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As filed with the Securities and Exchange Commission on June 14, 2000
Registration No. 333-39040
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ENDO PHARMACEUTICALS HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2834 13-4022871
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of IndustrialClassification Identification No.)
Incorporation or Code Number)
Organization)
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223 Wilmington--West Chester Pike
Chadds Ford, Pennsylvania 19317
(610) 558-9800
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Each Registrant's Principal Executive Offices)
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Carol A. Ammon
President and Chief Executive Officer
223 Wilmington--West Chester Pike
Chadds Ford, Pennsylvania 19317
(610) 558-9800
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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Copies to:
Eileen T. Nugent, Esq. James J. Connors, II, Raymond Y. Lin, Esq.
Skadden, Arps, Slate, Esq. Latham & Watkins
Meagher & Flom LLP Kelso & Company 885 Third Avenue
4 Times Square 320 Park Avenue, 24th New York, New York
New York, New York Floor 10022-4802
10036-6522 New York, New York (212) 906-1200
(212) 735-3000 10022
(212) 751-3939
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger of Algos Pharmaceutical Corporation, a Delaware
corporation, with and into Endo Inc., a Delaware corporation and a newly
formed, wholly owned subsidiary of Endo Pharmaceuticals Holdings Inc., pursuant
to the Agreement and Plan of Merger, dated as of November 26, 1999, as may be
amended and restated from time to time, by and among Endo, Endo Inc. and Algos,
described in the enclosed Proxy Statement/Prospectus, have been satisfied or
waived.
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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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 the date that the Commission, acting under Section 8(a),
determines.
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[LOGO OF ALGOS]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
June 14, 2000
Dear Fellow Stockholder:
The Board of Directors of Algos Pharmaceutical Corporation has agreed to
merge Algos with a subsidiary of Endo Pharmaceuticals Holdings Inc. In this
merger, the holders of Algos common stock will receive for each share of Algos
common stock a share of Endo common stock and a warrant to purchase additional
shares of Endo common stock for nominal consideration. The warrants will become
exercisable only if the U.S. Food and Drug Administration approves Algos' New
Drug Application for MorphiDex(R) by March 31, 2003. For a more detailed
discussion of the consideration to be received by Algos stockholders in the
merger, please see the description set forth under the caption "SUMMARY--What
Algos Stockholders Will Receive in the Merger" on page 7 of this proxy
statement/prospectus. You will receive publicly tradable Endo common stock and
Endo warrants in the merger and the Endo common stock and the Endo warrants
will each be listed on the NASDAQ National Market under the symbols "ENDP" and
"ENDPW," respectively.
Before we can proceed with the merger, the stockholders of Algos must vote
in favor of the proposed transaction. We describe in detail the terms of the
merger in the accompanying proxy statement/prospectus, which I urge you to read
carefully. You should carefully consider the risk factors beginning on page 17
of this proxy statement/prospectus before voting your Algos shares.
The Algos Board of Directors has approved the merger and recommends that the
stockholders vote for the proposal. We have scheduled a special meeting of our
stockholders to vote on the proposal. You may vote on the proposal at the
special meeting either in person or by using the enclosed proxy card. We will
hold the special meeting at the Sheraton Eatontown Hotel and Conference Center,
6 Industrial Way East, Eatontown, New Jersey 07724 on Monday, July 17, 2000 at
10:00 a.m., local time.
Your vote is very important. Whether or not you plan to attend the special
meeting, please take the time to vote your shares. You may vote your shares by
completing, signing, dating and returning the enclosed proxy card as promptly
as possible in the enclosed postage-paid envelope. If you do not return your
proxy card or vote in person at the special meeting, the effect will be the
same as a vote against the proposal.
Sincerely,
[SIGNATURE OF JOHN W. LYLE]
John W. Lyle
Chief Executive Officer
and President
Neither the Securities and Exchange Commission nor any state securities
commission has approved the securities to be issued under this proxy
statement/prospectus or determined if this proxy statement/prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated June 14, 2000, and we first mailed
this proxy statement/ prospectus to stockholders of Algos on or about June 16,
2000.
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
1333 CAMPUS PARKWAY
NEPTUNE, NEW JERSEY 07753-6815
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
ON JULY 17, 2000
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We will hold a special meeting of the stockholders of Algos Pharmaceutical
Corporation, a Delaware corporation, at the Sheraton Eatontown Hotel and
Conference Center, 6 Industrial Way East, Eatontown, New Jersey 07724, on
Monday, July 17, 2000 at 10:00 a.m., local time, for the following purposes:
1. To consider and vote on a proposal to approve and adopt the Amended
and Restated Agreement and Plan of Merger, dated as of March 3, 2000, as
amended, by and among Endo Pharmaceuticals Holdings Inc., Endo Inc. and
Algos Pharmaceutical Corporation, under which, among other things, Algos
would merge with and into Endo Inc., a wholly owned subsidiary of Endo
Pharmaceuticals Holdings Inc., and holders of Algos common stock would
receive shares of Endo common stock and warrants to purchase additional
shares of Endo common stock that will become exercisable only if the U.S.
Food and Drug Administration approves Algos' New Drug Application for
MorphiDex(R) by March 31, 2003. A copy of the merger agreement and the
April 17, 2000 amendment are set forth as Appendices A and B, respectively,
to the attached proxy statement/prospectus.
2. To transact such other business as may properly come before the
special meeting or any adjournment or postponement.
We describe these items of business more fully in the proxy
statement/prospectus attached to this Notice.
The Algos Board of Directors recommends that you vote in favor of the
approval and adoption of the merger agreement and approval of the merger.
We will permit holders of record at the close of business on May 19, 2000 of
shares of Algos common stock to vote at the special meeting or any adjournment
or postponement thereof. We will make available a list of stockholders entitled
to vote at the special meeting during ordinary business hours at Algos' offices
at 1333 Campus Parkway, Neptune, New Jersey 07753-6815 for a period of at least
10 days prior to the special meeting for examination by any Algos stockholder
entitled to vote at the special meeting for any purpose germane to the special
meeting.
By Order of the Board of Directors,
[SIGNATURE OF JAMES R. LEDLEY]
James R. Ledley
Assistant Secretary
Neptune, New Jersey
June 14, 2000
To ensure the representation of your shares at the special meeting, we urge you
to complete, date and sign the enclosed proxy and mail it promptly in the
postage-paid return envelope provided, whether or not you plan to attend the
meeting in person. You can withdraw your proxy, or change your vote, at any
time before it is voted.
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REFERENCES TO ADDITIONAL INFORMATION
This document incorporates important business and financial information
about Algos from documents that Algos filed with the Securities and Exchange
Commission, or the SEC, that Algos has not included in or delivered with this
document. This information is available to you without charge upon your written
or oral request. You can obtain documents incorporated by reference in this
document by requesting them in writing or by telephone from Algos at the
following address:
Algos Pharmaceutical Corporation
Investor Relations
1333 Campus Parkway
Neptune, New Jersey 07753-6815
(732) 938-5959
Please request documents by July 5, 2000. If you request any incorporated
documents, we will mail the documents you request by first class mail, or
another equally prompt means, by the next business day after we have received
your request.
See "WHERE YOU CAN FIND MORE INFORMATION" for more information about the
documents referred to in this proxy statement/prospectus.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What is the proposed transaction?
A: Algos and Endo will form a combined company by merging Algos with and into
a subsidiary of Endo.
Q: When do you expect to complete the merger?
A: We expect to complete the merger immediately following the Algos special
meeting. Because the merger is subject to governmental approvals, however,
we cannot predict the exact timing.
Q: What will I receive for one Algos share in the merger?
A: You will receive one share of Endo common stock and one Endo warrant, which
together are called the merger consideration.
Q: Will I be able to trade the Endo common stock and Endo warrants that I
receive in the merger?
A: Yes. We intend to list both Endo common stock and the Endo warrants on the
NASDAQ National Market under the symbols "ENDP" and "ENDPW," respectively.
However, you may elect to receive non-transferable warrants by noting this
election on your proxy card.
Q: Can I exercise the warrant right away?
A: No. The warrant is not exercisable until the FDA approves MorphiDex(R) for
one or more pain indications. If the FDA approves MorphiDex(R), the warrant
must be exercised within 6 months of this approval. If the FDA does not
approve MorphiDex(R) by March 31, 2003, these warrants will expire and you
will receive nothing with respect to them.
Q: What is the exercise price of the warrant?
A: Each warrant is exercisable at a price of $0.01 per share of Endo common
stock. For example, if you have a warrant exercisable into 100 shares, you
will need to pay $1.00 to exercise the warrant. You may elect to exercise
on a "cashless" basis by not paying any money and receiving only the net
number of Endo shares, after deducting a number of shares the value of
which will equal the aggregate exercise price that you would have had to
otherwise pay to exercise the warrant.
Q: What is the difference between transferable and nontransferable warrants?
A: If you elect to receive transferable warrants, you will receive warrants
that Endo has registered and that are freely tradable on NASDAQ. If you
elect to receive nontransferable warrants, your warrants will be
restricted, and the terms of the warrants will permit you only to transfer
these warrants as the result of, or assignment by, operation of law (such
as death, merger or otherwise) or as law or a court order requires (such as
in connection with a divorce, bankruptcy or liquidation).
Q: Will my rights as an Algos stockholder change as a result of the merger?
A: Yes. While Delaware law will continue to govern your stockholder rights,
currently Algos' certificate of incorporation and by-laws govern Algos
stockholder rights, and Endo's certificate of incorporation and by-laws
govern Endo stockholder rights. Algos stockholders will receive Endo common
stock in the merger and will become stockholders of Endo. Endo intends to
amend and restate its certificate of incorporation and by-laws immediately
prior to the merger and, therefore, after the merger, Endo's amended and
restated certificate of incorporation and amended and restated by-laws will
govern your rights as an Endo stockholder.
Q: How do I vote?
A: If you hold your shares of Algos common stock directly, mail your signed
proxy card in the enclosed postage-paid return envelope as soon as possible
to ensure representation of your shares at the special meeting.
Stockholders may also vote in person at the special meeting. If a broker
holds your shares of Algos common stock in "street name" or another nominee
holds your shares, you must instruct your
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broker or nominee to vote your shares. If you do not vote your shares, the
effect will be a vote against the merger agreement.
Q: Can I change my vote?
A: Yes. You may change your vote before the special meeting by delivering, or
instructing your broker or other nominee to deliver, a later-dated, signed
proxy card to Algos' corporate secretary, or, if you hold your shares
directly, by attending the special meeting and voting in person.
Q: Whom can I call with questions?
A: If you have any questions about the merger or any related transactions,
please call Gary Anthony at Algos at (732) 938-5959 or Jeffrey R. Black at
Endo at (610) 558-9800 or Joseph Doherty at MacKenzie Partners, Inc. at
(212) 929-5500 or (800) 322-2885. If you would like copies of any of the
documents we refer to in this proxy statement/prospectus, you should call
Algos if the documents relate to Algos, or call Endo if the documents relate
to Endo.
Q: Should I send in my stock certificates now?
A: No. After we complete the merger, Endo will send instructions to
stockholders whose shares were converted in the merger. These instructions
will explain how to exchange your Algos share certificates for the
appropriate Endo share certificates and warrants.
Q: What do I need to do now?
A: Please carefully read and consider the information contained in this
document and please complete and sign and mail your proxy card in the
enclosed postage-paid return envelope as soon as possible so that your voted
shares may be represented at the special meeting. In order to assure the
receipt of your vote, please give your proxy in accordance with the
instructions on your proxy card even if you currently plan to attend the
meeting in person.
The board of directors of Algos recommends that you vote in favor of the
merger agreement.
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SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. For a more complete description of the legal terms of the
merger, you should carefully read the rest of this document and the other
documents to which we refer. See "WHERE YOU CAN FIND MORE INFORMATION" on page
130. We have included page references in parentheses to direct you to a more
complete description of the topics presented in this summary.
The Companies (See Page 84)
Algos Pharmaceutical Corporation
1333 Campus Parkway
Neptune, New Jersey 07753-6815
Telephone: (732) 938-5959
Algos is a leader in developing proprietary pain management products. Our
products combine existing analgesics, drugs designed to reduce or eliminate
pain, with NMDA-receptor antagonist drugs, drugs that block a specific type of
pain receptor in human cells, in an attempt to improve the pain relief efficacy
of existing drugs such as morphine. Algos' products currently in development
include opioid analgesics (MorphiDex(R), HydrocoDex(TM) and OxycoDex(TM)) for
moderate-to-severe pain, a non-opioid analgesic (NeuroDex(TM)) for neuropathic
pain, long-lasting local anesthetics (LidoDex(TM) IED) for post-operative pain,
an intranasal anesthetic for migraine and products for the treatment of opiate
and nicotine addiction.
Endo Pharmaceuticals Holdings Inc.
223 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
Telephone: (610) 558-9800
Endo is a specialty pharmaceutical company with market leadership in pain
management. The company researches, develops, produces and markets both branded
and generic pharmaceuticals focusing primarily on the treatment of pain. Endo
has a portfolio of fourteen branded products that include established brands
such as Percocet(R) and Percodan(R), opioid analgesics that treat moderate-to-
severe pain. In September 1999, Endo launched Lidoderm(R), the first and only
FDA-approved product for the treatment of the pain associated with post-
herpetic neuralgia. Endo is currently a private company owned by affiliates of
Kelso & Company, members of the management of Endo and other investors.
Endo Inc.
223 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
Telephone: (610) 558-9800
Endo Inc. is a newly formed, wholly owned subsidiary of Endo. Upon the
completion of the merger, Algos will merge with and into Endo Inc. Endo Inc.
will act as an operating subsidiary of Endo following the merger.
Summary of Transaction (See Page 66)
In the merger, Algos will merge with Endo Inc. As a result, Algos will cease
to exist as a separate corporate entity and Endo Inc. will continue as the
surviving corporation and a wholly owned subsidiary of Endo. Immediately after
the merger, current Endo stockholders will own approximately 80% of the
combined public company's approximately 89.8 million pro forma fully-diluted
outstanding shares, while Algos stockholders will own 20%.
In the merger, each stockholder of Algos will receive one share of Endo
common stock and one Endo warrant for each share of Algos common stock held by
them. In connection with the merger, each pre-merger Endo stockholder will
receive one Endo warrant, which has different terms and conditions than the
warrant Endo will issue to the Algos stockholders in the merger, for each share
of Endo common stock held by them. Algos stockholders' percentage ownership in
Endo will increase or decrease based on whether the FDA approves MorphiDex(R)
by specific dates. If the FDA does not approve MorphiDex(R) by March 31, 2003,
the warrants that the Algos stockholders will receive in the merger will not
become exercisable. Likewise, if the FDA approves MorphiDex(R) by December 31,
2002, the warrants that the Endo stockholders will receive prior to the merger
will not become exercisable. Algos stockholders' percentage ownership in Endo
will also increase or decrease
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based on whether Endo achieves a cash gross profit target (based on current
Endo products and future non-Algos related products internally developed and
sold or marketed by Endo) for fiscal year 2000 of at least $147.4 million. We
have included a detailed discussion of the amount of Endo common stock that the
Algos stockholders will own upon the occurrence of these events in this summary
under "What Algos Stockholders Will Receive in the Merger." Because there is
currently no market for the Endo common stock, the exact dollar value of the
merger consideration is difficult to determine until after the parties complete
the merger and the Endo common stock is trading on NASDAQ.
Algos Special Meeting (See Page 82)
Algos will hold its special meeting at the Sheraton Eatontown Hotel and
Conference Center, 6 Industrial Way East, Eatontown, New Jersey 07724 on
Monday, July 17, 2000, at 10:00 a.m., local time. At the special meeting, Algos
will ask its stockholders to consider and vote upon the approval and adoption
of the merger agreement and other matters that may properly come before the
special meeting or any postponements or adjournments of the meeting.
Record Date; Voting Power (See Page 82)
Algos stockholders are entitled to one vote per share. Only holders of Algos
common stock at the close of business on May 19, 2000 will receive notice of
the Algos special meeting and may vote at the Algos special meeting. On that
date, there were 95 holders holding 17,421,345 shares of Algos common stock
outstanding.
Vote Required (See Page 82)
The affirmative vote of the holders of record of a majority of the shares of
Algos common stock outstanding as of the record date is required to approve and
adopt the merger agreement.
Algos stockholders holding approximately 22% of all Algos common stock have
entered into voting agreements that obligate them to vote these shares in favor
of approval and adoption of the merger agreement unless the merger agreement is
terminated.
Recommendation to Algos Stockholders (See Page 82)
The Algos board of directors has concluded that the merger agreement and the
merger are fair to, and in the best interests of, the Algos stockholders, and
recommends that the stockholders vote in favor of approval and adoption of the
merger agreement.
Formation of Endo Pharma LLC and Treatment of Current Endo Employee Stock
Options (See Page 81)
Endo has agreed to use its reasonable best efforts to cause each of the
current Endo stockholders to contribute their shares of Endo common stock to
Endo Pharma LLC prior to the merger. In the event that Endo does not achieve a
cash gross profit (based on current Endo products and future non-Algos related
products internally developed and sold or marketed by Endo) for fiscal year
2000 of at least $147.4 million, Endo Pharma LLC will return a number of these
recently contributed shares of Endo common stock to Endo's treasury, which will
increase the percentage ownership in Endo of the Algos stockholders by an
additional five percentage points.
In addition, through the creation of Endo Pharma LLC and the contribution by
the current Endo stockholders of their shares of Endo common stock to Endo
Pharma LLC prior to the merger, Endo intends to ensure that the exercise of the
Endo employee stock options that are outstanding prior to the merger will
affect only those holders of Endo common stock that held these shares prior to
the merger and not dilute the Algos stockholders' ownership in Endo following
the merger. These current Endo employee stock options will be exercisable only
into shares of Endo common stock that Endo Pharma LLC will hold. Holders of
these Endo employee stock options must consent to this amendment to their stock
options. The holders of approximately 90% of the outstanding Endo employee
stock options have already consented to this amendment.
Upon these stock options vesting, Endo will incur substantial non-cash
compensation charges. The vesting of these options will not, however, result in
the issuance of any additional Endo shares. The expense associated with these
options remains deductible by Endo even though Endo Pharma LLC will satisfy
these options. Accordingly, the parties have entered into a tax sharing
agreement which, in general, provides that Endo will pay to Endo Pharma LLC the
amount of the tax benefits it receives as a
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result of the exercise of these current Endo stock options for the years in
which these tax benefits arise.
Ownership of Endo After the Merger (See Page 81)
After the merger, Endo Pharma LLC will own 79.6% of Endo's outstanding
common stock. Assuming that all of the Endo stockholders prior to the merger
exchange their shares of Endo common stock for Endo Pharma LLC units, Kelso
Investment Associates V, L.P., Kelso Equity Partners V, L.P. and other
affiliates and designees of Kelso & Company, will have contributed to Endo
Pharma LLC approximately 85.6% of the Endo common stock owned by Endo Pharma
LLC, and Greenwich Street Capital Partners, L.P. and affiliated investors will
have contributed to Endo Pharma LLC approximately 13.7%. See "THE MERGER
AGREEMENT--Additional Agreements--Formation of Endo Pharma LLC" and "ENDO
PHARMA LLC."
In connection with the merger, Kelso Investment Associates V, L.P. and Kelso
Equity Partners V, L.P. have entered into a binding letter agreement with Algos
and Endo in which these Kelso entities have agreed that they will not, among
other things, engage in any "going private" transaction within the meaning of
Rule 13e-3 of the Securities Exchange Act for a period of two years from the
merger unless the holders of the majority of the then outstanding Endo common
stock not affiliated with these Kelso entities approve the transaction. See
"ADDITIONAL AGREEMENTS--Kelso Side Letter."
Collaboration Agreement (See Page 79)
On November 26, 1999, Endo Pharmaceuticals Inc., an operating subsidiary of
Endo, and Algos also entered into a collaboration agreement under which the
parties will co-develop oxycodone-based products using Algos' proprietary
technology and Endo's established brands. Endo will be the exclusive worldwide
marketer of these products. In the event that the merger does not occur, this
collaboration agreement will survive. See "ADDITIONAL AGREEMENTS--Collaboration
Agreement."
Interests of Officers and Directors in the Merger (See Page 57)
Some members of Algos management and the Algos board of directors have
interests in the merger that are different from, or in addition to, the
interests of the Algos stockholders generally. The Algos board was aware of
these interests and considered them, among other matters, when they adopted and
approved the merger agreement.
Completion of the Merger (See Page 75)
Before we can complete the merger, we must satisfy a number of conditions.
These include:
. Stockholder Approval. A majority of the stockholders of Algos will have
voted to approve the merger agreement.
. Listing on the NASDAQ. NASDAQ will have authorized Endo common stock
issuable in the merger for listing.
. Registration Statement. The SEC will have declared effective a
registration statement that includes this proxy statement/prospectus.
. No Governmental Action/Order. There shall not have been any action by any
governmental entity or law challenging or preventing the merger.
. Performance of Obligations; Representations and Warranties. Each of the
parties will have performed in all material respects each of its
covenants and agreements contained in the merger agreement. Each of the
representations and warranties of the parties contained in the merger
agreement will be true and correct.
. Tax Opinion. The counsel of each of Endo and Algos will have delivered
legal opinions, stating that the merger will qualify as a tax-free
reorganization under the Internal Revenue Code, or the Code.
. Formation of Endo Pharma LLC. Endo will have formed Endo Pharma LLC.
. Appraisal Rights. Holders of not more than 12% of the shares of Algos
common stock outstanding at the time of the Algos stockholders' vote will
have exercised their appraisal rights.
Endo or Algos, as applicable, may waive the conditions to the completion of
the merger to the extent that a waiver would be permitted by law. If Endo or
Algos waives any condition relating to the tax opinions or any other material
condition to the merger, we will amend this proxy statement/ prospectus and
resolicit the votes of the Algos stockholders.
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Termination of the Merger Agreement (See Page 76)
Endo and Algos may mutually agree in writing to terminate the merger
agreement at any time without completing the merger, even after the
stockholders of Algos have approved it. In addition, either Endo or Algos may
decide to terminate the merger if:
. the other company breaches its obligations under the merger agreement in
a material manner;
. the other company has materially breached any representation or warranty;
. a final court order prohibits the merger;
. any condition to the merger becomes incapable of satisfaction prior to
July 31, 2000;
. the parties have not completed the merger by July 31, 2000, unless they
have extended this date; or
. the Algos stockholders fail to approve the merger agreement.
Fees and Expenses (See Page 73)
Each party will pay its own costs and expenses. However, Endo and Algos will
share equally all filing fees and printing expenses related to this proxy
statement/prospectus and the registration statement. If a non-breaching party
terminates the merger agreement as a result of a breach, the breaching party
will reimburse the non-breaching party for all out-of-pocket expenses. In
addition, Algos will reimburse Endo for all out-of-pocket expenses if the Algos
stockholders do not approve and adopt the merger agreement.
Accounting Treatment (See Page 38)
The parties will account for the merger by using the purchase method of
accounting in accordance with generally accepted accounting principles. The
purchase method accounts for a merger as an acquisition of one company by
another. Endo will be the acquiring company for accounting purposes principally
because the stockholders of Endo will receive 80% of the shares of the combined
company. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION."
Fairness Opinion of Financial Advisor to Algos Stockholders (See Page 31)
Algos' financial advisor, Credit Suisse First Boston Corporation, has given
a written opinion to Algos' board of directors that, as of November 26, 1999,
the merger consideration the Algos stockholders will receive is fair from a
financial point of view. This opinion is subject to the qualifications and
limitations referred to in the opinion. This opinion appears as Appendix C to
this proxy statement/prospectus. We urge you to read this opinion.
Federal Income Tax Considerations (See Page 39)
Endo and Algos each expect the merger to be tax free. Endo and Algos have
structured the merger so that their legal counsel expect to be able to deliver
opinions that Endo and Algos will not recognize any gain or loss for U.S.
federal income tax purposes in the merger. The delivery of these opinions is a
condition to the merger. Algos stockholders will not recognize gain or loss for
U.S. federal income tax purposes with respect to Endo common stock received in
the merger. The receipt of warrants by Algos stockholders also should not cause
Algos stockholders to recognize gain or loss for U.S. federal income tax
purposes, although this result is not completely free from doubt in the case of
the receipt of transferable warrants. See "THE MERGER--Material U.S. Federal
Income Tax Consequences of the Merger."
In order to ensure that the receipt of warrants will be tax free, Algos
stockholders may elect to receive non-transferable warrants by noting this
election on their proxy cards. In making this election, however, the warrants
that these Algos stockholders will receive will be illiquid securities, and not
transferable to a third party.
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult your tax
advisor for a full understanding of the tax consequences to you.
Appraisal Rights (See Page 44 and Appendix G)
The holders of Algos common stock are entitled to dissenters' or appraisal
rights in connection with the merger under applicable Delaware law.
Listing of Endo Common Stock and Warrants (See Page 72)
Endo will use its reasonable best efforts to cause the Endo common stock and
Endo warrants, issuable in connection with the merger, to be authorized for
listing on the NASDAQ. The listing
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<PAGE>
of the Endo common stock issuable in connection with the merger is a condition
to the merger's completion. Prior to the completion of the merger, there will
be no public market for these securities.
What Algos Stockholders Will Receive in the Merger
Each Algos stockholder will receive one share of Endo common stock and one
Endo warrant for each share of Algos common stock that a stockholder holds on
the day of the merger.
The Algos stockholders will initially own common stock that represents 20%
of Endo's outstanding common stock. If the FDA approves MorphiDex(R) on or
before March 31, 2002, the warrants issued to the Algos stockholders will
become exercisable, enabling the Algos stockholders to obtain additional shares
of Endo common stock that, together with shares issued to the Algos
stockholders in the merger, would have constituted 35% of Endo's outstanding
common stock at the time of the merger. If the FDA does not approve
MorphiDex(R) on or before March 31, 2002 but does approve it on or before
September 30, 2002, this percentage will decrease by six percentage points and
if the FDA does not approve Morphidex(R) on or before September 30, 2002, but
does approve it on or before March 31, 2003, this percentage will decrease by
11 percentage points. This proxy statement/prospectus describes these decreases
in detail under "DESCRIPTION OF THE ENDO WARRANTS" on page 114.
In addition, if the FDA does not approve MorphiDex(R) by December 31, 2002,
the warrants that the stockholders of Endo received immediately prior to the
merger will become exercisable, entitling the holders of these warrants to
receive an additional 5% of the pro forma combined company, calculated as if
the holders of all of these warrants had exercised them at the closing of the
merger.
Also, if Endo does not achieve a cash gross profit target (based on current
Endo products and future non-Algos related products internally developed and
sold or marketed by Endo) for fiscal year 2000 of at least $147.4 million, then
Endo Pharma LLC, which will hold the shares that the Endo stockholders had held
before the merger, will return a number of its shares of Endo common stock to
Endo's treasury, which will increase the percentage ownership in Endo of the
Algos stockholders by an additional five percentage points. For a discussion of
Endo Pharma LLC, see "THE MERGER AGREEMENT--Additional Agreements--Formation of
Endo Pharma LLC" and "ENDO PHARMA LLC."
----------------
The following table shows the percentage of Endo common stock that the
stockholders of Algos will own under the various possibilities, assuming that
Endo does not issue any other shares after the merger:
--------
<TABLE>
<CAPTION>
Endo Achieves Cash Gross Endo Does Not Achieve
Profit Target Cash Gross Profit Target
------------------------ ------------------------
<S> <C> <C>
The FDA approves MorphiDex(R) on or before
March 31, 2002............................. 35% 40%
The FDA approves MorphiDex(R) after March
31, 2002 and on or before September 30,
2002....................................... 29% 34%
The FDA approves MorphiDex(R) after
September 30, 2002 and on or before
December 31, 2002.......................... 24% 29%
The FDA approves MorphiDex(R) after December
31, 2002 and on or before March 31, 2003
and all of the warrants issued to pre-
merger Endo stockholders prior to the
merger are exercised ...................... 18.2% 23.5%
The FDA does not approve MorphiDex(R) by
March 31, 2003 and all of the warrants
issued to pre-merger Endo stockholders
prior to the merger are exercised.......... 15% 20%
</TABLE>
----------------
If Endo does achieve the cash gross profit target, Algos stockholders will
receive for each warrant upon exercise:
. approximately 1.15 shares of Endo common stock if the FDA approves
MorphiDex(R) on or before March 31, 2002;
. approximately 0.63 shares of Endo common stock if the FDA approves
MorphiDex(R) after March 31, 2002 and on or before September 30, 2002; and
. approximately 0.26 shares of Endo common stock if the FDA approves
MorphiDex(R) after September 30, 2002 and before March 31, 2003.
7
<PAGE>
If Endo does not achieve the cash gross profit target, Algos stockholders
will receive for each warrant upon exercise:
. approximately 1.00 share of Endo common stock if the FDA approves
MorphiDex(R) on or before March 31, 2002;
. approximately 0.55 shares of Endo common stock if the FDA approves
MorphiDex(R) after March 31, 2002 and on or before September 30, 2002;
and
. approximately 0.23 shares of Endo common stock if the FDA approves
MorphiDex(R) after September 30, 2002 and before March 31, 2003.
The above share numbers may be subject to some antidilution adjustments.
If the FDA does not approve MorphiDex(R) by March 31, 2003, the warrants
will expire and Algos stockholders will receive nothing with respect to them.
With respect to the warrants issued to the pre-merger Endo stockholders, if the
FDA does not approve MorphiDex(R) by December 31, 2002, the warrants that the
stockholders of Endo received immediately prior to the merger will be
exercisable, entitling the holders of these warrants to receive upon exercise:
. approximately 0.42 shares of Endo common stock if Endo does achieve the
cash gross profit described above; and
. approximately 0.25 shares of Endo common stock if Endo does not achieve
this cash gross profit.
The above share numbers may be subject to some antidilution adjustments.
8
<PAGE>
Summary Selected Historical Financial Data
Endo Summary Selected Historical Consolidated Financial Data
The following table contains summary selected historical consolidated
financial data for Endo. The consolidated balance sheet data as of December 31,
1997, 1998 and 1999 and the consolidated statement of operations data for the
period from August 26, 1997, the date of the acquisition of Endo from the then
DuPont Merck Pharmaceutical Company (see "THE COMPANIES--Endo"), to December
31, 1997, the years ended December 31, 1998 and 1999 have been derived from the
consolidated financial statements audited by Deloitte & Touche LLP independent
accountants of Endo (except for net income (loss) per share data) and the
consolidated balance sheet data as of August 26, 1997, December 31, 1996 and
December 31, 1995 and the consolidated statement of operations data for the
periods then ended have been derived from the statements of earnings and
statement of assets to be sold audited by PricewaterhouseCoopers LLP,
independent accountants. The consolidated statement of operations data and
consolidated balance sheet data for the three months ended as of March 31, 1999
and March 31, 2000 have been derived from unaudited financial statements, which
in the opinion of Endo's management contain all adjustments, consisting only of
normal recurring accruals, which are necessary for a fair statement of Endo's
financial results for these periods. The results of operations for the three
months ended March 31, 2000 are not necessarily indicative of results to be
expected for the entire year ending December 31, 2000 or any future period. The
information presented below is not necessarily indicative of the results of
Endo's future operations. You should read the following information together
with the consolidated financial statements and the related notes that are
included elsewhere in this proxy statement/prospectus, "UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION" and "THE COMPANIES--Endo--
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Predecessor Company (1) Endo
--------------------------------- -----------------------------------------------------
Period From
August 26, 1997
Year Ended Period From (Date of Year Ended Three Months Ended
December 31, January 1, 1997 Acquisition) to December 31, March 31,
----------------- to August 26, December 31, ----------------- -------------------
1995 1996 1997 1997 1998 1999 1999 2000
-------- -------- --------------- --------------- -------- -------- --------- ---------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............... $113,884 $102,325 $65,077 $ 39,431 $108,370 $138,546 $ 28,561 $ 27,000
Cost of sales........... 44,691 48,369 30,551 29,779 54,731 58,263 13,440 12,062
-------- -------- ------- -------- -------- -------- -------- ---------
Gross profit............ 69,193 53,956 34,526 9,652 53,639 80,283 15,121 14,938
Selling, general &
administrative......... 13,024 12,286 5,621 8,707 25,540 42,921 9,663 12,073
Research & development.. 6,550 6,856 5,253 2,865 5,893 9,373 1,983 3,028
Depreciation and
amortization........... -- -- -- 2,340 7,373 8,309 1,879 2,151
Separation benefits..... -- -- -- -- -- -- -- 22,034
Purchased in-process
research and
development............ -- -- -- 46,000 -- -- -- --
-------- -------- ------- -------- -------- -------- -------- ---------
Operating income (loss)
....................... 49,619 34,814 23,652 (50,260) 14,833 19,680 1,596 (24,348)
Interest expense, net... -- -- -- 5,352 14,451 14,347 3,362 3,937
-------- -------- ------- -------- -------- -------- -------- ---------
Income (loss) before
income tax (benefit)... 49,619 34,814 23,652 (55,612) 382 5,333 (1,766) (28,285)
Income tax (benefit).... -- -- -- (20,318) 181 2,073 (687) (10,691)
-------- -------- ------- -------- -------- -------- -------- ---------
Net income (loss)....... $ 49,619 $ 34,814 $23,652 $(35,294) $ 201 $ 3,260 $ (1,079) $ (17,594)
======== ======== ======= ======== ======== ======== ======== =========
Net income (loss) per
share
Basic.................. N/A N/A N/A $ (0.49) $ 0.00 $ .05 $ (0.02) $ (0.25)
Diluted................ N/A N/A N/A $ (0.49) $ 0.00 $ .05 $ (0.02) $ (0.25)
Shares used to compute
net income (loss) per
share
Basic.................. N/A N/A N/A 71,529 71,787 71,812 71,817 71,805
Diluted................ N/A N/A N/A 71,529 71,787 71,812 71,817 71,805
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Predecessor Company (1) Endo
----------------------------- ------------------------------------------------------
December 31, December 31, March 31,
------------- August 26, ---------------------------------- ---------
1995 1996 1997 1997 1998 1999 2000
------ ------ --------------- --------------- -------- -------- ---------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ -- $ -- $-- $ 14,521 $ 17,367 $ 22,028 $ 30,201
Working capital......... -- -- -- 17,659 37,676 49,541 45,673
Total assets............ -- -- -- 275,496 287,618 329,436 325,248
Total debt.............. -- -- -- 167,472 170,544 191,203 189,699
Other long-term
obligations............ -- -- -- 5,852 6,352 6,745 11,756
Stockholders' equity.... -- -- -- 74,706 75,358 78,587 81,782
<CAPTION>
Predecessor Company (1) Endo
----------------------------- ------------------------------------------------------
Period From
August 26, 1997
Year Ended Period From (Date of Year Ended Three Months
December 31, January 1, 1997 Acquisition) to December 31, Ended March 31,
------------- to August 26, December 31, ------------------ ------------------
1995 1996 1997 1997 1998 1999 1999 2000
------ ------ --------------- --------------- -------- -------- --------- -------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Financial Data:
Cash flows provided by
operating activities... -- -- -- $ 15,165 $ 20,932 $ 13,766 $ 2,766 $10,617
Cash flows used in
investing activities... -- -- -- (268,454) (3,537) (9,074) (774) (201)
Cash flows provided by
(used in) financing
activities............. -- -- -- 267,810 (14,549) (31) (13) (2,243)
Consolidated
EBITDA (2)............. -- -- -- 14,025 40,726 47,232 8,108 2,082
Cash gross profit (3)... -- -- -- 25,597 72,159 99,526 19,754 18,435
</TABLE>
--------
(1) On August 26, 1997, Endo commenced operations by acquiring certain branded
and generic pharmaceutical products, related rights and certain assets of
DuPont Pharmaceuticals Company, or the predecessor company. The financial
information for the predecessor company is not comparable to Endo's
financial information as the business was operated within a division of the
predecessor company and historical financial statements were not prepared
for the Endo business. These products represented less than 10% of the
revenues of DuPont Pharmaceuticals Company. Consolidated balance sheet data
and cash flow data of the predecessor company related to these products
have been omitted from the table above. It is our understanding that
because of the manner in which certain transactions were historically
processed, recorded and accumulated, it was not, and is not practicable to
prepare complete financial statements. The financial information for the
predecessor company includes estimates and allocations that may not
necessarily be indicative of the costs that would have resulted if the
business had been operated as a separate entity. The consolidated statement
of operations data include those net sales, other operating revenue, costs
and expenses directly related to the manufacture and distribution of the
products acquired including the allocation of certain manufacturing and
distribution overhead costs. The consolidated statement of operations data
also include direct and allocated expenses for marketing and selling,
general and administrative and research and development. In connection with
the original formation of the predecessor company no indebtedness was
assumed nor any material indebtedness incurred subsequent to formation.
Accordingly, no interest expense has been charged in the consolidated
statement of operations data. In addition, although depreciation and
amortization expense is included in the allocation of expenses to the
acquired products, such amount is not compatible to depreciation and
amortization expense of Endo.
Endo has been informed that it is not practical for the predecessor company
to prepare a balance sheet or statement of cash flows related to the products
acquired by Endo for any period prior to August 26, 1997. The predecessor
company's systems for processing, recording and accumulating transactions
were designed to support the management and reporting requirements of the
predecessor business as a whole and not designed to support reporting related
only to the products acquired by Endo. At the time of the August 26, 1997
acquisition, the products were managed as an integrated part of the
predecessor company. Consequently, it is not practical to provide operating
cash flow information of the predecessor company related to Endo products
before August 26, 1997.
In addition, the predecessor company's sales, manufacturing, research and
development and corporate activities were integrated for all products of the
predecessor company, not only those products of Endo. Endo did not acquire
the physical assets used to produce the products and these products continue
to be manufactured by the predecessor company. Consequently, Endo
understands that there has not been a segregation of production assets
associated with the products by the predecessor company and accordingly, it
is not practical to provide financing or investing cash flow information,
such as capital expenditures or depreciation, related to Endo products
before August 26, 1997. The omitted predecessor company financial
information would not be comparable or meaningful. Consequently,
depreciation and amortization expense of the predecessor company is not
comparable to depreciation and amortization expense of Endo.
Due to the August 26, 1997 acquisition, a new basis of accounting has been
recorded for the purchase. The predecessor company did not charge to the
business interest expense and income taxes, although income tax expense, on
a pro forma basis, has been reflected on the face of the predecessor
financial statements of $19,848, $13,926 and $9,461 for the years ended
December 31, 1995, December 31, 1996 and the period ended August 26, 1997,
respectively.
10
<PAGE>
(2) In evaluating consolidated EBITDA and the trends it depicts, you should
consider the following significant factors:
. Consolidated EBITDA should not be considered as an alternative to net
income as a measure of Endo's operating results or its cash flows as a
measure of liquidity;
. Consolidated EBITDA may not be comparable to similarly titled measures
reported at other companies;
. Consolidated EBITDA is presented because management understands
consolidated EBITDA is customarily used by investors as a criterion in
evaluating companies;
. Credit Suisse First Boston, Algos' financial advisor, used consolidated
EBITDA in its discounted cash flow analysis to evaluate whether the merger
is fair to the stockholders of Algos from a financial point of view and
. Consolidated EBITDA is a significant measurement to the holders of Endo's
credit facility and its trends depict Endo's ability to repay its
indebtedness and fund its ongoing operations.
