10.16 to GelTex Pharmaceuticals, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997.
10.13* Contract Manufacturing Agreement between GelTex
Pharmaceuticals, Inc. and The Dow Chemical Company. Filed as
Exhibit 10.17 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997 and
incorporated herein by reference.
10.14* Collaboration Agreement among GelTex Pharmaceuticals, Inc.,
Genzyme Corporation and RenaGel LLC dated as of June 17,
1997. Filed as Exhibit 10.18 to GelTex Pharmaceuticals,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference.
</TABLE>
<PAGE> 224
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.15 Purchase Agreement between GelTex Pharmaceuticals, Inc. and
Genzyme Corporation, dated as of June 17, 1997. Filed as
Exhibit 10.19 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference.
10.16* Operating Agreement of RenaGel LLC, dated as of June 17,
1997. Filed as Exhibit 10.20 to GelTex Pharmaceuticals,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 and incorporated herein by reference.
10.17* License Agreement between GelTex Pharmaceuticals, Inc. and
Nitto Boseki Co., Ltd., dated as of June 9, 1997. Filed as
Exhibit 10.21 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference.
10.18# Letter Agreement between GelTex Pharmaceuticals, Inc. and
Paul J. Mellett, Jr., dated March 11, 1997. Filed as Exhibit
10.19 to GelTex Pharmaceuticals, Inc.'s Annual Report on
Form 10-K for the year ended 1997 and incorporated herein by
reference.
10.19# Letter Agreement between GelTex Pharmaceuticals, Inc. and
Edmund J. Sybertz, Jr., dated November 17, 1997. Filed as
Exhibit 10.20 to GelTex Pharmaceuticals, Inc.'s Annual
Report on Form 10-K for the year ended 1997 and incorporated
herein by reference.
10.20# Promissory Note in favor of GelTex Pharmaceuticals, Inc.
executed by Edmund J. Sybertz, Jr., dated June 30, 1998.
Filed as Exhibit 10.3 to GelTex Pharmaceuticals, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998 and incorporated herein by reference.
10.21 Purchase and Sale Agreement between Sodexho USA, Inc.,
Service Supply Corporation and GelTex Pharmaceuticals, Inc.,
dated as of August 4, 1998. Filed as Exhibit 10.5 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated herein by
reference.
10.22 Agency Agreement by and between First Security Bank, N.A.
and GelTex Pharmaceuticals, Inc., dated October 21, 1998.
Filed as Exhibit 10.1 to GelTex Pharmaceuticals, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 and incorporated herein by reference.
10.23 Lease Agreement by and between First Security Bank, N.A. and
GelTex Pharmaceuticals, Inc., dated October 21, 1998. Filed
as Exhibit 10.2 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
and incorporated herein by reference.
10.24* Manufacturing and Supply Agreement (United States) between
RenaGel LLC and Circa Pharmaceuticals, Inc., dated as of
July 31, 1998. Filed as Exhibit 10.4 to GelTex
Pharmaceuticals, Inc.'s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998.
10.25# Letter Agreement between GelTex Pharmaceuticals, Inc. and
Dr. Douglas Reed, dated as of September 4, 1998. Filed as
Exhibit 10.1 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
10.26# Promissory Note in favor of GelTex Pharmaceuticals, Inc.
executed by Dr. Douglas Reed, dated December 1, 1998. Filed
as Exhibit 10.2 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
10.27# Promissory Note in favor of GelTex Pharmaceuticals, Inc.
executed by Dr. Douglas Reed, dated December 31, 1998. Filed
as Exhibit 10.3 to GelTex Pharmaceuticals, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
10.28# Promissory Note in favor of GelTex Pharmaceuticals, Inc.
executed by Dr. Douglas Reed and Linda Reed, dated December
31, 1998. Filed as Exhibit 10.4 to GelTex Pharmaceuticals,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 and incorporated herein by reference.
</TABLE>
<PAGE> 225
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10.29 Purchase and Sale Agreement between Barry L. Solar and
Robert L. Solar as Trustees of 211 Second Avenue Realty
Trust and GelTex Pharmaceuticals, Inc., dated as of July 26,
1999. Filed as Exhibit 10.4 to GelTex Pharmaceuticals,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999 and incorporated herein by reference.
23.1 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. Included as part of its opinions filed as Exhibit 5 and
Exhibit 8.1, respectively, and incorporated herein by
reference.
23.2 Consent of Andrews & Kurth, L.L.P. Included as part of its
opinion filed as Exhibit 8.2 and incorporated herein by
reference.
23.3 Consent of Ernst & Young LLP. Filed herewith.
23.4 Consent of Deloitte & Touche LLP. Filed herewith.
23.5 Consent of PricewaterhouseCoopers, LLP. Filed herewith.
23.6 Consent of Petkevich & Partners, L.L.C. Included as part of
its opinion included as Annex C to the proxy
statement/prospectus forming a part of this Registration
Statement and incorporated herein by reference.
24.1 Power of Attorney. Included on the signature page of this
Form S-4 and incorporated herein by reference.
99.1 Form of Proxy of SunPharm Corporation.
</TABLE>
- ---------------
* Certain confidential material contained in Exhibits 10.4, 10.13, 10.14,
10.16, 10.17 and 10.24 has been omitted and filed separately with the
Securities and Exchange Commission.
# Identifies a management contract or compensatory plan or agreement in which
an executive officer or director of GelTex Pharmaceuticals, Inc.
participates.
<PAGE> 1
EXHIBIT 5
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.
One Financial Center
Boston, MA 02111
Telephone: (617) 542-6000 Facsimile: (617) 542-2241
October 4, 1999
GelTex Pharmaceuticals, Inc.