Endo's credit facility defines consolidated EBITDA as consolidated net
income for the applicable period plus, without duplication and to the extent
deducted from revenues in determining consolidated net income for that
period, the sum of (a) the aggregate amount of consolidated cash interest
expense for the period, (b) the aggregate amount of letter of credit fees
paid during the period, (c) the aggregate amount of income tax expense for
the period, (d) all amounts attributable to depreciation and amortization
for the period, (e) all extraordinary charges during the period and (f) all
other non-cash charges during the period; and minus, without duplication and
to the extent added to revenues in determining consolidated net income for
such period, the sum of (i) all extraordinary gains during the period and
(ii) all other non-cash gains during such period, all as determined on a
consolidated basis with respect to Endo and subsidiaries in accordance with
generally accepted accounting principles. The reconciliation of operating
income (loss) (as determined by generally accepted accounting principles) to
consolidated EBITDA (as defined in Endo's credit facility) is as follows:
<TABLE>
<CAPTION>
Period from Year Ended Three Months
August 26, 1997 December 31, Ended March 31,
(Date of Acquisition) to --------------- ---------------
December 31, 1997 1998 1999 1999 2000
------------------------ ------- ------- ------ --------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Operating income
(loss)................. $(50,260) $14,833 $19,680 $1,596 $(24,279)
Plus: Purchased in-
process research and
development............ 46,000 -- -- -- --
Plus: Depreciation and
amortization........... 2,340 7,373 8,309 1,879 2,151
Plus: Compensation
related to stock
options................ -- -- -- -- 20,713
Plus: Non-cash
manufacturing charges.. 2,701 14,228 19,135 4,548 3,497
Plus: Purchase
accounting charges..... 13,244 4,292 108 85 --
-------- ------- ------- ------ --------
Consolidated EBITDA.... $ 14,025 $40,726 $47,232 $8,108 $ 2,082
======== ======= ======= ====== ========
</TABLE>
Non-cash manufacturing charges reflect the present value of non-interest
bearing promissory notes issued annually to DuPont Pharmaceuticals over the
initial five-year term of the manufacturing and supply agreement. These
amounts have been excluded from consolidated EBITDA as defined by Endo's
credit facility.
Purchase accounting charges are related to the allocation of purchase price
to the finished goods inventory that Endo acquired at the date of the
acquisition on August 26, 1997. These charges are non-cash and deemed to be
non-recurring.
Compensation related to stock options is the non-cash charge resulting from
the acceleration of vesting of stock options held by two former executives
pursuant to two separation and release agreements entered into by Endo.
Items excluded from consolidated EBITDA and cash gross profit are
significant components in understanding and assessing Endo's financial
performance.
(3) Cash gross profit is defined in the merger agreement and is equal to gross
profit as determined by generally accepted accounting principles excluding
non-cash charges. Cash gross profit is a meaningful measure of financial
performance because, unless Endo achieves a cash gross profit of $147.4
million for fiscal year 2000, Endo Pharma LLC will, as set forth in the
merger agreement, return a number of its shares of Endo common stock to
Endo's treasury, which will increase the percentage ownership in Endo of
the Algos stockholders by an additional five percentage points. See "THE
MERGER AGREEMENT--Additional Agreements--Formation of Endo Pharma LLC" for
the definition of cash gross profit. Cash gross profit is not a substitute
for operating cash flow. Cash gross profit may not be comparable to
similarly titled measures reported at other companies. Cash gross profit
does not purport to represent net income or net cash provided by operating
activities as determined by generally accepted accounting principles. The
reconciliation of gross profit (as determined by generally accepted
accounting principles) to cash gross profit (as defined in the merger
agreement) is as follows:
<TABLE>
<CAPTION>
Period from Year Ended Three Months
August 26, 1997 December 31, Ended March 31,
(Date of Acquisition) to --------------- ---------------
December 31, 1997 1998 1999 1999 2000
------------------------ ------- ------- ------- -------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Gross profit............ $ 9,652 $53,639 $80,283 $15,121 $14,938
Plus: Non-cash
manufacturing charges.. 2,701 14,228 19,135 4,548 3,497
Plus: Purchase
accounting charges..... 13,244 4,292 108 85 --
------- ------- ------- ------- -------
Cash gross profit...... $25,597 $72,159 $99,526 $19,754 $18,435
======= ======= ======= ======= =======
</TABLE>
11
<PAGE>
Non-cash manufacturing charges reflect the present value of non-interest
bearing promissory notes issued annually to DuPont Pharmaceuticals over the
initial five-year term of the manufacturing and supply agreement. These
amounts have been excluded from gross profit per the definition of cash gross
profit.
Purchase accounting charges are related to the allocation of purchase price
to the finished goods inventory that Endo acquired at the date of the
acquisition on August 26, 1997. These charges are non-cash and deemed to be
non-recurring.
Items excluded from consolidated EBITDA and cash gross profit are significant
components in understanding and assessing Endo's financial performance.
Algos Selected Historical Financial Information
The following selected financial information of Algos as of and for the five
fiscal years ended December 31, 1999 has been derived from Algos' financial
statements audited by PricewaterhouseCoopers LLP, independent accountants. The
financial statements for the three years ended December 31, 1999 are attached
to this proxy statement/prospectus. Prior audited financial statements are
contained in Algos' Annual Reports on Form 10-K/A for the years then ended, and
are qualified in their entirety by such documents. The summary financial
information for Algos as of and for the three months ended March 31, 1999 and
2000 has been derived from the unaudited financial statements attached to this
proxy statement/prospectus and is qualified in its entirety by such statements.
In the opinion of Algos' management, the unaudited financial statements as of
and for the three months ended March 31, 1999 and 2000 include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such information for the unaudited interim periods. The
operating results for the three months ending March 31, 2000 are not
necessarily indicative of results for the full fiscal year ending December 31,
2000. You should read this information in conjunction with management's
discussion and analysis of results of operations and financial condition of
Algos and the financial statements and notes thereto of Algos which, for the
three years ended December 31, 1999 and the three months ended March 31, 1999
and 2000, are included in this document and for prior years are incorporated by
reference into this proxy statement/prospectus.
<TABLE>
<CAPTION>
For the Three
Months Ended
For the Year Ended December 31, March 31,
--------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(amounts in thousands, except per share data)
Statement of Operations
Data:
Net sales............... $ -- $ 2,000 $ 1,000 $ -- $ -- $ -- $ --
Operating expenses:
Research and
development............ 1,615 3,344 9,799 13,086 9,508 2,517 1,935
Selling, general and
administrative......... 760 2,466 2,459 4,813 10,286 3,462 1,386
------- ------- ------- -------- -------- ------- -------
Total operating
expenses............... 2,375 5,810 12,258 17,899 19,794 5,979 3,321
------- ------- ------- -------- -------- ------- -------
Interest income......... 253 723 2,435 2,029 2,051 568 445
------- ------- ------- -------- -------- ------- -------
Net loss................ $(2,122) $(3,087) $(8,823) $(15,870) $(17,743) $(5,411) $(2,876)
======= ======= ======= ======== ======== ======= =======
Net loss per common
share, basic and
diluted................ $ (0.35) $ (0.36) $ (0.56) $ (0.98) $ (1.02) $ (0.31) $ (0.17)
======= ======= ======= ======== ======== ======= =======
Weighted average common
shares outstanding,
basic and diluted...... 6,003 8,535 15,863 16,144 17,355 17,299 17,416
======= ======= ======= ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------------------ ---------
1995 1996 1997 1998 1999 2000
------ ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
(amounts in thousands)
Balance Sheet Data:
Cash, cash equivalents,
marketable securities
and interest
receivable.............. $3,707 $48,576 $41,658 $50,497 $34,970 $32,507
Working capital.......... 3,419 47,932 36,368 44,216 31,253 28,487
Total assets............. 3,820 49,202 42,360 52,430 36,309 33,762
Deficit accumulated
during the development
stage................... (3,888) (6,976) (15,798) (31,668) (49,411) (52,287)
Total stockholders'
equity.................. 3,521 48,228 39,759 49,518 32,358 29,587
</TABLE>
12
<PAGE>
Summary Selected Unaudited Pro Forma Combined Financial Information of Endo
The following table contains summary selected unaudited pro forma financial
information derived from the unaudited pro forma condensed combined financial
information set forth under "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION." You should read this table in conjunction with "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL INFORMATION" and the financial statements
that this proxy statement/prospectus includes elsewhere or incorporates by
reference.
<TABLE>
<CAPTION>
Unaudited Pro Forma Unaudited Pro Forma
Combined for the Combined for the
Year Ended Three Months Ended
December 31, March 31,
1999(1) 2000(1)
------------------- -------------------
(amounts in thousands, except per share
data)
<S> <C> <C>
Consolidated Statement of Operations
Data:
Net sales............................ $138,546 $ 27,000
Cost of sales........................ 58,263 12,062
-------- --------
Gross profit......................... 80,283 14,938
Selling, general and administrative.. 52,976 13,404
Research and development............. 18,881 4,963
Depreciation and amortization........ 30,647 7,733
Separation benefits.................. -- 22,034
Purchased in-process research and
development......................... -- --
-------- --------
Operating loss....................... (22,221) (33,196)
Interest expense, net................ 12,296 3,492
-------- --------
Loss before income tax (benefit)..... (34,517) (36,688)
Income tax (benefit)................. -- --
-------- --------
Net loss............................. $(34,517) $(36,688)
======== ========
Net loss per share
Basic.............................. $ (0.38) $ (.41)
Diluted............................ (0.38) $ (.41)
Shares used to compute loss per
share
Basic.............................. 89,764 89,757
Diluted............................ 89,764 89,757
<CAPTION>
Unaudited Pro Forma
Combined as of the
Three Months Ended
March 31, 2000
-------------------
(amounts in
thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............ $ 58,448
Working capital...................... 66,660
Total assets......................... 580,078
Total debt........................... 189,699
Other long-term obligations.......... 11,756
Stockholders' equity................. 324,937
</TABLE>
--------
(1) Cash gross profit is defined in the merger agreement and is equal to gross
profit as determined by generally accepted accounting principles excluding
non-cash charges. Cash gross profit is a meaningful measure of financial
performance because, unless Endo achieves a cash gross profit of $147.4
million for fiscal year 2000, Endo Pharma LLC will, as set forth in the
merger agreement, return a number of its shares of Endo common stock to
Endo's treasury, which will increase the percentage ownership in Endo of
the Algos
13
<PAGE>
stockholders by an additional five percentage points. See "THE MERGER
AGREEMENT--Additional Agreements--Formation of Endo Pharma LLC" for the
definition of cash gross profit. Cash gross profit is not a substitute for
operating cash flow. Cash gross profit may not be comparable to similarly
titled measures reported at other companies. Cash gross profit does not
purport to represent net income or net cash provided by operating activities
as determined by generally accepted accounting principles. The reconciliation
of gross profit (as determined by generally accepted accounting principles)
to cash gross profit (as defined in the merger agreement) is as follows:
<TABLE>
<CAPTION>
Unaudited Unaudited
Pro Forma Pro Forma
Combined Combined
for the for the
Year Ended Three Months Ended
December 31, March 31,
1999 2000
------------ ------------------
(amounts in thousands)
<S> <C> <C>
Gross profit............................. $80,283 $14,938
Plus: Non-cash manufacturing charges..... 19,135 3,497
Plus: Purchase accounting charges........ 108 --
------- -------
Cash gross profit...................... $99,526 $18,435
======= =======
</TABLE>
Non-cash manufacturing charges reflect the present value of non-interest
bearing promissory notes issued annually to DuPont Pharmaceuticals over the
initial five-year term of the manufacturing and supply agreement. These
amounts have been excluded from gross profit per the definition of cash gross
profit.
Purchase accounting charges are related to the allocation of purchase price
to the finished goods inventory that Endo acquired at the date of the
acquisition on August 26, 1997. These charges are non-cash and deemed to be
non-recurring.
14
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are separate net income (loss), cash dividends and book
value per common share data for Endo on a historical basis, giving effect to
the recapitalization of Endo that will take place immediately prior to the
merger, for the combined company on a pro forma combined basis, for Algos on a
historical basis and for the combined company on a pro forma combined basis per
equivalent Algos share.
Under "Pro Forma Combined Per Algos Equivalent Common Share Data" below, we
show the effect of the merger from the perspective of an Algos stockholder. We
computed the information set out under that caption by multiplying the combined
company pro forma information by the exchange ratio of one (1).
You should read the information below together with Endo's and Algos'
historical financial statements and related notes contained in the annual
reports and other information that Algos has filed with the Securities and
Exchange Commission, or SEC, and incorporated by reference. To obtain copies of
these documents, see "WHERE YOU CAN FIND MORE INFORMATION" on page 130. We have
provided unaudited pro forma combined data below 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 we would have achieved had our companies always been
combined or the future results that the combined company will experience after
the merger.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- ------------------
<S> <C> <C>
Endo Historical per Common Share Data:
Earnings (Loss)--Basic................... $ .05 $(0.25)
Earnings (Loss)--Assuming dilution....... $ .05 $(0.25)
Cash dividends........................... -- --
Book value (as of the end of the
period)................................. $ 1.10 $ 1.14
Pro Forma Combined per Common Share Data
for the Combined Company:
Loss--Basic.............................. $(0.38) $ (.41)
Loss--Assuming dilution.................. $(0.38) $ (.41)
Cash dividends........................... -- --
Book value (as of the end of the
period)................................. -- $ 3.62
Algos Historical per Common Share Data:
Loss--Basic.............................. $(1.02) $(0.17)
Loss--Assuming dilution.................. $(1.02) $(0.17)
Cash dividends........................... -- --
Book value (as of the end of the
period)................................. $ 1.86 $ 1.70
Pro Forma Combined per Algos Equivalent
Common Share Data:
Loss--Basic.............................. $(0.38) $ (.41)
Loss--Assuming dilution.................. $(0.38) $ (.41)
Cash dividends........................... -- --
Book value (as of the end of the
period)................................. -- $ 3.62
</TABLE>
15
<PAGE>
ALGOS MARKET PRICE INFORMATION AND DIVIDENDS
Algos common stock trades on the NASDAQ National Market under the symbol
"ALGO." The following table sets forth, for the periods indicated, the range of
high and low sale prices of Algos common stock. The prices shown represent
quotations between dealers, without adjustment for retail markups, markdowns or
commissions, and may not represent actual transactions. We urge you to consult
publicly available sources for current price information regarding the Algos
common stock. Algos has never declared or paid any cash dividends on its
capital stock.
<TABLE>
<CAPTION>
Algos Common
Stock
-----------------
High Low
-------- --------
<S> <C> <C>
Year Ending December 31, 1997
1st Quarter............................................. $ 20.75 $ 10.875
2nd Quarter............................................. 19.25 14.00
3rd Quarter............................................. 31.625 14.75
4th Quarter............................................. 33.00 21.50
Year Ending December 31, 1998
1st Quarter............................................. $ 34.00 $ 26.50
2nd Quarter............................................. 39.50 23.75
3rd Quarter............................................. 36.00 19.5625
4th Quarter............................................. 29.75 18.50
Year Ending December 31, 1999
1st Quarter............................................. $ 33.625 $ 24.375
2nd Quarter............................................. 30.125 19.875
3rd Quarter............................................. 28.75 7.625
4th Quarter ............................................ 18.00 8.25
Year Ending December 31, 2000
1st Quarter............................................. $20.0625 $ 8.375
2nd Quarter (through June 13, 2000)..................... 17.4375 11.3125
</TABLE>
16
<PAGE>
RISK FACTORS
You should consider the following risk factors in determining how to vote at
the special meeting.
The present lack of a public market for Endo common stock and Endo warrants
may, after the merger, reduce the liquidity of these securities.
Before the merger, no public market will have existed for the Endo common
stock and Endo warrants that you will receive in the merger. Although Endo has
applied to have its common stock and warrants approved for trading on NASDAQ
and the listing of its common stock is a condition to the merger, we cannot
assure you that, even if NASDAQ approves the common stock and warrants for
listing, the common stock and warrants will actively trade on the market or
that, if active trading does develop, it will be sustained. The price at which
the Endo common stock and Endo warrants will trade following the merger is
uncertain and may not necessarily correlate to the market prices of the Algos
common stock exchanged in the merger. The potential volatility of the market
for the Endo common stock and Endo warrants after the merger may adversely
affect the trading price of these securities.
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. The market price of the Endo common stock and Endo
warrants, and the price at which Endo may sell its securities in the future,
could be subject to large fluctuations in response to changes and variations in
Endo's operating results, general market conditions, announcements of
technological innovations, regulatory matters or new commercial products by
Endo or its competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential clinical results
relating to products under development by Endo or its competitors, regulatory
developments in the United States as well as foreign countries, public concern
as to the safety of pharmaceutical products, and economic and other external
factors, as well as period-to-period fluctuations in Endo's financial results.
In addition, the complicated nature of this transaction and the non-cash
compensation charges associated with variable plan accounting may adversely
affect the market price of the Endo common stock and the Endo warrants. See
"THE COMPANIES-- Endo--Description of Endo Stock Option Plans Following the
Merger."
Endo has not paid, and does not intend to pay, dividends and therefore, unless
Endo stock appreciates in value, investors in Endo may not benefit from holding
Endo stock.
Endo has not paid any cash dividends since inception. Endo does not
anticipate paying cash dividends in the foreseeable future. As a result,
investors in Endo will not be able to benefit from owning Endo stock unless the
basis that these investors have in their shares appreciates in value.
The combined company's growth and development will be dependent on successful
product development, commercialization and marketing, which, if unsuccessful or
impaired, may have an adverse effect on the combined company's growth and
development.
The combined company's future results of operations will depend, to a
significant extent, upon its ability to successfully commercialize new
proprietary and off-patent pharmaceutical products in a timely manner. As a
result, the combined company must continually develop, test and manufacture new
products and, in addition, these new products must meet regulatory standards
and receive requisite regulatory approvals. Products currently in development
by Endo or Algos may or may not receive the regulatory approvals necessary for
marketing by the combined company and other third-party partners. Furthermore,
the development and commercialization process is time-consuming and costly, and
we cannot assure you that any of the combined company's products, if and when
developed and approved, can be successfully commercialized. Risk particularly
exists with respect to the development of proprietary products, because of the
uncertainties and higher costs associated with research and development of
these products and the unproven market acceptability of these products.
17
<PAGE>
Once approved, there is no guarantee that the market will accept the combined
company's future products, and this may have an adverse effect on the combined
company's future results of operations.
Even if the combined company obtains regulatory approvals, uncertainty
exists as to whether the market will accept the combined company's products. A
number of factors may limit the market acceptance of the combined company's
products, including the timing of regulatory approvals and market entry
relative to competitive products, the availability of alternative products, the
price of the company's products relative to alternative products, the
availability of third-party reimbursement and the extent of marketing efforts
by third-party distributors or agents retained by the company. We cannot assure
you that products will receive market acceptance in a commercially viable
period of time, if at all. In addition, many of the company's products contain
narcotic ingredients that require stringent record-keeping obligations and
strict storage requirements and other limitations on these products'
availability which could limit the commercial usage of these products.
The FDA may never approve MorphiDex(R). As a result, the Endo warrants issuable
in the merger may never become exercisable, and thus may expire worthless, and
the former Algos stockholders' ownership of Endo will be diluted.
The Endo warrants issuable to Algos stockholders in the merger are only
exercisable if the FDA approves MorphiDex(R) on or before March 31, 2003. If
the FDA does not approve MorphiDex(R) by this time, each of these Endo warrants
will become void, and all rights in respect of these Endo warrants will cease.
In the event that the FDA never approves MorphiDex(R), a material adverse
effect on Endo's business, results of operations or financial condition could
occur.
Additionally, if the FDA does not approve MorphiDex(R) by December 31, 2002,
the warrants that the stockholders of Endo received immediately prior to the
merger will become exercisable, entitling the holders of these warrants to
receive an additional 5% of the pro forma combined company, calculated as if
holders had exercised all of these warrants at the closing of the merger. In
this event, there will be a dilution of the former Algos stockholders'
ownership of Endo.
Conflicts of interests regarding the merger could result in decisions that are
not in the Algos stockholders' best interests.
Some members of Algos management and the Algos board of directors have
interests in the merger that are different from, or in addition to, the
interests of the Algos stockholders generally. Under the merger agreement, John
W. Lyle, Michael Hyatt and Roger H. Kimmel, current directors of Algos, will
become members of the Endo board of directors upon completion of the merger. In
addition, Mr. Lyle will serve as Chairman of the Board of Endo after the merger
and will enter into a five-year employment agreement with Endo to serve in a
senior executive capacity on a part-time basis. For a description of the terms
of Mr. Lyle's employment agreement, see "INTERESTS OF CERTAIN PERSONS IN THE
MERGER AND RELATED MATTERS--Compensation Arrangements for Algos Officers --Lyle
Employment Agreement." The Algos board was aware of these interests and
considered them, among others, when it adopted and approved the merger
agreement.
A merger agreement provision may result in management of the combined company's
business for the short-term goal of ensuring that a particular cash gross
profit target is met at the possible expense of the company's long-term
business plan.
The merger agreement provides that if the cash gross profit of the combined
company (based on current Endo products and future non-Algos related products
internally developed and sold or marketed by Endo) for fiscal year 2000 does
not meet or exceed $147.4 million, then shares that Endo's stockholders held
prior to the merger will be returned to the combined company's treasury,
increasing current Algos stockholders' ownership of the company by an
additional five percentage points. The result of this merger agreement
provision is that the company's business could be managed for the short-term
goal of ensuring that the company achieves this cash gross profit target at the
possible expense of the company's long-term business plan.
18
<PAGE>
The two sets of warrants that Endo will issue in connection with the merger are
triggered by mutually exclusive events and, accordingly, stockholders of the
combined company may be at odds.
The two sets of Endo warrants that Endo will issue in connection with the
merger are triggered by mutually exclusive events in that the warrants to be
issued to Algos stockholders in the merger become exercisable if the FDA
approves MorphiDex(R) on or prior to March 31, 2003 and the warrants being
issued to Endo stockholders prior to the merger become exercisable if the FDA
does not approve MorphiDex(R) by December 31, 2002. However, Endo has agreed in
the merger agreement to use its reasonable efforts to continue to process the
FDA application for MorphiDex(R) in a timely fashion.
Existing stockholders of Endo, as opposed to existing stockholders of Algos,
will control the combined company following the merger.
After the merger, Endo Pharma LLC will own approximately 79.6% of Endo's
common stock. See "THE MERGER AGREEMENT--Conditions Precedent to the Merger--
Formation of Endo Pharma LLC" and "ENDO PHARMA LLC." Kelso Investment
Associates V, L.P. and Kelso Equity Partners V, L.P. (affiliates of Kelso &
Company) together with other Kelso affiliates and designees will have
contributed to this LLC approximately 85.6% of the Endo common stock that the
LLC will hold and Greenwich Street Capital Partners, L.P. and affiliated
investors will have contributed to this LLC approximately 13.7%. In addition,
some of the directors of Endo are partners in Kelso Investment Associates V,
L.P., the managing member of the LLC, and therefore may affect how the LLC
votes its Endo shares on corporate matters. As a result, this entity and these
individuals would be able to control the outcome of stockholder votes,
including votes concerning the election of the majority of directors, the
adoption or amendment of provisions in Endo's charter or by-laws and the
approval of mergers and other significant corporate transactions.
After the merger, the exercise of current Endo employee stock options and
future share issuances may dilute Algos stockholders' ownership of Endo.
Endo has agreed to use its reasonable best efforts to cause each of the
current Endo stockholders to contribute its shares of Endo common stock to Endo
Pharma LLC prior to the merger, in an effort to ensure that the Endo employee
stock options that are outstanding prior to the merger will affect only those
holders of Endo common stock who held their shares prior to the merger. These
current Endo employee stock options will be exercisable only into shares of
Endo common stock that the LLC holds. Holders of these Endo employee stock
options must consent to this amendment to their stock options. Although the
executives of Endo who, in the aggregate, hold approximately 88% of the
currently outstanding Endo employee stock options have consented to this
amendment, there is a risk that the remaining employees who hold approximately
12% of these stock options will not. Accordingly, it is possible that the
current Endo employee stock options that these non-executive employees hold
may, once exercised into shares of Endo common stock, dilute the ownership of
all holders of Endo on a pro rata basis. In addition, any future share
issuances by Endo will also dilute the ownership of all holders of Endo other
than warrant holders who will have minimal antidilution protection.
Endo and Algos are, and, following the merger the combined company will
continue to be, dependent on key personnel, which the combined company may not
be able to retain.
Because of the specialized scientific nature of each company's business, the
ability of Endo, Algos and the combined company to develop products and to
compete with their current and future competitors will remain, highly
dependent, in large part, upon their ability to attract and retain qualified
scientific and technical personnel. The loss of significant scientific and
technical personnel or the failure to recruit additional key scientific and
technical personnel could have a material adverse effect on the combined
company. While Endo has consulting agreements with certain key individuals and
institutions and has employment agreements with its key executives, we cannot
assure you that the combined company will succeed in retaining this personnel
or their services under existing agreements. There is intense competition for
qualified personnel in the areas of the company's activities, and we cannot
assure you that the company will be able to continue to attract and retain the
qualified personnel necessary for the development of its business.
19
<PAGE>
Endo faces, and, following the merger the combined company will continue to
face, intense competition from new products and from lower-cost generic
products.
The pharmaceutical industry is highly competitive and rapidly changing. Many
of Endo's principal competitors are, and the combined company's will be, major
international corporations with substantial resources for research and
development, production, and technical, marketing and human resources. Endo's
branded products also face intense competition from lower-cost generic
products. As new products enter the market, Endo's competitors' products may be
more effective or more effectively marketed and sold than Endo's products.
Increased competition could result in significant price competition, reduced
profit margins or loss of market share. Additionally, we cannot assure you that
Endo's combination with Algos will improve the company's competitive position.
If the combined company fails to maintain Endo's competitive position, a
material adverse effect on its business, results of operations or financial
condition could result.
Endo's current credit agreement limits its ability to conduct its business,
which could negatively affect the combined company's ability to finance future
capital needs and engage in other business activities. In addition, Endo's
indebtedness may restrict its growth and put it at a competitive disadvantage.
The covenants in Endo's existing credit agreement contain a number of
significant limitations on its ability to, among other things:
. pay dividends;
. incur additional indebtedness;
. create liens on its assets; and
. acquire or dispose of assets.
These restrictive covenants contained in Endo's credit agreement could
negatively affect its ability to finance its future capital needs, engage in
other business activities or withstand a future downturn in its business or the
economy.
In addition, as of March 31, 2000, Endo had total indebtedness of
approximately $189.7 million. This leverage may have important negative
consequences for the combined company, including the following:
. its ability to obtain additional financing for acquisitions, working
capital, investments or other expenditures could be impaired or financing
may not be available on terms favorable to it;
. a portion of the company's cash flow will be used to make principal and
interest payments on its debt, reducing the funds that would otherwise be
available to it for its operations and future business opportunities;
. a decrease in the company's net operating cash flows or an increase in
its expenses could make it difficult for the company to meet its debt
service requirements and force Endo to modify its operations; and
. the company may be placed at a competitive disadvantage if it has
significantly more reliance on indebtedness than its competitors.
20
<PAGE>
The combined company will have significant goodwill and other intangibles
assets. Consequently, amortization of goodwill and other intangibles will
significantly impact the results of operations of the combined company.
Pro forma goodwill and other intangibles represent a significant portion of
total pro forma assets and pro forma stockholders' equity of the combined
company. As of March 31, 2000, based on a preliminary allocation of the
estimated purchase price, goodwill and other intangibles may comprise
approximately 71% of total assets and 127% of stockholders' equity for the
combined company. Endo assesses the recoverability and the amortization period
of goodwill by determining whether the amount can be recovered through
undiscounted net cash flows of the businesses acquired over the remaining
amortization period. Endo reviews the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable such as in the event of a significant adverse
change in business conditions or a significant change in the intended use of an
asset. An impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset are less than
its carrying amount. Endo uses the discounted future expected net cash flows as
its estimate of fair value in order to determine the amount of impairment loss.
As a result of the significance of goodwill and other intangibles, amortization
of goodwill and other intangibles will significantly impact the results of
operations of the combined company. In addition, results of operations of the
combined company in a future period would be further negatively impacted should
impairment of goodwill and other intangible assets occur.
Product regulation may adversely affect the combined company's ability to bring
new products to market.
Endo, Algos and their competitors are subject to strict government controls
on the development, manufacture, labeling, distribution and marketing of
products. The combined company must obtain and maintain regulatory approval for
a pharmaceutical product before it may sell the product.
The submission of an application to the FDA does not guarantee that the FDA
will grant approval to market the product.
In the company's principal market, the approval process for a new product is
complex and lengthy. The time taken to obtain approval varies but generally
takes from eight months to four years from the date of application. This
process increases the costs to the company of developing new products and
increases the risk that the company will not succeed in selling these products
successfully.
Endo is, and, following the merger, the combined company will continue to be,
dependent on outside manufacturers for the manufacture of its products, and,
therefore, the combined company will be unable to control the manufacturing
process and related costs.
Third-party manufacturers currently manufacture, and, following the merger,
will continue to manufacture, all of Endo's products pursuant to contractual
arrangements. Accordingly, the company has a limited ability to control the
manufacturing process or costs related to this process. Endo is reliant on its
third-party manufacturers to maintain the facilities at which they manufacture
Endo's products in compliance with FDA and DEA regulations. DuPont
Pharmaceuticals manufactures, and, following the merger will continue to
manufacture, the vast majority of Endo's products. The contract that governs
this manufacturing arrangement has a five-year initial term expiring August
2002, and is renewable at Endo's option up through 2007. At the expiration of
this term, Endo will have to consider alternatives for its manufacturing which
may be expensive. Additionally, we cannot assure you that Endo's third-party
manufacturers will fulfill their obligations under the terms of the
manufacturing contracts.
21
<PAGE>
Endo is, and, following the merger the combined company will continue to be,
dependent on third parties to supply all raw materials used in its products and
finished goods and to provide services for the core aspects of its business.
Any interruption or failure by these suppliers, distributors and collaboration
partners to meet their obligations pursuant to various agreements with Endo
could have a material adverse effect on the combined company's business,
financial condition and results of operations.
Endo relies on, and following the merger the combined company will continue
to rely on, third parties to supply all raw materials used in its products and
finished goods. In addition, Endo relies on, and following the merger the
combined company will continue to rely on, third-party suppliers, distributors
and collaboration partners to provide services for the core aspects of its
business, including, but not limited to, warehousing, distribution, customer
service support, medical affairs services, sales promotion, clinical studies,
sales and other technical and financial services. Endo's business and financial
viability are, and, following the merger the combined company's business and
financial viability will continue to be, dependent on the strength, validity
and terms of its various contracts with these third-party suppliers,
distributors and collaboration partners. Any interruption or failure by these
suppliers, distributors and collaboration partners to meet their obligations
pursuant to various agreements with Endo could have a material adverse effect
on the combined company's business, financial condition and results of
operations.
Each of Endo's and Algos' businesses is subject to government regulation. We
cannot assure you of U.S. or foreign regulatory approval of any of the combined
company's products.
The federal, state and local governmental authorities in the United States,
the principal one of which is the FDA, impose substantial requirements on the
manufacture, labeling, sale, distribution, marketing, advertising, promotion
and introduction of therapeutic pharmaceutical products through lengthy and
detailed laboratory and clinical testing and other costly and time-consuming
procedures. Satisfaction of these requirements typically takes a number of
years, varies substantially based upon the type, complexity and novelty of the
pharmaceutical products and is subject to uncertainty. Government regulation
also affects the manufacture and marketing of pharmaceutical products.
Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which a company may market a product. The FDA actively
enforces regulations prohibiting marketing of products for non-indicated use.
Failure to comply with applicable regulatory requirements in this regard can
result in, among other things, government-imposed fines, suspensions of
approvals, seizures or recalls of products, operating restrictions and criminal
prosecutions. Furthermore, changes in existing regulations or adoption of new
regulations could prevent the combined company from obtaining, or affect the
timing of, future regulatory approvals. The effect of government regulation may
be to delay marketing of the combined company's new products for a considerable
period of time, to impose costly procedures upon the combined company's
activities and to furnish a competitive advantage to larger companies that
compete with Endo.
We cannot assure you that the FDA or other regulatory agencies will approve
any products developed by the combined company, including MorphiDex(R), on a
timely basis, if at all, or, if granted, that this approval will not entail
limiting the indicated uses for which the combined company may market the
product, which indications could limit the potential market for any of these
products. Any delay of this nature in obtaining, or failure to obtain, these
approvals would adversely affect the marketing of the company's products and
the ability to generate product revenue. Additionally, Endo is, and, following
the merger the combined company will be, subject to certain U.S. Drug
Enforcement Agency, or DEA, regulations, including restrictions on storage,
transportation and administration, for its narcotic products. Government
regulation may increase at any time, creating additional hurdles for the
company. Furthermore, approved products and their manufacture are subject to
continued review and the possible discovery of previously unknown problems with
a product or its manufacture, and this review may result in restrictions on
this product or its manufacture, including withdrawal of the product from the
market. In general, failure to comply with FDA requirements could result in
severe civil and criminal penalties, including but not limited to recall or
seizure of product, injunction against a product's manufacture, distribution,
sales and marketing and possible criminal prosecution. In addition, we cannot
predict the extent of potentially adverse government regulation that might
arise from future legislation or administrative action.
22
<PAGE>
The ability of Endo, and, following the merger, the combined company, to
protect its proprietary technology, which is vital to the combined company's
business, financial condition and results of operations, is uncertain.
The combined company's success, competitive position and amount of potential
future income will depend in part on its ability to obtain patent protection
relating to the technologies, processes and products each of Endo and Algos is
currently developing and that the combined company may develop in the future.
Endo's policy is, and, following the merger the combined company's policy will
be, to seek patent protection and enforce intellectual property rights. We
cannot assure you that patent applications submitted by the combined company
will result in patents being issued. We cannot assure you that a third party
will not infringe upon, or design around, any patent issued or licensed to
Endo, Algos or the combined company or that these patents will otherwise be
commercially viable. In this regard, the patent position of pharmaceutical
compounds and compositions is particularly uncertain. Even issued patents may
later be modified or revoked by the U.S. Patent and Trademark Office, or PTO,
or in legal proceedings. Moreover, Endo believes that obtaining foreign patents
may be more difficult than obtaining domestic patents because of differences in
patent laws and, accordingly, its patent position may be stronger in the U.S.
than abroad. In addition, foreign patents may be more difficult to protect
and/or the remedies available may be less extensive than in the United States.
Patent applications in the United States are maintained in secrecy until
patents issue and, since publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries, Endo cannot be certain that
it was the first creator of the inventions covered by pending patent
applications or the first to file patent applications on those inventions. We
cannot assure you that any of Endo's or Algos' pending patent applications will
be allowed, or if allowed, whether the scope of the claims allowed will be
sufficient to protect the combined company's products. Litigation to establish
the validity of patents, to defend against patent infringement claims of others
and to assert patent infringement claims against others can be expensive and
time-consuming even if the outcome is favorable to the combined company. If the
outcome is unfavorable to the combined company, this could have a material
adverse effect on its business, results of operations or financial condition.
The combined company may, in the future, take steps to enhance its patent
protection, but we cannot assure you that these steps will be successful or
that, if unsuccessful, its patent protection will be adequate.
Endo also relies upon, and expects the combined company to continue to rely
upon, trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain its competitive position. Endo
attempts, and, following the merger the combined company will continue, to
protect its proprietary technology in large part by confidentiality agreements
with its employees, consultants and other contractors. We cannot assure you,
however, that these agreements will not be breached, that the company would
have adequate remedies for any breach or that competitors will not know of or
independently discover the company's trade secrets. We cannot assure you that
others will not independently develop substantially equivalent proprietary
information or be issued patents that may prevent the sale of the company's
products or know-how or require licensing and the payment of significant fees
or royalties by the company in order to produce its products. Moreover, we
cannot assure you that Endo's or Algos' technology does not infringe upon any
valid claims on patents that other parties own.
If, in the future, the combined company were found to be infringing on a
patent held by another, the company might have to seek a license to use the
patented technology. We cannot assure you that, if required, the company would
be able to obtain such a license on terms acceptable to it, if at all. If a
third party brought a legal action against the company or its licensors, the
company could incur substantial costs in defending itself, and we cannot assure
you that such an action would be resolved in the company's favor. If such a
dispute were to be resolved against the company, the company could be subject
to significant damages, and the testing, manufacture or sale of one or more of
its technologies or proposed products, if developed, could be enjoined.
We cannot assure you as to the degree of protection any patents will afford,
whether the PTO will issue patents or whether Endo will be able to avoid
violating or infringing upon patents issued to others or that others will not
manufacture and distribute Endo's patented products upon expiration of their
patents. Despite the use of confidentiality agreements and non-compete
agreements, which themselves may be of limited effectiveness, it may be
difficult for Endo to protect its trade secrets.
23
<PAGE>
Product liability claims could adversely affect the combined company's business
and results of operations.
Although Endo is, and following the merger the combined company will be,
insured for product liability claims, product liability is a significant
commercial risk for Endo and following the merger will be a significant
commercial risk for the combined company. Some plaintiffs have received
substantial damage awards in some jurisdictions against pharmaceutical
companies based upon claims for injuries allegedly caused by the use of their
products.
Currently, Endo is not involved in any product liability cases. However, we
cannot assure you that a future product liability claim or series of claims
brought against Endo or the combined company would not have an adverse effect
on its business, results of operations or financial condition. If any claim is
brought against Endo or the combined company, regardless of the success or
failure of the claim, we cannot assure you that the combined company will be
able to obtain or maintain product liability insurance in the future on
acceptable terms or with adequate coverage against potential liabilities.
The availability of healthcare reimbursement is uncertain and thus the combined
company may find it difficult to maintain current price levels. Additionally,
the market may not accept those products for which healthcare reimbursement is
not adequately provided.
Endo's ability, and following the merger the combined company's ability, to
commercialize its pain management products depends in part on the extent to
which reimbursement for the costs of these products is available from
government health administration authorities, private health insurers and
others. We cannot assure you that third-party insurance coverage will be
adequate for the company to maintain price levels sufficient for realization of
an appropriate return on its investment. Government, private insurers and other
third-party payers are increasingly attempting to contain health care costs by
(1) limiting both coverage and the level of reimbursement for new products
approved for marketing by the FDA and (2) refusing, in some cases, to provide
any coverage for uses of approved products for indications for which the FDA
has not granted marketing approval. If government and third-party payers do not
provide adequate coverage and reimbursement levels for uses of the combined
company's products, the market acceptance of these products could be adversely
affected.
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THE MERGER
Background of the Merger
From time to time during 1997, while Kelso and members of Endo's management
were considering the acquisition of Endo, Michael B. Goldberg, a principal at
Kelso and a director of Endo, and Donald G. Drapkin, a director of Algos,
discussed the similarities between the businesses of Endo and Algos as well as
the potential strategic fit between the companies. Shortly after the formation
of Endo in August 1997, Carol A. Ammon, the President and Chief Executive
Officer of Endo, approached John W. Lyle, the President and Chief Executive
Officer of Algos, regarding Endo's interest in a strategic combination of the
two companies. Those discussions did not result in any agreement with respect
to a combination. However, Algos recognized the potential strategic fit between
Algos' products in development and Endo's product line and manufacturing and
marketing capabilities and expressed an interest in continuing communications.
Over the next two years, the companies from time to time discussed a
possible stock-for-stock transaction as well as a possible collaboration in
which Algos and Endo would work together to complete the development,
manufacturing and commercialization of pain management products containing
Algos' proprietary technology and marketed under Endo's brand names. These
discussions regarding a possible transaction continued throughout June and July
1999, beginning with a June 29, 1999 meeting of Mr. Lyle, Roger Kimmel and
Michael Hyatt, each Algos directors, and Ms. Ammon, other members of Endo's
management, representatives of Kelso and representatives of Endo's financial
advisors, Goldman, Sachs & Co. and Salomon Smith Barney Inc.
In connection with these discussions regarding a strategic combination, or
alternatively a collaboration, Endo and Algos each furnished the other
periodically from the fall of 1997 to the present information regarding its
products and its business generally. None of these discussions resulted in an
agreement on the material terms of either a strategic combination or a
collaboration.
On August 2, 1999, Algos received a letter from the FDA indicating that its
New Drug Application for MorphiDex(R) was not approvable at that time. Shortly
after Algos issued a press release describing the FDA's letter, Mr. Goldberg
approached Mr. Drapkin to express Endo's continued interest in a strategic
stock-for-stock transaction between the two companies, notwithstanding the
current status of the MorphiDex(R) New Drug Application with the FDA. Mr.
Goldberg presented to Mr. Drapkin a proposal in which Algos stockholders would
receive for their shares of Algos common stock, shares representing 20% of the
outstanding common stock of Endo in a tax-free reorganization. In addition, the
Algos stockholders would receive warrants to purchase for a nominal amount an
additional 15% of the Endo common stock if FDA approval of MorphiDex(R) was
received within two years. On September 16, 1999, Mr. Lyle, Mr. Kimmel and Mr.
Hyatt met with Ms. Ammon, representatives of Endo's management and
representatives of Kelso to receive more business and financial information
regarding Endo and to better understand Endo's merger proposal. During
September 1999, representatives of Endo discussed with management of Algos the
strategic fit of the two companies and the terms of the Endo proposal.
On September 17, 1999, the Algos board held a special meeting in which the
Algos board discussed the strategic direction for Algos in light of the status
of MorphiDex(R) approval with the FDA. The Algos board discussed a variety of
possible strategic alternatives for Algos' future direction, including the
possibility of changing Algos' product development and drug application
strategy, entering into collaboration agreements with other companies, seeking
a partner for a strategic merger, selling Algos and continuing to operate under
the current business plan. Prior to receiving the FDA "not approvable" letter
on August 2, 1999, Algos was developing its drugs on a stand-alone basis
because management believed that Algos' products had great potential and Algos
had sufficient resources to develop a commercially viable product. During this
period, Algos from time to time had general discussions with a variety of
companies regarding possible licensing or other collaboration arrangements.
Algos did not, however, receive any proposal other than from Endo for a
possible merger or acquisition. Following receipt of the FDA "not approvable"
letter, the Algos board became concerned with Algos' stand-alone strategy
because Algos' lead drug's development schedule became less
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certain, increasing the risk that Algos would have insufficient funds to
develop and market its pipeline of products in development. The Algos board
also considered joint venture and collaboration strategies, but believed that a
joint venture or a collaboration could slow Algos' product development
schedule. As part of the discussion of a strategic merger, the Algos board
discussed generally the Endo merger proposal suggested by Mr. Goldberg. The
Algos board found the Endo proposal particularly attractive in part because of
the unique synergies a combination between the two companies would create. A
merger with Endo provided Algos with an established sales force, distribution,
customer service and manufacturing capabilities for its products in the
narcotic analgesic business, an area that is heavily regulated. The Algos board
also believed that as the pharmaceutical business has recently been rapidly
consolidating, the greater size as well as breadth of products that the
combined company would have would provide Algos with a competitive advantage.
In addition, it was the general sense of the Algos board following these
discussions of the Endo merger proposal that, given the current trading price
of the Algos common stock and the significant value that they continued to
believe existed if the FDA approved Algos' products, it would not be in the
best interest of the Algos stockholders to sell Algos in a cash transaction in
which Algos stockholders would not be able to share in the future value of
their company. At the same time, a number of Algos directors expressed concern
that relying solely on a business plan that depended upon FDA approval of
Algos' products presented a considerable risk to Algos stockholders. The Algos
board then determined to continue discussions with Endo and to engage Credit
Suisse First Boston to assist in evaluating the Endo merger proposal and other
possible strategic alternatives.
On October 6, 1999, Mr. Kimmel, together with representatives of Latham &
Watkins, Algos' outside counsel, met with Mr. Goldberg, representatives of
Kelso and representatives of Skadden, Arps, Slate, Meagher & Flom LLP, Endo's
outside counsel, to discuss the structure of the Endo merger proposal. During
this meeting, Mr. Goldberg modified the Endo merger proposal regarding the
warrants to be received by the Algos stockholders. Among other things, he
proposed to extend the period in which FDA approval for MorphiDex(R) could be
obtained in order for the warrant to become exercisable from two years to
three, with the percentage of Endo common stock for which the warrants would be
exercisable, decreasing by five percentage points for every six months
following the second year of that period in which FDA approval for MorphiDex(R)
was not yet obtained.
Beginning in early October 1999, Credit Suisse First Boston examined Algos'
business, financial condition, prospects and strategic alternatives as well as
Endo's business, financial condition and prospects. On October 11, 1999, the
senior management of both Algos and Endo, together with representatives of the
financial and legal advisors of both companies, attended a meeting in which
Endo's senior management made a presentation of its business, financial
condition and prospects.
At a special meeting of the Algos board held on October 18, 1999, the Algos
board discussed generally with Credit Suisse First Boston the Endo merger
proposal as well as other strategic alternatives that might be available to
Algos. The Algos board concluded, based upon the information provided by Endo,
that Endo was a good strategic fit. The Algos board discussed whether it should
nevertheless solicit other strategic partners. However, Endo had previously
indicated to Algos that it would terminate discussions of the Endo merger
proposal if Algos conducted a solicitation. In addition, the Algos board
concluded that soliciting other strategic partners so soon after the public
announcement of the FDA's current position that the New Drug Application for
MorphiDex(R) was not approvable would suggest that Algos had lost confidence in
its proprietary technology. Also, the Algos board determined that a
solicitation would be unlikely to result in any competitive proposal to the
Endo merger proposal that was not conditioned upon FDA approval of MorphiDex(R)
or another of Algos' products under development. The Algos board noted that,
other than Endo, no one had approached Algos directly regarding any possible
transaction since the public announcement of the FDA letter and the substantial
decrease in the Algos common stock price since that announcement. The Algos
board authorized Mr. Kimmel to continue negotiations with Endo.
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For the next two weeks, each company and its financial and legal advisors
conducted their review of the business and financial position of the other
company. On November 2, 1999, representatives from the companies and their
respective legal and financial advisors met to further discuss the terms of
Endo's merger proposal and Endo's request for voting agreements and options
from particular members of Algos' board and management and an option from Algos
to purchase shares of Algos common stock. At that meeting the parties agreed
that the existing Endo management incentive options, if exercised, would dilute
only the ownership of existing Endo stockholders, even if exercised after the
merger. In addition, Algos agreed to attempt to obtain voting agreements from
Algos' directors, management and significant stockholders holding in aggregate
approximately 33% of the Algos common stock. The companies also agreed that,
irrespective of the merger, they would seek to enter into a collaboration
agreement in which Algos and Endo would work together to successfully complete
the development, manufacturing and commercialization of pain management
pharmaceutical products containing the combination of oxycodone and
dextromethorphan.
On November 11, 1999, the Algos board received detailed presentations from
Mr. Lyle, and representations from Credit Suisse First Boston and Latham &
Watkins regarding the proposed transaction, and Credit Suisse First Boston
indicated that it was prepared to render an opinion that the consideration to
be received by Algos stockholders was fair from a financial point of view.
After discussing the matter, the Algos board directed Mr. Kimmel, with the
assistance of Credit Suisse First Boston and Latham & Watkins, to negotiate
further on certain provisions of the various agreements. The Algos board also
unanimously authorized Mr. Lyle to complete negotiations on a collaboration
agreement for pain management pharmaceutical products containing the
combination of oxycodone and dextromethorphan.
On November 15, 1999, Mr. Kimmel, Mr. Lyle and representatives of Credit
Suisse First Boston met with Unifina Holding, A.G., the holder of approximately
9% of the outstanding Algos common stock, to discuss the Endo proposal and
whether Unifina would be willing to enter into a voting agreement. Unifina
indicated that it was not prepared to do so, given its current view of its
investment in Algos and the expected dilutive effect of the Endo proposal.
Unifina also expressed concern as to Endo's relative value in the event that
Endo was not able to meet its financial forecasts. Following the meeting with
Unifina, representatives of Algos and Endo and their respective financial
advisors had numerous discussions to address the Unifina concerns. Endo then
revised its proposal on November 17, 1999 to provide that, in addition to the
shares of Endo common stock and the warrants the Algos stockholders were to
receive pursuant to Endo's prior proposal, the current stockholders of Endo
would agree that if Endo (based on current Endo products and future non-Algos
related products internally developed and sold or marketed by Endo) did not
meet a cash gross profit target of $147.4 million for fiscal year 2000, these
Endo stockholders would return to Endo's treasury the number of shares of Endo
common stock owned by them such that the former Algos stockholders would then
own an additional 5% of all of the outstanding Endo common stock as of the
closing of the merger. In addition, Endo proposed that warrants to purchase 5%
of the common stock of Endo be granted to the existing stockholders of Endo.
These warrants would become exercisable only if FDA approval of MorphiDex(R)
was not obtained within three years and would expire unexercised if FDA
approval of MorphiDex(R) were obtained prior to that time. Furthermore, at this
time Endo modified its offer to eliminate its request, which had been opposed
by the Algos board, that it receive an option from Algos to purchase shares of
Algos common stock and options from particular members of Algos' board and
management. Nevertheless, Unifina declined to enter into the voting agreement,
and Unifina's representative on the Algos board, Mr. Dieter Sulser, abstained
from the vote to approve the merger agreement.
Negotiations continued over the next week, and at a special meeting of the
Algos board held on November 24, 1999, Credit Suisse First Boston and Latham &
Watkins provided updated presentations reflecting the revised terms of the Endo
merger proposal. The Algos board decided to review the presentation of Credit
Suisse First Boston and current drafts of the definitive documentation in order
to come to a final decision and authorized Mr. Kimmel to further negotiate
specific terms of the merger that remained open. In addition, the Algos board
approved the collaboration agreement with Endo Pharmaceuticals. At a special
meeting of the Algos board held on the afternoon of November 26, 1999, the
Algos board received the oral opinion of Credit Suisse First Boston, confirmed
by a written opinion dated November 26, 1999, that, as of that date, the
consideration to be received by the Algos stockholders was fair from a
financial point of view. At the
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November 26, 1999 meeting, five of the six members of the Algos board approved
the terms of the agreements and authorized the execution of these agreements on
the basis that they had been negotiated, subject to specified modifications.
Mr. Dieter Sulser, the Unifina representative on the Algos board, abstained
from the vote.
On the evening of November 26, 1999, the merger agreement, the voting
agreements and the collaboration agreement were executed following final
negotiations. Before the opening of trading on November 29, 1999, Endo and
Algos publicly announced these agreements in a joint press release.
In the ensuing months, the parties continued to discuss the timetable
associated with the process of obtaining FDA approval of MorphiDex(R). As a
result of these discussions, in March 2000, Mr. Goldberg, on behalf of Endo,
proposed to Mr. Drapkin, on behalf of Algos, an amendment to the merger
agreement that would extend the period in which FDA approval for MorphiDex(R)
could be obtained in order for the warrants to be received by the Algos
stockholders to become exercisable from December 31, 2002 to March 31, 2003. In
addition, the percentage of Endo common stock issuable upon exercise of the
warrants would not begin to decrease until after March 31, 2002 instead of
December 31, 2001. However, instead of decreasing by five percentage points for
every six months following March 31, 2002, the amount of Endo common stock
issuable upon exercise of the warrants would decrease by six percentage points
during the first six-month period following March 31, 2002 and an additional
five percentage points during the second six-month period following March 31,
2002. After discussing the proposed amendment, the Algos directors approved the
amendment by unanimous consent on April 15, 2000, and the amendment was
executed by Algos and Endo on April 17, 2000.
Algos' Reasons for the Merger; Recommendation of the Algos Board
On November 26, 1999, the Algos board of directors determined by a vote of
five directors (with the Unifina representative on the Algos board abstaining)
that the merger is advisable and fair to, and in the best interests of, Algos
and the Algos stockholders. The Algos board approved the merger agreement and
decided to recommend that Algos stockholders approve and adopt the merger
agreement. In making this decision, the Algos board considered the factors
listed below:
1. The Algos board considered several strategic alternatives to a merger or
acquisition, including continuing to operate Algos on a stand-alone basis,
acquiring compatible businesses or products or entering into joint ventures or
collaborations. Although Algos had sufficient funds to continue developing its
products on a stand-alone basis, if FDA approval of MorphiDex(R) or another one
of its products took significantly longer or cost significantly more than
anticipated, Algos could have had inadequate funds to fund its operations and
develop and market its products still in development. The Algos board was also
concerned that management's focus on obtaining FDA approval of MorphiDex(R)
could leave it less time to continue developing other products and to build a
sales and marketing force. The Algos board thus believed that a strategy to
continue operating Algos on a stand-alone basis was less favorable than a
merger with Endo. In addition, the Algos board believed that a joint venture or
a collaboration could slow the Algos' product development schedule. Therefore,
the Algos board determined that the merger was the best alternative for Algos.
2. The Algos board determined that the merger presented Algos stockholders
with a unique strategic opportunity to maximize the long-term value of their
investment in Algos by exchanging their shares of Algos common stock for Endo
common stock and warrants to purchase additional Endo common stock if FDA
approval of MorphiDex(R) is obtained by March 31, 2003. The merger would give
Algos stockholders the opportunity to continue to participate in Algos'
potential growth while:
. reducing the risk that Algos' limited resources would impede this
growth by merging with a company with established product revenues;
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. reducing the risks associated with transitioning from a product
development-oriented company to a commercial sales and marketing-
oriented enterprise by merging with a company with an established sales
and marketing team focused on pain management;
. simultaneously offering the Algos stockholders the chance to benefit
from Endo's substantially greater capacity to develop, test and market
Algos' products as part of Endo's strategy of expanding Endo's pain
franchise through innovative proprietary pharmaceuticals; and
. providing Algos with the immediate significant brand recognition that
Percocet(R) and Percodan(R) enjoy within the pain management market by
enabling Algos to market its products containing oxycodone utilizing
the brand equity of these products.
The Algos board also believed that there were special opportunities for
synergistic benefits to be realized from a combination of Algos and Endo. These
benefits include the combination of the established manufacturing and marketing
infrastructure of Endo with Algos' pipeline of proprietary pharmaceuticals and
management expertise in selling proprietary pharmaceuticals. However, the Algos
board also recognized the risk that these synergistic benefits may not be
realized.
3. In reaching this conclusion, the Algos board considered not only the
value of the consideration being offered to Algos stockholders in the merger,
as discussed in paragraph 5 below, but also certain other specific aspects of
Endo's proposal, including:
. Endo's demonstrated enthusiasm for assisting with the development of
Algos' products and existing familiarity with Algos and its product
line as a result of the discussions that started in 1997 and its
continued commitment throughout that period to a merger with Algos as
an integral step in Endo's own business strategy;
. Endo's willingness to improve its offer for Algos such that if Endo
(based on current Endo products and future products internally
developed and sold or marketed by Endo) did not meet or exceed a cash
gross profit target of $147.4 million for fiscal year 2000, Algos
stockholders would become the owners of an additional 5% of Endo's
outstanding common stock;
. Endo's agreement to eliminate its request, which had been opposed by
the Algos board, that it receive an option from Algos to purchase
shares of Algos common stock and options from particular members of
Algos' board and management; and
. Endo's intention to integrate Algos' own workforce with Endo's
workforce.
4. The Algos board also took into account:
. its own and Endo's respective assessments of Algos' business,
financial condition, pipeline of potential products, contractual
arrangements, plans and prospects; and
. its own and Endo's respective assessments of Endo's business,
financial condition and prospects, including forecasts of its
financial performance prepared by Endo and a more conservative case
estimate of Endo's financial performance for calendar years 2000
through 2002, based on Endo management estimates in various scenarios,
and for 2003, using extrapolations developed by Algos management and
Credit Suisse First Boston, and capacity, as a major participant in
the pain management pharmaceutical products industry, to exploit
Algos' potential.
5. The Algos board viewed the consideration to be received by the Algos
stockholders for their shares of common stock as an attractive price for Algos.
Among other factors, the Algos board took into consideration:
. the Algos board's evaluation of financial analyses presented in
connection with Credit Suisse First Boston's opinion and summarized
under "THE MERGER--Opinion of Algos' Financial Advisor";
. the financial condition of Endo, which indicated to the Algos board
that the shares of Endo common stock and the warrants to purchase Endo
common stock that Algos stockholders would receive in the merger would
be readily tradeable by those Algos stockholders who do not wish to
make a long-term investment in Algos and would therefore offer
immediate liquidity to those Algos stockholders; and
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. the facts that (1) the merger is conditioned upon the receipt of
opinions of counsel that it will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368 of the
Internal Revenue Code and (2) assuming this treatment, no gain or loss
will be recognized by Algos stockholders upon their exchange of Algos
common stock for Endo common stock and warrants.
6. The Algos board took into consideration Credit Suisse First Boston's
opinion that, as of November 26, 1999, the date the merger agreement was
approved by the Algos board, the merger consideration was fair to Algos
stockholders from a financial point of view. A copy of Credit Suisse First
Boston's written opinion, dated November 26, 1999, setting forth the
assumptions made, matters considered and review undertaken, is attached to this
proxy statement/prospectus as Appendix C. The full text of the written opinion
is incorporated into this proxy statement/prospectus by reference, and the
description above of the opinion is qualified in its entirety by this
reference. See "--Opinion of Algos' Financial Advisor." Algos stockholders are
urged to read the opinion carefully in its entirety.
7. The Algos board considered generally the material terms of the merger
agreement and concluded that the terms were appropriate for a transaction of
the nature of the merger. The Algos board recognized that the conditions to
Endo's obligations to consummate the merger include conditions beyond the
ability of Algos to control and concluded that the risk of nonconsummation of
the merger had been appropriately limited and was outweighed by the potential
advantages of the merger to Algos stockholders. In making this determination,
the Algos board considered that the merger agreement provided that the merger
generally cannot be terminated by Endo for any change or development relating
to MorphiDex(R) or any other of the Algos products under development, including
the FDA or DEA approval process for those products.
8. The Algos board considered the fact that members of Algos management had
a variety of interests regarding the merger that differed from the interests of
Algos stockholders, including the fact that as part of the merger Endo had
offered to Mr. Lyle a five-year employment contract. In addition, Messrs. Lyle,
Kimmel and Hyatt will become directors of Endo after the merger and may receive
directors' stock options and directors' fees. Taking into account these
interests, the Algos board continued to believe that the merger was in the best
interests of the Algos stockholders. The Algos board believed that having
members of Algos management, including Mr. Lyle, continue with Endo and having
Algos stockholders, who either directly or with their families are significant
stockholders of Algos, serve on the Endo board were also in the best interests
of Algos stockholders, especially in light of the extended period for the
exercisability of the Endo warrants, which is contingent upon FDA approval of
MorphiDex(R). In addition, in view of Mr. Lyle's and his immediate family's
very significant stockholder interest in Algos, the Algos board viewed Mr.
Lyle's employment contract as immaterial to the merger.
9. Before approving the merger with Endo, the Algos board considered whether
to solicit competing offers for the company. However, Endo informed Algos that
it would rescind its merger proposal if Algos commenced an auction or otherwise
authorized management or advisors to solicit other proposals. The Algos board
also considered that the terms of the merger agreement permitted the Algos
stockholders to reject the merger in order to accept a higher offer. In
addition, the Algos board noted that Algos had received no business combination
proposals other than from Endo. For these reasons, the Algos board determined
that it was in the best interests of the Algos stockholders not to solicit
competing offers.
10. In considering the opportunity created by the merger for Algos
stockholders to participate in the anticipated value that will be created by
the combined company, including the value created by the future introduction of
Algos' products in the marketplace, the Algos board considered the binding
letter agreement among Kelso Investment Associates V, L.P. and Kelso Equity
Partners V, L.P., the current majority stockholders of Endo, Endo and Algos in
which these Endo stockholders agreed not to take any actions for the next two
years that would constitute a "going private" transaction under the Securities
Exchange Act of 1934, unless a majority of the Endo stockholders not affiliated
with these stockholders also approved the transaction.
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11. The Algos board considered the termination provisions of the merger
agreement, which provide that the Algos board is permitted to:
. consider competing proposals,
. provide information to competing bidders if required to do so in
carrying out its fiduciary duties and
. change its recommendation regarding this merger to the Algos
stockholders upon the receipt of a superior proposal.
However, the Algos board noted that the terms of the merger agreement do not
permit the Algos board to terminate the merger agreement for a superior
acquisition proposal by a competing bidder but instead require the Algos board
to take the merger agreement and the merger to the Algos stockholders for a
vote. The Algos board also noted that, under the voting agreements, Endo has
been granted irrevocable proxies to vote shares of Algos common stock
representing approximately 22% of the presently outstanding shares. The merger
agreement provides that Endo will not in any event receive any fees for
termination of the merger agreement other than out-of-pocket expenses under
limited circumstances.
The discussion above of the factors considered by the Algos board is not
intended to be exhaustive, but summarizes all material factors considered. The
Algos board did not assign any relative or specific weights to the above
factors nor did it specifically characterize any factor as positive or negative
(except as described above), and individual directors may have given differing
weights to differing factors and may have viewed certain factors more
positively or negatively than others.
The Algos board recommends that you approve and adopt the merger agreement.
Opinion of Algos' Financial Advisor
Summary
Credit Suisse First Boston, as financial advisor to Algos, delivered a
written opinion, dated November 26, 1999, to the Algos board of directors to
the effect that, as of that date, the merger consideration was fair to the
Algos stockholders from a financial point of view. The full text of Credit
Suisse First Boston's opinion is attached as Appendix C to this proxy
statement/prospectus. The opinion describes important exceptions, assumptions
and limitations, and you should read it carefully and completely. Credit Suisse
First Boston's opinion is not a recommendation to any Algos stockholder as to
how a stockholder should vote with respect to the merger.
Opinion of Credit Suisse First Boston
Credit Suisse First Boston Corporation has acted as Algos' financial advisor
in connection with the merger. Algos selected Credit Suisse First Boston based
on Credit Suisse First Boston's experience, expertise and reputation and
familiarity with Algos' business. Credit Suisse First Boston is an
internationally recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, Algos requested
that Credit Suisse First Boston evaluate whether the merger consideration was
fair to the stockholders of Algos from a financial point of view. On November
26, 1999, Credit Suisse First Boston rendered to the Algos board of directors
its oral opinion as well as its written opinion dated November 26, 1999 that,
as of that date and based upon and subject to the factors and assumptions set
forth in its opinion, the merger consideration was fair to the Algos
stockholders from a financial point of view.
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This summary of the Credit Suisse First Boston opinion is qualified in its
entirety by the full text of the opinion, which sets forth the procedures
followed, assumptions made, matters considered, and qualifications and
limitations of the review undertaken by Credit Suisse First Boston. The full
text of the Credit Suisse First Boston opinion is attached as Appendix C and is
incorporated by reference to this proxy statement/prospectus. Holders of Algos
common stock should read the Credit Suisse First Boston opinion carefully and
completely. Credit Suisse First Boston's opinion was provided to the Algos
board for its information and relates to whether the merger consideration was
fair to the Algos stockholders from a financial point of view. Credit Suisse
First Boston's opinion does not address the underlying decision by Algos to
engage in the merger and does not constitute a recommendation to any
stockholder of Algos as to how to vote on the proposed merger.
Matters Reviewed
In connection with rendering its opinion, Credit Suisse First Boston
reviewed and considered, among other things:
. the merger agreement and the warrant agreements;
. publicly available business information relating to Endo and publicly
available business and financial information relating to Algos;
. other information, including financial forecasts, provided by Algos and
Endo as of November 26, 1999;
. financial and stock market data of Algos and financial data of Endo, and
similar data for publicly held companies in businesses similar to Algos
and Endo;
. the financial terms of a number of recent business combinations and other
transactions; and
. other relevant information, financial studies, analyses and
investigations and financial, economic and market criteria.
Credit Suisse First Boston has not assumed any responsibility for
independent verification of any of the information above and has relied on its
being complete and accurate in all material respects.
Assumptions
In its review and analysis and in formulating its opinion, Credit Suisse
First Boston assumed without independent verification that:
. Endo common stock to be received by the stockholders of Algos would be
issued pursuant to an effective Registration Statement on Form S-4, and
that these shares will be authorized for quotation on the NASDAQ;
. the financial forecasts provided by Algos and Endo were prepared on
reasonable bases reflecting the best currently available estimates and
judgments of Algos' and Endo's management, respectively, as to the future
financial performance of Algos and Endo;
. the merger will be treated as a tax-free reorganization for income tax
purposes; and
. the representations and warranties of each party contained in the merger
agreement were and will remain true and correct, that each party would
perform all the covenants and agreements required under the merger
agreement, and that all conditions to the consummation of the merger
would be satisfied without being waived.
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Limitations
Credit Suisse First Boston's analysis and opinion were subject to certain
limitations, including that Credit Suisse First Boston:
. did not make, nor was it provided, any independent evaluation or
appraisal of the assets or liabilities of Endo or Algos;
. did not express any opinion as to the actual value of the common stock
and/or warrants when issued to the Algos stockholders pursuant to the
merger, whether any active trading market will develop for the common
stock or warrants, or the prices at which the common stock and warrants
will trade subsequent to the merger;
. based its opinion upon financial, economic, market and other conditions
as they existed and could be evaluated on the date the opinion was
rendered; and
. did not solicit third-party indications of interest in acquiring all or
any part of Algos.
Credit Suisse First Boston's opinion and its financial analyses presented to
the Algos board and summarized below were not the only factors considered by
the Algos board of directors in its evaluation of the proposed merger and
should not be viewed as necessarily determinative of the views of the Algos
board with respect to the merger or merger consideration.
Presentation to the Algos Board of Directors
The following is a summary of the material analyses underlying Credit Suisse
First Boston's opinion to the Algos board of directors in connection with the
merger. The financial analyses summarized below include information presented
in tabular format. In order to fully understand Credit Suisse First Boston's
financial analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial analyses. Considering the data set forth in the table below without
considering the full narrative description of the financial analyses, including
methodologies and assumptions underlying the analyses, could create a
misleading or incomplete view of Credit Suisse First Boston's financial
analyses.
The estimates contained in Credit Suisse First Boston's analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by the
analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Credit Suisse First
Boston's analyses and estimates are inherently subject to substantial
uncertainty.
The summaries set forth below do not purport to be complete descriptions of
the analyses underlying Credit Suisse First Boston's opinion or the
presentation made by Credit Suisse First Boston to the Algos board of
directors. The preparation of a fairness opinion is a complex analytical
process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances and, therefore, a fairness opinion is not readily
susceptible to partial analysis or summary description. Accordingly, Credit
Suisse First Boston believes that its analyses must be considered as a whole
and that selecting portions of its analyses, without considering all analyses,
would create an incomplete view of the process underlying the preparation of
Credit Suisse First Boston's opinion.
Discounted Cash Flow Analysis
Credit Suisse First Boston estimated the present value of the stand-alone,
unlevered, after-tax free cash flows that Algos could produce over calender
years 2000 through 2007, and that Endo could produce over the calendar years
2000 through 2002, based on Endo management estimates in various scenarios, and
for 2003, using extrapolations developed together with the management of Algos.
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The free cash flows in each of the years were individually discounted using
a weighted average discount rate based on the contribution to total revenue of
each product and each product's stage of clinical development. The terminal
values were calculated using two different methodologies:
(1) unlevered net income multiples, using a range of multiples of 16.0x to
22.0x; and
(2) a free cash flow perpetuity method using a range of perpetual growth
rates of 8.0% to 11.0% and a terminal discount rate of 15%.
The terminal values were discounted using a range of discount rates from
33.0% to 39.0%. This range of discount rates reflects the relative risk of not
obtaining the expected cash flows based on the different stages of clinical
development.
For the Algos discounted cash flow analysis, Credit Suisse First Boston
examined four cases. The first Algos case assumed that MorphiDex(R) was
approved by the FDA by the end of 2001. This analysis indicated a value per
share of Algos common stock ranging from $23.31 to $28.93 and a range of
implied Algos pro forma fully diluted equity ownership of the combined company
of 32.1% to 39.8% based on an implied summary equity valuation range for Endo
of $778 to $878 million.
Using the same analyses for the second Algos case, in which MorphiDex(R) is
not approved by the FDA, the indicated value per share of Algos common stock
ranged from $5.03 to $7.84, and the range of implied Algos pro forma fully
diluted equity ownership of the combined company ranged from 9.2% to 15.2%
based on an implied summary equity valuation range for Endo of $778 to $878
million.
Using the same analyses for the third Algos case, in which MorphiDex(R) is
approved by the FDA by mid-2002, the indicated value per share of Algos common
stock ranged from $17.68 to $21.90. Finally in the fourth Algos case, in which
MorphiDex(R) is approved by the FDA by the end of 2002, the same analyses
indicated a value per share of Algos common stock ranging from $10.65 to
$14.87.
The following chart sets forth the implied enterprise value and implied
equity value reference ranges for each of the four Algos cases (in millions):
<TABLE>
<CAPTION>
Implied enterprise Implied equity
value range value range
------------------ --------------
<S> <C> <C>
MorphiDex(R) approval by the end of 2001..... $375--$475 $414--$514
No MorphiDex(R) approval..................... $ 50--$100 $ 89--$139
MorphiDex(R) approval by mid-2002............ $275--$350 $314--$389
MorphiDex(R) approval by the end of 2002..... $150--$225 $189--$264
</TABLE>
For the Endo discounted cash flow analysis, the free cash flows were
discounted at a range of discount rates from 12.0% to 15.0%. The terminal
values were calculated using three different methodologies:
(1) Cash EBITDA multiples, using a range of 9.0x to 12.0x;
(2) unlevered net income multiples, using a range of 15.0x to 21.0x and
(3) a free cash flow perpetuity method, using a range of perpetual growth
rates of 0.0% to 3.0% and a terminal discount rate of 10%.
The terminal values were discounted using a range of discount rates from
12.0% to 15.0%. Credit Suisse First Boston examined three cases for Endo. The
first Endo case, the base case, utilized assumptions from the calender years
from 2000 through 2002 provided by the management of Endo as of November 26,
1999 and did not include the revised forecasts set forth in this proxy
statement/prospectus, and assumptions for 2003 extrapolated from the prior two
years by the management of Algos together with Credit Suisse First Boston. The
downside and worst Endo cases are both more conservative than the base case,
and were prepared by the management of Algos together with Credit Suisse First
Boston. The worst case was based on the assumption that Endo will not meet its
downside case fiscal year 2000 cash gross profit estimate of $147.4 million.
The revised forecast prepared by Endo for the year 2000 presents financial
performance that is between the base case and the worst case.
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The following chart sets forth the implied enterprise value and implied
equity value reference ranges for each of the three Endo cases (in millions):
<TABLE>
<CAPTION>
Implied
Implied Enterprise Equity
Value Range Value Range
------------------ -------------
<S> <C> <C>
Base Case..................................... $1,200-$1,400 $1,028-$1,228
Downside Case................................. $ 700-$ 850 $ 528-$ 678
Worst Case.................................... $ 650-$ 800 $ 478-$ 628
Summary DCF Reference Range................... $ 950-$1,050 $ 778-$ 878
</TABLE>
Credit Suisse First Boston placed the greatest emphasis on a discounted cash
flow analysis for both Algos and Endo, and less emphasis on a comparable
companies trading analysis or a comparable acquisitions analysis, given the
difficulty in assigning relevant multiples for a company and peer group that is
often not yet profitable.
Comparable Company Trading Analysis
Credit Suisse First Boston also reviewed and compared financial information,
ratios and public market multiples relating to Algos and Endo to corresponding
publicly available financial data for similar, publicly-traded pharmaceutical
companies. Credit Suisse First Boston selected these companies based upon its
views as to the comparability of the financial and operating characteristics of
these companies to Algos and Endo, respectively. Credit Suisse First Boston
divided companies comparable to Algos into three categories, corresponding to
different stages of product development.
The companies included in the Algos comparable companies analysis were:
Companies with Approved Products
. Advanced Polmer Systems, Inc.
. Guilford Pharmaceuticals, Inc.
. Andrx Corporation
. KV Pharmaceuticals, Inc.
. Anesta Corporation
. Kos Pharmaceuticals, Inc.
. Celgene Corporation
. The Liposome Company, Inc.
. Cephalon, Inc.
. Nastech Pharmaceutical Company Inc.
. CIMA Labs Inc.
. Noven Pharmaceuticals, Inc.
. Columbia Laboratories, Inc.
. PathoGenesis Corporation
. Dura Pharmaceuticals, Inc. . Penwest Pharmaceuticals Co.
. SuperGen, Inc.
Companies with Products Filed
Companies with Development Stage
Products
. Aviron Corporation
. Alkermes, Inc.
. Cygnus, Inc.
. Aradigm Corporation
. Emisphere Technologies, Inc.
. Enzon, Inc.
. Inhale Therapeutic Systems, Inc.
. GelTex Pharmaceuticals, Inc.
. Matrix Pharmaceutical, Inc. . Oxford GlycoSciences Plc
. Skyepharma Plc
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<PAGE>
The mean and median forward multiples of price to earnings per share for
estimated 1999, 2000 and 2001 earnings per share of the comparable companies
are set forth in the following table:
<TABLE>
<CAPTION>
1999 earnings 2000 earnings 2001 earnings
per share per share per share
------------- ------------- -------------
<S> <C> <C> <C>
Overall Mean....................... 31.3x 28.4x 20.7x
Overall Median..................... 31.6x 27.8x 15.7x
</TABLE>
Algos' multiples for the same periods did not produce meaningful results
because Algos did not have positive earnings per share in 1999 or projected
earnings per share in 2000 and had minimal projected earnings per share in
2001. The multiples that would be produced in this case would not be
instructive as to value.
The companies included in the Endo comparable companies trading analysis
were:
. IVAX Corporation . Duramed Pharmaceuticals, Inc.
. Alpharma Inc. . SICOR Inc.
. Barr Laboratories, Inc. . Mylan Laboratories Inc.
. Schein Pharmaceutical, Inc. . TEVA Pharmaceutical
. Biovail Corporation International
Credit Suisse First Boston compared financial information and multiples of
market value of these companies to the following information regarding Endo
provided by management:
. enterprise value to the latest 12 months' earnings before interest,
taxes, depreciation and amortization, or, cash EBITDA;
. 1999 estimated net income;
. 2000 estimated net income; and
. 2001 estimated net income.
This information implied a range of multiples of enterprise value to the
latest 12 months' cash EBITDA of from 9.0x to 12.0x. This information also
implied ranges of multiples of price to 1999 estimated earnings per share from
16.0x to 23.0x, of price to 2000 estimated earnings per share from 13.0x to
17.0x and of price to 2001 estimated net income from 11.0x to 15.0x.
These reference multiple ranges were applied to cash EBITDA and net income
assumptions in the three Endo cases considered. This analysis indicated implied
enterprise value ranges for the base case, downside case and worst case of $722
to $922 million, $447 to $547 million and $372 to $447 million, respectively.
This analysis also indicated implied equity value ranges for the base case,
downside case and worst case of $550 to $750 million, $275 to $375 million and
$200 to $275 million, respectively.
No company utilized in the comparable public companies analysis is identical
to Algos or Endo. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of Algos and Endo and
other factors that could affect the public trading value of the companies to
which they are being compared. In evaluating the comparable companies, Credit
Suisse First Boston 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 Algos or Endo, such as
the impact of competition on Algos or Endo and the industry generally, industry
growth and the absence of any adverse material change in the financial
conditions and prospects of Algos or Endo or the industry or in the financial
markets in general.
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Comparable Acquisitions Analysis
Credit Suisse First Boston performed a comparable acquisitions analysis for
both Algos and Endo for illustrative purposes, but the mean and median
multiples were not used to calculate a valuation for either company because of
the inherent difficulty in assigning relevant trailing multiples for a company
and peer group that is often not yet profitable and for which meaningful
multiples are not available. Credit Suisse First Boston selected these
transactions based upon Credit Suisse First Boston's views as to the
comparability of the transactions' characteristics to the proposed transaction
between Algos and Endo. Credit Suisse First Boston reviewed and compared
certain financial information, ratios and public market multiples relating to
Algos and Endo to corresponding publicly available financial data for similar
publicly-traded companies in preparing this analysis.
Algos Comparable Acquisitions
Biovail Corporation International/Fuisz Technologies Ltd.
Abbott Laboratories/ALZA Corporation
Gilead Sciences, Inc./NeXstar Pharmaceuticals, Inc.
Watson Pharmaceuticals, Inc./Theratech, Inc.
ALZA Corporation /SEQUUS Pharmaceuticals, Inc.
Mylan Laboratories, Inc./Penederm Inc.
Cardinal Health, Inc./R.P. Scherer Corporation
Elan Corporation plc/Neurex Corporation
Elan Corporation plc/Sano Corporation
Elan Corporation plc/Athena Neurosciences, Inc.
Endo Comparable Acquisitions
Teva Pharmaceutical/Copley Pharmaceuticals, Inc.
Watson Pharmaceuticals, Inc./Rugby (Hoechst Marion Roussel)
Teva Pharmaceutical/Biocraft Laboratories, Inc.
Watson Pharmaceuticals, Inc./Royce Laboratories, Inc.
IVAX Corporation/Zenith Laboratories, Inc.
Contribution Analysis
Credit Suisse First Boston reviewed selected estimated future financial
information for Algos and Endo to determine Algos' and Endo's relative
contribution to the combined company after the merger, using Endo's base case
and both the no MorphiDex(R) approval and the MorphiDex(R) approval by the end
of 2001 cases. Credit Suisse First Boston analyzed Algos' and Endo's relative
contributions to cash EBITDA and revenues, based the discounted cash flow
valuations discussed above for the years 2001 through 2003. The relative
contributions of Algos and Endo to the combined company implied relative
contributions to enterprise value of 7% for Algos and 93% for Endo in the no
MorphiDex(R) approval case and of 30% for Algos and 70% for Endo in the
MorphiDex(R) approval by the end of 2001 case.