153 Second Avenue
Waltham, Massachusetts 02154
Ladies and Gentlemen:
In connection with the registration statement on Form S-4 (the
"Registration Statement") being filed by GelTex Pharmaceuticals, Inc., a
Delaware corporation (the "Company"), with the Securities and Exchange
Commission for the purpose of registering under the Securities Act of 1933 (the
"Act") shares of the Common Stock of the Company, par value $.01 per share (the
"Shares"), to be issued in connection with the merger (the "Merger") of Shine
Acquisition Sub, Inc. ("Merger Sub"), a Delaware corporation and wholly-owned
subsidiary of GelTex, with and into SunPharm Corporation, a Delaware corporation
("SunPharm"), pursuant to the terms of the Agreement and Plan of Merger (the
"Merger Agreement") dated August 13, 1999 among the Company, Merger Sub and
SunPharm, you have requested our opinion with respect to the matters set forth
below.
We have examined originals or copies, certified or otherwise
authenticated to our satisfaction, of all such documents and records and
conducted such other investigations of fact and law as we have deemed necessary
as a basis for this opinion. As to certain questions of fact, we have relied
upon statements of officers of the Company and others.
In rendering this opinion, we have assumed that prior to the issuance
of any of the Shares: (i) the Registration Statement, as then amended, will have
become effective under the Securities Act, (ii) the shareholders of SunPharm
will have approved and adopted the Merger Agreement, (iii) the Board of
Directors of GelTex will have approved the issuance of the Shares, and (iv) the
transactions contemplated by the Merger Agreement are consummated.
On the basis of the foregoing, we are of the opinion that the Shares,
when issued and delivered in accordance with the terms and conditions of the
Merger Agreement, will be duly authorized, validly issued, fully paid and
non-assessable.
This opinion relates solely to the corporate law of the State of
Delaware.
We consent to the filing of this opinion as Exhibit 5 to the
Registration Statement. In addition, we consent to the reference to our firm
under the caption "Legal Matters" in the Proxy Statement/Prospectus constituting
a part of the Registration Statement. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act.
Very truly yours,
/s/ Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
-------------------------------------------------------
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
<PAGE> 1
EXHIBIT 8.1
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.
One Financial Center
Boston, MA 02111
Telephone: (617) 542-6000 Facsimile: (617) 542-2241
October 4, 1999
GelTex Pharmaceuticals, Inc.
153 Second Avenue
Waltham, Massachusetts 02154
Ladies and Gentlemen:
We have acted as counsel for GelTex Pharmaceuticals, Inc., a Delaware
corporation ("GelTex"), in connection with the Agreement and Plan of Merger,
dated as of August 13, 1999 (the "Merger Agreement"), by and between SunPharm
Corporation, a Delaware corporation ("SunPharm"), GelTex, and Shine Acquisition
Sub, Inc., a Delaware corporation and wholly-owned subsidiary of GelTex ("Merger
Sub"), pursuant to which Merger Sub will be merged with and into SunPharm.
At your request, in connection with the filing of the Registration
Statement, we are rendering our opinion concerning certain federal income tax
consequences of the Merger. In connection with rendering our opinion, we have
reviewed the Merger Agreement, including the Exhibits thereto, the Proxy
Statement/Prospectus constituting part of the Registration Statement on Form S-4
filed with the Securities and Exchange Commission on the date hereof, and such
other documents and corporate records as we have deemed necessary or appropriate
as a basis therefor. We have assumed that the representations and warranties
contained in the Merger Agreement were true, correct and complete when made, and
will continue to be true, correct and complete throughout the Effective Time,
and that the parties have complied with and, if applicable, will continue to
comply with, the covenants contained in the Merger Agreement. We also have
assumed that statements as to factual matters contained in the Proxy
Statement/Prospectus are true, correct and complete, and will continue to be
true, correct and complete through the Effective Time. Finally, we have assumed
that the representations and covenants to be made by SunPharm, GelTex and Merger
Sub contained in tax certificates substantially in the form of Appendices A and
B attached hereto will be provided to us at the Effective Time, and we have
assumed that such representations will be true, correct and complete through the
Effective Time and that such covenants will be complied with in all material
respects.
All statements of legal conclusions attributable to us in the discussion
under the caption "Material United States Federal Income Tax Consequences of the
Merger" in the Proxy Statement/Prospectus included in the Registration Statement
on Form S-4 of GelTex filed in respect of the transactions contemplated in the
Merger Agreement are our opinion with respect to the matters set forth therein.
We hereby consent to the reference to our firm and this opinion contained
in the proxy statement/prospectus included in the Registration Statement. We
will deliver to GelTex, at the Effective Time of the Merger, the opinion
required by Section 6.1(g) of the Merger Agreement.
Sincerely,
/s/ Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
-------------------------------------------------------
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
<PAGE> 2
APPENDIX A
GelTex Pharmaceuticals, Inc.
153 Second Avenue
Waltham, Massachusetts 02154
[DATE]
Andrews & Kurth L.L.P.
2170 Buckthorne Place, Suite 150
The Woodlands, Texas 77380
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
In connection with the opinions to be delivered pursuant to
Section 6.1(g) of the Agreement and Plan of Merger (the "Merger Agreement"),
dated as of August 13, 1999, among SunPharm Corporation, a Delaware corporation
(the "Company"), Shine Acquisition Sub, Inc., a Delaware corporation ("Merger
Sub") and GelTex Pharmaceuticals, Inc., a Delaware corporation ("Parent"), with
respect to the merger (the "Merger") of Merger Sub with and into the Company,
pursuant to which stockholders of the Company will receive voting stock of
Parent, in exchange for their stock in the Company, the undersigned does hereby
make the following certification and representations on behalf of Parent and
Merger Sub as of the date hereof. Terms not otherwise defined herein have the
meanings ascribed to them in the Merger Agreement or the Proxy Statement/
Prospectus of Parent and the Company on Form S-4, Registration No. ____________.
1. I certify to you that I am the ____________ of Parent and
the ___________ of Merger Sub. I am familiar with the transactions
contemplated by, and the terms and provisions of, the Merger Agreement,
have personal knowledge of the matters covered by the representations
made herein, and I am authorized to make these representations on
behalf of Parent and Merger Sub.
2. The fair market value of the Parent Common Stock and cash
received in lieu of fractional shares received by each Company
stockholder will be approximately equal to the fair market value of the
Company Common Shares and Company Preferred Shares (collectively, the
"Company Shares") surrendered in the exchange.
<PAGE> 3
3. Parent has no plan or intention to redeem or reacquire, or
have a party related to Parent acquire, shares of Parent Common Stock
issued in the Merger. For purposes of this representation and the
following representations, a party is related to Parent if such party
and Parent would be treated as related parties within the meaning of
Treasury Regulation Section 1.368-1(e)(3).
4. Following the Merger, Parent will cause the Company to hold
at least 90 percent of the fair market value of its net assets and at
least 70 percent of the fair market value of its gross assets and at
least 90 percent of the fair market value of Merger Sub's net assets
and at least 70 percent of the fair market value of Merger Sub"s gross
assets held immediately prior to the Merger. For purposes of this
representation, amounts paid by the Company or Merger Sub to
dissenters, amounts paid by the Company or Merger Sub to stockholders
who receive cash or other property, amounts used by the Company or
Merger Sub to pay reorganization expenses will be included as assets of
the Company or Merger Sub, respectively, immediately prior to the
Merger.
5. Prior to the Merger, Parent will be in control of Merger
Sub. For purposes of this representation and the following
representations, control is defined as the ownership of stock
possessing at least 80 percent of the total combined voting power of
all classes of stock entitled to vote and at least 80 percent of the
total number of shares of all other classes of stock of the
corporation.
6. Parent has no plan or intention to liquidate the Company
subsequent to the Merger; to merge the Company with or into another
corporation subsequent to the Merger; to sell or otherwise dispose of
the stock of the Company, except for transfers of stock to corporations
controlled by Parent, subsequent to the Merger, or to cause the Company
to sell or otherwise dispose of any of its assets or any assets
acquired from Merger Sub subsequent to the Merger, except for (i)
dispositions made in the ordinary course of business and (ii) transfers
of assets to corporations controlled by Parent.
7. Merger Sub will have no liabilities assumed by the Company,
and will not transfer to the Company any assets subject to liabilities
in the Merger.
8. Following the Merger, Parent will cause the Company to
continue its historic business or use a significant portion of its
historic business assets in a business within the meaning of Treasury
Regulation Section 1.368-1(d). For purposes of this representation,
Parent will be deemed to satisfy this requirement if (a) the members of
Parent's qualified group (as defined in Treasury Regulation Section
1.368-1(d)(4)(ii)), in the aggregate, continue the historic business of
the Company or use a significant portion of the Company's historic
business assets in a business, or (b) the foregoing activities are
undertaken by a partnership in which (i) the members of Parent's
qualified group, in the aggregate, own at least a 33 1/3 percent
capital and/or profits interest, or (ii) one or more members of the
qualified group has active and substantial management functions as a
partner with respect to the partnership business and the members of the
qualified group,
<PAGE> 4
in the aggregate, own at least a 20 percent capital and/or profits
interest in the partnership.
9. There is no intercorporate indebtedness existing between
Parent and the Company or between Merger Sub and the Company that was
issued, acquired or will be settled at a discount.
10. Neither Parent nor Merger Sub are investment companies.
For purposes of this representation, an investment company means a
regulated investment company (as defined in the Code), a real estate
investment trust (as defined in the Code) or a corporation, 50 percent
or more of the value of whose total assets are stock and securities and
80 percent or more of the value of whose total assets are assets held
for investment within the meaning of Section 368(a)(2)(F)(iii) of the
Code.
11. Parent and Merger Sub will pay their respective expenses,
if any, incurred in connection with the Merger.
12. None of the compensation received by any
stockholder-employees of the Company will be separate consideration
for, or allocable to, any of their shares of common stock of the
Company. None of the shares of Parent Common Stock to be received by
any stockholder-employee will be separate consideration for, or
allocable to, any employment agreements, and the compensation paid to
any stockholder-employee will be for services actually rendered and
will be commensurate with amounts paid to third parties bargaining at
arm's length for similar services.
13. The payment of cash in lieu of issuing fractional shares
of Parent Common Stock is solely for the purpose of avoiding the
expense and inconvenience to Parent of issuing fractional shares and
does not represent separately bargained-for consideration. The total
cash consideration that will be paid in the Merger to the Company
stockholders instead of issuing fractional shares of Parent Common
Stock will not exceed one percent of the total consideration that will
be issued in the Merger to the Company stockholders in exchange for
their Company Shares. The fractional share interests of each Company
stockholder will be aggregated and no Company stockholder will receive
cash in an amount equal to or greater than the value of one full share
of Parent Common Stock.