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Merger Consequence Analysis
Credit Suisse First Boston analyzed the merger consequences based on the
following assumptions:
. purchase accounting treatment for the merger;
. use of Endo management base case projections for Endo and both the
MorphiDex(R) non-approval case and the MorphiDex(R) approval by the end
of 2001 case for Algos; and
. limitations on the use of Algos' net operating losses, or NOLs, to the
extent the combined company generates earnings in future periods.
Credit Suisse First Boston determined that based on the above assumptions,
the proposed merger would be:
. dilutive to Endo's stand-alone earnings per share for each of the years
2000, 2001 and 2002 applying both the no MorphiDex(R) approval case and
the MorphiDex(R) approval by the end of 2001 case projections for Algos.
The actual results achieved by the combined company may vary from projected
results, and the variations may be material.
Miscellaneous
Algos has agreed to pay Credit Suisse First Boston for its financial
advisory services an aggregate fee equal to $750,000, of which $500,000 was
payable upon delivery of Credit Suisse First Boston's opinion and the remaining
$250,000 will be payable upon completion of the merger. Algos also has agreed
to reimburse Credit Suisse First Boston for its reasonable out-of-pocket
expenses, including reasonable fees and expenses of legal counsel, and to
indemnify Credit Suisse First Boston and related parties against liabilities,
including liabilities under the federal securities laws, arising out of its
engagement.
In the ordinary course of business, Credit Suisse First Boston or its
affiliates may actively trade the equity securities of Algos for its own and
such affiliates' own accounts and for the accounts of customers and,
accordingly may at any time hold a long or short position in such securities.
Accounting Treatment
The merger will be accounted for using the purchase method of accounting,
which means that the assets and liabilities of Algos, including intangible
assets, will be recorded at their fair values. The results of operations and
cash flows of Algos will be included in Endo's financial statements
prospectively as of the completion of the merger. Endo will consolidate its
investment in Algos.
The purchase price, which will be allocated to the assets acquired and
liabilities assumed at the date of the merger, will be based on the market
price of a share of Algos common stock for a reasonable period before and after
the measurement date (April 17, 2000, date of amendment of the merger
agreement) multiplied by the number of shares of Algos common stock outstanding
at the time of closing. The fair value of the consideration received by the
Algos stockholders will be allocated between the Endo common stock and the
transferable and nontransferable warrants issued based on their respective fair
value and recorded as components of stockholders equity at the date of the
merger.
The warrants to be received by the Endo stockholders are not being issued to
the seller as consideration for the acquisition. However, as is the case with
all publicly traded securities, we believe that the market price of the Endo
common stock and warrants reflects the value of any dilutive securities issued
to Endo.
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Material U.S. Federal Income Tax Consequences of the Merger
The material United States federal income tax consequences generally
applicable to Algos, Endo, Endo Inc. and Algos stockholders who receive Endo
common stock and warrants pursuant to the merger are described below and, to
the extent that the following statements constitute matters of law or legal
conclusions, they are the opinion of Latham & Watkins and the opinion of
Skadden, Arps. This discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, or the Code, currently applicable Treasury
regulations, administrative decisions and rulings and court decisions. We
cannot assure you that the Internal Revenue Service, or IRS, will not take a
contrary view, and we have not and will not seek a ruling from the IRS.
Legislative, judicial or administrative changes or interpretations may occur
that could alter or modify the statements and conclusions set forth in this
proxy statement/prospectus. Any changes or interpretations that occur after the
date of this proxy statement/prospectus could be retroactive and could affect
the tax consequences to the Algos stockholders.
This discussion does not purport to deal with all aspects of United States
federal income taxation that may affect particular Algos stockholders in light
of their individual circumstances, and is not intended for Algos stockholders
subject to special treatment under the United States federal income tax law.
Algos stockholders subject to special treatment include:
. insurance companies,
. tax-exempt organizations,
. non-resident aliens,
. foreign corporations,
. foreign partnerships,
. foreign trusts,
. financial institutions,
. broker-dealers,
. Algos stockholders who hold their common stock as part of a hedge,
straddle or conversion transaction,
. Algos stockholders who do not hold their common stock as a capital asset,
and
. Algos stockholders who have acquired their common stock upon the exercise
of options or otherwise as compensation.
In addition, this discussion does not consider the effect of any applicable
foreign, state, local or other tax laws.
We encourage each Algos stockholder to consult its own tax advisors as to
the particular tax consequences to it of the merger, including the
applicability and effect of any state, local, foreign, or other tax laws, and
of changes in applicable tax laws.
Tax Treatment of Algos, Endo Inc. and Endo
The merger is intended to qualify as a reorganization under Section 368(a)
of the Code. It is a condition to the obligation of Endo to consummate the
merger that Endo shall have received an opinion from Skadden, Arps to the
effect that the merger will be treated as a reorganization within the meaning
of Section 368(a) of the Code. It is a condition to the obligation of Algos to
consummate the merger that Algos shall have received an opinion from Latham &
Watkins to the effect that the merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code. In rendering these opinions
that will be delivered at the time of the merger, counsel to each of Endo and
Algos will rely upon the truth and accuracy, at all relevant times, of the
statements, covenants, representations and warranties contained in (1) the
amended and restated merger
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<PAGE>
agreement, (2) certificates executed by officers of Endo and Algos attached as
Exhibits E-1 and E-2, respectively, to Appendix A of this proxy
statement/prospectus and (3) such other documents and corporate records as
counsel to each of Endo and Algos has deemed necessary or appropriate for
purposes of their opinions. In addition, counsel have assumed that (1) original
documents (including signatures) are authentic, documents submitted to such
counsel as copies conform to the original documents, and there has been (or
will be by the effective time of the merger) due execution and delivery of all
documents where due execution and delivery are prerequisites to the
effectiveness thereof; (2) the merger will be completed in accordance with the
provisions of the amended and restated merger agreement; (3) all statements,
descriptions and representations contained in any of the documents referred to
above or otherwise made to counsel are true and correct in all material
respects, and no such actions have been taken or will be taken which are
inconsistent with such statements, descriptions or representations or which
make any such statements, descriptions or representations untrue, incorrect or
incomplete in any material respect; (4) any statements made in any of the
documents referred to above which are qualified by the limitation "to the
knowledge of" or as to "belief" or which are otherwise similarly qualified are
correct and will continue to be true, correct and complete at all times up to
and including the closing date, in each case without regard to any such
qualification as to knowledge or belief; and (5) the sum of the fair market
value of the warrants at the time of the merger and the amount of
consideration, if any, to be awarded by a court to holders of Algos common
stock who perfect appraisal rights will not exceed 60% of the total
consideration that will be paid in the merger.
Assuming the accuracy of the representations and assumptions referred to
above, the merger will constitute a reorganization within the meaning of
Section 368(a) of the Code. As a result, no gain or loss will be recognized for
federal income tax purposes by Endo, Endo Inc. or Algos.
Tax Treatment of Algos Stockholders
In general, no gain or loss is recognized by a stockholder if stock or
securities in a corporation that is a party to a reorganization is exchanged
solely for stock or securities in another corporation that is a party to the
reorganization. If any other property is received, sometimes referred to as
"boot," gain will be recognized, but only to the extent of the realized gain,
as described below. If a stockholder receives in the exchange either property
other than stock or securities, or securities with a principal amount that
exceeds the principal amount of the securities that it surrendered, such
amounts are treated as boot and gain will be recognized in an amount equal to
the lesser of the realized gain or the fair market value of the boot, as
described in more detail below. Treasury Regulations provide that, for this
purpose, securities include rights issued by a party to the reorganization to
acquire its stock but that such rights are treated as having no principal
amount. Accordingly, if the warrants are properly treated as "securities" an
Algos stockholder will not be treated as receiving boot and therefore will not
recognize gain or loss on the exchange of Algos common stock for Endo common
stock and warrants pursuant to the merger.
Because the exercise price of each warrant will be a nominal amount and the
ability to exercise the warrants is contingent upon the occurrence of future
events, however, it is not clear whether the warrants will be treated as
"securities" with a zero principal amount under the Treasury Regulations
referred to above. If the warrants are not "securities" within the meaning of
the Treasury Regulations, then they will instead be treated as a contingent
right to receive Endo common stock. In that case, non-transferable warrants
will not be treated as boot and Algos stockholders electing to receive non-
transferable warrants will not recognize gain on the exchange. Although the
matter is not free from doubt, the transferable warrants also should not be
treated as boot, and Algos stockholders receiving transferable warrants also
should not recognize gain on the exchange. Although existing case law supports
the position that transferable contingent stock rights are not boot, the IRS
has published administrative guidance indicating that it will follow the case
law only where the contingent stock rights are non-transferable and, therefore,
we cannot assure you that the IRS would not be able to successfully treat the
transferable warrants as boot.
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If the transferable warrants are considered boot, an Algos stockholder who
receives transferable warrants and whose tax basis in its Algos common stock is
less than the fair market value of Endo common stock and Endo warrants received
in the merger will recognize gain in the merger in an amount equal to the
lesser of that excess or the fair market value of the transferable warrants
received. Any such gain recognized by an Algos stockholder will be taxed as a
dividend, to the extent of the Algos stockholder's ratable share of Endo's
accumulated earnings and profits, if the receipt of the transferable warrants
has "the effect of the distribution of a dividend." Gain recognized in excess
of a stockholder's ratable share of Endo's accumulated earnings and profits
will be capital gain.
To determine if the receipt of boot in the merger has "the effect of the
distribution of a dividend," an Algos stockholder will be treated as if it
solely received Endo common stock in the merger and then exchanged the extra
shares of Endo common stock for the boot (the warrants). The receipt of
transferable warrants will be treated as having "the effect of the distribution
of a dividend" unless the deemed redemption of Endo common stock for these
transferable warrants is (a) "substantially disproportionate" or (b) "not
essentially equivalent to a dividend," each within the meaning of Section
302(b) of the Code. A deemed redemption is not essentially equivalent to a
dividend if it results in a "meaningful reduction" in the stockholder's
interest in Endo.
In general, a stockholder who owns a relatively small percentage of Endo
stock and who exercises no control over Endo, taking into account the
constructive ownership rules of Section 318 of the Code, and whose interest in
Endo is reduced as a result of the deemed redemption should be treated as
having experienced a meaningful reduction in its interest in Endo common stock.
There can be no certainty, however, as to whether a "meaningful reduction" has
occurred because the applicable test is not based on numerical criteria.
Satisfaction of the "substantially disproportionate" test is dependent upon
compliance with the objective tests set forth in Section 302(b)(2) of the Code.
We encourage each Algos stockholder to consult its own tax advisor as to the
ability, in light of its own particular circumstances, to satisfy the foregoing
tests. Additionally, we encourage corporate Algos stockholders to consult their
own tax advisors concerning the availability of the corporate dividends
received deduction and the possible application of the extraordinary dividend
rules of Section 1059 of the Code to an exchange by a corporate Algos
stockholder for whom the distribution is taxable as a dividend.
Basis and Holding Period of Merger Consideration
Assuming the warrants are not treated as boot, the aggregate tax basis of
the Endo common stock and the warrants (whether transferable or non-
transferable) received by the Algos stockholders pursuant to the merger will be
the same as the aggregate tax basis of the Algos stockholder's surrendered
common stock exchanged therefor, or the historic basis. The historic basis of
each Algos stockholder will be allocated among the warrants and the Endo common
stock as though the Algos stockholder received the maximum number of shares
that can be issued under the warrants.
An adjustment to the Algos stockholder's basis in the Endo common stock
received and the warrants should be made once it becomes known how many shares
(if any) the holders of the warrants are entitled to receive. It is unclear how
this adjustment should be made, particularly if an Algos stockholder no longer
retains all the Endo common stock or warrants received in the merger.
The IRS has not issued guidelines on how a stockholder should make this
adjustment. An Algos stockholder could recalculate its basis in any remaining
Endo common stock or additional Endo common stock received upon exercise or
lapse of the warrants, without recalculating the basis that had been allocated
to any disposed merger consideration. Alternatively, the Algos stockholder
could recalculate its basis in both the warrants, even if the Algos stockholder
has disposed of these warrants, and all of its, including already disposed of,
Endo common stock. Each Algos stockholder should consult its own tax advisors
as to the allocation of its historic basis among the Endo common stock and the
warrants.
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If the warrants are treated as taxable boot, then an Algos stockholder who
receives Endo common stock and transferable warrants will have an aggregate tax
basis in the Endo common stock received equal to the Algos stockholder's
historic basis decreased by the fair market value of the transferable warrants
and increased by the amount of gain the Algos stockholder recognized on the
exchange, not including any portion of the gain that was treated as a dividend.
This Algos stockholder will have a basis in the transferable warrants equal to
the fair market value of these warrants when received.
The holding period of the Endo common stock in the hands of an Algos
stockholder will include the holding period of the Algos stockholder's common
stock exchanged for the Endo common stock pursuant to the merger. If the
warrants are not boot, the holding period of the warrants in the hands of an
Algos stockholder will include the holding period of the Algos stockholder's
common stock exchanged for the Endo common stock pursuant to the merger. If the
warrants are boot, the holding period of the warrants in the hands of an Algos
stockholder will not include the holding period of the Algos stockholder's
common stock exchanged for the Endo common stock pursuant to the merger.
Disposition of Endo Common Stock and the Warrants
Because, as described above, the exercise price of each warrant will be a
nominal amount, it is likely that the warrants will be treated as contingent
stock rights, rather than as warrants for federal income tax purposes. If,
however, the warrants were treated as warrants for tax purposes, the cash
exercise of the warrants would not be taxable to the exercising Algos
stockholder, except with respect to cash, if any, received in lieu of a
fractional share. An Algos stockholder would have a tax basis in the shares of
Endo common stock received upon exercise of the warrants equal to the Algos
stockholder's tax basis in the warrants exercised, plus the amount of cash used
to pay the exercise price, minus the portion of the Algos stockholder's basis
in the warrants and cash used to pay the exercise price attributable to cash,
if any, received in lieu of fractional shares. An Algos stockholder would have
a holding period in shares of Endo common stock received upon exercise of the
warrants that commences on the day after the date of the exercise. The tax
consequences to a holder who elects to exercise warrants on a "cashless" basis
are uncertain. Holders should consult their own tax advisors regarding the
proper treatment of a "cashless" exercise.
In addition, if the warrants are treated as warrants for tax purposes, an
adjustment to the exercise price or conversion ratio of the warrants, or the
failure to make such adjustments, may, in a limited number of circumstances,
result in constructive distributions to the warrant holders, which could be
taxable as dividends under Section 305 of the Code. In this event, a warrant
holder's tax basis in the warrant would be increased by the amount of any
dividend.
Further, if the warrants are treated as warrants for tax purposes, an Algos
stockholder will recognize gain or loss upon the sale, lapse or other taxable
disposition of the warrants in an amount equal to the difference between the
amount of cash and the fair market value of other property received, if any, by
the Algos stockholder and the stockholder's tax basis in the warrants. Any gain
or loss realized on the sale, lapse, or other taxable disposition of the
warrants will generally be capital gain or loss.
If the warrants are not treated as warrants for tax purposes and treated
instead as a contingent right to receive Endo common stock:
. no gain or loss would be recognized to an Algos stockholder upon the
cash exercise of the contingent right, except with respect to cash
received in lieu of a fractional share;
. the tax basis in the Endo common stock received on exercise will equal
the Algos stockholder's tax basis in the warrants, plus the amount of
cash used to pay the exercise price, minus the portion of the Algos
stockholder's basis in the warrants and cash used to pay the exercise
price attributable to cash, if any, received in lieu of fractional
shares;
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. the holding period of the Endo common stock received will include the
holding period of the warrants; and
. the Algos stockholder will generally recognize capital gain or loss upon
the sale or other taxable disposition of the warrants in an amount equal
to the difference between the amount the Algos stockholder realizes for
the warrants and its tax basis in the warrants.
No loss would be recognized upon the lapse of a warrant, however, except
perhaps in the case of transferable warrants, if these warrants are treated as
taxable boot.
When an Algos stockholder sells or otherwise disposes of warrants or its
shares of Endo common stock received in the merger or upon exercise of the
warrants, the Algos stockholder will generally recognize capital gain or loss
in an amount equal to the difference between the amount the stockholder
realizes for the shares and its tax basis in the shares. Algos stockholders
who are individuals are entitled to a reduced rate of tax on capital gains
with respect to property held for more than one year.
Reporting Requirements and Backup Withholding
Each Algos stockholder receiving Endo common stock and warrants as a result
of the merger will be required to retain certain records and file with its
federal income tax return a statement setting forth certain facts relating to
the merger.
Backup withholding at a rate of 31% may apply with respect to cash payments
received by Algos stockholders unless the recipient is (a) a corporation or
other exempt recipient and when required demonstrates this fact or (b)
provides a correct taxpayer identification number, certifies as to no loss to
exemption from back-up withholding and otherwise complies with applicable
requirements of the backup withholding rules. An Algos stockholder who does
not provide Endo with its correct taxpayer identification number may be
subject to penalties imposed by the IRS. Any amounts withheld under the backup
withholding rules may be allowed as a refund or a credit against the
stockholder's federal income tax liability provided that certain required
information is furnished to the IRS.
Regulatory Matters
U.S. Antitrust
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or the HSR
Act, we cannot complete the merger until we have given to the Federal Trade
Commission, or the FTC, and the Antitrust Division of the United States
Department of Justice, or the DOJ:
. notification that Endo and Algos desire to merge; and
. specific information relating to the competitive nature of the businesses
and industries in which Endo and Algos operate; and
one or more specified waiting periods expire or are earlier terminated.
Both Endo and Algos filed notification and report forms under the HSR Act
with the FTC and the DOJ on January 21, 2000. On February 21, 2000, the
waiting period applicable to the merger terminated. Endo and Algos do not
expect to be required to receive any other material regulatory approval in
order to consummate the merger.
FDA and DEA
Endo and Algos believe that no filings with the FDA or the DEA will be
necessary until after the closing.
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General
It is possible that other state or local governmental entities or third
parties may seek to challenge the merger. In addition, it is possible that
governmental entities having jurisdiction over Endo and Algos may seek
regulatory concessions as conditions for granting approval of the merger. Under
the merger agreement, Endo and Algos have both agreed to use their reasonable
best efforts to take all actions to obtain all necessary regulatory and
governmental approvals necessary to complete the merger and to address concerns
of regulators and governmental officials. While Endo and Algos do not expect
the closing of the merger to be prevented or materially delayed by any
challenge by regulatory authorities within the United States, we can give no
assurance that Endo and Algos will obtain the required regulatory approvals on
terms that satisfy the conditions to completion of the merger or within the
time frame that Endo and Algos have contemplated. See "THE MERGER AGREEMENT--
Conditions Precedent to the Merger" on page 75.
Appraisal Rights
If the merger is consummated, a holder of record of shares of Algos common
stock may seek an appraisal under Section 262 of the Delaware General
Corporation Law of the "fair value" of the holder's shares. Set forth below is
a summary of the principal provisions of Section 262 and does not purport to be
a complete description and, accordingly, this summary is qualified in its
entirety by reference to Section 262 of the Delaware General Corporation Law. A
copy of Section 262 is attached to this proxy statement/prospectus as Appendix
G. Failure to take any action required by Section 262 in a timely manner will
result in a termination or waiver of a stockholder's rights under Section 262.
(1) A stockholder electing to exercise appraisal rights must (a) deliver to
Algos, before the Algos stockholders vote on the merger agreement at
the Algos special meeting, a written demand for appraisal that is made
by or on behalf of the person who is the holder of record of Algos'
common stock for which appraisal is demanded and (b) not vote in favor
of approving and adopting the merger agreement. The demand must be
delivered to Algos at 1333 Campus Parkway, Neptune, New Jersey 07753-
6815 (facsimile: (732) 938-2825). A proxy or vote against approving and
adopting the merger agreement does not constitute a demand. A
stockholder electing to take this action must do so by a separate
written demand that reasonably informs Algos of the identity of the
holder of record and of the stockholder's intention to demand appraisal
of the holder's shares of our common stock. Because a proxy left blank
will, unless revoked, be voted FOR approval and adoption of the merger
agreement, a stockholder electing to exercise appraisal rights who
votes by proxy must not leave the proxy blank but must vote AGAINST
approval and adoption of the merger agreement or ABSTAIN from voting
for or against approval and adoption of the merger agreement.
(2) Only holders of record of Algos common stock are entitled to demand
appraisal rights for their shares of Algos common stock registered in
their name. The demand must be executed by or for the holder of record,
fully and correctly, as the holder's name appears on the holder's stock
certificates. If Algos common stock is owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, the demand
should be executed in that capacity. If Algos common stock is owned of
record by more than one person, as in a joint tenancy or tenancy in
common, the demand should be executed by or for all owners. An
authorized agent, including one of two or more joint owners, may
execute the demand for appraisal for a holder of record; however, the
agent must identify the owner or owners of record and expressly
disclose the fact that, in executing the demand, the agent is acting as
agent for the owner or owners of record.
A holder of record, such as a broker, who holds shares of Algos common
stock as nominee for beneficial owners may exercise a holder's right of
appraisal with respect to shares of Algos common stock held for all or
less than all of the beneficial owners. In that case, the written
demand should set forth the number of shares of Algos common stock
covered by the demand. Where no number of shares is expressly
mentioned, the demand will be presumed to cover all shares of Algos
common stock standing in the name of the holder of record.
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(3) Within 10 days after the effective time of the merger, Endo will send
notice of the effectiveness of the merger to each person who prior to
that time satisfied the foregoing conditions.
(4) Within 120 days after the effective time of the merger, Endo or any
stockholder who has satisfied the foregoing conditions may file a
petition in the Delaware Court of Chancery demanding a determination of
the fair value of the Algos common stock. Stockholders seeking to
exercise appraisal rights should not assume that Endo will file a
petition to appraise the value of their shares of Algos common stock or
that Endo will initiate any negotiations with respect to the "fair
value" of such common stock. Accordingly, holders of Algos common stock
should initiate all necessary action to perfect their appraisal rights
within the time periods prescribed in Section 262.
(5) Within 120 days after the effective time of the merger, any stockholder
who has complied with the requirements for exercise of appraisal
rights, as discussed above, is entitled, upon written request, to
receive from the combined company a statement setting forth the
aggregate number of shares of Algos common stock not voted in favor of
the merger and with respect to which demands for appraisal have been
made and the aggregate number of holders of that common stock. We are
required to mail this statement within 10 days after we receive a
written request to do so.
(6) If a petition for an appraisal is timely filed, after a hearing on the
petition, the Delaware Court of Chancery will determine the
stockholders entitled to appraisal rights and will appraise the Algos
common stock owned by these stockholders, determining its "fair value"
exclusive of any element of value arising from the accomplishment or
expectation of the merger and will determine the amount of interest, if
any, to be paid upon the value of the Algos common stock of the
stockholders entitled to appraisal. Any such judicial determination of
the "fair value" of the Algos common stock could be more than, less
than or the same as the consideration paid pursuant to the merger
agreement. The court may also order that all or a portion of any
stockholder's expenses incurred in connection with an appraisal
proceeding, including, without limitation, reasonable attorneys' fees
and fees and expenses of experts utilized in the appraisal proceeding,
be charged pro rata against the value of all shares of the Algos common
stock entitled to appraisal.
(7) Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the effective time of the merger, be
entitled to vote the shares subject to this demand for any purpose or
be entitled to dividends or other distributions on those shares of
Algos common stock, other than those payable or deemed to be payable to
stockholders of record as of a date prior to the filing of the
certificate of merger.
(8) Holders of Algos common stock lose the right to appraisal if no
petition for appraisal is filed within 120 days after the effective
time of the merger, or if a stockholder delivers to Endo a written
withdrawal of that stockholder's demand for an appraisal and an
acceptance of the merger consideration, except that any attempt to
withdraw made more than 60 days after the effective time of the merger
requires Endo's written approval. If appraisal rights are not perfected
or a demand for appraisal rights is withdrawn, a stockholder will be
entitled to receive the consideration otherwise payable pursuant to the
merger agreement.
(9) If an appraisal proceeding is timely instituted, that proceeding may
not be dismissed as to any stockholder who has perfected a right of
appraisal without the approval of the Delaware Court of Chancery.
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Federal Securities Laws Consequences; Resale Restrictions
All shares of Endo common stock and transferable warrants that Algos
stockholders will receive in the merger will be freely transferable. However,
shares of Endo common stock received by persons who are deemed to be
"affiliates" of Algos under the Securities Act of 1933 at the time of the Algos
special meeting may resell those shares only in transactions permitted by Rule
145 or as the Securities Act otherwise permits. Persons who may be affiliates
of Algos for those purposes generally include individuals or entities that
control, are controlled by, or are under common control with Algos, and would
not include stockholders who are not officers, directors or principal
stockholders of Algos.
The merger agreement requires that, prior to the completion of the merger,
Algos deliver to Endo a letter identifying all persons who may be, as of the
date that Algos submits the merger for approval to its stockholders, an
affiliate of Algos. Algos is also required to use its reasonable best efforts
to cause each person who is identified as an affiliate in the letter described
above to deliver to Endo, at least 30 days prior to completion of the merger,
an executed letter agreement from each affiliate. This letter will state that
the affiliate will not offer, sell or otherwise dispose of any of the shares of
Endo common stock that Endo issued to that affiliate in the merger in violation
of Rule 145 promulgated by the Commission under the Securities Act.
Delisting and Deregistration of Algos Common Stock
If the merger is completed, Algos will delist its shares of Algos common
stock from the NASDAQ and will deregister its shares under the Securities
Exchange Act. The stockholders of Algos will become stockholders of Endo, and
their rights as stockholders will be governed by Endo's amended and restated
certificate of incorporation, Endo's amended and restated by-laws and the laws
of the State of Delaware. See "COMPARISON OF STOCKHOLDER RIGHTS" on page 118
and Appendices E and F to this proxy statement/prospectus.
Conduct of the Business if the Parties Do Not Complete the Merger
The merger is subject to several conditions, in addition to the approval of
the merger by the holders of a majority of the Algos common stock. These
conditions include, among others: (1) the absence of any legal restraints,
proceedings or prohibitions that prevent consummation of the merger and (2) the
obtaining of all required governmental consents and approvals. See "THE MERGER
AGREEMENT--Conditions Precedent to the Merger."Accordingly, even if Algos
obtains the requisite stockholder approval, we cannot assure you that the
parties will complete the merger.
If the parties do not complete the merger, Algos would continue to pursue
its senior management's current business plan, which includes seeking FDA
approval for MorphiDex(R) and its other products in development. Algos would
consider other strategic opportunities as they present themselves. In addition,
whether or not the parties complete the merger, the collaboration agreement
between Endo Pharmaceuticals and Algos will continue. For a discussion of the
collaboration agreement, see "ADDITIONAL AGREEMENTS--Collaboration Agreement."
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FINANCIAL FORECASTS
Endo does not as a matter of course make public forecasts as to future
sales, earnings, or other results. However, the management of Endo prepared the
prospective financial information set forth below only because its management
made the information available to representatives of Algos. Endo did not
prepare the accompanying prospective financial information with a view toward
public disclosure or with a view toward complying with the guidelines that the
American Institute of Certified Public Accountants established with respect to
prospective financial information. Rather, Endo prepared this information, on a
basis that was reasonable at the time, to (1) reflect the best then currently
available estimates and judgments of Endo's management as to expected future
financial results and conditions of Endo at such time and (2) present, to the
best of management's then knowledge and belief, the expected course of action
and the expected future financial performance of Endo at such time. However,
this information is not fact, and you should not rely upon this information as
necessarily indicative of actual future results that might be achieved, which
may be significantly less favorable than set forth below.
We caution readers of this proxy statement/prospectus not to place undue
reliance on the prospective financial information.
Neither the independent auditors for Endo nor the independent auditors for
Algos, nor any other independent accountants, have compiled, examined, or
performed any procedures with respect to the prospective financial information
contained herein, nor have they expressed any opinion or any other form of
assurance on such information or its achievability, and assume no
responsibility for, and disclaim any association with, the prospective
financial information. The opinions of said independent auditors included in
this proxy statement/prospectus relate to historical financial information
only. The opinions of said independent auditors do not extend to prospective
financial information and should not be read to do so.
Endo's financial forecasts set forth below are based on the following
significant estimates and assumptions which were made at the time such
information was made available to representatives of Algos:
. continuation of certain historical trends;
. performance of similar products;
. existing manufacturing agreements;
. proprietary market research data;
. management's experience and expectations; and
. estimated product introduction dates (including competing products).
The assumptions and estimates underlying the prospective financial
information are inherently uncertain and, though considered reasonable by the
management of Endo as of the date such information was made available to
representatives of Algos, are subject to a wide variety of significant
business, economic, and competitive risks, uncertainties and conditions that
could cause actual results to differ materially from those contained in the
prospective financial information. See "RISK FACTORS." Accordingly, we cannot
assure you that the prospective results are indicative of the future
performance of Endo or that actual results will not differ materially from
those that the prospective financial information present. Readers should not
regard inclusion of the prospective financial information in this proxy
statement/prospectus as a representation by any person that Endo will achieve
the results that the prospective financial information contains.
In preparing the financial forecasts set forth below, Endo assumed that the
forecasted increase in net sales, gross profit and cash gross profit would be
primarily due to the contribution from products that Endo introduced in the
second half of 1999, including Percocet(R) 2.5/325, Percocet(R) 7.5/500 and
Percocet(R) 10.0/650 (each of which Endo launched in November 1999) and
Lidoderm(R) (launched in September 1999). In addition, Endo assumed a continued
growth in net sales, gross profit and cash gross profit from products
introduced
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earlier in 1999 and the fourth quarter of 1998 including Zydone(R) and Morphine
Sulphate ER. Endo assumed that these products would experience market
penetration similar to other product line extensions and substitution rates
typical of similar products. Endo based its estimates with respect to
forecasted net sales, gross profit and cash gross profit for the existing
Percocet(R) 5.0/325 on the product's historical performance.
Endo's forecasted increase in gross profit in relation to forecasted net
sales was substantially due to the fixed nature of Endo's most significant
contract relationship with DuPont Pharmaceuticals.
Endo's forecasted increase in profitability and forecasted consolidated
EBITDA was due to a favorable change in business mix, more heavily weighted
towards higher margin brand products and the relative fixed nature of Endo's
manufacturing and other operating costs.
Endo provided Algos with certain non-public financial forecasts that Endo's
management prepared for Algos' use in connection with its evaluation of the
merger. The material portions of these forecasts, as made available to
representatives of Algos in late 1999, are set forth below:
<TABLE>
<CAPTION>
Forecasted Fiscal Year
--------------------------
2000 2001 2002
-------- -------- --------
(amounts in thousands)
<S> <C> <C> <C>
Forecasted net sales............................. $220,573 $294,183 $317,939
Forecasted gross profit.......................... 154,329 215,831 237,195
Forecasted cash gross profit(1).................. 174,814 237,797 252,528
Forecasted consolidated EBITDA(2)(3)............. 100,322 146,569 155,574
</TABLE>
--------
(1) Cash gross profit is defined in the merger agreement and is equal to gross
profit as determined by generally accepted accounting principles excluding
non-cash charges. Non-cash charges include charges which reflect the
projected present value of non-interest bearing promissory notes that Endo
issues annually to DuPont Pharmaceuticals over the initial five-year term
of the manufacturing and supply agreement. Cash gross profit is a
meaningful measure of financial performance because, unless Endo achieves a
cash gross profit of $147.4 million for fiscal year 2000, Endo Pharma LLC
will, as set forth in the merger agreement, return a number of its shares
of Endo common stock to Endo's treasury, which will increase the percentage
ownership in Endo of the Algos stockholders by an additional five
percentage points. See "THE MERGER AGREEMENT--Additional Agreements--
Formation of Endo Pharma LLC" for the definition of cash gross profit. Cash
gross profit is not a substitute for operating cash flow. Cash gross profit
may not be comparable to similarly titled measures reported at other
companies. Cash gross profit does not purport to represent net income or
net cash provided by operating activities as determined by generally
accepted accounting principles. Forecasted cash gross profit equals
forecasted gross profit excluding forecasted non-cash charges equal to
$20,485, $21,966 and $15,333 for fiscal years 2000, 2001 and 2002,
respectively. These amounts are excluded from forecasted gross profit per
the definition of cash gross profit.
(2) Does not reflect the impact of non-cash compensation charges related to
variable plan accounting for the current Endo stock option plan. Upon
occurrence, these charges are expected to be substantial, but will not
result in the issuance of additional Endo shares. See "THE COMPANIES--
Endo--Description of Endo Stock Option Plans Following the Merger."
(3) Endo's credit facility defines consolidated EBITDA as consolidated net
income for the applicable period plus, without duplication and to the
extent deducted from revenues in determining consolidated net income for
that period, the sum of (a) the aggregate amount of consolidated cash
interest expense for the period, (b) the aggregate amount of letter of
credit fees paid during the period, (c) the aggregate amount of income tax
expense for the period, (d) all amounts attributable to depreciation and
amortization for the period, (e) all extraordinary charges during the
period and (f) all other non-cash charges during the period; and minus,
without duplication and to the extent added to revenues in determining
consolidated net income for such period, the sum of (i) all extraordinary
gains during the period and (ii) all other non-cash
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gains during such period, all as determined on a consolidated basis with
respect to Endo and subsidiaries in accordance with generally accepted
accounting principles. Consolidated EBITDA is presented because management
understands it is customarily used as a criteria in evaluating companies.
Furthermore, Credit Suisse First Boston, Algos' financial advisor, used
consolidated EBITDA in its discounted cash flow analysis to evaluate
whether the merger consideration is fair to the stockholders of Algos from
a financial point of view. Consolidated EBITDA should not be considered an
alternative to net income as a measure of Endo's operating results or to
cash flow as a measure of liquidity. Consolidated EBITDA may not be
comparable to similarly titled measures reported at other companies.
The preceding financial forecasts were prepared and provided to
representatives of Algos in late 1999 in order to reflect the best then
currently available estimates and judgments of Endo's management as to
expected future financial results and conditions of Endo and to present, to
the best of management's knowledge and belief at the time, the expected course
of action and the expected future financial performance of Endo. The preceding
forecasted increases in net sales, gross profit, cash gross profit and
consolidated EBITDA were primarily based on assumptions regarding the
contribution from products that Endo introduced in the second half of 1999.
The performance of any recently launched product is inherently uncertain, and
the actual initial demand for certain of these products, in particular
Lidoderm(R), was, in fact, less than expected. Although Endo does not as a
matter of course make public forecasts as to future sales, earnings or other
results, Endo's management believed it appropriate to provide to readers of
this proxy statement/prospectus financial forecasts that have been revised
downward based on the lower demand estimates for these recently launched
products. The material portions of these revised forecasts are set forth below
as of the date hereof. Although Endo has not prepared a revised financial
forecast beyond fiscal year 2000, it is believed that certain of the changes
in assumptions may adversely impact the forecasts provided to the Algos
representatives for periods beyond fiscal year 2000.
<TABLE>
<CAPTION>
Forecasted Fiscal Year
2000
----------------------
(amounts in thousands)
<S> <C>
Forecasted net sales.................................. $193,163
Forecasted gross profit............................... 129,534
Forecasted cash gross profit(1)....................... 150,019
Forecasted consolidated EBITDA(2)(3).................. 80,405
</TABLE>
--------
(1) Cash gross profit is defined in the merger agreement and is equal to gross
profit as determined by generally accepted accounting principles excluding
non-cash charges. Non-cash charges include charges which reflect the
projected present value of non-interest bearing promissory notes that Endo
issues annually to DuPont Pharmaceuticals over the initial five-year term
of the manufacturing and supply agreement. Cash gross profit is a
meaningful measure of financial performance because, unless Endo achieves
a cash gross profit of $147.4 million for fiscal year 2000, Endo Pharma
LLC will, as set forth in the merger agreement, return a number of its
shares of Endo common stock to Endo's treasury, which will increase the
percentage ownership in Endo of the Algos stockholders by an additional
five percentage points. See "THE MERGER AGREEMENT--Additional Agreements--
Formation of Endo Pharma LLC" for the definition of cash gross profit.
Cash gross profit is not a substitute for operating cash flow. Cash gross
profit may not be comparable to similarly titled measures reported at
other companies. Cash gross profit does not purport to represent net
income or net cash provided by operating activities as determined by
generally accepted accounting principles. Forecasted cash gross profit
equals forecasted gross profit excluding forecasted non-cash charges equal
to $20,485 for fiscal year 2000. These amounts are excluded from
forecasted gross profit per the definition of cash gross profit.
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(2) Endo's credit facility defines consolidated EBITDA as consolidated net
income for the applicable period plus, without duplication and to the
extent deducted from revenues in determining consolidated net income for
that period, the sum of (a) the aggregate amount of consolidated cash
interest expense for the period, (b) the aggregate amount of letter of
credit fees paid during the period, (c) the aggregate amount of income tax
expense for the period, (d) all amounts attributable to depreciation and
amortization for the period, (e) all extraordinary charges during the
period and (f) all other non-cash charges during the period; and minus,
without duplication and to the extent added to revenues in determining
consolidated net income for such period, the sum of (i) all extraordinary
gains during the period and (ii) all other non-cash gains during such
period, all as determined on a consolidated basis with respect to Endo and
subsidiaries in accordance with generally accepted accounting principles.
Consolidated EBITDA is presented because management understands it is
customarily used as a criteria in evaluating companies. Furthermore,
Credit Suisse First Boston, Algos' financial advisor, used consolidated
EBITDA in its discounted cash flow analysis to evaluate whether the merger
consideration is fair to the Algos stockholders from a financial point of
view. Consolidated EBITDA is unaudited data and should not be considered
an alternative to net income as a measure of Endo's operating results or
to cash flow as a measure of liquidity. Consolidated EBITDA may not be
comparable to similarly titled measures reported at other companies.
(3) Does not reflect the impact of non-cash compensation charges related to
variable plan accounting for the current Endo stock option plan. Upon
occurrence, these charges are expected to be substantial, but will not
result in the issuance of additional Endo shares. See "THE COMPANIES--
Endo--Description of Endo Stock Option Plans Following the Merger."
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
have been derived by the application of pro forma adjustments to Endo's
historical consolidated financial statements included elsewhere in this proxy
statement/prospectus. The Unaudited Pro Forma Condensed Combined Balance Sheet
as of March 31, 2000 gives effect to the merger as if it had occurred on that
date. The Unaudited Pro Forma Condensed Combined Statement of Operations for
the Year Ended December 31, 1999 and for the Three Months Ended March 31, 2000
gives effect to the merger as if it had occurred on January 1, 1999.
You should read the following Unaudited Pro Forma Condensed Combined
Financial Statements together with Endo's historical audited and unaudited
financial statements and the related notes included elsewhere in this proxy
statement/prospectus.
In connection with the merger, Endo anticipates issuing approximately 18.0
million shares of common stock and 18.0 million warrants in the aggregate for
the shares of the Algos common stock then outstanding. The actual number of
Endo common shares that Endo will issue in connection with the merger is based
on the one-for-one exchange ratio.