14. Except for the payment of cash in lieu of issuing
fractional shares of Parent Common Stock, Parent will acquire Company
Shares solely in exchange for Parent Common Stock. For purposes of this
representation, Company shares redeemed for cash or other property
furnished by Parent will be considered as acquired by Parent. Further,
no liabilities of the Company stockholders will be assumed by Parent,
nor will any of the Company Shares be subject to any liabilities.
I understand, and Parent and Merger Sub understand, that
Andrews & Kurth L.L.P. and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
will rely on these
<PAGE> 5
representations and assume them to be accurate as of the date hereof and as of
the date of the Merger, without further inquiry on their part, in rendering
their opinions with respect to the Merger and that the inaccuracy of any of
these representations may negatively affect those opinions.
Very truly yours,
GELTEX PHARMACEUTICALS, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
SHINE ACQUISITION SUB, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE> 6
APPENDIX B
SunPharm Corporation
The Veranda, Suite 301
814 Highway A-1A
Ponte Vedra Beach, Florida 32082
[DATE]
Andrews & Kurth L.L.P.
2170 Buckthorne Place, Suite 150
The Woodlands, Texas 77380
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
In connection with the opinions to be delivered pursuant to
Section 6.1(g) of the Agreement and Plan of Merger (the "Merger Agreement"),
dated as of August 13, 1999, among SunPharm Corporation, a Delaware corporation
(the "Company"), Shine Acquisition Sub, Inc., a Delaware corporation ("Merger
Sub") and GelTex Pharmaceuticals, Inc., a Delaware corporation ("Parent"), with
respect to the merger (the "Merger") of Merger Sub with and into the Company,
pursuant to which stockholders of the Company will receive voting stock of
Parent, in exchange for their stock in the Company, the undersigned does hereby
make the following certification and representations on behalf of the Company as
of the date hereof. Terms not otherwise defined herein have the meanings
ascribed to them in the Merger Agreement or the Proxy Statement/Prospectus of
Parent and the Company on Form S-4, Registration No. ________.
1. I certify to you that I am the _______________ of the
Company. I am familiar with the transactions contemplated by, and the
terms and provisions of, the Merger Agreement, have personal knowledge
of the matters covered by the following representations, and am
authorized to make the following representations on behalf of the
Company.
2. The fair market value of the Parent Common Stock and cash
received in lieu of fractional shares received by each Company
stockholder will be approximately equal to the fair market value of the
Company Common Shares and Company Preferred Shares (collectively, the
"Company Shares") surrendered in the exchange.
<PAGE> 7
3. There is no plan or intention of the stockholders of the
Company to have Parent redeem, or have a party related to Parent
acquire, shares of Parent Common Stock received in the Merger which
would reduce the Company stockholders' ownership of a number of shares
of Parent Common Stock received in the Merger to a number of shares
having a value, at the Effective Time, of less than 50% of the value at
the Effective Time of all the Company Shares held immediately prior to
the Merger by the Company stockholders. For purposes of this
representation, Company Shares outstanding immediately prior to the
Merger includes stock exchanged for cash in lieu of fractional shares
of Parent Common Stock as well as stock redeemed prior to the Merger by
reason of or as part of the Merger, and the value of all stock
outstanding immediately prior to the Merger shall be determined without
regard to any extraordinary distributions (i.e., distributions with
respect to stock other than periodic dividends that are consistent with
the Company's historic dividend practices and repurchases in the
ordinary course of business of unvested shares by the Company, if any,
acquired from Company terminating employees) by the Company by reason
of or as part of the Merger. For purposes of this representation, a
party is related to Parent if such party and Parent would be treated as
related parties within the meaning of Treasury Regulation Section
1.368-1(e)(3).
4. Following the Merger, the Company will hold at least 90
percent of the fair market value of its net assets and at least 70
percent of the fair market value of its gross assets and at least 90
percent of the fair market value of Merger Sub's net assets and at
least 70 percent of the fair market value of Merger Sub's gross assets
held immediately prior to the Merger. For purposes of this
representation, amounts paid by Company or Merger Sub to dissenters,
amounts paid by the Company or Merger Sub to stockholders who receive
cash or other property, amounts used by the Company or Merger Sub to
pay reorganization expenses, and all redemptions and distributions
(except for regular, normal dividends, if any) made by the Company have
been included as assets of the Company or Merger Sub, respectively,
immediately prior to the Merger.
5. The Company has no plan or intention to issue additional
shares of its stock that would result in Parent failing to acquire or
losing control of the Company. For purposes of this representation and
the following representations, control means the ownership of stock
possessing at least 80 percent of the total combined voting power of
all classes of stock entitled to vote and at least 80 percent of the
total number of shares of all other classes of stock of the
corporation.
6. Following the Merger, the Company intends to continue its
historic business or use a significant portion of its historic business
assets in a business.
7. There is no intercorporate indebtedness existing between
Parent and the Company or between Merger Sub and the Company that was
issued, acquired or will be settled at a discount.
<PAGE> 8
8. Except for the payment of cash in lieu of issuing
fractional shares of Parent Common Stock, in the Merger, Parent will
acquire all of the Company Shares solely in exchange for Parent Common
Stock. For purposes of this representation, Company Shares exchanged
for cash or other property originating with Parent will be treated as
outstanding Company Shares on the date of the Merger that is acquired
by Parent. Further, no liabilities of the Company stockholders will be
assumed by Parent, nor will any of the Company Shares be subject to any
liabilities.
9. At the time of the Merger, the Company will not have
outstanding any warrants, options, convertible securities, or any other
type of right pursuant to which any person could acquire stock in the
Company that, if exercised or converted, would affect Parent'
acquisition or retention of control of the Company.