Endo will account for the merger using the purchase method of accounting. In
accordance with the purchase method of accounting, the purchase price will be
allocated to Algos' assets and liabilities based on their respective estimated
fair values on the date of the merger. The excess of the purchase price over
the fair value of the net tangible assets will be allocated to identifiable
intangible assets, including intellectual property and in-process research and
development, and the remainder to goodwill. The estimated fair values, as
presented in the Unaudited Pro Forma Condensed Combined Financial Statements,
are preliminary in nature and may not be indicative of the final purchase price
allocations. A final determination of the purchase accounting adjustments will
be made following the completion of an independent valuation to determine the
fair value of certain of Algos' assets and liabilities, including intangible
assets. Any amounts that may be allocable to in-process research and
development would be recorded as a one-time charge immediately following the
completion of the merger. See the notes to the Unaudited Pro Forma Condensed
Combined Financial Statements for a discussion of the changes to earnings that
may occur as a result of the final allocation of purchase price.
The following Unaudited Pro Forma Condensed Combined Financial Statements
and notes thereto contain forward-looking statements that involve risks and
uncertainties. Assuming completion of the merger, Endo's financial position and
results of operations will differ, perhaps significantly, from the pro forma
amounts reflected in this proxy statement/prospectus because of a variety of
factors, including additional information, changes in value not currently
identified and changes in operating results between the dates of the pro forma
financial information and the date on which the merger is completed. Endo has
presented these Unaudited Pro Forma Condensed Combined Financial Statements for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that Endo would have achieved had the merger been
completed as of the date indicated, or the results that Endo may obtain in the
future.
51
<PAGE>
Endo Pharmaceuticals Holdings Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2000
(In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical
----------------
Endo Algos Adjustments Pro Forma
-------- ------- ----------- ---------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents........... $ 30,201 $28,247 $ -- $58,448
Marketable securities............... -- 4,002 -- 4,002
Interest receivable................. -- 258 -- 258
Accounts receivable................. 36,643 -- -- 36,643
Inventories......................... 26,540 -- -- 26,540
Prepaid expenses and other current
assets............................. 2,792 155 -- 2,947
Deferred income taxes............... 9,370 -- -- 9,370
-------- ------- -------- --------
Total current assets................ 105,546 32,662 -- 138,208
-------- ------- -------- --------
Property and equipment, net......... 5,539 950 -- 6,489
Goodwill and other intangibles...... 190,304 -- 221,068(1) 411,372
Deferred income taxes............... 19,477 -- -- 19,477
Restricted cash..................... -- 150 -- 150
Other assets........................ 4,382 -- -- 4,382
-------- ------- -------- --------
Total assets........................ $325,248 $33,762 $221,068 $580,078
======== ======= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses........................... $ 42,011 $ 4,175 $ 7,500 (2) $ 53,686
Current portion of long-term debt... 17,862 -- -- 17,862
-------- ------- -------- --------
Total current liabilities........... 59,873 4,175 7,500 71,548
-------- ------- -------- --------
Long-term debt, less current
portion............................ 171,837 -- -- 171,837
Other liabilities................... 11,756 -- -- 11,756
(29,587)(3)
Stockholders' equity................ 81,782 29,587 243,155 (4) 324,937
-------- ------- -------- --------
Total liabilities and stockholders'
equity............................. $325,248 $33,762 $221,068 $580,078
======== ======= ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements for
discussion of pro forma adjustments.
52
<PAGE>
Endo Pharmaceuticals Holdings Inc.
Unaudited Pro Forma Condensed Combined Statements of Operations
(In thousands, except per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
-------------------------------------------
Historical Adjustments Pro Forma
----------------- ----------- ---------
Endo Algos
-------- --------
<S> <C> <C> <C> <C>
Net sales......................... $138,546 $ -- $ -- $138,546
Costs of sales.................... 58,263 -- -- 58,263
Selling, general &
administrative................... 42,921 10,055 -- 52,976
Research & development............ 9,373 9,508 -- 18,881
Depreciation and amortization..... 8,309 231 22,107 (5) 30,647
Purchased in-process research and
development...................... -- -- -- (1) --
-------- -------- -------- --------
Operating income (loss)........... 19,680 (19,794) (22,107) (22,221)
Interest expense (income), net.... 14,347 (2,051) -- 12,296
-------- -------- -------- --------
Loss before income tax (benefit).. 5,333 (17,743) (22,107) (34,517)
Income tax (benefit).............. 2,073 -- (2,073)(6) --
-------- -------- -------- --------
Net income (loss)................. $ 3,260 $(17,743) $(20,034) $(34,517)
======== ======== ======== ========
Pro forma net income (loss) per
share (7)
Basic........................... $ .05 $ (1.02) $ (.38)
======== ======== ========
Diluted......................... $ .05 $ (1.02) $ (.38)
======== ======== ========
Shares used to compute net income
(loss) per share (7)
Basic........................... 71,812 17,355 89,764
======== ======== ========
Diluted......................... 71,812 17,355 89,764
======== ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements for
discussion of pro forma adjustments.
53
<PAGE>
Endo Pharmaceuticals Holdings Inc.
Unaudited Pro Forma Condensed Combined Statements of Operations
(In thousands, except per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
2000
-------------------------------------------
Historical Adjustments Pro Forma
----------------- ----------- ---------
Endo Algos
-------- -------
<S> <C> <C> <C> <C>
Net sales......................... $ 27,000 $ -- $ -- $ 27,000
Costs of sales.................... 12,062 -- -- 12,062
Selling, general &
administrative................... 12,073 1,331 -- 13,404
Research & development............ 3,028 1,935 -- 4,963
Depreciation and amortization..... 2,151 55 5,527 (5) 7,733
Separation benefits............... 22,034 -- -- 22,034
Purchased in-process research and
development...................... -- -- -- (1) --
-------- ------- -------- --------
Operating income (loss)........... (24,348) (3,321) (5,527) (33,196)
Interest expense (income), net.... 3,937 (445) -- 3,492
-------- ------- -------- --------
Loss before income tax (benefit).. (28,285) (2,876) (5,527) (36,688)
Income tax (benefit).............. (10,691) -- 10,691 (6) --
-------- ------- -------- --------
Net loss.......................... $(17,594) $(2,876) $(16,218) $(36,688)
======== ======= ======== ========
Pro forma net income (loss) per
share (7)
Basic........................... $ (.25) $ (.17) $ (.41)
======== ======= ========
Diluted......................... $ (.25) $ (.17) $ (.41)
======== ======= ========
Shares used to compute net income
(loss) per share (7)
Basic........................... 71,805 17,416 89,757
======== ======= ========
Diluted......................... 71,805 17,416 89,757
======== ======= ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements for
discussion of pro forma adjustments.
54
<PAGE>
Endo Pharmaceuticals Holdings Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(dollars in thousands, except share and per share data)
(1) Reflects the excess of the estimated purchase price of the merger over the
estimated fair value of the net identifiable assets acquired, as follows:
<TABLE>
<S> <C>
Common stock of Algos.............................................. 17,421,345
Common stock equivalents of Algos.................................. 530,761
-----------
Total common stock and equivalents of Algos........................ 17,952,106
Average closing price.............................................. $ 13.5446
-----------
Market capitalization of Algos..................................... $ 243,155
Estimated merger fees.............................................. 7,500
-----------
Total estimated purchase price..................................... $ 250,655
Net assets acquired................................................ (29,587)
-----------
Preliminary goodwill and other intangibles......................... $ 221,068
===========
</TABLE>
A preliminary allocation of the estimated purchase price has been made for
illustration purposes to certain identifiable tangible assets and
liabilities, according to their book value. Endo has referred to the excess
of the estimated purchase price over the net identified tangible assets as
preliminary goodwill and other intangibles. The final allocation of the
excess purchase price over net tangible assets will include, if applicable,
recognition of adjustments of the tangible assets and liabilities to their
fair values, the fair value of identifiable intangible assets, including
intellectual property and in-process research and development, and residual
goodwill. Consideration allocated to in-process research and development
will be recorded as a charge against net income (loss) in the period the
merger occurs. Endo has assumed an average amortization of preliminary
goodwill and other intangibles of ten years for illustration purposes,
which is the simple average of the estimated intellectual property blended
useful life of 17 years and the estimated goodwill life of three years.
Upon completion of an independent appraisal, the amortization periods for
goodwill and other intangibles will be finalized. These final amortization
periods may differ, perhaps significantly, from the amortization periods
used, for illustrative purposes, in these unaudited pro forma condensed
combined financial statements. Endo's financial position and results of
operations may differ, perhaps significantly, from the pro forma amounts
reflected in this proxy statement/prospectus as a result of the
finalization of the amortization periods of goodwill and other intangibles.
Each $1,000 of consideration allocated to in-process research and
development will increase future annual income incrementally by $100, due
to the reduction in future goodwill and other intangible amortization. A
preliminary estimate of in-process research and development and identified
intangible assets will not be available until the completion of an
independent valuation as of the date of the merger.
For illustration purposes, the total number of shares of common stock used
for calculating the market capitalization represents (1) the number of
shares of common stock outstanding at the April 17, 2000 measurement date
as stated in the merger agreement and (2) dilutive securities outstanding
as of the April 17, 2000 measurement date which had an exercise price less
than $16.875. For illustrative purposes, the number of common stock
equivalents includes 229,661 warrants and 301,100 stock options which
represents only those dilutive securities which had an exercise price less
than $16.875 which is the highest closing price of the Algos common stock
in the three months prior to the announcement of the transaction. The
purchase price will be based on the number of shares of Algos common stock
outstanding at the time of closing. Due to the acceleration of vesting of
all of the Algos stock options and the ability of all of the warrants
holders to exercise into shares of common stock, the actual number of
shares of Algos common stock outstanding at the time of the closing may
differ, perhaps significantly from the amounts used for illustrative
purposes in these unaudited pro forma condensed combined financial
statements.
55
<PAGE>
Assuming completion of the merger, Endo's financial position and results of
operations will differ, perhaps significantly, from the pro forma amounts
reflected in this proxy statement/prospectus because of a variety of
factors, including additional information, changes in value not currently
identified and changes in operating results between the dates of the pro
forma financial information and the date on which the merger is
consummated.
(2) Reflects the estimated merger fees from the transaction.
(3) Reflects the elimination of Algos' historical stockholders' equity as of
March 31, 2000.
(4) Reflects the issuance of 17,952,106 common shares and common share
equivalents at $13.54 per share (the average closing price of Algos' common
stock for the three days prior to and the three days subsequent to the
April 17, 2000 amendment to the merger agreement April 12, 2000 through
April 20, 2000). The actual number of Endo common shares to be issued in
connection with the merger is based on the exchange ratio of one-to-one.
Due to the availability of a public market for Algos common stock and a
lack of a public market for the Endo common stock, it has been determined
that the fair value of the consideration received is a more readily
determinable indication of value for purposes of determining the purchase
price. In determining the purchase price, it is estimated that the average
closing price of the Algos common stock for a reasonable period of time
before and after the April 17, 2000 measurement date is the most
appropriate measure of fair value of the consideration to be received by
the Endo stockholders in the merger and, correspondingly, is the most
appropriate measure of the fair value of the consideration to be issued to
the Algos stockholders in the merger.
The fair value of the consideration issued to the Algos stockholders will
be allocated between the Endo common stock and the transferable and
nontransferable warrants issued based on their respective fair values and
recorded as components of stockholders equity at the date of the merger.
The allocation of the fair value of the Endo common stock and the
transferable and nontransferable warrants to be issued to the Algos
stockholders will not be available until the completion of an independent
valuation.
(5) Reflects the amortization of preliminary goodwill and other intangibles
resulting from the merger over the blended estimated useful life of ten
years.
(6) Reflects the elimination of the Endo income taxes and income tax benefits
due to the combined pro forma loss before income tax (benefit). No income
tax (benefit) has been recorded on a pro forma basis due to the uncertainty
of its utilization.
(7) Historical weighted average shares of Endo of 1,104,353 for the year ended
December 31, 1999 and 1,104,240 for the three months ended March 31, 2000
have been adjusted to reflect the pro forma recapitalization of Endo. The
pro forma recapitalization of Endo adjusts each existing share of Endo on a
65.0265 to 1.0 ratio to reflect the estimated adjustment necessary to
accomplish the exchange ratio in the merger. Pro forma basic and diluted
shares outstanding include the 17,952,106 shares estimated to be issued in
the merger.
56
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
AND RELATED MATTERS
Some members of the Algos board of directors and some executive officers of
Algos have interests in the merger that are in addition to the interests of the
Algos stockholders generally.
Board of Directors
Under the merger agreement, John W. Lyle, Michael Hyatt and Roger H. Kimmel,
current directors of Algos, will become members of the Endo board of directors
upon the completion of the merger. In addition, Mr. Lyle, currently President
and Chief Executive Officer of Algos, will serve as the Chairman of the Board
of Endo following the merger. For a discussion of Endo director compensation,
see "DIRECTORS AND MANAGEMENT OF ENDO FOLLOWING THE MERGER--Directors of Endo
Following the Merger."
Indemnification and Insurance
Algos currently maintains a directors and officers liability insurance
policy covering all of its directors and officers. Algos also currently
maintains a $6.0 million life insurance policy on Mr. Lyle, the beneficiary of
which is Algos.
For not less than six years after completing the merger, Endo will be
required to indemnify, to the fullest extent allowed under law, each individual
who is or was an officer, director or employee of Algos for all actions taken
by them in their capacities as such or at the request of Algos prior to the
completion of the merger and to honor all indemnification obligations of Algos
to those persons, whether pursuant to Algos's certificate of incorporation, by-
laws or an indemnification agreement. Endo will also be required to indemnify
and hold harmless those officers, directors and employees of Algos to the
fullest extent allowed under law for acts or omissions occurring in connection
with the approval of the merger agreement and the consummation of the
transactions contemplated by the merger agreement.
For not less than six years after completing the merger, Endo will also
provide officer's and director's liability insurance for acts or omissions
prior to the completion of the merger for each individual covered under the
comparable Algos policy as of the date of the merger agreement. Endo will not
be required to pay, in total, an annual premium for the insurance described in
this paragraph in excess of 200% of the current annual premium paid by Algos
for its existing coverage prior to the merger.
Compensation Arrangements for Algos Officers
Lyle Employment Agreement
In connection with the merger agreement, an agreement to employ Mr. Lyle in
a senior executive capacity with Endo will be executed upon completion of the
merger. The employment agreement provides for a term ending on the fifth
anniversary of the merger. Mr Lyle will work on a part-time basis on those
dates and at those times that Mr. Lyle and Endo mutually agree.
Mr. Lyle will receive an annual base salary of not less than $325,000 and
medical and other similar benefits set forth in the agreement. Mr. Lyle will
also have the opportunity to receive annual performance bonuses. The Endo board
of directors will determine the terms and conditions under which Mr. Lyle will
receive all or a portion of this bonus opportunity.
If the employment agreement is terminated by Endo without cause or by
involuntary termination, Mr. Lyle will be entitled to severance benefits
consisting of the payment of the remainder of his base salary for the full
five-year term of the agreement and continued medical and similar benefits
through the remainder of the term of the agreement. Termination for Cause is
defined in the agreement as any action taken by Mr. Lyle that would
57
<PAGE>
constitute willful and grossly negligent conduct, the commission of a crime or
fraud, or the breach of, or default under, any of Mr. Lyle's covenants not to
compete and confidentiality covenants under the agreement. Involuntary
Termination is defined as illness, disability or other incapacity.
Stay Bonuses
Algos is considering the payment of "stay bonuses" to specified executive
officers, provided that those executive officers remain employees of Endo
through the six-month anniversary of the merger, regardless of whether these
executive officers are terminated following this six-month anniversary.
Effect of Merger on Algos Stock Options and Warrants
There are three Algos stock option plans: the Incentive Stock Option Plan,
the Stock Option Plan and the Non-Employee Director Plan.
In accordance with these plans, the Algos board of directors has agreed in
the merger agreement to accelerate the vesting of all options granted under the
plans, to allow any holder of Algos stock options who wishes to exercise the
options prior to the merger to do so. The acceleration of such options, for
option holders who remain employees of Algos through the date of the merger,
will not result in the recognition of compensation expense in Algos' statement
of operations. Upon the completion of the merger, each outstanding option to
purchase Algos common stock will expire, and the Algos stock option plans will
cease to exist. Endo may adopt an employee stock option plan following the
merger under which the former Algos employees who remain with Endo following
the merger may receive stock options to purchase shares of Endo common stock.
This new plan, if adopted, would be in addition to the Endo stock option plans
that are currently outstanding and described below.
At May 1, 2000, there were outstanding options to purchase 665,510 shares of
Algos common stock, exercisable at prices ranging from $0.1205 per share to
$35.25 per share. Of these options, there were options to purchase 275,100
shares that were exercisable for a price of $15.00 per share, the closing price
of Algos common stock on November 26, 1999, the last trading day prior to the
announcement of this transaction, or less. Of the options that are exercisable
for a price of $15.00 per share or less, the following Algos directors and
officers hold options to purchase the number of shares at the exercise prices
set forth below:
<TABLE>
<CAPTION>
Exercise
Number Price
of per
Director or Officer Shares Share
------------------- ------- --------
<S> <C> <C>
John W. Lyle................................................... 132,800 $ 0.1325
15,000 $15.0000
Frank S. Caruso................................................ 8,300 $ 0.1205
24,000 $15.0000
Roger H. Kimmel................................................ 10,000 $12.0000
5,000 $15.0000
10,000 $ 9.3125
Michael Hyatt.................................................. 10,000 $12.8750
5,000 $15.0000
10,000 $ 9.3125
James R. Ledley................................................ 5,000 $15.0000
10,000 $ 9.3125
Donald G. Drapkin.............................................. 5,000 $15.0000
10,000 $ 9.3125
Dieter A. Sulser............................................... 5,000 $15.0000
10,000 $ 9.3125
</TABLE>
58
<PAGE>
Additionally, Algos has from time to time issued warrants to purchase shares
of Algos common stock in connection with private placement transactions. These
warrants are governed by the terms of their respective warrant agreements. The
merger will affect the warrants as follows:
. BB Biotech Warrants. If these warrants are not exercised prior to the
merger, they will expire. These warrants have an exercise price of
$25.00 per share. On June 5, 2000, there were outstanding BB Biotech
warrants to purchase 250,000 shares of Algos common stock.
. Series A Warrants. If these warrants are not exercised prior to the
merger, they will become warrants to purchase an equivalent amount of
shares in the combined entity, which will have the effect of diluting
only the Algos stockholders' ownership in Endo. These warrants have an
exercise price of $1.20 per share. On June 5, 2000, there were
outstanding Series A warrants to purchase 229,661 shares of Algos common
stock.
Ownership of Algos Common Stock by Certain Owners and Management of Algos
The following table provides information regarding the ownership of Algos
common stock as of June 5, 2000 by: (1) each stockholder who is known to Algos
to own beneficially more than 5% of Algos common stock; (2) Algos' chief
executive officer and the other named executive officers of Algos; (3) each
director of Algos; and (4) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares
Beneficially
Owned
-----------------
Name of Beneficial Owner Number Percent
------------------------ --------- -------
<S> <C> <C>
Directors and Executive Officers:
John W. Lyle(a)............................................. 1,607,754 9.1%
Frank S. Caruso(b).......................................... 394,100 2.3
Ronald Goldblum(c).......................................... -- *
W. Bradford Middlekauff(d).................................. -- *
Robert E. Sosnowski(e)...................................... 15,500 *
George M. Wagner(f)......................................... -- *
Terence S. Novak(g)......................................... -- *
Donald G. Drapkin(h)........................................ 46,600 *
Michael Hyatt(i)............................................ 1,874,024 10.7
Roger H. Kimmel(j).......................................... 948,525 5.4
James R. Ledley(k).......................................... 147,950 *
Dieter A. Sulser(l)......................................... 183,550 *
Directors and Executive Officers as a group(m).............. 4,560,810 25.4
Other Principal Stockholders:
Unifina Holding AG and related investors(n)................. 1,734,700 9.9
Karen Lyle(o)............................................... 1,607,754 9.1
Biotech Target S.A.(p)...................................... 1,699,500 9.6
</TABLE>
--------
* Represents less than one percent.
(a) Includes (i) 1,344,916 shares of Algos common stock and options to
purchase 10,000 shares of Algos common stock owned by Karen Lyle, wife of
Mr. Lyle, as to which Mr. Lyle disclaims beneficial ownership, (ii) 38
shares owned by Mr. Lyle's son and (iii) options to purchase 252,800
shares of Algos common stock owned directly by Mr. Lyle. Excludes 660,000
shares of Algos common stock held in a trust for the benefit of the
children of Mr. and Mrs. Lyle, as to which shares Mr. Lyle has neither the
power of disposition nor the power to vote.
59
<PAGE>
(b) Includes (i) 1,000 shares of Algos common stock owned directly by Mrs.
Caruso, wife of Dr. Caruso, as to which Dr. Caruso disclaims beneficial
ownership, (ii) 7,200 shares of Algos common stock held in a trust for
which Dr. Caruso serves as trustee and as to which shares Dr. Caruso holds
either the sole or the shared power of disposition and the power to vote
and (iii) options to purchase 82,300 shares of Algos common stock. Excludes
a total of 24,900 shares held in trust for the benefit of the children of
Dr. and Mrs. Caruso, as to which shares Dr. Caruso has neither the power of
disposition nor the power to vote.
(c) Dr. Goldblum ceased to be employed by Algos in December, 1999.
(d) Mr. Middlekauff ceased to be employed by Algos in February 2000.
(e) Includes options to purchase 15,000 shares of Algos common stock.
(f) Mr. Wagner ceased to be employed by Algos in January 2000.
(g) Mr. Novak ceased to be employed by Algos in June 1999.
(h) Includes (i) 16,600 shares owned directly by Mr. Drapkin and (ii) options
to purchase 30,000 shares of Algos common stock. Excludes a total of
809,244 shares of Algos common stock held in six trusts for the benefit of
the children of Mr. Drapkin, as to which shares Mr. Drapkin has neither the
power of disposition nor the power to vote.
(i) Includes (i) 829,551 shares of Algos common stock owned directly by Mr.
Hyatt, (ii) 1,004,473 shares held in trusts for which Mr. Hyatt serves as
trustee and as to which shares Mr. Hyatt holds either the sole or the
shared power of disposition or the power to vote and (iii) options to
purchase 40,000 shares of Algos common stock. Excludes 221,332 shares of
Algos common stock held in a trust for the benefit of the children of Mr.
Hyatt, as to which shares Mr. Hyatt has neither the power of disposition
nor the power to vote.
(j) Includes (i) 30,000 shares owned directly by Mr. Kimmel, (ii) 878,525
shares held in trusts for which Mr. Kimmel serves as trustee and as to
which shares Mr. Kimmel holds either the sole or the shared power of
disposition and power to vote and (iii) options to purchase 40,000 shares
of Algos common stock. Excludes a total of 326,530 shares of Algos common
stock held in trusts for the benefit of Mr. Kimmel's adult children, as to
which shares Mr. Kimmel has neither the power of disposition nor the power
to vote.
(k) Includes (i) 109,450 shares owned directly by Mr. Ledley, (ii) a total of
8,500 shares of Algos common stock held in trusts, as to which shares Mr.
Ledley holds either the sole or the shared power of disposition and power
to vote and (iii) options to purchase 30,000 shares of Algos common stock.
(l) Includes (i) options to purchase 30,000 shares of Algos common stock and
(ii) 141,100 shares of Algos common stock and 12,450 warrants to purchase
shares of Algos common stock owned directly by Gaby Tschofen Sulser, wife
of Mr. Sulser, as to which Mr. Sulser disclaims beneficial ownership.
Excludes 1,734,700 shares beneficially owned by Unifina Holding AG, as to
which shares Mr. Sulser disclaims beneficial ownership. Mr. Sulser is the
General Manager of Unifina Holding AG.
(m) Includes options and warrants to purchase 542,550 shares of Algos common
stock.
(n) Consists of 1,577,000 shares of Algos common stock and 157,700 warrants to
purchase shares of Algos common stock held by EBC Zurich AG. The address of
Unifina Holding AG is Zurcherstrasse 62; CH 8406, Winterthur, Switzerland
and the address of EBC Zurich AG is Zurcherstrasse 32, LH 8400, Winterthur,
Switzerland. Excludes (i) 166,000 shares of Algos common stock and warrants
to purchase 16,600 shares of Algos common stock held by Mr. Rolf P. Erb,
Chairman of EBC Zurich AG and a member of the board of directors of Unifina
Holding AG, as to which shares each of Unifina Holding AG and EBC Zurich AG
disclaim beneficial ownership and (ii) 141,100 shares of Algos common
stock, warrants to purchase 12,450 shares of Algos common stock and options
to purchase 30,000 shares of Algos common stock beneficially owned by Mr.
Sulser, General Manager of Unifina Holding AG, as to which shares Unifina
Holding AG disclaims beneficial ownership.
60
<PAGE>
(o) Includes (i) 1,344,916 shares of Algos common stock and options to purchase
10,000 shares of Algos common stock, owned directly by Mrs. Lyle and (ii)
options to purchase 252,800 shares of Algos common stock owned directly by
John W. Lyle, husband of Mrs. Lyle, as to which Mrs. Lyle disclaims
beneficial ownership. Excludes 660,000 shares of Algos common stock held in
a trust for the benefit of the children of Mr. and Mrs. Lyle, as to which
shares Mrs. Lyle has neither the power of disposition nor the power to
vote.
(p) Includes warrants to purchase 250,000 shares of Algos common stock.
Current Holdings of Stockholders, Directors and Executive Officers of Endo
The following table sets forth, as of June 5, 2000 the name, address, where
required, and holdings of each person, including any "group" as defined in
Section 13(d)(3) of the Exchange Act, known by Endo to be the beneficial owner
of more than 5% of Endo common stock, and the amount of Endo common stock
beneficially owned by each of the directors and executive officers of Endo, and
by all directors and executive officers of Endo as a group.
<TABLE>
<CAPTION>
Shares
Beneficially
Owned
-----------------
Percent
Name of Beneficial Owner Number of Class
------------------------ ------- --------
<S> <C> <C>
Kelso Investment Advisors V, L.P.(a)(b).................. 918,300 83.16%
Kelso Equity Partners V, L.P.(a)(b)...................... 918,300 83.16%
Joseph S. Schuchert(b)................................... (d)
Frank T. Nickell(b)...................................... (d)
Thomas R. Wall, IV(b).................................... (d)
George E. Matelich(b).................................... (d)
Michael B. Goldberg(b)(c)................................ (d)
David I. Wahrhaftig(b)(c)................................ (d)
Frank K. Bynum, Jr.(b)................................... (d)
Philip E. Berney(b)...................................... (d)
Greenwich Street Capital Partners, L.P.(e)(f)............ 150,000 13.58%
Greenwich Street Capital Offshore Fund, Ltd.(e)(f)....... 150,000 13.58%
TRV Employees Fund, L.P.(e)(f)........................... 150,000 13.58%
The Travelers Insurance Company(e)(f).................... 150,000 13.58%
The Travelers Life and Annuity Company(e)(f)............. 150,000 13.58%
Carol A. Ammon(g)(h)..................................... 4,000 *
Mariann T. MacDonald(g)(h)............................... 3,000 *
Louis J. Vollmer(h)(i)................................... 3,000 *
Jeffrey R. Black(g)(h)................................... 500 *
Osagie O. Imasogie(h)(j)................................. 400 *
David A.H. Lee, M.D., Ph.D.(g)(h)........................ 250 *
All current directors and executive officers of Endo (6
persons)(d) ............................................ 7,750 .70%
</TABLE>
--------
* Represents less than one percent.
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(a) As part of the 1997 acquisition of Endo from the then DuPont Merck
Pharmaceutical Company, Kelso Investment Associates V, L.P., or KIA V, and
Kelso Equity Partners V, L.P., or KEP V, acquired respectively 847,028 and
71,722 shares of Endo common stock, representing 77.0% and 6.5%,
respectively of the 1,100,000 shares of Endo common stock then outstanding.
Subsequent to the acquisition, KEP V transferred 500 shares to an affiliate
of Kelso. KIA V and KEP V, due to their common control, could be deemed to
beneficially own each other's shares, but disclaim this beneficial
ownership.
(b) The business address for these entities is c/o Kelso & Company, 320 Park
Avenue, 24th Floor, New York, NY 10022.
(c) Messrs. Goldberg and Wahrhaftig are directors of Endo.
(d) Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig, Bynum and
Berney may be deemed to share beneficial ownership of shares of Endo common
stock owned of record by KIA V and KEP V. Messrs. Schuchert, Nickell, Wall,
Matelich, Goldberg, Wahrhaftig, Bynum and Berney share investment and
voting power with respect to securities owned by KIA V and KEP V. Messrs.
Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig, Bynum and Berney
disclaim beneficial ownership of shares of common stock owned of record by
KIA V and KEP V.
(e) The business address for this person is 338 Greenwich Street, 36th Floor,
New York, New York 10013.
(f) Greenwich Street Capital Partners, L.P., Greenwich Street Capital Offshore
Fund, Ltd., TRV Employees Fund, L.P., The Travelers Insurance Company and
The Travelers Life and Annuity Company, due to their common control, could
be deemed to beneficially own each other's shares, but disclaim this
beneficial ownership.
(g) The business address for these persons is c/o Endo Pharmaceuticals Holdings
Inc., 223 Wilmington-West Chester Pike, Chadds Ford, Pennsylvania 19317.
(h) These amounts do not include any Endo employee stock options that these
individuals hold.
(i) The address for this person is 6 Sunnyside Road, Greenville, Delaware
19807.
(j) The address for this person is 121 Bantery Road, West Chester, Pennsylvania
19380.
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DIRECTORS AND MANAGEMENT OF ENDO
FOLLOWING THE MERGER
General
In connection with the merger, Endo intends to amend and restate its
certificate of incorporation and by-laws. Forms of the proposed amended and
restated certificate of incorporation and proposed amended and restated by-laws
for Endo, to be put into effect immediately prior to the merger, are attached
as Appendices E and F, respectively, to this proxy statement/prospectus and are
incorporated in this proxy statement/prospectus by reference. See "COMPARISON
OF STOCKHOLDER RIGHTS."
Directors of Endo Following the Merger
The amended and restated certificate of incorporation provides that the Endo
board will consist of between seven and eleven members, three of whom will be
designated by Algos. The initial board of directors of Endo will consist of
nine individuals with an initial term expiring at the annual meeting of
stockholders to be held in 2001. Each director is elected for a one-year term.
Under the merger agreement, John W. Lyle, Michael Hyatt and Roger H. Kimmel,
current directors of Algos, will become members of the Endo board of directors
upon the completion of the merger. The merger agreement and the amended and
restated by-laws of Endo also provide that these Algos nominees will remain on
the board of directors for a period of three years. Pursuant to the terms of
the merger agreement, Mr. Lyle will serve as the chairman of the board of
directors of Endo following the merger.
Set forth below is information with respect to the nine individuals whom
Endo has designated as the initial members of the Endo board of directors:
<TABLE>
<CAPTION>
Position with Endo Current Position
Name Age Following the Merger with Endo or Algos
---- --- -------------------- ------------------
<S> <C> <C> <C>
John W. Lyle............ 56 Chairman of the Board Chief Executive Officer
and President of Algos
Carol A. Ammon.......... 49 President, Chief Executive President, Chief Executive
Officer and Director Officer and Director of
Endo
Michael B. Goldberg..... 52 Director Director of Endo
David I. Wahrhaftig..... 43 Director Director of Endo
Michael Hyatt........... 54 Director Director of Algos
Roger H. Kimmel......... 53 Director Director of Algos
</TABLE>
JOHN W. LYLE, 56, has been President and Chief Executive Officer and a
Director of Algos since its formation in January 1992. Mr. Lyle served as
President and Chief Executive Officer of OmniCorp Holdings, Inc., in 1991.
Prior to founding Algos, Mr. Lyle was one of the founders of Osteotech, Inc., a
public orthopaedic pharmaceutical company formed in 1986. He served as
Osteotech, Inc.'s Chairman and Chief Executive Officer from 1989 to 1991 and as
President from 1986 to 1989. From 1981 to 1986, Mr. Lyle served as President of
CIBA-GEIGY Corporation's Self-Medication Division. From 1975 to 1981, Mr. Lyle
held various positions at Johnson & Johnson.
CAROL A. AMMON, 49, is President, Chief Executive Officer and Director of
Endo. Prior to joining Endo, Ms. Ammon was the President of DuPont Merck's U.S.
Pharmaceuticals Division from 1996 through 1997, and from 1993 through 1995 she
was the President of Endo Laboratories, L.L.C. She also serves as a director on
the boards of the Medical Center of Delaware, the Arnold & Marie Schwartz
School of Pharmacy in Brooklyn, New York and the Pete DuPont Delaware Public
Policy Committee.
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MICHAEL B. GOLDBERG, 52, is currently a Director of Endo. Mr. Goldberg
joined Kelso & Company as Managing Director in 1991. Mr. Goldberg is also a
director of Consolidated Vision Group, Inc., HCI Direct, Inc. and Unilab Inc.
He also serves as a member of the Phoenix House Foundation Board of Directors
and The Wilson Council of the Woodrow Wilson International Center for Scholars.
DAVID I. WAHRHAFTIG, 43, is a Director of Endo. Mr. Wahrhaftig became
Managing Director of Kelso & Company in April 1997, after joining the firm in
1987. Mr. Wahrhaftig is also a director of Consolidated Vision Group, Inc.,
Unilab Inc. and Humphreys, Inc.
MICHAEL HYATT, 54, has been a Director of Algos since November 1996. For
more than five years, Mr. Hyatt has been a Senior Managing Director of Bear
Stearns & Co., Inc.
ROGER H. KIMMEL, 53, has been a Director of Algos since July 1996. Mr.
Kimmel has been a partner of the law firm of Latham & Watkins for more than
five years. Mr. Kimmel is also a director of Weider Nutrition International,
Inc. and TSR Paging, Inc.
Audit Committee
The audit committee of Endo will consist of at least two independent
directors who will be selected by Endo's board of directors following the
merger. Prior to the completion of the merger, Endo will appoint an additional
independent director. This committee will be responsible for: choosing the firm
to be appointed as independent accountants to audit Endo's financial statements
and to perform services related to the audit; reviewing the scope and results
of the audit with those independent accountants; reviewing with management and
the independent accountants Endo's year-end operating results; evaluating the
adequacy of Endo's internal accounting and control procedures; and reviewing
the non-audit services to be performed by Endo's independent accountants, if
any, and considering the effect of such performance on their independence.
Executive Officers of Endo Following the Merger
The executive officers of Endo following the merger are expected to be:
<TABLE>
<CAPTION>
Name Age Position and Offices
---- --- --------------------
<C> <C> <S>
Carol A. Ammon.......... 49 President and Chief Executive Officer and
Director
Mariann T. MacDonald.... 52 Executive Vice President, Operations
Jeffrey R. Black........ 36 Senior Vice President, Chief Financial Officer
and Treasurer
David A.H. Lee, M.D.,
Ph.D. ................. 50 Senior Vice President, Research & Development
</TABLE>
MARIANN T. MACDONALD, 52, is Executive Vice President, Operations of Endo.
Prior to joining Endo, Ms. MacDonald was Vice President of Business
Information, Training, Administration & Technology for the U.S. Pharmaceuticals
Division of DuPont Merck from 1996 to 1997 and Vice President of Operations for
Endo Laboratories, L.L.C. from 1995 to 1996. From 1993 to 1995, Ms. MacDonald
held various management positions in DuPont Merck.
JEFFREY R. BLACK, 36, is Senior Vice President, Chief Financial Officer and
Treasurer of Endo. Prior to joining Endo, Mr. Black became a Partner in June
1997 with Deloitte & Touche LLP in the New York Merger and Acquisition Services
Group, after joining that firm in 1986.
DAVID A.H. LEE, M.D. Ph.D., 50, is Senior Vice President, Research &
Development and Regulatory Affairs of Endo. Prior to joining Endo in December
of 1997, Dr. Lee was Executive Vice President, Research and Development for
CoCensys, Inc., an emerging pharmaceuticals company based in Irvine,
California, from 1992 through 1997. Prior to joining CoCensys, Dr. Lee held
various positions at Solvary Pharmaceuticals in the Netherlands, ranging from
head of global clinical development programs to his final position as V.P.
Research and Development. Dr. Lee received his M.D. and PH.D. degrees from the
University of London and specialized in internal medicine and gastroenterology,
prior to joining the pharmaceutical industry.
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Certain Relationships and Related Transactions of Endo
Endo has a pre-existing agreement with Kelso & Company to:
. pay Kelso an annual fee of $347,000 for financial advisory services,
. indemnify Kelso in providing its services, and
. reimburse Kelso for out-of-pocket expenses incurred.
In connection with the completion of the merger, Endo will terminate this
agreement to pay an annual fee to Kelso by making a one-time payment to Kelso
of $1.5 million. However, the arrangements for indemnification and
reimbursement of specific expenses will survive the termination of this annual
fee arrangement.
Kelso, formed in 1971, is a private New York based investment firm
specializing in leveraged buyouts. Since 1980, Kelso has acquired more than 67
companies requiring total capital of more than $16 billion. Kelso has a
successful track record of investments including: American Standard, Charter
Communications, Club Car, General Medical, International House of Pancakes, iXL
Enterprises, MJD Communications and Universal Outdoor. After completion of the
merger, affiliates and designees of Kelso & Company will have contributed to
Endo Pharma LLC approximately 85.6% of the Endo common stock to be held by Endo
Pharma LLC. After the merger, Endo Pharma LLC will own approximately 79.6% of
the Endo common stock.
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THE MERGER AGREEMENT
General
The following is a description of the material terms of the merger
agreement. This description is qualified in its entirety by reference to the
merger agreement. A copy of the merger agreement is attached as Appendix A to
this proxy statement/prospectus and is incorporated in this proxy
statement/prospectus by reference. You should read the full text of the merger
agreement because it, and not this proxy statement/prospectus, is the legal
document that governs the merger.
The Merger
When the merger contemplated by the merger agreement occurs, Algos will
merge with and into Endo Inc., a wholly-owned subsidiary of Endo
Pharmaceuticals Holdings Inc. As a result, Algos will cease to exist as a
separate corporate entity and Endo Inc. will continue as the surviving
corporation and retain its name. Endo Inc., as the surviving corporation, will
assume all rights and obligations of Algos. The laws of the State of Delaware
will govern Endo Inc. The merger will have the effects specified in Section 259
of the Delaware General Corporation Law.
Each share of Algos common stock, par value $.01 per share, issued and
outstanding immediately before the merger, other than those held in the
treasury of Algos and those owned by Endo or Endo Inc., will be converted into
(a) one validly issued, fully paid and non-assessable share of Endo common
stock, par value $.01 per share, and (b) one warrant that the terms and
conditions of a warrant agreement will govern. All shares of Algos common stock
that are converted will be cancelled and retired. Each holder of a certificate
representing any shares of Algos common stock will no longer have any rights
regarding Algos common stock. Shares of Algos common stock (a) held in the
treasury of Algos and (b) owned by Endo or Endo Inc. will be cancelled without
any payment.