10. The Company is not an investment company. For purposes of
this representation, an investment company means a regulated investment
company (as defined in the Code), a real estate investment trust (as
defined in the Code), or a corporation, 50 percent or more of the value
of whose total assets are stock and securities and 80 percent or more
of the value of whose total assets are assets held for investment
within the meaning of Section 368(a)(2)(F)(iii) of the Code.
11. On the date of the Merger, the fair market value of the
assets of the Company will exceed the sum of its liabilities, plus the
amount of liabilities, if any, to which its assets are subject.
12. The Company is not under the jurisdiction of a court in a
case under Title 11 of the United States Code, or a receivership,
foreclosure, or similar proceeding in a Federal or State court.
13. The Company and the Company stockholders will pay their
respective expenses, if any, incurred in connection with the Merger.
14. None of the compensation received by any
stockholder-employees of the Company will be separate consideration
for, or allocable to, any of their shares of common stock of the
Company. None of the shares of Parent Common Stock to be received by
any stockholder-employee will be separate consideration for, or
allocable to, any employment agreements, and the compensation paid to
any stockholder-employee will be for services actually rendered and
will be commensurate with amounts paid to third parties bargaining at
arm's length for similar services.
15. The payment of cash in lieu of issuing fractional shares
of Parent Common Stock is solely for the purpose of avoiding the
expense and inconvenience to Parent of issuing fractional shares and
does not represent separately bargained-for consideration. The total
cash consideration that will be paid in the Merger to the Company
stockholders instead of issuing fractional shares of Parent Common
Stock will not exceed one percent of the total consideration that will
be issued in the Merger to the Company stockholders
<PAGE> 9
in exchange for their Company Shares. The fractional share interest of
each Company stockholder will be aggregated and no Company stockholder
will receive cash in an amount equal to or greater than the value of
one full share of Parent Common Stock.
I understand, and the Company understands, that Andrews &
Kurth L.L.P. and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. will rely
on these representations and assume them to be accurate as of the date hereof
and as of the date of the Merger, without further inquiry on their part, in
rendering their opinions with respect to the Merger and that the inaccuracy of
any of these representations may negatively affect those opinions.
Very truly yours,
SUNPHARM CORPORATION
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE> 1
EXHIBIT 8.2
ANDREWS & KURTH LLP
2170 Buckthorne, Suite 150
The Woodlands, TX 77380
Telephone: (713) 220-4312 Facsimile: (713) 238-7282
October 4, 1999
SunPharm Corporation
The Veranda, Suite 301
814 Highway A-1
Ponte Vedra Beach, Florida 32082
Ladies and Gentlemen:
We have acted as counsel for SunPharm Corporation, a Delaware
corporation ("SunPharm"), in connection with the Agreement and Plan of Merger,
dated as of August 13, 1999 (the "Merger Agreement"), by and between SunPharm,
GelTex Pharmaceuticals, Inc., a Delaware corporation ("GelTex"), and Shine
Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary of
GelTex ("Merger Sub"), pursuant to which Merger Sub will be merged with and into
SunPharm.
At your request, in connection with the filing of the Registration
Statement, we are rendering our opinion concerning certain federal income tax
consequences of the Merger. In connection with rendering our opinion, we have
reviewed the Merger Agreement, including the Exhibits thereto, the proxy
statement/prospectus constituting part of the Registration Statement on Form S-4
filed with the Securities and Exchange Commission on the date hereof, and such
other documents and corporate records as we have deemed necessary or appropriate
as a basis therefor. We have assumed that the representations and warranties
contained in the Merger Agreement were true, correct and complete when made and
will continue to be true, correct and complete through the Effective Time, and
that the parties have complied with and, if applicable, will continue to comply
with the covenants contained in the Merger Agreement. We also have assumed that
statements as to factual matters contained in the proxy statement/prospectus are
true, correct and complete, and will continue to be true, correct and complete
through the Effective Time. Finally, we have assumed that the representations
and covenants to be made by SunPharm, GelTex and Merger Sub contained in tax
certificates substantially in the form of Appendices A and B attached hereto
will be provided to us at the Effective Time, and we have assumed that such
representations will be true, correct and complete through the Effective Time
and that such covenants will be complied with in all material respects.
All statements of legal conclusions attributable to us in the
discussion under the caption "Material U.S. Federal Income Tax Consequences of
the Merger" in the proxy statement/prospectus included in the Registration
Statement on Form S-4 of GelTex filed in respect of the transactions
contemplated in the Merger Agreement are our opinion with respect to the matters
set forth therein.
We hereby consent to the references to our firm and this opinion
contained in the joint proxy statement/prospectus included in the Registration
Statement. We will deliver to SunPharm, at the Effective Time of the Merger, the
opinion required by Section 6.1(g) of the Merger Agreement.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
----------------------------
ANDREWS & KURTH L.L.P.
<PAGE> 2
APPENDIX A
GelTex Pharmaceuticals, Inc.
153 Second Avenue
Waltham, Massachusetts 02154
[DATE]
Andrews & Kurth L.L.P.
2170 Buckthorne Place, Suite 150
The Woodlands, Texas 77380
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
In connection with the opinions to be delivered pursuant to
Section 6.1(g) of the Agreement and Plan of Merger (the "Merger Agreement"),
dated as of August 13, 1999, among SunPharm Corporation, a Delaware corporation
(the "Company"), Shine Acquisition Sub, Inc., a Delaware corporation ("Merger
Sub") and GelTex Pharmaceuticals, Inc., a Delaware corporation ("Parent"), with
respect to the merger (the "Merger") of Merger Sub with and into the Company,
pursuant to which stockholders of the Company will receive voting stock of
Parent, in exchange for their stock in the Company, the undersigned does hereby
make the following certification and representations on behalf of Parent and
Merger Sub as of the date hereof. Terms not otherwise defined herein have the
meanings ascribed to them in the Merger Agreement or the Proxy Statement/
Prospectus of Parent and the Company on Form S-4, Registration No. ____________.