The officers and directors of Endo Inc. immediately prior to the merger will
be the officers and directors of the surviving corporation. The certificate of
incorporation and by-laws of Endo Inc. in effect immediately prior to the
effective time will be the certificate of incorporation and by-laws of the
surviving corporation until Endo amends or changes either document.
Effective Time and Closing of the Merger
Promptly after the satisfaction of the terms and conditions of the merger
agreement, Algos will file a certificate of merger with the Secretary of State
of Delaware as required by the Delaware General Corporation Law. The merger
will be effective when the certificate of merger is filed. However, Algos and
Endo Inc. may agree to a later date or time and specify that date or time in
the certificate of merger. We expect to complete the merger on or promptly
after July 17, 2000, the date Algos has scheduled for the special meeting of
its stockholders to approve and adopt the merger agreement and the merger.
Procedure to Exchange Certificates
Endo will authorize a commercial bank to act as exchange agent. The exchange
agent will mail letters of transmittal and instructions regarding the exchange
process to each record holder of shares of Algos common stock promptly
following the merger. Upon surrender of Algos common stock certificates, the
Algos record holders will receive certificates representing Endo common stock
and warrants. Once the holders of certificates previously representing Algos
common stock surrender these certificates, they will receive any dividends or
other distributions on the Endo common stock that have a record date after the
merger and a payment date before the holder surrenders the Algos common share
certificate. However, Endo will not pay any dividends until the holder of the
Algos share certificate surrenders that certificate. The holder will also
receive any dividends or other distributions with a record date after the
merger but before the surrender, and a payment date
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<PAGE>
after the surrender. In each case, taxes will be withheld as required. No
interest will be paid or accrued on unpaid dividends or distributions, if any,
which will be paid on surrender of Algos common share certificates.
At the merger, Algos will close its stock transfer books. Algos will not
record any transfer of shares of Algos common stock outstanding prior to the
merger after the merger. If, after the merger, any holder presents Algos
certificates to the surviving corporation, the exchange agent or Endo, these
certificates will be canceled and exchanged as described above.
The exchange agent will deliver to Endo any Endo common share certificates
and warrant certificates issued in the merger and any dividends or
distributions that Endo deposited with the exchange agent which former Algos
stockholders do not claim within six months after the merger. Any former Algos
stockholder who has not complied with the exchange procedures before the six-
month anniversary of the merger may only look to Endo for payment of Endo
common stock and warrants, and any unpaid dividends and distributions on Endo
common stock. Neither Algos, Endo, the exchange agent nor any other person will
be liable to you for any amount properly delivered to a public official under
applicable abandoned property, escheat or similar laws.
The exchange agent will deliver Endo common stock and warrants in exchange
for lost, stolen, or destroyed certificates if the record holder of these Algos
common stock certificates signs an affidavit of loss, theft or destruction. The
surviving corporation may also, in its discretion, require the holder of a
lost, stolen or destroyed certificate to deliver a bond in reasonable sum as
indemnity against any claim that any claimant might make against the surviving
corporation regarding the alleged lost, stolen or destroyed certificate.
Representations and Warranties
Except as discussed in the paragraphs below, the merger agreement contains
essentially reciprocal representations and warranties that each of Endo and
Algos made to the other. These representations and warranties relate to the
following matters:
. due organization, power and standing, and other corporate matters;
. capital structure;
. authority to enter into and enforce the merger agreement;
. required consents and approvals, and absence of violations of law;
. financial statements;
. the accuracy of the information contained in the registration statement
of which this proxy statement/prospectus forms a part;
. absence of any material adverse change;
. permits and licenses;
. tax matters;
. actions and proceedings;
. agreements relating to employee benefits that will be affected by the
merger;
. ERISA matters;
. compliance with applicable laws, including laws relating to the
environment, health and the FDA;
. liabilities;
. labor matters;
. intellectual property;
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<PAGE>
. ownership of shares;
. brokers' fees and expenses with respect to the merger;
. state takeover statutes;
. year 2000 compliance;
. required vote of stockholders with respect to the merger; and
. interests in other entities.
Endo and Endo Inc. also made additional representations and warranties to Algos
relating to the following matters:
. accuracy of information furnished to Algos; and
. operation of Endo Inc.
Algos also made an additional representation and warranty to Endo and Endo Inc.
relating to the opinion of its financial advisor.
As defined in the merger agreement, a material adverse change or material
adverse effect would not include any change or development relating to
MorphiDex(R) or any other of Algos' products under development, including the
FDA or DEA approval relating to these products.
Covenants Relating to Conduct of Business
Endo has agreed that, during the period from the date of the merger
agreement through the merger, Endo and each of its subsidiaries will, in all
material respects:
. carry on its business in the ordinary course as currently conducted;
. use its reasonable best efforts to preserve intact its current business
organizations;
. keep available the services of its current officers and employees; and
. preserve its relationships with customers, suppliers and others having
business dealings with it.
In addition, unless Algos agrees in writing or the merger agreement provides
otherwise, Endo has agreed that before the merger neither it nor any of its
subsidiaries will:
. declare, set aside or pay any dividends or make distributions on any of
its capital stock;
. split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock;
. other than pursuant to any existing shareholder agreement, purchase,
redeem or otherwise acquire any shares of capital stock of Endo or its
subsidiaries or any rights, warrants or options to acquire any of these
shares;
. institute or amend any share repurchase program;
. issue, deliver, sell, pledge, dispose of, grant, transfer or otherwise
encumber any shares of its capital stock or any rights, warrants or
options to acquire any of these shares, voting securities, equity
equivalent or convertible securities, other than (a) the issuance of
stock options and shares under Endo's incentive plans and in the ordinary
course of business consistent with past practice and (b) the issuance by
any wholly-owned subsidiary of Endo of its capital stock to Endo or
another wholly-owned subsidiary of Endo;
. amend its certificate of incorporation or by-laws;
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. acquire or agree to acquire any (a) business, corporation, partnership,
association or other business organization or division or (b) assets,
other than acquisitions of assets in the ordinary course of business
consistent with past practice in an amount not to exceed $20 million;
. sell, lease or dispose of any of its rights or other assets, other than:
. sales of inventory, merchandise and finished goods in the ordinary
course of business and
. transactions that are in the ordinary course of business consistent
with past practice and that, individually or in the aggregate, are
not material to Endo and its subsidiaries, taken as a whole;
. incur any indebtedness for borrowed money, guarantee any of this
indebtedness or make any loans, advances or capital contributions to, or
other investments in, any other entity, other than:
. indebtedness incurred in the ordinary course of business consistent
with past practice in an amount not to exceed $20 million;
. indebtedness, loans, advances, capital contributions and investments
between Endo and any of its wholly owned subsidiaries or between any
of these subsidiaries;
. indebtedness that may be necessary to fund permissible acquisitions
of any (x) business, corporation, partnership, association or other
business organization or division or (y) assets; and
. indebtedness that may be necessary in connection with a refinancing
of Endo's existing credit agreement;
. knowingly violate or fail to perform any material obligation required
under any applicable federal, state or local law, rule, regulation,
guideline or ordinance;
. take any action, other than reasonable and usual actions in the ordinary
course of business consistent with past practice, regarding accounting
policies or procedures and other than actions required to be taken by
generally accepted accounting principles;
. enter into any contract, agreement, commitment or arrangement to take any
action prohibited by the merger agreement; or
. take any action that would, or that could reasonably be expected to, make
any of the representations and warranties of Endo and Endo Inc. in the
merger agreement to become untrue.
Algos has guaranteed that, during the period from the date of the merger
agreement through the merger, it will carry out the following actions:
. carry on its business in the ordinary course as currently conducted;
. use its reasonable best efforts to preserve intact its current business
organizations;
. keep available the services of its current officers and employees; and
. preserve its relationships with customers, suppliers and others having
business dealings with it.
In addition, unless Endo agrees in writing or the merger agreement provides
otherwise, Algos has agreed that before the merger it will not:
. declare, set aside or pay any dividends or make any distributions on any
of its capital stock;
. split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock;
. purchase, redeem or otherwise acquire any shares of capital stock of
Algos or any other securities of Algos or any rights, warrants or options
to acquire any of these shares or other securities;
. institute or amend any share repurchase program;
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<PAGE>
. issue, deliver, sell, pledge, dispose of, grant, transfer or otherwise
encumber any shares of its capital stock, any other voting securities or
equity equivalent or any securities convertible or exchangeable into, or
exercisable for, or any rights, warrants or options to acquire any of
these shares, voting securities, equity equivalent or convertible
securities, other than the issuance of shares of Algos common stock upon
the exercise of Algos stock options outstanding on the date of the merger
agreement;
. amend its certificate of incorporation or by-laws;
. acquire or agree to acquire any:
. business, corporation, partnership, association or other business
organization or division or
. assets other than acquisitions of assets in the ordinary course of
business consistent with past practice, the value of which do not
exceed $500,000 in the aggregate;
. sell, lease or otherwise dispose of, or agree to sell, lease or dispose
of, any of its rights or other assets other than
. sales of inventory, merchandise and finished goods in the ordinary
course of business and
. transactions that are in the ordinary course of business consistent
with past practice, not material to Algos and in an aggregate amount
no greater than $250,000;
. incur any indebtedness for borrowed money, guarantee any such
indebtedness or make any loans, advances or capital contributions to, or
other investments in, any other entity, other than investments relating
to permissible acquisitions of any:
. business, corporation, partnership, association or other business
organization or division and
. assets and other than indebtedness incurred in the ordinary course of
business consistent with past practice in an amount not to exceed
$50,000 in the aggregate;
. alter, through merger, liquidation, reorganization, restructuring or in
any other fashion, the corporate structure or ownership of Algos other
than as a result of the regular trading of Algos common stock on the
NASDAQ;
. enter into or adopt, or amend any existing, severance plan, agreement or
arrangement or enter into or amend any Algos deferred compensation, bonus
or incentive compensation, stock purchase, stock option and other equity
compensation, or other plan, or employment or consulting agreement, other
than:
. as required by applicable law;
. as expressly contemplated by the merger agreement or
. stay bonuses as reasonably approved by Endo;
. increase the compensation payable to its officers, employees or
directors except for increases in the ordinary course of business
consistent with past practice;
. grant any additional rights to severance or termination pay to any
director or officer of Algos;
. enter into any employment or severance agreement with any director or
officer of Algos; and
. enhance or accelerate any rights or benefits under any labor,
collective bargaining, bonus, profit sharing, thrift, compensation,
stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
director, officer or employee;
. knowingly violate or fail to perform any material obligation or duty
imposed upon it by any applicable federal, state or local law, rule,
regulation, guideline or ordinance;
. take any action, other than reasonable and usual actions in the ordinary
course of business consistent with past practice, with respect to
accounting policies or procedures and other than actions required to be
taken by generally accepted accounting principles;
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. make any tax election, change its method of accounting, or settle or
compromise any material federal, state, local or foreign income tax
liability or refund;
. except for purchases of MorphiDex(R) and clinical supplies, as needed,
enter into any contract that cannot be canceled on 30 days' notice
pursuant to which Algos is obligated in an amount in excess of $500,000;
. make any capital expenditure in the aggregate in excess of $100,000,
subject to specified exceptions;
. enter into any agreement, arrangement or contract that provides for the
allocation or sharing of, or indemnification for, taxes;
. enter into any contract, agreement, commitment or arrangement to take any
action prohibited by the merger agreement; or
. take any action that would, or could reasonably be expected to, make any
of the representations and warranties of Algos in the merger agreement to
become untrue.
No Solicitation
Algos has agreed not to, and has agreed to use its best efforts to cause its
officers, directors, employees, investment bankers, consultants, attorneys,
accountants, agents, advisors or representatives not to:
. take any action to solicit, initiate, encourage, facilitate, enter into
or approve any agreement or agreement-in-principle that will result in,
participate or engage in any discussions or negotiations regarding, or
furnish to any Person any information that will lead to, any company
takeover proposal.
The merger agreement defines company takeover proposal as any proposal for a
merger or other business combination involving Algos or the acquisition or
purchase of more than 25% of any class of equity securities of Algos, or any
tender offer, including a self-tender offer, or exchange offer that, if
concluded, would result in any person beneficially owning more than 25% of any
class of equity securities of Algos or a majority of the assets of Algos, other
than the transactions that the merger agreement contemplates.
The "no solicitation" provision in the merger agreement does not prohibit
Algos or the board of directors of Algos from:
. taking and disclosing to Algos' stockholders a position with respect to a
tender or exchange offer by a third party,
. exercising their fiduciary duties by providing information about Algos to
third parties or conducting negotiations with respect to a takeover
proposal that was not solicited by Algos, or
. making any disclosure required by applicable law.
Algos has agreed to promptly advise Endo orally and in writing in the event
that Algos receives any company takeover proposal or any inquiry that could
reasonably be expected to lead to any company takeover proposal. Algos has
agreed to (a) keep Endo fully informed of the status of any company takeover
proposal or inquiry and (b) provide to Endo as soon as practicable, copies of
all correspondence and other written material sent to Algos in connection with
any company takeover proposal.
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Additional Agreements
Stockholder Meeting. Algos has agreed to call a meeting of its stockholders
for the purposes of considering the approval of the merger agreement as
promptly as practicable after the SEC declares effective a registration
statement relating to the shares of Endo common stock and warrants issuable in
the merger. The board of directors of Algos has agreed not to withdraw or
modify, in a manner adverse to Endo, its approval or recommendation of the
merger agreement or the merger, except in the case of a superior third party
proposal. The board of directors of Algos has also agreed not to recommend or
propose any third party proposal to acquire Algos unless the Algos board of
directors determines in its good faith judgment that this third party proposal
is superior, from a financial point of view, to the stockholders of Algos.
Regardless of any permissible change in the recommendation of the Algos board
of directors regarding the merger agreement and the merger, Algos has agreed to
submit the merger agreement and the merger to the Algos stockholders for
approval at the special meeting in order to give Algos stockholders the
opportunity to vote on the merger agreement and the merger in order to obtain
the requisite approval of Algos' stockholders.
Preparation of the Registration Statement and Proxy Statement. Endo and
Algos have agreed to cooperate in the prompt preparation and filing of
documents under federal and state securities laws and with applicable
governmental authorities.
Access to Information; Regulatory Communication. Endo and Algos have agreed
to provide to the accountants, counsel, financial advisors and other
representatives of the other company reasonable access to all properties,
books, contracts, commitments and records during the period between the date of
the merger agreement and the merger. Algos has agreed to keep Endo promptly
informed of any communication with or from the FDA or the DEA. Algos has also
agreed to keep Endo promptly informed of any communication relating to Algos'
intellectual property. Algos has agreed not to make any submission to, or have
discussions with, the FDA or the DEA without either the prior consultation or
the inclusion of Endo. Endo has agreed to keep Algos promptly informed of any
communications from the FDA or the DEA with respect to specified drugs.
Compliance with the Securities Act of 1933. Algos has agreed to deliver to
Endo a list of names and addresses of affiliates of Algos as defined in Rule
145 of the Securities Act. Algos has agreed to exercise all reasonable efforts
to deliver to Endo an affiliate letter from each of the affiliates no later
than 30 days prior to the merger.
Designation of Directors. After the merger, Endo has agreed to:
. appoint three (3) designees of Algos to its board of directors to serve
as directors and
. appoint John W. Lyle as the Non-Executive Chairman of the board of
directors of Endo.
During the three-year period from and including the effective time of the
merger, Endo has agreed to, among other things:
. use its reasonable best efforts to have at least three designees of Algos
on the board of directors of Endo at all times,
. nominate designees of Algos at stockholder meetings convened for the
purpose of electing Endo's board of directors, and
. appoint one designee of Algos to the compensation committee or such other
committee that will have power with respect to the granting of employee
stock options.
NASDAQ Listing. Endo has agreed to use its reasonable best efforts to list
the Endo common stock and the Endo warrants on the NASDAQ.
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Fees and Expenses. Endo and Algos have agreed that the party incurring costs
and expenses in connection with the merger agreement will pay for these costs
and expenses. However, Endo and Algos will share equally all filing fees and
printing expenses related to this proxy statement/prospectus and the
registration statement. If the non-breaching party terminates the merger
agreement as a result of a breach, the breaching party will reimburse the non-
breaching party for all out-of-pocket expenses. In addition, Algos has agreed
to reimburse Endo for all out-of-pocket expenses if the Algos stockholders do
not approve and adopt the merger agreement so long as Endo is not then in
material breach of its obligations under the merger agreement. There are no
other termination fees.
Algos Stock Options. Algos has agreed to cause each unexpired and
unexercised Algos stock option that is outstanding under its stock plans to
become fully vested and exercisable for the thirty (30)-day period immediately
prior to the merger. If any Algos stock option is unexpired or unexercised at
the end of such period, Algos will terminate this stock option.
Endo Stock Options. Endo has agreed to take all actions necessary and to use
its reasonable best efforts to obtain the consent of its option holders to
amend their options so as to provide that each Endo stock option which is
outstanding at the effective time of the merger will, after the merger, be
exercisable solely into shares of Endo common stock which the holders of Endo
common stock who held these shares prior to the merger beneficially owned. The
holders of approximately 90% of the outstanding Endo employee stock options
have already consented to this amendment.
Reasonable Efforts. Endo and Algos have each agreed to use its reasonable
efforts to take all actions, and to do all things, necessary, proper or
advisable to conclude and make effective the merger and any transactions that
the merger agreement contemplates, including, among other things:
. obtaining all consents, approvals and actions by governmental entities;
. obtaining all necessary consents, approvals or waivers from third
parties;
. defending any lawsuits or legal proceedings that challenge the merger
agreement; and
. consulting and cooperating with one another in all actions taken in
connection with proceedings under the Hart-Scott-Rodino Act or any other
federal, state or foreign antitrust or fair trade law.
Indemnification; Directors and Officers Insurance.
. For a period of six years from the merger, Endo has agreed to, and to
cause Endo Inc. to, indemnify each present and former director, officer
and employee of Algos to the same extent these persons are indemnified as
of November 26, 1999 by Algos pursuant to Algos' certificate of
incorporation, by-laws and any indemnification agreements in existence on
November 26, 1999 for acts or omissions occurring at or prior to the
merger.
. Endo has also agreed that it will indemnify these persons for a period of
six years after the merger to the fullest extent that the law permits for
acts or omissions occurring in connection with the approval of the merger
agreement and the merger.
. For a period of six years after the merger, Endo has agreed to provide
Algos' current directors and officers an insurance and indemnification
policy for events occurring prior to the merger with coverage that is no
less favorable than Algos' existing policy. Endo, however, is not
required to pay an annual premium for this insurance in excess of 200
percent of the last annual premium that Algos paid.
Notification of Certain Matters. Endo and Algos have agreed to use their
reasonable best efforts to give prompt notice to each other of:
. any occurrence or non-occurrence of an event that would render any
representation or warranty of any covenant or condition of the merger
agreement untrue or incapable of satisfaction;
. any material litigation or governmental complaints, investigations or
hearings; and
. any change or event that will reasonably be likely to have a material
adverse effect on Endo or Algos.
Employee Matters. Endo has agreed to give continuing employees full credit
for purposes of eligibility and vesting under any employee benefit plan.
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Tax Treatment. Endo and Algos have each agreed to use their reasonable
efforts before and after the completion of the merger to have the merger
qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code.
Conveyance Taxes. Endo and Algos have agreed to cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding:
. any real property gains, sales, use, transfer, value-added, stock
transfer and stamp taxes;
. any recording, registration and other fees; and
. any similar taxes and fees that become payable in connection with the
merger.
Additional Agreements. At or before the merger:
. Endo and Endo Pharma LLC have agreed to enter into a tax sharing
agreement under which Endo will pay to Endo Pharma LLC the amount of the
tax benefits it receives as a result of the exercise of these current
Endo stock options into shares of Endo common stock that Endo Pharma LLC
held for the years in which these tax benefits arise; and
. Endo and John W. Lyle have agreed to enter into an employment agreement
as described under "INTERESTS OF CERTAIN PERSONS IN THE MERGER AND
RELATED MATTERS--Compensation Arrangements for Algos Officers."
Forms of these agreements are exhibits to the merger agreement, which we
have attached as Appendix A to this proxy statement/prospectus.
Issuance of Warrants to Endo. Immediately prior to the merger, Endo and
Algos have agreed that Endo will issue one warrant with respect to each share
of Endo common stock outstanding prior to the merger.
Formation of Endo Pharma LLC. Endo has agreed in the merger agreement to
form immediately prior to the merger a limited liability company to which each
of the then current holders of Endo common stock will contribute all of the
shares of Endo owned by them in exchange for membership interests in this
limited liability company. This covenant will be deemed to have occurred if
holders of at least 85% of Endo common stock prior to the merger contribute
their shares to Endo Pharma LLC.
On or before March 31, 2001, Endo will determine the cash gross profit of
Endo (as defined below) for fiscal year 2000 and an adjustment event will be
deemed to occur or not occur on that date. An adjustment event will occur if:
. (x) the cash gross profit of Endo for the fiscal year ended December 31,
2000 does not equal or exceed $147.4 million and (y) the FDA has approved
MorphiDex(R) prior to March 31, 2001, then Endo Pharma LLC will transfer
for no consideration 13.8 million shares of Endo common stock that Endo
Pharma LLC owns at the time of this adjustment event to Endo, which will
deposit these shares in its treasury; and
. (x) the cash gross profit of Endo for the fiscal year ended December 31,
2000 does not equal or exceed $147.4 million and (y) the FDA has not
approved MorphiDex(R) prior to March 31, 2001, then Endo Pharma LLC will
transfer for no consideration 18.0 million shares of Endo common stock
that Endo Pharma LLC owns at the time of this adjustment event to Endo,
which will deposit these shares in its treasury.
Endo and Algos have agreed that, prior to the merger, there will be an
adjustment to the above numbers of shares of Endo common stock that Endo Pharma
LLC must transfer to Endo's treasury:
. to ensure that after giving effect to the number of shares so
transferred, the shares of Endo common stock that Endo issues to Algos
stockholders in the merger together with the shares of Endo common stock
issuable upon exercise of the Endo warrants (if the warrants were then
immediately exercisable), will represent 40% of the outstanding Endo
common stock on a fully diluted basis in the event that the adjustment
event (described above) has occurred and the FDA has, at such time,
approved MorphiDex(R).
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For purposes of the merger agreement, "cash gross profit of Endo" means the
difference between:
. the gross invoice price of current and future internally developed
products sold or marketed by Endo (other than products developed or being
developed by Algos) sold to any third party less (1) cash, trade,
promotional or quantity discounts and/or rebates and chargebacks, (2)
retroactive price reductions, (3) sales, use or other excise taxes and
(4) returns and allowances; and
. the cost of sales of Endo, determined in accordance with generally
accepted accounting principles, used by Endo attributable to current and
future internally developed products sold or marketed by Endo (other than
products developed or being developed by Algos) less all non-recurring
charges and non-cash charges included in cost of sales, including, but
not limited to, depreciation, amortization and other non-cash
manufacturing charges.
Effect of Recapitalization. Endo has agreed that its recapitalization will
reflect an adjustment to the outstanding Endo common stock immediately prior to
the merger such that, as a result of the merger, those persons who had been
holders of:
. Algos common stock immediately prior to the merger will hold, in the
aggregate, immediately after the merger 20% of the outstanding Endo
common stock, on a fully diluted basis, excluding the effect of the
warrants; and
. Endo common stock immediately prior to the merger will hold, in the
aggregate, immediately after the merger 80% of the outstanding Endo
common stock, on a fully diluted basis, excluding the effect of the
warrants.
Conditions Precedent to the Merger
Endo and Algos are required to complete the merger only if each of the
following conditions is met:
. Stockholder Approval. The holders of a majority of the outstanding shares
of Algos common stock have approved and adopted the merger agreement and
approved the merger.
. Listing on the NASDAQ. Nasdaq has authorized for listing the Endo common
stock to be issued in the merger.
. Hart-Scott-Rodino Act. The waiting period applicable to the consummation
of the merger under the Hart-Scott-Rodino Act has expired or terminated.
This waiting period expired on February 21, 2000.
. Registration Statement. The SEC has declared effective the registration
statement on Form S-4 of which this proxy statement/prospectus is a part.
The SEC has not issued any stop order suspending the effectiveness of the
registration statement. Endo has received all necessary state securities
or "blue sky" authorizations.
. No Governmental Action/Order. There is no action, suit or proceeding by
any governmental entity that challenges or enjoins the merger. No court
or governmental entity has enacted, issued, promulgated or enforced any
law, rule, regulation, order, decree or injunction that has the effect of
making the merger or other transactions that the merger agreement
considers illegal.
Additionally, the merger agreement obligates Endo, on the one hand, and
Algos, on the other hand, to complete the merger only if, before the merger,
satisfaction or waiver of the following additional conditions has occurred:
. The other party has performed in all material respects its agreements and
covenants contained in the merger agreement that it is required to
perform before completion of the merger.
. Each of the representations and warranties of the other party in the
merger agreement that is qualified by materiality is true and correct as
of the effective time of the merger as if made on and as of such date,
except for those representations and warranties made as of an earlier
date, and each of the
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representations and warranties of the other party that is not so qualified
is true and correct in all material respects as of the effective time of
the merger as if made on and as of this date, with the same force and
effect as if made on and as of the effective time, except for those
representations and warranties made as of an earlier date.
. Each party has received an opinion of tax counsel to the effect that the
merger will qualify for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code.
In addition, Endo is obligated to complete the merger only if Algos
delivers executed letters from affiliates and the condition described under
the caption "--March 3, 2000 Amendment to Merger Agreement" on page 77 of this
proxy statement/prospectus is satisfied or waived by Endo.
Also, Algos is obligated to complete the merger only if Endo forms Endo
Pharma LLC in accordance with the terms of the merger agreement.
Termination; Amendment and Waiver
Conditions to Termination. Endo and Algos may terminate the merger
agreement at any time prior to the merger, even if the stockholders of Algos
approve matters related to the merger, by their mutual written consent. Either
Endo or Algos may also terminate the merger agreement if:
. the other fails to comply in any material respect with any of its
covenants or agreements contained in the merger agreement, and if the
breaching party has not cured the failure to comply within ten (10)
business days following a written notice; however, if the breaching party
can cure this breach through the exercise of its best efforts, so long as
the breaching party uses its best efforts to cure the breach, the non-
breaching party may not terminate the merger agreement;
. the other party has breached any representation or warranty that is (a)
not qualified as to materiality which has the effect of making this
representation or warranty not true and correct in all material respects
or (b) qualified as to materiality and, in each case, the breaching party
has cured the breach within ten business days following receipt of
written notice of the breach; however, if the breaching party can cure
this breach through the exercise of best efforts and so long as the
breaching party uses its best efforts to cure this breach, the non-
breaching party may not terminate the merger agreement;
. any governmental entity issues an order, decree or ruling or takes any
action to permanently enjoin, restrain or prohibit the merger, and this
order, decree or ruling has become final and nonappealable;
. any condition or obligation of a party to consummate the merger becomes
incapable of satisfaction prior to July 31, 2000, so long as the
terminating party is not then in material breach of any representation,
warranty or covenant contained in the merger agreement;
. the parties have not effected the merger on or prior to the close of
business on July 31, 2000, which will be the termination date; however,
this right to terminate the merger agreement will not be available to any
party whose failure to fulfill any of its obligations contained in the
merger agreement has been the cause of the failure of the merger to have
occurred on or prior to the termination date; or
. the stockholders of Algos do not approve the merger agreement at the
special meeting or any adjournment or postponement of the special
meeting.
Effect of Termination. In the event of a termination of the merger
agreement by either Endo or Algos, the merger agreement will terminate
immediately, and there will be no liability on the part of Algos, Endo,
Endo Inc. or their respective officers or directors. However, no party is
relieved from liability for (a) any willful breach of a representation or
warranty or (b) the breach of any covenant contained in the merger agreement.
Amendment. The parties may amend the merger agreement at any time before or
after the approval of the merger by the stockholders of Algos. However, after
stockholder approval, the parties will not agree to any amendment which by law
requires the Algos stockholders' approval without this further stockholder
approval. The parties may not amend the merger agreement except by a written
instrument that each of the parties to the merger agreement has signed.
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Waiver. At any time prior to the merger, Endo and Algos may, in writing:
. extend the time for performance of any obligations;
. waive any inaccuracies in the representations and warranties; and
. waive compliance with any of the agreements or conditions of the merger
agreement.
Procedure for Termination, Amendment, Extension or Waiver. In order to be
effective,
. termination of the merger agreement;
. amendment of the merger agreement; and
. extension or waiver of provisions in the merger agreement
will require action by the board of directors, or the authorized designee of
the board of directors, of Endo, Endo Inc. or Algos, as the case may be.
December 17, 1999 Amendment to Merger Agreement
On December 17, 1999, Endo, Endo Inc. and Algos amended the merger agreement
to provide, among other things, that Endo may have terminated the merger if, on
or before January 25, 2000, Endo had determined, in good faith, that any of
Algos' intellectual property representations contained in the merger agreement
is inaccurate or untrue (other than solely by reason of Algos' act of
disclosing information to Endo after November 26, 1999 and prior to December
17, 1999), provided further that the representation must be materially
inaccurate or untrue if it is not qualified by materiality.
March 3, 2000 Amendment and Restatement of Merger Agreement
On March 3, 2000, Endo, Endo Inc. and Algos amended and restated the merger
agreement to clarify that Algos stockholders are entitled to appraisal rights
in the merger under Section 262 of the Delaware General Corporation Law. In
connection with this amendment and restatement, the parties also agreed that
Endo is not obligated to close the transaction if immediately prior to the
taking of the vote at the special meeting, holders of more than 12% of the
outstanding shares of Algos common stock at such time have exercised those
appraisal rights.
April 17, 2000 Amendment to Merger Agreement
On April 17, 2000, Endo, Endo Inc. and Algos amended the merger agreement to
extend the termination date of the merger agreement from June 30, 2000 to July
31, 2000 and to modify certain terms of the warrants that the Algos
stockholders will receive in the merger. A copy of this amendment is attached
as Appendix B to this proxy statement/prospectus. In particular, prior to this
amendment, the merger agreement had provided that if FDA approval of
MorphiDex(R) was obtained on or before December 31, 2001, then upon exercise of
the warrants, holders of the warrants would have received an additional 15% of
the pro forma combined company (to be calculated as if all warrants had been
exercised at the closing of the merger). The April 17, 2000 amendment changed
the warrant provisions such that holders of these warrants will receive this
additional 15% of the pro forma combined company (to be calculated as if all
warrants had been exercised at the closing of the merger) if FDA approval of
MorphiDex(R) is obtained on or before March 31, 2002, instead of December 31,
2001. In addition, prior to this amendment, under the merger agreement, this
percentage was to be reduced by an amount that represented five percentage
points for each six-month period after December 31, 2001 that MorphiDex(R) is
not approved. The amendment provided instead that for the first six-month
period after March 31, 2002 that MorphiDex(R) is not approved, this percentage
will be reduced by an amount that represents six percentage points, and for the
second six-month period after March 31, 2002 that MorphiDex(R) is not approved,
by an amount that represents an additional five percentage points. Prior to
this amendment, the merger agreement also provided that if FDA approval of
MorphiDex(R) was not attained by December 31, 2002, the warrants would expire
unexercised. The amendment extended this deadline to March 31, 2003. The
amendment did not change any of the other provisions of these warrants. See
"DESCRIPTION OF THE ENDO WARRANTS" on page 114 of this proxy
statement/prospectus.
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ADDITIONAL AGREEMENTS
Voting Agreements
Voting and Proxies
In order to induce Endo to enter into the merger agreement, fourteen Algos
stockholders, including five of Algos' six directors (each in his capacity as a
stockholder and without limiting or affecting his obligations as a director),
have each entered into a voting agreement, at Endo's request. These voting
agreements terminate in accordance with their terms immediately after the vote
of the Algos stockholders on the merger and the merger agreement. These
stockholders are: Michael Hyatt, the Trust Under the Will of Inez L. Kimmel,
the Todd Kimmel Trust, the Melissa Kimmel Trust, the Anita Hyatt Family Trust,
Roger H. Kimmel, the Hyatt Family Trust, James R. Ledley, Donald G. Drapkin,
John W. Lyle, Karen B. Lyle, Frank S. Caruso, the Frank S. Caruso Irrevocable
Trust and Patricia Caruso. Pursuant to and during the terms of the voting
agreements, each stockholder party to a voting agreement has agreed to vote, or
cause to be voted, all of the Algos common stock owned by the stockholder and
all shares of Algos common stock subsequently acquired by the stockholder:
(1) to adopt and approve the merger agreement and each of the other actions
contemplated by the merger agreement or the stockholder's voting
agreement; and
(2) against the following actions (other than the merger or the merger
agreement):
(a) any extraordinary corporate transaction, such as a merger,
consolidation or other business combination involving Algos;
(b) a sale, lease or transfer of a material amount of assets of Algos
or a reorganization, recapitalization, dissolution or liquidation
of Algos;
(c) any change in the majority of the Algos board of directors;
(d) any material change in the present capitalization or Algos or any
amendment of the Algos certificate of incorporation;
(e) any other material change in the corporate structure or business of
Algos; or
(f) any other action which, in the case of each of the matters referred
to in clauses (c), (d) and (e) above, is intended or could
reasonably expected to impede, interfere with, delay, postpone,
discourage or materially adversely affect the contemplated economic
benefits to Endo of the merger or the transactions contemplated by
the merger agreement or the voting agreement.
In addition, each of the Algos stockholders party to a voting agreement has
granted Endo an irrevocable proxy to vote his, her or its shares of the Algos
common stock in the manner described above. The voting agreements terminate
upon the earlier to occur of the termination of the merger agreement or the
completion of the merger.
The aggregate number of shares of Algos common stock that is subject to the
voting agreements is 3,885,522, or approximately 22% of all Algos common stock
outstanding on June 13, 2000.
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Prohibited Actions
Each of the Algos stockholders party to a voting agreement has also agreed
with respect to the shares of Algos common stock subject to the voting
agreement that the stockholder will not:
. sell, transfer, give, pledge or otherwise dispose of, or enter into any
contract, option, agreement or other understanding to sell, transfer,
give, pledge or otherwise dispose of the shares,
. grant any proxy, power-of-attorney or other authorization in or with
respect to the shares,
. deposit the shares into a voting trust or enter into a voting agreement
or arrangement with respect to the shares,
. request that Algos register the transfer of any certificate or
uncertificated interest in the shares except in accordance with the
voting agreement,
. exercise any rights of appraisal or rights to dissent from the merger or
. take any other action that would in any way restrict, limit or interfere
with the performance of the stockholder's obligations under the voting
agreement or the merger agreement.
A copy of the form of voting agreement is attached as Exhibit B to the
merger agreement, which is attached as Appendix A to this proxy
statement/prospectus.
Collaboration Agreement
On November 26, 1999, Endo Pharmaceuticals and Algos entered into a
collaboration agreement, pursuant to which Endo Pharmaceuticals and Algos will
work together exclusively to develop, manufacture and commercialize pain
management products containing the combination of oxycodone and
dextromethorphan molecules. Under this collaboration agreement, each party
granted to the other party a sole and exclusive worldwide license to its
respective know-how, patent rights and trademark rights used in connection with
the collaboration. Endo Pharmaceuticals and Algos will share equally the costs
associated with, and profits generated by, the collaboration, after adjustments
with respect to reduced sales of Endo products resulting from sales of products
that the parties developed under the collaboration agreement. The collaboration
agreement will continue in effect until the parties to the agreement mutually
agree in writing to terminate the agreement or the patent rights licensed under
the collaboration agreement expire.
Kelso Side Letter
Kelso Investment Associates V, L.P. and Kelso Equity Partners V, L.P., the
majority stockholders of Endo, have agreed in a binding letter agreement with
Algos and Endo, dated November 26, 1999, that, for a period of two years from
the completion of the merger, they will not, and will not permit any of their
affiliates to which they have transferred any of their shares of Endo common
stock, including Endo Pharma LLC to, sell their shares except pursuant to:
(a) Rule 144 under the Securities Act,
(b) an effective registration statement filed under the Securities
Act,
(c) privately negotiated sales to any person or group of affiliated
persons that do not aggregate more than 5.0% of the issued and
outstanding Endo common stock at the time of the sale,
(d) a transaction in which all of the Endo stockholders are permitted
to participate on equal economic terms and on a pro rata basis in
accordance with their ownership, or
(e) any transfer, sale or distribution to any affiliate of these Kelso
entities.
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In addition, these majority stockholders agreed that, for a period of two
years from the completion of the merger, they would not engage in any
transaction that would be a "going private" transaction within the meaning of
Rule 13e-3 of the Securities Exchange Act unless the holders of the majority of
the then outstanding Endo common stock not affiliated with a majority
stockholder have approved the transaction by a vote or other action.
Registration Rights Agreement
In connection with the formation of Endo Pharma LLC, Endo and Endo Pharma
LLC will enter into a registration rights agreement, providing Endo Pharma LLC
with registration rights with respect to the shares of Endo common stock owned
by Endo Pharma LLC. The registration rights agreement will provide, among other
things, that Endo Pharma LLC, as a holder of such shares of common stock, will
be entitled to six demand registrations and, together with its permitted
transferees (as to be defined in the registration rights agreement), unlimited
piggyback registrations. No piggyback registrations will be permitted, however,
if a managing underwriter (or, in the case of an offering that is not
underwritten, a nationally recognized investment banker) determines in good
faith and in writing that the participation in an incidental registration would
adversely affect the offering, the marketability or the offering price of the
securities to be sold by Endo in such registration. In addition, Endo will not
be required to effect any registration of common stock pursuant to the
registration rights agreement that is incidental to the registration of any of
its securities in connection with mergers, acquisitions, exchange offers or
subscription offers or any executive, employee benefit or compensation plans.
Pursuant to this registration rights agreement, Endo will pay all expenses
in connection with demand and piggyback registrations other than underwriting
discounts, commissions and transfer taxes. This agreement will continue in
effect until the earlier of (1) its termination by the consent of the parties
thereto or their respective successors in interest and (2) the date on which no
registrable securities (as to be defined in the registration rights agreement)
of Endo remain outstanding.
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ENDO PHARMA LLC
Formation; Purpose
Immediately prior to the merger, Endo will form Endo Pharma LLC, a Delaware
limited liability company, whereby certain of the then current holders of Endo
common stock (and in no event less than 85% of these holders) will contribute
all of their shares of Endo to Endo Pharma LLC in exchange for membership
interests in this limited liability company. Due to these exchanges, Endo
Pharma LLC will, following the merger, be the majority holder of Endo common
stock, holding approximately 79.6% of the outstanding shares. Endo Pharma LLC
will be governed by a board of managers elected by Endo Pharma LLC's members.
Because each share of Endo common stock will be exchanged for one membership
interest, upon the creation of Endo Pharma LLC, Kelso Investment Associates V,
L.P. will hold the majority of the membership interests in Endo Pharma LLC.
The formation of Endo Pharma LLC will ensure that the Endo employee stock
options that are outstanding immediately prior to the merger will only affect
those holders of Endo common stock who held these shares prior to the merger.