1. I certify to you that I am the ____________ of Parent and
the __________ of Merger Sub. I am familiar with the transactions
contemplated by, and the terms and provisions of, the Merger Agreement,
have personal knowledge of the matters covered by the representations
made herein, and I am authorized to make these representations on
behalf of Parent and Merger Sub.
2. The fair market value of the Parent Common Stock and cash
received in lieu of fractional shares received by each Company
stockholder will be approximately equal to the fair market value of the
Company Common Shares and Company Preferred Shares (collectively, the
"Company Shares") surrendered in the exchange.
<PAGE> 3
3. Parent has no plan or intention to redeem or reacquire, or
have a party related to Parent acquire, shares of Parent Common Stock
issued in the Merger. For purposes of this representation and the
following representations, a party is related to Parent if such party
and Parent would be treated as related parties within the meaning of
Treasury Regulation Section 1.368-1(e)(3).
4. Following the Merger, Parent will cause the Company to hold
at least 90 percent of the fair market value of its net assets and at
least 70 percent of the fair market value of its gross assets and at
least 90 percent of the fair market value of Merger Sub's net assets
and at least 70 percent of the fair market value of Merger Sub"s gross
assets held immediately prior to the Merger. For purposes of this
representation, amounts paid by the Company or Merger Sub to
dissenters, amounts paid by the Company or Merger Sub to stockholders
who receive cash or other property, amounts used by the Company or
Merger Sub to pay reorganization expenses will be included as assets of
the Company or Merger Sub, respectively, immediately prior to the
Merger.
5. Prior to the Merger, Parent will be in control of Merger
Sub. For purposes of this representation and the following
representations, control is defined as the ownership of stock
possessing at least 80 percent of the total combined voting power of
all classes of stock entitled to vote and at least 80 percent of the
total number of shares of all other classes of stock of the
corporation.
6. Parent has no plan or intention to liquidate the Company
subsequent to the Merger; to merge the Company with or into another
corporation subsequent to the Merger; to sell or otherwise dispose of
the stock of the Company, except for transfers of stock to corporations
controlled by Parent, subsequent to the Merger, or to cause the Company
to sell or otherwise dispose of any of its assets or any assets
acquired from Merger Sub subsequent to the Merger, except for (i)
dispositions made in the ordinary course of business and (ii) transfers
of assets to corporations controlled by Parent.
7. Merger Sub will have no liabilities assumed by the Company,
and will not transfer to the Company any assets subject to liabilities
in the Merger.
8. Following the Merger, Parent will cause the Company to
continue its historic business or use a significant portion of its
historic business assets in a business within the meaning of Treasury
Regulation Section 1.368-1(d). For purposes of this representation,
Parent will be deemed to satisfy this requirement if (a) the members of
Parent's qualified group (as defined in Treasury Regulation Section
1.368-1(d)(4)(ii)), in the aggregate, continue the historic business of
the Company or use a significant portion of the Company's historic
business assets in a business, or (b) the foregoing activities are
undertaken by a partnership in which (i) the members of Parent's
qualified group, in the aggregate, own at least a 33 1/3 percent
capital and/or profits interest, or (ii) one or more members of the
qualified group has active and substantial management functions as a
partner with respect to the partnership business and the members of the
qualified group,
<PAGE> 4
in the aggregate, own at least a 20 percent capital and/or profits
interest in the partnership.
9. There is no intercorporate indebtedness existing between
Parent and the Company or between Merger Sub and the Company that was
issued, acquired or will be settled at a discount.
10. Neither Parent nor Merger Sub are investment companies.
For purposes of this representation, an investment company means a
regulated investment company (as defined in the Code), a real estate
investment trust (as defined in the Code) or a corporation, 50 percent
or more of the value of whose total assets are stock and securities and
80 percent or more of the value of whose total assets are assets held
for investment within the meaning of Section 368(a)(2)(F)(iii) of the
Code.
11. Parent and Merger Sub will pay their respective expenses,
if any, incurred in connection with the Merger.
12. None of the compensation received by any
stockholder-employees of the Company will be separate consideration
for, or allocable to, any of their shares of common stock of the
Company. None of the shares of Parent Common Stock to be received by
any stockholder-employee will be separate consideration for, or
allocable to, any employment agreements, and the compensation paid to
any stockholder-employee will be for services actually rendered and
will be commensurate with amounts paid to third parties bargaining at
arm's length for similar services.
13. The payment of cash in lieu of issuing fractional shares
of Parent Common Stock is solely for the purpose of avoiding the
expense and inconvenience to Parent of issuing fractional shares and
does not represent separately bargained-for consideration. The total
cash consideration that will be paid in the Merger to the Company
stockholders instead of issuing fractional shares of Parent Common
Stock will not exceed one percent of the total consideration that will
be issued in the Merger to the Company stockholders in exchange for
their Company Shares. The fractional share interests of each Company
stockholder will be aggregated and no Company stockholder will receive
cash in an amount equal to or greater than the value of one full share
of Parent Common Stock.
14. Except for the payment of cash in lieu of issuing
fractional shares of Parent Common Stock, Parent will acquire Company
Shares solely in exchange for Parent Common Stock. For purposes of this
representation, Company shares redeemed for cash or other property
furnished by Parent will be considered as acquired by Parent. Further,
no liabilities of the Company stockholders will be assumed by Parent,
nor will any of the Company Shares be subject to any liabilities.