As discussed above under "THE COMPANIES--Endo--Description of Endo Stock Option
Plans," these current Endo employee stock options will be exercisable only into
shares of Endo common stock that are held by Endo Pharma LLC. Holders of these
Endo employee stock options must consent to this amendment to their stock
options. The holders of approximately 90% of the outstanding Endo employee
stock options have already consented to this amendment.
The formation of Endo Pharma LLC will also ensure that the Algos
stockholders' percentage ownership of Endo will increase by an additional five
percentage points in the event Endo does not achieve a cash gross profit (based
on current Endo products and future non-Algos related products internally
developed and sold or marketed by Endo) for fiscal year 2000 of at least $147.4
million. This increase in the Algos' stockholders' ownership will result from
Endo Pharma LLC returning a number of its shares of Endo common stock to Endo's
treasury pursuant to a separate agreement between Endo and Endo Pharma LLC.
Tax Sharing Agreement
Under U.S. federal income tax law, the exercise of options by Endo employees
for Endo common stock held by Endo Pharma LLC, generally will result in
compensation deductions to Endo. In general, to the extent that Endo is
permitted to deduct these amounts in computing its income tax liability, Endo's
income tax liability would be reduced. Because Endo Pharma LLC (and not Endo)
will provide the shares issued upon the exercise of the options, Endo, Endo
Inc. and Endo Pharma LLC have agreed to enter into an agreement under which, in
general, Endo will pay to Endo Pharma LLC the amount of the tax benefits it
receives as a result of the exercise of these current Endo stock options into
shares of Endo common stock held by Endo Pharma LLC for the years in which
these tax benefits arise.
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THE ALGOS SPECIAL MEETING
At the Algos special meeting, the Algos stockholders will consider and vote
to approve and adopt the merger agreement.
Time and Place; Purposes
Algos is furnishing this proxy statement/prospectus to the Algos
stockholders in connection with the solicitation of proxies by the board of
directors of Algos for use at the special meeting of the Algos stockholders to
be held at the Sheraton Eatontown Hotel and Conference Center, 6 Industrial Way
East, Eatontown, New Jersey 07724 on Monday, July 17, 2000, commencing at 10:00
a.m., local time.
At the Algos special meeting, the Algos stockholders will consider and vote
upon the merger agreement. Algos may conduct at the special meeting only
business that it has described in the Algos notice of special meeting of
stockholders.
Recommendation
The Algos board has approved the merger agreement and recommends that you
vote for approval and adoption of the merger agreement.
Record Date
The Board of Directors of Algos has fixed the close of business on May 19,
2000 as the Algos record date for determining holders entitled to notice of and
to vote at the Algos special meeting.
Quorum
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of Algos common stock is
necessary to constitute a quorum at the Algos special meeting. Abstentions and
broker non-votes will each be included in determining whether a quorum is
present.
Vote Required
Approval of the merger proposal requires the affirmative vote of a majority
of the outstanding shares of Algos common stock. Accordingly, abstentions and
broker non-votes will have the same effect as negative votes for purposes of
approving the merger agreement.
Voting Rights; Proxies
As of the Algos record date, there were 17,421,345 shares of Algos common
stock issued and outstanding, each of which entitles its holder to one vote.
All shares of Algos common stock represented by properly executed proxies will,
unless these proxies have been previously revoked, be voted in accordance with
the instructions indicated in the proxies. In addition, each Algos stockholder
who submits a proxy should indicate, where specified on the proxy, whether the
Algos stockholder wants to receive transferable or non-transferable warrants.
If no election is made, the Algos stockholder will receive transferable
warrants.
If you return your proxy card but no instructions are indicated, the shares
of Algos common stock will be voted in favor of approval and adoption of the
merger agreement.
Only the matters described in the accompanying notice of the Algos special
meeting will come before the Algos special meeting. If the stockholders
properly present for action any other matter or matters at the Algos special
meeting, the persons named in the enclosed form of proxy and acting thereunder
will have the discretion to vote on the matters in accordance with their best
judgment, unless authorization is withheld.
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The inspector of election appointed for the meeting will tabulate votes cast
by proxy or in person at the Algos special meeting, and the inspector(s) will
determine whether or not a quorum is present.
John W. Lyle, Michael Hyatt, Roger H. Kimmel, Donald G. Drapkin and entities
and individuals associated with members of the board of directors and officers
of Algos, collectively holding 3,885,522 shares of Algos common stock,
representing approximately 22% of the outstanding Algos common stock as of the
record date for the Algos special meeting, have each entered into a voting
agreement with Endo and Endo Inc., pursuant to which these holders have agreed
to vote their shares of Algos common stock in favor of approval and adoption of
the merger agreement.
Solicitation of Proxies
Algos will bear the expenses of the solicitation of proxies for use at the
Algos special meeting. In addition to solicitation by mail, proxies may be
solicited by directors, officers or other employees of Algos or, at the request
of Algos, in person or by telephone, telegram or other means of communication.
These persons will receive no additional compensation for solicitation of
proxies, but may be reimbursed for reasonable out-of-pocket expenses in
connection with the solicitation. Algos will make arrangements with brokerage
houses and other custodians, nominees and fiduciaries to send the proxy
materials to beneficial owners; and Algos will, upon request, reimburse these
brokerage houses and custodians for their reasonable expenses in so doing. We
urge stockholders to send in their proxies without delay.
Voting and Revocation of Proxies
All Algos shares represented by properly executed proxies received prior to
or at the Algos special meeting and not revoked will be voted in accordance
with the instructions indicated in their proxies. If a holder does not indicate
instructions on a properly executed returned proxy, the proxy will be voted FOR
the approval and adoption of the merger agreement.
A holder may specify an abstention. A properly executed proxy marked
"ABSTAIN" with respect to the merger agreement will be counted as present for
purposes of determining whether there is a quorum. Because the approval of the
merger agreement requires the affirmative vote of a majority of the outstanding
shares, a proxy marked "ABSTAIN" with respect to the merger agreement will have
the effect of a vote against it. In addition, the failure of an Algos
stockholder to return a proxy and to vote in person at the Algos special
meeting will have the effect of a vote against the merger agreement.
Shares represented by "broker non-votes," i.e., shares held by brokers or
nominees that are represented at a meeting but with respect to which the broker
or nominee is not empowered to vote on the merger agreement, will also be
counted for purposes of determining whether there is a quorum at the Algos
special meeting but will not be voted. Accordingly, broker non-votes will have
the same effect as a vote cast against the merger agreement.
A stockholder may revoke his, her or its proxy at any time prior to its use
by delivering to the Secretary of Algos a signed notice of revocation or a
later-dated, signed proxy or by attending the Algos special meeting and voting
in person. Attendance at the Algos special meeting will not in itself
constitute the revocation of a proxy.
Stockholders should not send in any stock certificates with their proxy
cards. As soon as practicable after the consummation of the merger, Algos will
send a transmittal letter to former stockholders of Algos with instructions for
surrendering their certificates in exchange for certificates representing Endo
common stock and warrants.
The matters to be considered at the Algos special meeting are of great
importance to the Algos stockholders. Accordingly, we urge you to read and
carefully consider the information presented in this proxy
statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage pre-paid envelope.
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THE COMPANIES
Algos
Background
Algos is a leader in developing proprietary pain management products. The
company's products combine analgesics and anesthetics with NMDA-receptor
antagonist drugs to enhance the efficacy of existing pain management drugs such
as morphine. Algos' products in development include opioid analgesics
(MorphiDex(R), HydrocoDex(TM) and OxycoDex(TM)) for moderate-to-severe pain, a
non-opioid analgesic (NeuroDex(TM)) for neuropathic pain, an intranasal
anaesthetic (LidoDex(TM) NS) for migraine pain and products for the treatment
of opiate and nicotine addictions. Algos has also licensed certain of its
worldwide rights to McNeil Consumer Products Company (a Johnson & Johnson
company) to develop two over-the-counter pain medications that combine an NMDA-
receptor antagonist with acetaminophen and ibuprofen, respectively.
On August 2, 1999, Algos received a not approvable letter from the FDA for
its lead product, MorphiDex(R), an NMDA-enhanced opioid analgesic. Algos had
submitted a new drug application for MorphiDex(R) in August 1998 for the
treatment of moderate-to-severe cancer pain. MorphiDex(R) is a patented
combination of morphine and the NMDA-receptor antagonist dextromethorphan. FDA
approval of a new drug application is required for Algos to sell MorphiDex(R)
in the United States. Not approvable letters are issued by the FDA for various
reasons and outline deficiencies that must be corrected prior to approval. In
its letter to Algos, the FDA raised issues specifically related to the adequacy
of clinical trials, Algos' preclinical animal toxicology models and a high-dose
pharmacokinetic study.
Algos was incorporated in 1992 under the laws of the state of Delaware and
has its principal executive offices at 1333 Campus Parkway, Neptune, New Jersey
07753-6815 (telephone number: (732) 938-5959).
Algos has incorporated certain information by reference into this proxy
statement/prospectus. See "WHERE YOU CAN FIND MORE INFORMATION."
Recent Developments
On December 13, 1999, Algos met with the FDA to discuss Algos' new drug
application for MorphiDex(R). Discussion at the meeting focused on efficacy and
safety issues raised in the FDA's not approvable letter for MorphiDex(R)
received by Algos on August 2, 1999. At the meeting, Algos resolved a number of
issues and intends to submit a plan to the FDA to address the remaining issues.
The plan will include the submission of data from an additional large single-
dose post-operative pain clinical trial that has already been initiated.
However, no assurance can be given as to whether or if MorphiDex(R) will be
approved by the FDA or if additional studies will be required. If the FDA
requires Algos to perform further clinical work, the potential approval of
MorphiDex(R) could be substantially delayed.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
Algos, a development stage company, is engaged primarily in the development
and commercialization of proprietary pharmaceutical products. Since its
formation in January 1992, Algos has devoted a substantial amount of its
efforts to licensing technology, recruiting key management and staff,
developing products, filing patent and regulatory applications and raising
capital.
Algos has incurred losses since its inception and expects to incur losses in
the future. Algos' product development expenses may increase as additional
drugs are developed. In August 1999, Algos received a not approvable letter
from the FDA regarding a new drug application filed in 1998 for its most
developmentally advanced drug, MorphiDex(R). Algos will incur additional
development costs for MorphiDex(R) in connection with amending the new drug
application and delay certain expenses associated with pre-commercialization
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activities such as the establishment of a sales force, the preparation of
promotional plans and materials, additions to and changes in financial and
operating systems, and related administrative activities.
Results of Operations
Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31,
1999
Revenue: Algos, which is in the development stage, earned no revenue in the
three months ended March 31, 2000 or the three months ended March 31, 1999.
Research and development: In the three months ended March 31, 2000, research
and development expenses were $1.9 million, a decrease of $0.6 million, or 23%,
from the three months ended March 31, 1999. Research and development expenses
were higher in 1999 due to the impact of large-scale clinical studies of
MorphiDex(R) and a greater number of ongoing clinical studies of HydrocoDex(TM)
and other Algos products in development. Algos' development expenses may
increase in future periods as additional clinical studies are initiated and
Algos' products enter more advanced stages of development.
Selling, general and administrative: In the three months ended March 31,
2000, selling, general and administrative expenses were $1.4 million, a
decrease of $2.1 million from the three months ended March 31, 1999. The
decrease was primarily attributable to expenses incurred in 1999 in preparation
for the possible future commercialization of products, including fees to sales
and marketing consultants, educational materials and activities, and the
addition of marketing personnel. Algos expects to delay some other expenses
associated with the possible commercialization of products pending amendments
to the MorphiDex(R) new drug application. In addition, in 1999, Algos incurred
higher compensation expenses, professional fees and other general and
administrative expenses.
Fiscal Year Ended December 31, 1999 Compared to the Fiscal Year Ended December
31, 1998
Revenue: Algos, which is in the development stage, earned no revenue in 1999
and 1998.
Research and development: In 1999, research and development expenses were
$9.5 million, a decrease of $3.6 million, or 27%, from 1998. In 1999, expenses
decreased due to the impact in 1998 of large-scale, clinical trials and
toxicology studies of MorphiDex(R). These effects were partially offset by the
costs of obtaining drug supplies and manufacturing of full-scale demonstration
batches of MorphiDex(R) in 1999 and expenses related to Phase II clinical
studies of other products.
Selling, general and administrative: In 1999, selling, general and
administrative expenses were $10.3 million, an increase of approximately $5.5
million from 1998. The increase was primarily attributable to expenses incurred
in preparation for the possible future commercialization of products, including
fees to sales and marketing consultants, educational materials and activities,
and the addition of marketing personnel, as well as the general expansion of
Algos' business activities. Algos expects to delay certain other expenses
associated with the possible commercialization of products pending amendments
to the MorphiDex(R) new drug application. In addition, in 1999, Algos incurred
professional fees and other expenses in connection with its merger agreement
with Endo.
Fiscal Year Ended December 31, 1998 Compared to the Fiscal Year Ended December
31, 1997
Revenue: Algos, which is in the development stage, earned no revenue in
1998. In 1997, Algos earned a $1.0 million contractual milestone payment under
the McNeil License Agreement upon McNeil's initiation of a large-scale clinical
trial of a licensed product.
Research and development: In 1998, research and development expenses were
$13.1 million, an increase of approximately $3.3 million or 34%, from 1997. The
significant increase in 1998 expenses was primarily attributable to large-
scale, advanced clinical trials for MorphiDex(R) and the expansion of Algos'
development
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staff. The impact of these increases was partially offset by reduced expenses
related to bioavailability studies and the costs of manufacturing small-scale
regulatory test batches of MorphiDex(R), which occurred in 1997.
Selling, general and administrative: In 1998, selling, general and
administrative expenses were $4.8 million, an increase of $2.4 million or 96%,
from 1997. The 1998 results include expenses related to preparations for the
possible future commercialization of MorphiDex(R), including the addition of
sales and marketing personnel. Algos incurred increased general and
administrative costs to support its business activities, including the addition
of administrative personnel and the relocation and expansion of Algos'
headquarters facilities in April 1998.
Interest income: Interest income decreased 17% in 1998 to $2.0 million as a
result of lower average cash and securities balances prior to the November 1998
private placement of common stock and a warrant and lower interest rates.
Liquidity and Capital Resources
In the three months ended March 31, 2000 and 1999, spending for Algos'
product development efforts and other pre-commercialization activities resulted
in net cash outflows from operations of $2.5 million, $3.7 million,
respectively. Algos funded this spending primarily from accumulated cash
balances which resulted primarily from sales of common stock. In the three
months ended March 31, 2000, net cash outflows from operations decreased
compared to the three months ended March 31, 1999 as the result of lower
development expenses and lower spending for other pre-commercialization
activities.
In 1999, 1998 and 1997, spending for Algos' product development efforts and
other pre-commercialization activities resulted in net cash outflows from
operations of $15.5 million, $15.3 million and $7.3 million, respectively.
Algos funded this spending primarily from accumulated cash balances at
December 31, 1996, which resulted from Algos' 1996 public offering of common
stock. In November 1998, to provide greate
financial flexibility, Algos raised $25 million in a private sale of common
stock and a warrant. In 1998, net cash outflows from operations increased
significantly from 1997 as a result of Algos' expanded development programs. In
1999, net cash outflows from operations increased slightly as the effect of
lower development expenses in the period offset increased spending for other
pre-commercialization activities.
Algos expects to incur product development expenses as clinical trials of
MorphiDex(R) and HydrocoDex(TM) continue and other drugs that the Company
currently has under development move into advanced clinical trials and as
additional drugs are developed and research and development staff increased. In
August 1999, Algos received a not approvable letter from the FDA regarding its
new drug application for MorphiDex(R). Algos will incur additional development
costs associated with amending the MorphiDex(R) new drug application. Algos
currently expects that as a stand-alone entity its cash and marketable
securities at March 31, 2000 will be sufficient to fund its development
activities through the year 2001 and support a resubmission of the new drug
application based upon Algos' current schedule of clinical trials and level of
business activities. However, if additional trials are necessary or advisable,
or if additional products are developed, Algos may require additional funds. In
the event that internally generated funds are insufficient for such efforts,
Algos will need to raise additional capital. We cannot assure you that Algos
would be able to obtain such additional financing on terms acceptable to Algos.
Algos' future funding requirements will depend on a number of factors,
including: the results of its development efforts; the timing and costs of
obtaining required regulatory approvals; the amount of resources required for
activities in preparation for the possible commercialization of MorphiDex(R);
the successful completion of the merger of Algos with Endo; the
commercialization of competing products; the execution of licensing or other
collaborative research agreements on terms acceptable to Algos; and the cost of
prosecuting and defending patents.
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Net Operating Losses
At December 31, 1999, Algos had accumulated net operating loss carryforwards
of approximately $48 million for federal and state tax purposes. Federal
carryforwards expire in 2009 through 2019 and are available to reduce future
taxable income recognized in the carryforward period, if any. Due to the
uncertainty of future taxable income, Algos has established a valuation
allowance for these carryforwards and has not recognized their potential
benefit on a current basis. The future utilization of these carryforwards may
be limited by Section 382 of the Internal Revenue Code related to changes
ownership of Algos.
Other
Generally, Algos' results of operations are not significantly affected by
seasonal factors and Algos does not believe that inflation has had a
significant impact on its business.
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities' is effective in the year 2001.
Based on Algos' current business activities, the statement is not expected to
have a material impact on Algos' financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements". Algos is currently evaluating
the future impact of SAB No. 101 on its financial statements.
Year 2000
Algos has evaluated the impact of the year 2000 computer issue and completed
upgrading, modifying and testing critical applications and systems to
accommodate year 2000 dating. This includes computer systems, office machines,
phone and security systems, off the shelf systems and applications, custom
software applications and accounting systems. In addition, Algos has evaluated
its communications with all of its significant suppliers and vendors regarding
their year 2000 compliance.
To date, the year 2000 issue has not had a material affect on the business
and operations of Algos. However, Algos or its third-party contractors may make
additions to and changes in existing computer applications and systems and/or
the use of such systems that could affect Algos' exposure to the year 2000
issue. In addition, there is no assurance that year 2000 issues will not be
discovered in the future.
Algos has not incurred more than $10,000 of costs to date related to the
year 2000 issue and does not expect that the future cost of its compliance
program will be material to its business, financial condition or results of
operations.
Endo
Endo, through its wholly owned subsidiary, Endo Pharmaceuticals, is engaged
in the research, development, sales and marketing of branded and generic
prescription pharmaceuticals used primarily for the treatment and management of
pain. Branded products comprised approximately 69% and 68% of net sales for
fiscal years 1998 and 1999, respectively.
Through a national dedicated contract sales force of approximately 300
individuals, Endo markets branded pharmaceutical products to doctors, drug
wholesalers and other healthcare professionals. Endo markets its generics
through sales and marketing activities as well as customer service activities
directly with wholesale drug distributors and chain and independent retail
pharmacists. Endo's portfolio of branded products includes recognized brand
names such as Percocet(R), Percodan(R), Zydone(R) and Lidoderm(R). Endo's
portfolio of generic products includes approximately 20 products for various
indications, including pain management, hypertension, Parkinson's Disease and
ulcers. Endo seeks to continually expand its product portfolio through on-going
investment in research and development and product acquisitions.
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All of Endo's products are manufactured by third parties. Endo's primary
suppliers of contract manufacturing services are DuPont Pharmaceuticals, Merck
& Co. and Teikoku Seiyaku Pharmaceuticals.
Endo's business strategy is to continue to strengthen its leading position
in pain management by:
. leveraging the established Endo brand names through focused marketing and
promotion;
. developing product line extensions for existing Endo brands through new
formulations, dosages or indications;
. pursuing acquisitions and licensing of molecules and compounds in the
late stages of pre-clinical and the early stages of clinical development
and furthering the development through commercialization; and
. pursuing strategic acquisitions and alliances that provide complementary
product lines or technologies in the area of pain.
Competitive Strengths
Endo believes that its competitive position is attributable to a number of
key strengths, including the following:
Portfolio of Established Branded Products. Endo has a portfolio of
established branded pharmaceutical products that are used primarily for the
treatment and management of pain. These products include Percocet(R),
Percodan(R), Lidoderm(R) and Zydone(R). Endo also maintains approximately ten
other off-patent brand products in various therapeutic categories.
Selective Focus on Generic Products. Endo's generic product portfolio
includes approximately 20 products for various indications including pain
management, hypertension, Parkinson's Disease and ulcers. Endo's strategy is to
selectively develop and market generic products that are generally in its
therapeutic niche, pain, and may include complex formulation or development
characteristics, regulatory or legal challenges or difficulty in raw material
sourcing. For example, in November 1998, Endo launched Morphine Sulfate
Extended Release Tablets, the therapeutic equivalent version of MS Contin(R), a
registered trademark of Purdue Pharma, for moderate to severe pain. Endo's
Morphine Sulfate Extended Release Tablets are currently the sole therapeutic
equivalent to the innovator on the market and, since the time of their launch,
have gained significant market share.
Outsourced Manufacturing. Endo contracts with leading pharmaceutical
companies for the manufacture of its finished goods. Companies providing Endo
with contract manufacturing services include DuPont Pharmaceuticals, Merck &
Co. and Teikoku Seiyaku Pharmaceuticals. Endo believes that by outsourcing
manufacturing to these companies, the company benefits from their substantial
manufacturing expertise and reduced capital investment. Currently, DuPont
Pharmaceuticals is Endo's largest provider of contract manufacturing services.
Through its agreement with DuPont, Endo has two FDA- and DEA-approved and
compliant facilities available for the manufacture of its products.
National Sales and Marketing Infrastructure. Endo's products are marketed
directly to physicians through a dedicated contract sales force of
approximately 300 individuals. These sales representatives are provided under
an exclusive contract with Ventiv Healthcare and market Endo's brands by
focusing on those physicians who are high prescribers of pain management
products.
The strategy employed by the sales representatives to increase the sales of
Endo's branded products includes one-on-one meetings with physicians, known as
"detailing," and promotional efforts including sampling, advertising and direct
mail. Endo believes that this focused marketing approach enables it to develop
highly knowledgeable and dedicated sales representatives and foster close
professional relationships with physicians. Endo markets its branded products
under the label Endo Laboratories and its generic products under the label Endo
Generic Products.
Research and Development Expertise. Endo seeks to continually expand its
product portfolio through ongoing investment in research and development. Endo
believes that it has a balanced research and development portfolio, including
patent-protected new chemical entities, new formulations, strengths and
delivery forms of its existing proprietary brand products and generic
pharmaceuticals.
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Endo devotes significant resources to its pipeline and incurred research
and development expenses of $2.9 million, $5.9 million and $9.4 million for
the period from August 26, 1997, the date of the acquisition of Endo
Pharmaceuticals from the then DuPont Merck Pharmaceutical Company, to December
31, 1997, fiscal years 1998 and 1999, respectively. Endo maintains its
research and development facilities in Garden City, New York.
Endo has a broad portfolio of branded, products, including many proprietary
analgesic compounds, for which a substantial market exists. Depending on the
product being developed, marketing authorization from the FDA may require a
limited development program with the submission of an Abbreviated New Drug
Application or a more extensive development program with the submission of a
New Drug Application. Endo focuses its brand research and development efforts
in pain management.
In addition, Endo pursues the development and marketing of generic
pharmaceuticals that have one or more barriers to entry. The characteristics
of the products that Endo pursues may include:
. complex formulation or development characteristics;
. regulatory or legal challenges; or
. difficulty in raw material sourcing.
Endo believes products with these barriers will face limited competition
and therefore provide longer product life cycles and/or higher profitability
than commodity generic products.
Experienced and Dedicated Management Team. Endo has an experienced and
dedicated management team with an average of approximately 20 years of
experience in the pharmaceutical industry.
Product Overview
Branded Products
The following table provides an overview of a portion of Endo's branded
pain management product line.
<TABLE>
<CAPTION>
Product Indication
------- ----------
<S> <C>
Percocet(R) 2.5/325, Percocet(R)
5.0/325, Percocet(R) 7.5/500 and
Percocet(R) 10.0/650 (oxycodone and
acetaminophen)..................... Relief of moderate-to-severe pain
Percodan(R) (oxycodone and
aspirin)........................... Relief of moderate-to-severe pain
Lidoderm(R) (lidocaine 5%).......... For the pain of post-herpetic neuralgia
Zydone(R) (hydrocodone and
acetaminophen)..................... Relief of moderate-to-severe pain
</TABLE>
Except for Lidoderm(R), patients generally use these products on a short-
term basis to relieve various degrees of pain, from moderate to severe.
Despite generic competition, Endo maintains a leading position in the pain
management segment due to its broad portfolio of well-known products. Launched
in September 1999, Lidoderm(R) is used to treat the pain of post-herpetic
neuralgia.
Two of Endo's brands, Percocet(R) and Percodan(R), are considered "gold
standards" of the pain management segment. Although Percocet(R) has been off
patent for more than fifteen years, in 1999, according to IMS National
Prescription Audit, approximately 10.2 million prescriptions for this
combination of oxycodone HCl and acetaminophen were written for the brand name
Percocet(R), of which, due to generic substitution, only approximately 12%
were filled with the brand Percocet(R). Similarly, in 1999, according to IMS
National Prescription Audit, approximately 566,000 prescriptions for oxycodone
hydrochloride and oxycodone terephthalate in combination with aspirin were
written for the brand name Percodan(R), of which, due to generic substitution,
only approximately 32% were filled with Percodan(R). Because Percocet(R) and
Percodan(R) have been off patent for over fifteen years, generic penetration
in their markets has generally stabilized, and the potential of new generic
competitors is minimal.
During the fourth quarter of 1999, Endo introduced three new strengths of
Percocet(R): Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R)
10.0/650, complementing the existing Percocet(R) 5.0/325. Physician
prescribing practices indicate that over 80% of current prescriptions are
written for amounts other than the label amount. As an example, the current
prescription information for Percocet(R) 5.0/325 calls for one tablet every
six
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hours. Approximately 30% of prescriptions are written to take two tablets every
four hours, translating into a dosage of 10mg every four hours. By creating new
prescription strengths, physicians will be able to prescribe one tablet of the
proper dose for their patients, facilitating greater ease and compliance. There
are currently no generic substitutes for Percocet(R) 2.5/325, Percocet(R)
7.5/500 and Percocet(R) 10.0/650.
Endo launched Zydone(R) tablets in February 1999, a branded
hydrocodone/acetaminophen product offering for the relief of moderate to severe
pain. Zydone is available in three strengths, 5.0mg., 7.5mg. and 10.0mg. each
in combination with 400mg acetaminophen. Although not patent protected, these
three products have no generic competition because there is no bioequivalent
form of the product approved by the FDA. Zydone(R) competes in the $1 billion
dollar (branded dollars) hydrocodone/acetaminophen market for the relief of
moderate to severe pain.
Endo launched Lidoderm(R) in September 1999. Lidoderm(R), a patch product
containing lidocaine, is the first and only FDA approved product for the relief
of the pain of post-herpetic neuralgia, which is the chronic painful condition
that often follows an attack of shingles. There are approximately 200,000
patients per year that suffer from post-herpetic neuralgia in the U.S., the
majority of whom are elderly. The FDA has granted Lidoderm(R) orphan status.
Orphan status in this context means that no other lidocaine-containing patch
product can be approved for post-herpetic neuralgia for a period of seven years
or until March 2006.
Generic Products
Endo's generic portfolio is currently comprised of approximately 20 products
which cover a broad range of indications include pain relief, hypertension,
Parkinson's Disease and the treatment of ulcers. Endo's strategy is to select
molecules that generally center on pain management and complement the company's
brand offering.
Endo principally pursues the development and marketing of generic
pharmaceuticals that have one or more barriers to entry. The characteristics of
the products that Endo may target for generic development may include:
.complex formulation or development characteristics;
.regulatory or legal challenges; or
.difficulty in raw material sourcing.
Endo believes products with these barriers will face limited competition,
and, therefore provide longer product life cycles and/or higher profitability
than commodity generic products.
Competition
The pharmaceutical industry is highly competitive and regulated. Endo's
competitors vary depending upon therapeutic and product categories. Competitors
include the major brand name and generic manufacturers of pharmaceuticals,
especially those doing business in the United States. Many competitors have
been in business for a longer period of time than Endo, have a greater number
of products on the market and have greater financial and other resources. Endo
competes principally through its targeted product development strategies. In
addition to product development, other competitive factors in the
pharmaceutical industry include product quality and price, reputation and
access to technical information.
The competitive environment with brands requires an intensive worldwide
search for technological innovations and Endo's ability to market the products
effectively, including capitalizing on the brand equity and name recognition of
certain of the products.
Newly introduced generic products with limited or no other generic
competition are typically sold at higher selling prices. As competition from
generic companies increases, selling prices of the generic products typically
decline. Consequently, the maintenance of profitable operations in generics
depends, in part, on
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Endo's ability to maintain efficient, high quality manufacturing relationships
and to select, develop and launch new products in a timely and cost efficient
manner.
Net sales and gross profits derived from generics tend to follow a pattern
based on certain regulatory and competitive factors. As patents for brand name
products expire, the first generic company to receive regulatory approval is
generally able to achieve a relatively high market share. As competing generic
companies receive regulatory approval on similar products, market share, net
sales and gross profit typically decline. Accordingly, the level of market
share, net sales and gross profit from generic products typically relate to the
number of competitors and the timing of the product launch in relation to the
competition.
There are, however, a number of factors which enable products to remain
profitable once patent protection has ceased. These factors include the
establishment of a strong brand image with the prescriber or consumer,
supported by the development of a broader range of alternative formulations
than the manufacturers of generic products typically supply.
Endo has witnessed a consolidation of its customers as chain drug stores and
wholesalers merge or consolidate. In addition, a number of Endo's customers
have instituted source and bundling programs that enhance the access suppliers
who participate in the source program have to the customers of the wholesaler.
Consequently, there is heightened competition among generic drug companies for
the business of this smaller and more selective customer base of large
wholesalers.
Seasonality
Endo's business is not materially impacted by seasonality.
Customers
Endo sells its products through wholesale drug distributors who, in turn,
supply products to pharmacies, hospitals, governmental agencies and physicians.
Three wholesale customers individually accounted for 27%, 20% and 13% of net
sales in 1999, and 26%, 21% and 14% of net sales in 1998. Five wholesale
customers individually accounted for 22%, 18%, 15%, 15% and 12% of net sales in
1997. Endo's business is affected by the purchasing patterns and concentration
of its customers. Generally, the fourth fiscal quarter has relatively higher
net sales than each of the first three fiscal quarters.
Patents, Trademarks, Licenses and Proprietary Property
With respect to its products, Endo holds two U.S. issued patents and two
foreign issued patents, two U.S. patent applications pending and eleven foreign
patent applications pending and has exclusive licenses for 22 U.S. issued
patents and 64 foreign issued patents. The two U.S. issued patents that Endo
holds expire on February 19, 2017 and September 21, 2019. The two foreign
issued patents that Endo holds expire on June 29, 2018 and June 24, 2018. The
effect of these issued patents is that they provide Endo patent protection for
the claims covered by the patents. Endo's management does not believe that any
of these patents are material to the company's current business.
Endo believes that its patents, the protection of discoveries in connection
with its development activities, its proprietary products, technologies,
processes and know-how and all of its intellectual property are important to
its business. All of Endo's brand products and certain generic products are
sold under trademarks. To achieve a competitive position, Endo relies on trade
secrets, non-patented proprietary know-how and continuing technological
innovation, where patent protection is not believed to be appropriate or
attainable. In addition, Endo has a number of patent licenses from third
parties. See "--Summary of Recent Transactions." There can be no assurance that
any of Endo's patents, licenses or other intellectual property will afford Endo
any protection from competition.
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Endo relies on confidentiality agreements with its employees, consultants
and other parties to protect, in part, trade secrets and other proprietary
technology. There can be no assurance that these agreements will not be
breached, that Endo will have adequate remedies for any breach, or that others
will not independently develop equivalent proprietary information or other
third parties will not otherwise gain access to its trade secrets and other
intellectual property.
Endo may find it necessary to initiate litigation to enforce its patent
rights, to protect its intellectual property and to determine the scope and
validity of the proprietary rights of others. Litigation is costly and time-
consuming, and there can be no assurance that Endo's litigation expenses will
not be significant in the future or that Endo will prevail in this litigation.
Governmental Regulation
The manufacture, testing, packaging, labeling, distribution, sales and
marketing of Endo's products and its ongoing product development activities are
subject to extensive and rigorous regulation at both the federal and state
levels. The Federal Food, Drug and Cosmetic Act and other federal statutes and
regulations govern or influence the testing, manufacture, safety, labeling,
storage, record keeping, approval, advertising, promotion, sale and
distribution of pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production and/or distribution, refusal of the government
to enter into supply contracts or to approve New Drug Applications and
Abbreviated New Drug Applications, civil sanctions and criminal prosecution.
The FDA also has the authority to revoke previously granted drug approvals.
From time to time, the FDA issues notices and warning letters to pharmaceutical
companies that request or require the company to modify certain activities.
The FDA's current good manufacturing practices standards have become more
complex in recent years. The Abbreviated New Drug Application development and
approval process now averages approximately two to five years. FDA approval is
required before each dosage form of any new drug can be marketed. Applications
for FDA approval must contain information relating to bioequivalency, product
formulation, raw material suppliers, stability, manufacturing processes,
packaging, labeling and quality control. FDA procedures require full-scale
manufacturing equipment to be used to produce test batches for FDA approval.
Validation of manufacturing processes by the FDA also is required before a
company can market new products. The FDA conducts pre-approval and post-
approval reviews and plant inspections to enforce these rules. Supplemental
filings are required for approval to transfer products from one manufacturing
site to another and may be under review for over a year or more. In addition,
certain products may only be approved for transfer once new bioequivalency
studies are conducted.
The evolving and complex nature of regulatory requirements, the broad
authority and discretion of the FDA and the generally high level of regulatory
oversight results in a continuing possibility that from time to time, Endo will
be adversely affected by regulatory actions despite ongoing efforts and
commitment to achieve and maintain full compliance with all regulatory
requirements.
Endo also sells products that are "controlled substances" as defined in the
Controlled Substances Act, which establishes certain security and record
keeping requirements administered by the DEA, a division of the Department of
Justice. The DEA has a dual mission, law enforcement and regulation. The DEA's
regulatory responsibilities are concerned with the control of licensed handlers
of controlled substances, and with the substances themselves, equipment and raw
materials used in their manufacture and packaging, in order to prevent such
articles from being diverted into illicit channels of commerce. Endo has not
experienced restrictions or fines for non-compliance with the foregoing
regulations but Endo cannot assure you that restrictions or fines which could
have a material adverse effect upon its business, financial condition and
results of operations will not be imposed upon Endo in the future.
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Product development and approval within this regulatory framework requires a
number of years and involves the expenditure of substantial resources. Endo
cannot determine what effect changes in regulations or legal interpretations,
when and if promulgated, may have on its business in the future. Changes could,
among other things, require expanded or different labeling, the recall or
discontinuance of certain products, additional record keeping and expanded
documentation of the properties of certain products and scientific
substantiation. Such changes, or new legislation, could have a material adverse
effect on Endo's business, financial condition and results of operations.
Endo believes that it and/or its contract manufacturers and other third
parties with which it interacts have the proper FDA, DEA or other regulatory
approval and authority for its drugs.
The Hatch-Waxman Act of 1984 extended the established Abbreviated New Drug
Application forms of brand-name drugs, which were originally marketed before
1962 or whose market exclusivity has expired. The Hatch-Waxman Act also
provides market exclusivity provisions that could preclude the submission or
delay the approval of a competing Abbreviated New Drug Application. One such
provision allows a five-year market exclusivity period for New Drug
Applications involving new chemical compounds and a three-year market
exclusivity period for New Drug Applications, including different dosage forms,
containing new clinical investigations essential to the approval of the
application. The market exclusivity provisions apply equally to patented and
non-patented products.
Medicaid, Medicare and other reimbursement legislation or programs govern
reimbursement levels, including requiring that all pharmaceutical companies
rebate to individual states a percentage of their net sales arising from
Medicaid-reimbursed products. The federal and/or state governments may continue
to enact measures in the future aimed at reducing the cost of prescription
pharmaceuticals to the public. Endo cannot predict the nature of such measures
or their impact on its profitability.
Service Agreements
Endo contracts with various third parties to provide certain critical
services including manufacturing, its sales representatives, warehousing,
distribution, customer service, certain financial functions, certain research
and development activities and medical affairs.
Third Party Manufacturing/Supply Agreements
Endo contracts with various third party manufacturers to provide it with its
finished goods including, among others, DuPont Pharmaceuticals, Merck & Co. and
Teikoku Seiyaku Pharmaceuticals. While Endo has generally not had difficulty
obtaining finished goods, raw materials and components from suppliers in the
past, there can be no assurance that these necessary finished goods, raw
materials and components will continue to be available on commercially
acceptable terms in the future. Although Endo has no reason to believe it will
be unable to procure adequate supply of finished goods, raw materials and
components on a timely basis, if for any reason it is unable to obtain
sufficient quantities of any of the finished goods, raw materials or components
required for its products, it may have a materially adverse effect on its
business, financial condition and results of operations. A description of the
material terms of the material third party manufacturing/supply contracts
follows:
DuPont Pharmaceuticals-Manufacture and Supply Agreement. Under the terms of
this agreement, DuPont manufactures the majority of Endo Pharmaceuticals' brand
and generic pharmaceutical products. DuPont manufactures both the products that
Endo purchased from DuPont as a result of the August 1997 acquisition of Endo,
as well as some new products. The products are manufactured at either the
DuPont facility in Garden City, New York or the DuPont facility in Manati,
Puerto Rico. Both of these facilities are FDA- and DEA-approved. Under the
terms of this agreement, Endo Pharmaceuticals is able to introduce the
manufacture of new products that Endo Pharmaceuticals has developed in those
plants. For these manufacturing services, Endo Pharmaceuticals pays DuPont
compensation in the form of (1) a fixed amount to cover DuPont's fixed
manufacturing costs for both manufacturing facilities, (2) an amount, adjusted
on an annual basis, to cover
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DuPont's variable manufacturing costs for the Endo Pharmaceuticals products in
both facilities and (3) an additional fee, paid annually, based upon a pre-
determined formula.
In addition to manufacturing services, DuPont provides other ancillary
services to Endo Pharmaceuticals in connection with the manufacture of Endo
Pharmaceuticals' products such as raw material procurement, product
development, inventory management and quality control services. Compensation
for these services is included in the compensation for manufacturing services.
The initial term of this agreement is five years, expiring on August 26, 2002,
and is renewable, at Endo Pharmaceuticals' option, for an additional period of
time not to exceed five years (i.e., through August 2007). This agreement may
be terminated, with transition provisions, in the event of termination by
DuPont of its operations at, or sale of, the Garden City plant facility.