I understand, and Parent and Merger Sub understand, that
Andrews & Kurth L.L.P. and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
will rely on these
<PAGE> 5
representations and assume them to be accurate as of the date hereof and as of
the date of the Merger, without further inquiry on their part, in rendering
their opinions with respect to the Merger and that the inaccuracy of any of
these representations may negatively affect those opinions.
Very truly yours,
GELTEX PHARMACEUTICALS, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
SHINE ACQUISITION SUB, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE> 6
APPENDIX B
SunPharm Corporation
The Veranda, Suite 301
814 Highway A-1A
Ponte Vedra Beach, Florida 32082
[DATE]
Andrews & Kurth L.L.P.
2170 Buckthorne Place, Suite 150
The Woodlands, Texas 77380
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Ladies and Gentlemen:
In connection with the opinions to be delivered pursuant to
Section 6.1(g) of the Agreement and Plan of Merger (the "Merger Agreement"),
dated as of August 13, 1999, among SunPharm Corporation, a Delaware corporation
(the "Company"), Shine Acquisition Sub, Inc., a Delaware corporation ("Merger
Sub") and GelTex Pharmaceuticals, Inc., a Delaware corporation ("Parent"), with
respect to the merger (the "Merger") of Merger Sub with and into the Company,
pursuant to which stockholders of the Company will receive voting stock of
Parent, in exchange for their stock in the Company, the undersigned does hereby
make the following certification and representations on behalf of the Company as
of the date hereof. Terms not otherwise defined herein have the meanings
ascribed to them in the Merger Agreement or the Proxy Statement/Prospectus of
Parent and the Company on Form S-4, Registration No. ___________.
1. I certify to you that I am the _______________ of the
Company. I am familiar with the transactions contemplated by, and the
terms and provisions of, the Merger Agreement, have personal knowledge
of the matters covered by the following representations, and am
authorized to make the following representations on behalf of the
Company.
2. The fair market value of the Parent Common Stock and cash
received in lieu of fractional shares received by each Company
stockholder will be approximately equal to the fair market value of the
Company Common Shares and Company Preferred Shares (collectively, the
"Company Shares") surrendered in the exchange.
<PAGE> 7
3. There is no plan or intention of the stockholders of the
Company to have Parent redeem, or have a party related to Parent
acquire, shares of Parent Common Stock received in the Merger which
would reduce the Company stockholders' ownership of a number of shares
of Parent Common Stock received in the Merger to a number of shares
having a value, at the Effective Time, of less than 50% of the value at
the Effective Time of all the Company Shares held immediately prior to
the Merger by the Company stockholders. For purposes of this
representation, Company Shares outstanding immediately prior to the
Merger includes stock exchanged for cash in lieu of fractional shares
of Parent Common Stock as well as stock redeemed prior to the Merger by
reason of or as part of the Merger, and the value of all stock
outstanding immediately prior to the Merger shall be determined without
regard to any extraordinary distributions (i.e., distributions with
respect to stock other than periodic dividends that are consistent with
the Company's historic dividend practices and repurchases in the
ordinary course of business of unvested shares by the Company, if any,
acquired from Company terminating employees) by the Company by reason
of or as part of the Merger. For purposes of this representation, a
party is related to Parent if such party and Parent would be treated as
related parties within the meaning of Treasury Regulation Section
1.368-1(e)(3).
4. Following the Merger, the Company will hold at least 90
percent of the fair market value of its net assets and at least 70
percent of the fair market value of its gross assets and at least 90
percent of the fair market value of Merger Sub's net assets and at
least 70 percent of the fair market value of Merger Sub's gross assets
held immediately prior to the Merger. For purposes of this
representation, amounts paid by Company or Merger Sub to dissenters,
amounts paid by the Company or Merger Sub to stockholders who receive
cash or other property, amounts used by the Company or Merger Sub to
pay reorganization expenses, and all redemptions and distributions
(except for regular, normal dividends, if any) made by the Company have
been included as assets of the Company or Merger Sub, respectively,
immediately prior to the Merger.
5. The Company has no plan or intention to issue additional
shares of its stock that would result in Parent failing to acquire or
losing control of the Company. For purposes of this representation and
the following representations, control means the ownership of stock
possessing at least 80 percent of the total combined voting power of
all classes of stock entitled to vote and at least 80 percent of the
total number of shares of all other classes of stock of the
corporation.
6. Following the Merger, the Company intends to continue its
historic business or use a significant portion of its historic business
assets in a business.
7. There is no intercorporate indebtedness existing between
Parent and the Company or between Merger Sub and the Company that was
issued, acquired or will be settled at a discount.
<PAGE> 8
8. Except for the payment of cash in lieu of issuing
fractional shares of Parent Common Stock, in the Merger, Parent will
acquire all of the Company Shares solely in exchange for Parent Common
Stock. For purposes of this representation, Company Shares exchanged
for cash or other property originating with Parent will be treated as
outstanding Company Shares on the date of the Merger that is acquired
by Parent. Further, no liabilities of the Company stockholders will be
assumed by Parent, nor will any of the Company Shares be subject to any
liabilities.
9. At the time of the Merger, the Company will not have
outstanding any warrants, options, convertible securities, or any other
type of right pursuant to which any person could acquire stock in the
Company that, if exercised or converted, would affect Parent'
acquisition or retention of control of the Company.
10. The Company is not an investment company. For purposes of
this representation, an investment company means a regulated investment
company (as defined in the Code), a real estate investment trust (as
defined in the Code), or a corporation, 50 percent or more of the value
of whose total assets are stock and securities and 80 percent or more
of the value of whose total assets are assets held for investment
within the meaning of Section 368(a)(2)(F)(iii) of the Code.
11. On the date of the Merger, the fair market value of the
assets of the Company will exceed the sum of its liabilities, plus the
amount of liabilities, if any, to which its assets are subject.
12. The Company is not under the jurisdiction of a court in a
case under Title 11 of the United States Code, or a receivership,
foreclosure, or similar proceeding in a Federal or State court.
13. The Company and the Company stockholders will pay their
respective expenses, if any, incurred in connection with the Merger.
14. None of the compensation received by any
stockholder-employees of the Company will be separate consideration
for, or allocable to, any of their shares of common stock of the
Company. None of the shares of Parent Common Stock to be received by
any stockholder-employee will be separate consideration for, or
allocable to, any employment agreements, and the compensation paid to
any stockholder-employee will be for services actually rendered and
will be commensurate with amounts paid to third parties bargaining at
arm's length for similar services.
15. The payment of cash in lieu of issuing fractional shares
of Parent Common Stock is solely for the purpose of avoiding the
expense and inconvenience to Parent of issuing fractional shares and
does not represent separately bargained-for consideration. The total
cash consideration that will be paid in the Merger to the Company
stockholders instead of issuing fractional shares of Parent Common
Stock will not exceed one percent of the total consideration that will
be issued in the Merger to the Company stockholders
<PAGE> 9
in exchange for their Company Shares. The fractional share interest of
each Company stockholder will be aggregated and no Company stockholder
will receive cash in an amount equal to or greater than the value of
one full share of Parent Common Stock.
I understand, and the Company understands, that Andrews &
Kurth L.L.P. and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. will rely
on these representations and assume them to be accurate as of the date hereof
and as of the date of the Merger, without further inquiry on their part, in
rendering their opinions with respect to the Merger and that the inaccuracy of
any of these representations may negatively affect those opinions.
Very truly yours,
SUNPHARM CORPORATION
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE> 1
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of GelTex
Pharmaceuticals, Inc. for the registration of 1,198,606 shares of its common
stock and to the incorporation by reference therein of our report dated February
23, 1999, with respect to the consolidated financial statements of GelTex
Pharmaceuticals, Inc. included in its Annual Report (Form 10-K) for the year
ended December 31, 1998, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Boston, Massachusetts
September 30, 1999
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of GelTex Pharmaceuticals,
Inc. on Form S-4 of our report dated February 12, 1999, appearing in the Proxy
Statement/Prospectus, which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Proxy Statement/Prospectus.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------
DELOITTE & TOUCHE LLP
Certified Public Accountants
Jacksonville, Florida
October 4, 1999
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-4 of GelTex Pharmaceuticals, Inc. of our report dated
February 23, 1999 relating to the financial statements of RenaGel LLC as of
December 31, 1998, and for the year ended December 31, 1998, appearing in GelTex
Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December
31, 1998. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
/S/ PRICEWATERHOUSE COOPERS LLP
--------------------------------
PRICEWATERHOUSE COOPERS LLP
Boston, Massachusetts
October 1, 1999
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PROXY SUNPHARM CORPORATION PROXY
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD NOVEMBER 16, 1999
The undersigned, having received the Notice of Special Meeting and the proxy
statement/prospectus, hereby appoints Stefan Borg and Paul M. Herron, and each
of them, attorneys and proxies for the undersigned (with full power of
substitution) to attend the above Special Meeting and all adjournments thereof
and to act for and to vote all common stock and/or preferred stock of SunPharm
Corporation standing in the name of the undersigned at the Special Meeting to be
held on Tuesday, November 16, 1999 at 9:00 a.m. Eastern time at the offices of
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., located at One Financial
Center, Boston, Massachusetts.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
1. Proposal to approve and adopt the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of August 13, 1999, by and among GelTex
Pharmaceuticals, Inc. ("GelTex"), Shine Acquisition Sub, Inc., a wholly-owned
subsidiary of GelTex ("Merger Sub"), and SunPharm Corporation ("SunPharm"),
pursuant to which Merger Sub will merge with and into SunPharm (the "Merger")
and SunPharm will survive the Merger as a wholly-owned subsidiary of GelTex.
In the Merger, holders of outstanding SunPharm common stock, par value $.0001
per share ("SunPharm Common Stock") will receive between 0.12225 and 0.14493
of a share of common stock, par value $.01 per share, of GelTex ("GelTex
Common Stock") for each share of SunPharm Common Stock held by them, and
holders of outstanding Series A or Series B Preferred Stock, par value $.001
per share ("SunPharm Preferred Stock") will receive between 0.18338 and
0.21740 of a share of GelTex Common Stock for each share of SunPharm
Preferred Stock held by them. Approval and adoption of the Merger Agreement
will also constitute approval of the Merger and the other transactions
contemplated by the Merger Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
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MARK HERE FOR ADDRESS [
] CHANGE AND NOTE AT LEFT
PLEASE SIGN EXACTLY AS NAME
APPEARS HEREON. Joint owners
should each sign. When
signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such.
-----------------------------
Signature
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Signature
Date
-----------------------------------------------------------------------------,
1999
When properly executed, this proxy will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this proxy will grant
authority to vote "FOR" Proposal 1, and in the discretion of Stefan Borg or Paul
M. Herron on any other business matters or proposals as may properly come before
the Special Meeting.
IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS'
RECOMMENDATIONS, JUST SIGN ABOVE. YOU NEED NOT MARK ANY BOXES.