Teikoku Seiyaku Co., Ltd. Under the terms of this agreement, Teikoku, a
Japanese manufacturer, manufactures at its Japanese facility a transdermal
analgesic pharmaceutical patch product for commercial sale by Endo
Pharmaceuticals in the United States. Endo Pharmaceuticals is required to
purchase, on an annual basis, a minimum amount of product from Teikoku. The
purchase price for the product is equal to a pre-determined amount per unit of
product. The term of this agreement is November 23, 1998 until the shorter of
thirteen years from the date of FDA approval of the product or the expiration
of the last to expire patent that is licensed to Endo Pharmaceuticals under a
related agreement. This agreement may be terminated for material breach by
either party and by Endo Pharmaceuticals if the related license agreement is
terminated.
Mallinckrodt Inc. Under the terms of this agreement, Mallinckrodt will
manufacture and supply to Endo Pharmaceuticals narcotic active drug substances,
in bulk form, and upon the expiration of Mallinckrodt's existing supply
agreement with DuPont, raw materials for inclusion in Endo Pharmaceuticals'
controlled substance pharmaceutical products. Endo Pharmaceuticals is required
to purchase a fixed percentage of its annual requirements of each narcotic
active drug substance from Mallinckrodt. The purchase price for these
substances is equal to a fixed amount, adjusted on an annual basis. The initial
term of this agreement is July 1, 1998 until June 30, 2013, with an automatic
renewal provision for unlimited successive one-year periods. Either party may
terminate this agreement for a material breach.
In addition, under a separate agreement, Mallinckrodt exclusively
manufactures and supplies to Endo Pharmaceuticals a narcotic active drug
substance that is not covered under the previously discussed Mallinckrodt
agreement. Endo Pharmaceuticals is required to purchase a fixed percentage of
its annual requirements of this narcotic active drug substance from
Mallinckrodt. The purchase price of the substance is a fixed amount which may
be adjusted annually in the event of Mallinckrodt product cost increases. The
term of this agreement is April 1, 1998 until June 30, 2004, as extended
pursuant to an amendment, dated as of May 8, 2000, with an automatic renewal
provision for unlimited successive one-year periods. This agreement may also be
terminated for material breach by either party.
Other Service Agreements
In addition to the long-term manufacturing agreement with DuPont, Endo has
arrangements with (1) Livingston Healthcare Services, Inc. for customer service
support, warehouse and distribution services and certain financial functions,
(2) Kunitz and Associates Inc. for medical affairs and (3) Ventiv Healthcare
for sales and various clinical research organizations for its clinical studies.
Although Endo has no reason to believe that these agreements will not be
honored, failure by any of these third parties to honor their contractual
obligations would have a materially adverse effect on Endo's business,
financial condition and results of operations.
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A description of the material terms of these contracts follows:
Livingston Healthcare Services Inc. Under the terms of this agreement, Endo
Pharmaceuticals appointed Livingston to provide customer service support,
chargeback processing, accounts receivables management, warehouse and
distribution services for Endo Pharmaceuticals' products in the United States.
During the term of the agreement, the Livingston personnel responsible for
providing to Endo Pharmaceuticals customer service, chargeback processing and
accounts receivables management services may not provide these services to any
third party for any third party products which directly compete with Endo
Pharmaceuticals products covered under the agreement. Endo Pharmaceuticals pays
Livingston a (1) start-up fee, payable in three installments, (2) a fixed
monthly fee for all services and (3) certain miscellaneous out-of-pocket
expenses, which, in the aggregate, may, depending on the facts and
circumstances at the time, represent material costs to Endo. Endo cannot
currently assess the amount of these fees and expenses. The term of the
agreement for customer service support and chargeback processing services is
February 1, 2000 to January 31, 2003; for accounts receivables services,
February 1, 2000 to January 31, 2001; and for warehouse and distribution
services, February 1, 2000 to February 28, 2005. The agreement may be renewed
upon mutual agreement of the parties. The agreement may be terminated for
material breach; by Endo Pharmaceuticals, for Livingston's failure to obtain
all government permits and licenses necessary to perform its obligations under
this agreement; by Endo Pharmaceuticals, with prior notice, for a sale of Endo
Pharmaceuticals or a sale of substantially all of Endo Pharmaceuticals'
business by its parent company; by Endo Pharmaceuticals, with prior notice, for
a change in Endo Pharmaceuticals' or its parent company's stock ownership or
company control; by Endo Pharmaceuticals, with prior notice, if Endo
Pharmaceuticals decides to provide these services in-house or by an affiliate;
by Endo Pharmaceuticals, with prior notice, if Livingston fails to provide
additional storage space for Endo Pharmaceuticals products upon request. In the
event of termination under certain circumstances, Endo Pharmaceuticals is
required to pay Livingston for certain capital investments and wind-down
expenses.
Kunitz and Associates Inc. Under the terms of the agreement, Endo
Pharmaceuticals appointed Kunitz as its exclusive provider for all Endo
Pharmaceuticals products in the United States of pharmacovigilance, medical
communications, product information support, adverse drug experience
surveillance, medical literature search support and pharmaceutical regulatory
services. During the term of this agreement, Kunitz may not provide identical
or similar services to or for any third party whose products directly compete
with Endo Pharmaceuticals products in the prescription pain management
therapeutic category. For these services, Endo Pharmaceuticals pays Kunitz a
fixed amount, in equal monthly installments. The term of this agreement is June
1, 1999 until July 31, 2002, with an option, at Endo Pharmaceuticals'
discretion, to renew the agreement for up to two successive one-year periods
through July 31, 2004. The agreement may be terminated by either party for
material breach or by Endo Pharmaceuticals, with notice, for no reason.
Ventiv Healthcare. Under the terms of this agreement, a team of Ventiv's
professional sales representatives exclusively promotes certain Endo
Pharmaceuticals products to healthcare professionals in the United States. Endo
Pharmaceuticals pays Ventiv compensation in the form of (1) an annual fixed
amount, paid in equal monthly installments and (2) a variable fee and
additional incentive commission based upon attainment of specified sales
performance objectives. During the term of this agreement and for a defined
period after the expiration or termination of the agreement, certain Ventiv
personnel involved in the performance of Ventiv's obligations under this
agreement, are precluded from marketing, selling or promoting third party
pharmaceutical products which directly compete with the Endo Pharmaceuticals
products covered under this agreement. The term of this agreement is January
15, 1999 until January 31, 2001, with an automatic renewal provision. The
agreement may be terminated by either party for material breach and by Endo
Pharmaceuticals, with notice, for any reason.
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Property
Endo leases its research and development facility located in Garden City,
New York and also leases its corporate headquarters in Chadds Ford,
Pennsylvania. A description of the material terms of agreements pertaining to
these properties follows:
Garden City, New York
DuPont Pharmaceuticals Inc. Lease Agreement. Under this agreement, Endo
Pharmaceuticals leases a laboratory and office building from DuPont which is
located at DuPont's Garden City, New York manufacturing facility. Endo
Pharmaceuticals may use these facilities for the research and development of
Endo Pharmaceuticals pharmaceutical products. The lease is not assignable by
Endo Pharmaceuticals without the consent of DuPont. After August 26, 2000, the
lease may be terminated (1) by Endo Pharmaceuticals, if substantial premise
alteration charges are required in order to comply with government regulations,
(2) by DuPont, for tenant damage and destruction to the premises and (3) as a
result of arbitration between the parties. The term of the lease is five years,
expiring August 26, 2002 and is renewable at Endo Pharmaceuticals' option,
provided the related manufacturing and supply agreement between the parties has
been renewed, for an additional five-year period or successive one-year periods
through August 2007.
Chadds Ford, Pennsylvania
Northstar Lease Agreement. Under this agreement, Endo Pharmaceuticals leases
office space in Chadds Ford, Pennsylvania for its headquarters and
administrative functions. The lease commenced on October 1, 1997, for an
initial term of five years. The annual base rent is adjusted annually by a
fixed percentage. After the initial term, the parties may extend this lease for
another five-year term. The lease may be assigned or the premises sublet with
the landlord's written consent. Endo Pharmaceuticals and Northstar amended this
lease on December 16, 1997, January 6, 1999 and November 23, 1999, in order for
Endo Pharmaceuticals to acquire additional office space in the same building
for an additional fee.
Painters' Crossing One Associates, L.P. Lease Agreement. On May 5, 2000,
Endo Pharmaceuticals and Painters' Crossing One Associates, L.P. entered into a
ten-year lease pursuant to which Painters' Crossing has agreed to lease a
building of approximately 47,756 square feet located in Chadds Ford,
Pennsylvania. This lease will commence on April 1, 2001 and will end on April
1, 2011. However, Endo Pharmaceuticals, at its discretion, has the right to
terminate this lease at the end of the fifth year, by providing two years'
notice and paying a fixed termination fee to Painters' Crossing. Upon execution
of the lease, Endo Pharmaceuticals paid one-month's security deposit. During
the term of the lease, the annual rent is a fixed amount paid in equal monthly
installments which increases after the first five years of the lease.
Environmental Matters
Endo's operations are subject to substantial and evolving federal, state and
local environmental laws and regulations concerning, among other matters, the
generation, handling, storage, transportation, treatment and disposal of toxic
and hazardous substances. Endo believes that its facilities and the facilities
of its third party service providers are in substantial compliance with all
provisions of federal, state and local laws concerning the environment and does
not believe that future compliance with these provisions will have a material
adverse effect on its financial condition or results of operations.
Summary of Recent Transactions
On August 26, 1997, Endo Pharmaceuticals commenced operations by acquiring
pharmaceutical products, related rights and assets of The DuPont Merck
Pharmaceutical Company, which subsequently became the DuPont Pharmaceuticals
Company. Endo, a Delaware corporation, was incorporated on November 18, 1997
and Endo Pharmaceuticals, a Delaware corporation, was incorporated on April 2,
1997.
Under the terms of its August 26, 1997 purchase agreement, Endo
Pharmaceuticals purchased assets related to the worldwide DuPont generic and
multi-source pharmaceutical business (excluding certain territories). This
agreement may not be assigned by either party without the other party's consent
except to an affiliate or successor or Endo Pharmaceuticals' financial lenders.
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On September 17, 1997, Endo Pharmaceuticals entered into a collaboration
agreement with Penwest Pharmaceuticals to exclusively co-develop opioid
analgesic products for pain management, using Penwest's patent-protected
proprietary technology, for commercial sale worldwide. Under the terms of this
agreement, the parties are currently developing an opioid product for the
treatment of pain. The parties share on a fifty/fifty basis the costs and
profits of products developed under this agreement. At this point in time, Endo
cannot predict the cost of this agreement. Endo Pharmaceuticals has exclusive
marketing rights with respect to products developed under this collaboration.
On November 23, 1998, Endo Pharmaceuticals entered into a license agreement
with Hind Healthcare Inc. for the sole and exclusive right to develop, use,
market, promote and sell Lidoderm(R) (Lidocaine Patch 5%), a transdermal
pharmaceutical patch product for the treatment of post-herpetic neuralgia, in
the United States. Endo Pharmaceuticals also has an option to extend this
license agreement to other territories within a defined period of time. Endo
Pharmaceuticals paid to Hind up-front fees and milestone payments on the
occurrence of certain events. Beginning on March 19, 2001 and until the shorter
of (1) the life of the last-to-expire patent licensed pursuant to this license
agreement and (2) November 20, 2011, Endo Pharmaceuticals will pay Hind non-
refundable royalties, including a minimum annual royalty of at least $500,000
per year, on net sales of the product in the future. Because these royalty
payments are based on the net sales of the product, the maximum cost of these
royalty payments is uncertain at this time, and, accordingly, Endo cannot
currently assess whether payments under this license agreement will be
material. In addition, Endo Pharmaceuticals obtained an option for the sole and
exclusive license to another format of the licensed product. Endo
Pharmaceuticals is required to evaluate this product within six months from the
launch of Lidoderm(R) in the United States. Endo Pharmaceuticals must then
exercise its option within one month of the completion of its evaluation of the
product. Either party may terminate this agreement for material breach. In
September 1999, Endo Pharmaceuticals launched Lidoderm(R), the first and only
FDA-approved product for the treatment of the pain of post-herpetic neuralgia.
In addition to its approval, the FDA granted Lidoderm(R) orphan status, which
means seven years of exclusive marketing approval. In other words, for seven
years, the FDA will not approve a Lidocaine-containing patch product for the
indication of the relief of the pain associated with post-herpetic neuralgia.
In November 1999, Endo Pharmaceuticals entered into a collaboration
agreement with Lavipharm Laboratories Inc. pursuant to which Endo
Pharmaceuticals obtained exclusive, worldwide rights to Lavipharm's existing
drug delivery technology platforms, including, but not limited to, Lavipharm's
Quick-Dis and transdermal technologies for use in the field of pain management.
Under the terms of the collaboration agreement, Endo Pharmaceuticals and
Lavipharm will work jointly on the formulation and development of pain
management products using Lavipharm's technology platforms. In addition, if
Lavipharm acquires and/or develops additional drug delivery technology, such
technology will be made available for Endo Pharmaceuticals' use under the
collaboration agreement, provided that there are no contrary encumbrances with
respect to such acquired technology. Lavipaharm will manufacture products that
are jointly developed while Endo Pharmaceuticals will exclusively market and
sell these products on a worldwide basis. The collaboration agreement involves
the payment by Endo Pharmaceuticals to Lavipharm of up-front and milestone
fees, reimbursement of Lavipharm's development cost associated with the
products, manufacturing charges and a royalty on sales of jointly developed
marketed products by Endo Pharmaceuticals. The amounts payable to Lavipharm
under this collaboration agreement are uncertain at this time because these
amounts will be based on Endo achieving certain milestones. Currently, Endo
cannot predict the likelihood of achieving these milestones nor assess whether
the payments under this collaboration agreement will be material. The
collaboration agreement may be terminated for material breach by either party,
or by either party, if within one hundred eighty days of the effective date of
the agreement, the parties have not decided to proceed with product
development.
On November 26, 1999, Endo Pharmaceuticals entered into a collaboration
agreement with Algos under which the parties will co-develop oxycodone-based
products using Algos' proprietary technology and Endo Pharmaceuticals'
established brands. Endo Pharmaceuticals will be the exclusive worldwide
marketer of these products. See "ADDITIONAL AGREEMENTS--Collaboration
Agreement."
On February 1, 2000, Endo Pharmaceuticals and Livingston Healthcare Services
Inc. entered into an agreement pursuant to which Livingston agreed to provide
customer service support, chargeback processing, accounts receivables
management, warehouse and distribution services for Endo Pharmaceuticals'
products in the United States. See "--Service Agreements--Other Service
Agreements--Livingston Healthcare Services Inc."
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On March 1, 2000, Endo Pharmaceuticals and Elan Pharmaceuticals, Inc.
entered into a definitive agreement for the co-promotion of Endo
Pharmaceuticals' transdermal patch prescription product, Lidoderm(R) (lidocaine
5% patch), for the treatment of postherpetic neuralgia. The co-promotion
activities commenced on March 17, 2000 and will end no later than March 31,
2003, unless terminated earlier in accordance with the agreement. Under the
terms of this agreement, Elan will exclusively co-promote Lidoderm(R) for Endo
Pharmaceuticals to neurologists, physical medicine and rehabilitation
specialists, anesthesiologists, pain specialists and child neurologists in the
United States, the District of Columbia and the Commonwealth of Puerto Rico.
For the first year of the agreement, Elan will receive as compensation for its
selling efforts payments calculated as a fixed percentage of net sales of
Lidoderm(R) over a defined base in the co-promotion territory (which is
subsequently reduced in the second and third years of the agreement) and will
pay for all of the promotional expenses for its sales force. The payment to
Elan for its selling efforts will be recorded as a component of selling,
general and administrative costs. The agreement may be terminated by either
party for breach after a notice and cure period; and by either party from and
after the date ninety (90) days prior to the end of the first year of the
agreement upon ninety (90) days' prior written notice to the non-terminating
party.
On May 5, 2000, Endo Pharmaceuticals entered into a lease and other related
agreements with Painters' Crossing One Associates, L.P. This lease will
commence on April 1, 2001 for a ten-year term. See "--Property--Chadds Ford--
Painters' Crossing One Associates, L.P. Lease Agreement."
On May 8, 2000, Endo Pharmaceuticals entered into an amendment to its
manufacture and supply agreement with Mallinckrodt Inc. See "--Service
Agreements--Third Party Manufacturing/Supply Agreements--Mallinckrodt Inc." The
amendment, which was effective as of December 16, 1999, extended the term of
this agreement to June 30, 2004.
Description of Credit Agreement
Endo Pharmaceuticals entered into a credit agreement on August 26, 1997 with
a number of lenders and The Chase Manhattan Bank, as administrative agent.
Under this credit agreement, Endo, as of March 31, 2000, had outstanding a
Tranche A Term Loan in the amount of $45.0 million and a Tranche B Term Loan in
the amount of $102.8 million. Under the credit agreement, Endo Pharmaceuticals
has the ability to borrow on a revolving basis up to $25 million, none of which
was outstanding as of February 15, 2000. The Tranche A Term Loan amortizes
quarterly and has a final maturity date of December 31, 2002. The Tranche B
Term Loan also amortizes quarterly and has a final maturity date of June 30,
2004. The revolving loans may be borrowed, repaid and reborrowed and have a
final maturity of December 31, 2002.
These loans bear interest at an agreed-upon spread over the applicable base
rate (as defined in the credit agreement) or over the London Interbank Offered
Rate. The loans outstanding under the credit agreement are secured by a first
priority security interest in substantially all of the assets of Endo
Pharmaceuticals. These loans are subject to mandatory repayment in limited
circumstances. Voluntary prepayments of these loans and voluntary reductions of
the credit facility are permitted, in whole or in part, at the option of Endo
Pharmaceuticals in minimum principal amounts, without premium or penalty,
subject to reimbursement of the lenders' costs under specified circumstances.
The credit agreement contains representations and warranties, covenants,
events of default and other provisions customarily found in similar agreements.
Litigation
Endo is involved in, or has been involved in, arbitrations or legal
proceedings which arise from the normal course of its business. Endo cannot
predict the timing or outcome of these claims and proceedings. Currently, Endo
is not involved in any arbitration and/or legal proceeding that Endo expects to
have a material effect on its business, financial condition or results of
operations and cash flows.
Employees
As of May 31, 2000, Endo had 98 employees, of which 29 are engaged in
research and development, 19 in sales and marketing, 12 in quality and
approximately 38 in general and administrative capacities. Employees are not
represented by unions and Endo believes its relations with its employees are
good.
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Dividend Policy
Endo has never paid cash dividends on its common stock. Furthermore, the
payment of cash dividends from earnings is currently restricted by its credit
facility. Assuming removal of this restriction, the payment of cash dividends
is subject to the discretion of the Endo board of directors and will be
dependent on many factors, including Endo's earnings, capital needs and general
financial condition. Endo anticipates that, for the foreseeable future, it will
retain its earnings in order to finance the expansion of its business.
Industry
According to IMS, sales of pharmaceutical products in the United States were
estimated to be in excess of $122 billion in 1999. Growth in the pharmaceutical
industry, and the pain management sector in particular, is being driven
primarily by:
. the aging population;
. managed care's preference for drug therapy over surgery since drug
therapy is generally less costly;
. the medical communities increasing treatment of pain; and
. technological breakthroughs that have increased the number of ailments
which are treatable with drugs.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Except for the historical information contained in this proxy
statement/prospectus, this proxy statement/prospectus, including the following
discussion, contains forward-looking statements that involve risks and
uncertainties.
General
On August 26, 1997, Endo Pharmaceuticals commenced operations by acquiring
certain pharmaceutical products, related rights and certain assets of DuPont
Merck, which subsequently became DuPont Pharmaceuticals. The financial
information of this predecessor company is not comparable to Endo's financial
information as the business was operated within a division of the predecessor
company, and historical financial statements were not prepared for the
business. It is Endo's understanding that because of the manner in which
certain transactions were historically processed, recorded and accumulated, it
was not, and is not, practicable to prepare complete financial statements for
the predecessor company. The financial information for the predecessor company
includes estimates and allocations that may not necessarily be indicative of
the costs that would have resulted if the business has been operated as a
separate entity. In addition, due to the August 26, 1997 acquisition, a new
basis of accounting has been recorded for the purchase. Consequently, Results
of Operations discusses only the results for the three months ended March 31,
2000 compared to the three months ended March 31, 1999, for the fiscal year
ended December 31, 1999 compared to the fiscal year ended December 31, 1998 and
the fiscal year ended December 31, 1998 to the calendar year ended December 31,
1997 (the periods from January 1, 1997 to August 26, 1997 for DuPont
Pharmaceuticals Company and August 26, 1997 to December 31, 1997 for Endo
Pharmaceuticals Holdings Inc.), and Liquidity, and Capital Resources discusses
only the cash flow from operations, investing and financing for the three
months ended March 31, 2000 compared to the three months ended March 31, 1999
and the year ended December 31, 1999 compared to the year ended December 31,
1998 and as of March 31, 2000 compared to December 31, 1999 and as of December
31, 1999 compared to December 31, 1998.
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<PAGE>
Overview
Endo, through its wholly owned subsidiary, Endo Pharmaceuticals, is engaged
in the research, development, sales and marketing of branded and generic
prescription pharmaceuticals used primarily for the treatment and management of
pain. Branded products comprised approximately 69%, 68% and 72% of net sales
for the year ended December 31, 1998, the year ended December 31, 1999 and the
three months ended March 31, 2000, respectively. Percocet(R) 5.0/325 comprised
approximately 41%, 34% and 26% of Endo's net sales in the year ended December
31, 1998, the year ended December 31, 1999 and the three months ended March 31,
2000, respectively. On August 26, 1997, an affiliate of Kelso & Company and
existing management entered into an asset purchase agreement with the then
DuPont Merck Pharmaceutical Company to acquire certain branded and generic
pharmaceutical products and exclusive worldwide rights to a number of new
chemical entities in the DuPont research and development pipeline from DuPont
Merck through the newly-formed Endo Pharmaceuticals. Endo was formed as a
holding company and incorporated on November 18, 1997 under the laws of the
state of Delaware and has its principal executive offices at 233 Wilmington-
West Chester Pike, Chadds Ford, Pennsylvania 19317 (telephone number: (610)
558-9800).
Endo's quarterly results have fluctuated in the past, and may continue to
fluctuate. These fluctuations are primarily due to the timing of new product
launches, purchasing patterns of our customers, market acceptance of Endo's
products and the impact of competitive products and pricing.
Results of Operations
General
Goodwill and other intangibles represent a significant portion of the assets
and pro forma stockholders' equity of Endo. As of March 31, 2000, goodwill and
other intangibles comprise approximately 59% of total assets and 233% of
stockholders' equity. Endo assesses the recoverability and the amortization
period of goodwill by determining whether the amount can be recovered through
undiscounted net cash flows of the businesses acquired over the remaining
amortization period. Endo reviews for the impairment of long-lived assets
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable, such as in the event of a significant
adverse change in business conditions or a significant change in the intended
use of an asset. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset are
less than its carrying amount. Assets are grouped at the lowest level for which
there are identifiable cash flows that are largely independent from other asset
groups. Endo uses the discounted future expected net cash flows, as its
estimate of fair value, to determine the amount of impairment loss. As a result
of the significance of goodwill and other intangibles, amortization of goodwill
and other intangibles will significantly impact the results of operations of
Endo. In addition, Endo's results of operations and financial position in a
future period could be negatively impacted should an impairment of goodwill and
other intangible assets occur.
Three Months Ended March 31, 2000 Compared to the Three Months Ended March
31, 1999
Net sales for the three months ended March 31, 2000 decreased by 6% to $27.0
million from $28.6 million in the comparable 1999 period. The decrease in net
sales is primarily due to an increase in purchases by Endo's wholesale
customers in the fourth quarter of 1999 over the fourth quarter of 1998 related
to new product launches and anticipated price increases. The occurrence of such
buy-ins are normal in the pharmaceutical industry and generally adversely
impacts the immediate subsequent periods until a more normalized wholesale
inventory level, commensurate with prescription trends, is attained.
Gross profit for the three months ended March 31, 2000 decreased by 1% to
$14.9 million from $15.1 million in the comparable 1999 period. Gross profit
margins increased to 55% from 53% due primarily to Endo's continued focus on a
more favorable mix of higher margin products both through product launches, as
well as the discontinuation of some lower margin non-core products. If Endo
achieves its forecast for revenue and product mix, Endo's management expects
the increase in gross profit to continue.
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<PAGE>
Selling, general and administrative expenses for the three months ended
March 31, 2000 increased by 25% to $12.1 million from $9.7 million in the
comparable 1999 period. This increase is due to a $1.4 million increase in
sales and promotional efforts in 2000 over the comparable 1999 period to
support the recent launches of Zydone(R), Lidoderm(R) and the launches of
Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650 to complement
the existing Percocet(R) 5.0/325. In February 1999, Endo deployed a dedicated
contract field force of approximately 300 sales representatives to promote
these new products, which was an increase from the prior field force of
approximately 100 sales representatives. In addition, there was a provision for
doubtful accounts of $.8 million for a customer who filed for bankruptcy.
Research and development expenses for the three months ended March 31, 2000
increased by 50% to $3.0 million from $2.0 million in the comparable 1999
period. This increase is due to increased spending on products under
development focused in pain management.
Depreciation and amortization for the three months ended March 31, 2000
increased by 16% to $2.2 million from $1.9 million in the comparable 1999
period. This increase is due to a $.1 increase in depreciation expense
resulting from capital expenditure spending subsequent to the August 26, 1997
acquisition and a $.2 increase in amortization expense from license
arrangements entered into during 1998 and 1999.
Separation benefits of $22.0 million in the three months ended March 31,
2000 resulted from a $20.8 million charge related to the acceleration of
vesting of stock options held by two former executives and a $1.2 million
charge from compensation and other benefits pursuant to two separation and
release agreements entered into by Endo. The stock compensation charge reflects
the estimated difference in the fair value and the exercise price of such
options on the effective date of the separation and release agreements.
Interest expense, net for the three months ended March 31, 2000 increased by
15% to $3.9 million from $3.4 million in the comparable 1999 period. The
increase is due to an increase in interest expense of $.4 million due to an
increase in interest rates and an increase in interest expense of $.4 million
due to an increase in long-term debt outstanding. These increases are offset by
an increase in interest income of $.2 million due to an increase in the average
cash balance for the three months ended March 31, 2000 compared to three months
ended March 31, 1999.
Income tax benefit for the three months ended March 31, 2000 increased to
$10.7 million from $.7 million in the comparable 1999 period due to the
increase in the loss before income tax benefit.
Fiscal Year Ended December 31, 1999 Compared to the Fiscal Year Ended
December 31, 1998
Net sales for the year ended December 31, 1999 increased by 28% to $138.5
million from $108.4 million in the comparable 1998 period. The increase in net
sales is primarily due to the launch of several new products. In April 1998,
Endo terminated a promotional agreement with a third party regarding Moban(R)
tablets and liquid, and began its own promotion of the product for the
management of psychotic disorders. In November 1998, Endo launched Morphine
Sulfate Extended Release Tablets, the therapeutic equivalent version of MS
Contin(R), for moderate to severe pain. In February 1999, Endo launched
Zydone(R) tablets, a hydrocodone/acetaminophen offering for moderate to
moderately severe pain. In September 1999, Endo launched Lidoderm(R), the first
and only FDA approved product for the treatment of the pain of post-herpetic
neuralgia. In November 1999, Endo launched Percocet(R) 2.5/325, Percocet(R)
7.5/500 and Percocet(R) 10.0/650 to complement the existing Percocet(R)
5.0/325.
Gross profit for the year ended December 31, 1999 increased by 50% to $80.3
million from $53.6 million in the comparable 1998 period. Gross profit margins
increased to 58% from 49%. Gross profit margins increased substantially due to
the fixed cost nature of Endo's most significant contract manufacturing
relationship with DuPont Pharmaceuticals. In addition, the increase in gross
profit margins is due to Endo's continued focus since the asset purchase
transaction in August 1997 on a more favorable mix of higher margin products
both through product launches, as discussed above, as well as discontinuation
of some lower margin non-core products. If Endo achieves its forecast for
revenue and product mix, Endo's management expects the increase in gross profit
margins to continue.
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<PAGE>
Selling, general and administrative expenses for the year ended December 31,
1999 increased by 68% to $42.9 million from $25.5 million in the comparable
1998 period. This increase is substantially due to the increased sales and
promotional efforts to support the launches of Zydone(R), Lidoderm(R), and the
launches of Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650
to complement the existing Percocet(R) 5.0/325. In February 1999, Endo deployed
a dedicated contract field force of approximately 300 sales representatives to
promote these new products, which was an increase from the prior field force of
approximately 100 sales representatives.
Research and development expenses for the year ended December 31, 1999
increased by 59% to $9.4 million from $5.9 million in the comparable 1998
period. This increase is due to increased spending on products under
development focused in pain management.
Depreciation and amortization for the year ended December 31, 1999 increased
by 13% to $8.3 million from $7.4 million in the comparable 1998 period. This
increase is primarily due to the increase in capital spending required since
Endo's inception in August 1997.
Interest expense, net for the year ended December 31, 1999 decreased by 1%
to $14.3 million from $14.5 million in the comparable 1998 period. The decrease
in interest expense of $1.1 million due to lower interest rates applicable to
long-term debt was substantially offset by an increase in interest expense of
$.9 million due to an increase in long-term debt during 1999.
Income taxes for the year ended December 31, 1999 increased to $2.1 million
from $.2 million for the comparable 1998 period.
Fiscal year Ended December 31, 1998 Compared to the Calendar Year Ended
December 31, 1997 (the Period from January 1, 1997 to August 26, 1997 for
DuPont Pharmaceuticals Company and August 26, 1997 to December 31, 1997 for
Endo Pharmaceuticals Holdings Inc.)
Net sales for the fiscal year ended December 31, 1998 increased by 4% to
$108.4 million from $104.5 million in the calendar year 1997 period ($39.4
million for Endo for the period August 26, 1997 to December 31, 1997 and $65.1
for DuPont Pharmaceuticals Company (the predecessor company) for the period
from January 1, 1997 to August 26, 1997). The increase in net sales for 1998
over calendar 1997 is primarily due to the launch by Endo in November 1998 of
Morphine Sulfate Extended Release Tablets, the therapeutic equivalent version
of MS Contin(R), for moderate to severe pain.
Gross profit for the fiscal year ended December 31, 1998 increased by 21% to
$53.6 million from $44.2 million in the calendar year 1997 period ($9.7 million
for Endo and $34.5 million for the predecessor company). The increase is
substantially due to the purchase accounting charges related to the allocation
of purchase price to the finished goods inventory that Endo acquired in the
August 26, 1997 acquisition which decreased to $4.3 million in fiscal 1998 from
$13.2 million in calendar year 1997.
Selling, general and administrative expenses for the year ended December 31,
1998 increased by 78% to $25.5 million from $14.3 million in the calendar year
1997 period ($8.7 million for Endo and $5.6 million for the predecessor
company). The increase in 1998 was due to a $4.2 million increase in sales and
promotional efforts and an increase of $7.0 million in general and
administrative costs resulting from an increase in support activities.
Research and development expenses for the year ended December 31, 1998
decreased by 27% to $5.9 million from $8.1 million in the calendar year 1997
period ($2.9 million for Endo and $5.2 million for the predecessor company).
This decrease is due to a more focused research and development effort by Endo
during 1998, primarily in the therapeutic area of pain management.
Depreciation and amortization for the year ended December 31, 1998 increased
by 222% to $7.4 million from $2.3 million in the calendar year 1997 period (all
for Endo). The increase was due to an increase in amortization of $4.4 million
substantially due to a full year of amortization in 1998 of goodwill from the
August 26, 1997 acquisition and an increase in depreciation of $.7 million due
to increased capital expenditure spending subsequent to the August 26, 1997
acquisition.
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<PAGE>
Purchased in-process research and development of $46 million in the calendar
year 1997 period (all for Endo) resulted from the estimated fair value of the
products under development acquired by Endo on August 26, 1997.
Interest expense, net for the year ended December 31, 1998 increased by 169%
to $14.5 million from $5.4 million in the calendar year 1997 period (all by
Endo). This increase was due to an increase in Endo's long-term debt
outstanding during 1998 due primarily to the $165 million in borrowings used to
finance a portion of the August 26, 1997 acquisition. There were no interest
charges reflected in the predecessor company financial statements for the
period from January 1, 1997 to August 26, 1997.
Income taxes for the year ended December 31, 1998 increased to $.2 million
from a benefit of $10.8 million in the calendar year 1997 period ($20.3 million
benefit for Endo offset by $9.5 million pro forma expense for the predecessor
company). The change in income taxes was due primarily to changes in pretax
income for Endo and the predecessor company.
Liquidity and Capital Resources
Net cash provided by operating activities increased to $10.6 million for the
three months ended March 31, 2000 from $2.8 million for the three months ended
March 31, 1999. This increase is substantially due to cash conversion of
accounts receivable related to increases in net sales during the fourth quarter
of 1999 from new product launches and increases in purchases and inventory
levels maintained by Endo's wholesale customers. This increase is offset by the
utilization of cash for the build up in inventories to support the launches of
Lidoderm(R), Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650
as well as the utilization of cash for other working capital purposes.
Net cash utilized in investing activities decreased to $.2 million for the
three months ended March 31, 2000 from $.8 million for the three months ended
March 31, 1999 due to a decrease in capital expenditures. This decrease in
capital expenditures of $.6 million is primarily due to completion of an
enterprise software system implementation during 1999.
Net cash utilized in financing activities increased by $2.2 million due to
the scheduled repayments made on Endo's credit facility.
Net cash provided by operating activities decreased to $13.8 million for the
year ended December 31, 1999 from $20.9 million for the year ended December 31,
1998. This decrease is primarily due to an increase in accounts receivable due
to increased net sales and the build up of inventories to support the launches
of Lidoderm(R), Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R)
10.0/650.
Net cash utilized in investing activities increased to $9.1 million for the
year ended December 31, 1999 from $3.5 million for the year ended December 31,
1998. This increase is due to a $6.0 million payment for the license of
Lidoderm(R) in 1999, compared to $2.1 million in 1998 and a $1.0 million
payment for the exclusive license of technologies for pain management from
Lavipharm Laboratories, Inc. In addition, there was an increase in capital
expenditures of $.6 million primarily due to implementation of an enterprise
software system during 1999.
No significant net cash was utilized for financing activities in the year
ended December 31, 1999. Net cash utilized for financing activities was $14.5
million during the year ended December 31, 1998 substantially due to a $15
million voluntary prepayment in 1998 of the credit facility.
Endo's cash and cash equivalents totaled $30.2 million at March 31, 2000.
Endo believes that its (a) cash and cash equivalents, (b) cash flow from
operations and (c) existing credit facility, which has an unused line of credit
available of $25 million, will be sufficient to meet its normal operating,
investing and financing requirements. In the event that Endo makes any
significant acquisitions or other strategic investments, it may be required to
raise additional funds, through the issuance of additional debt or equity
securities.
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<PAGE>
Endo continues to evaluate growth opportunities including strategic
investments, licensing arrangements and acquisitions of product rights or
technologies, which could require significant capital resources.
Endo currently has no operations outside of the United States. As a result,
fluctuations in foreign currency exchange rates do not have a material effect
on the financial statements.
Endo does not believe that inflation had a material adverse effect on the
financial statements for the periods presented.
A substantial portion of Endo's net sales are through wholesale drug
distributors who in turn supply Endo's products to pharmacies, hospitals and
physicians.
Quantitative and Qualitative Disclosures about Market Risk
Endo's primary market risk exposure is to changes in interest rates (LIBOR)
on its variable rate borrowings. Endo does not utilize financial instruments
for trading purposes and holds no derivative financial instruments that could
expose Endo to significant market risk. Endo monitors interest rates and enters
into interest rate agreements as considered appropriate. To manage a portion of
its exposure to fluctuations in interest rates, Endo has entered into an
interest rate cap agreement with a notional amount of $82.5 million. The
interest rate cap agreement sets a maximum LIBOR rate of 8% that Endo will pay
on the related notional amounts.
During the three months ended March 31, 2000, there were no significant
changes to Endo's market risk exposures.
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<PAGE>
To the extent that Endo's financial instruments exposes it to interest rate
risk, they are presented in the table below. The table presents principal cash
flows and related interest rates by year of maturity for Endo's term loans,
notes payable and interest rate cap as of December 31, 1999. You should read
note 5 to Endo's consolidated financial statements for the year ended December
31, 1999, together with the tables below.
Schedule of Interest Rate Sensitive Assets and Liabilities at December 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Year of Maturity
---------------------------------------------- Total
due Fair
at Value at
2000 2001 2002 2003 Thereafter Maturity 12/31/99
------- ------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive
liabilities:
Short-term and variable
rate borrowings
Tranche A term loan..... $12,040 $15,538 $19,422 $ 47,000 $ 47,000
Average interest rate.. 8.40% 8.40% 8.40% 8.40%
Tranche B term loan..... 3,945 971 971 $44,672 $52,441 103,000 103,000
Average interest rate.. 8.90% 8.90% 8.90% 8.90% 8.90% 8.90%
Total................... 15,985 16,509 20,393 44,672 52,441 150,000 150,000
Fixed-rate borrowings
Acquisition Note
Payable................ 3,900 3,900 3,002
Average interest rate.. 9.75% 9.75%
Other Notes Payable..... 46,000 46,000 38,201
Average interest rate.. 7.00% 7.00%
------- ------- ------- ------- ------- -------- --------
Total interest rate
sensitive liabilities.. $15,985 $16,509 $70,293 $44,672 $52,441 $199,900 $191,203
======= ======= ======= ======= ======= ======== ========
Weighted average
interest rate.......... 8.44% 8.44% 7.68% 8.90% 8.90% 8.36%
======= ======= ======= ======= ======= ========
Interest rate
instruments:
Interest rate cap...... $ 50
=======
Cap rate............... 8.00%
=======
</TABLE>
Schedule of Interest Rate Sensitive Assets and Liabilities at December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Years of Maturity
----------------------------------------------------
Total due Fair Value
at at
1999 2000 2001 2002 2003 Thereafter Maturity 12/31/98
---- ------- ------- ------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive
liabilities:
Short-term and variable
rate borrowings:
Tranche A term loan..... $11,000 $16,000 $20,000 $ 47,000 $ 47,000
Average interest rate.. 7.40% 7.40% 7.40% 7.40%
Tranche B term loan..... 1,000 1,000 1,000 46,000 54,000 103,000 103,000
Average interest rate.. 7.90% 7.90% 7.90% 7.90%
Total................... 12,000 17,000 21,000 46,000 54,000 150,000 150,000
Fixed-rate borrowings
Acquisition Note
Payable................ 3,900 2,724
Average interest rate.. 9.75%
Other Notes Payable..... 23,000 17,820
Average interest rate.. 7.00%
---- ------- ------- ------- ------- ------- -------- --------
Total interest rate
sensitive
liabilities............ $-- $12,000 $17,000 $47,900 $46,000 $54,000 $150,000 $170,544
==== ======= ======= ======= ======= ======= ======== ========
Interest rate
instruments:
Interest rate cap...... $ 50 $ 50
==== =======
Cap rate............... 8.00% 8.00%
==== =======
</TABLE>
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<PAGE>
The most significant changes in interest rate sensitive assets and
liabilities were increases in interest rates from 1998 to 1999, and additional
notes issued during 1999.
Legal Proceedings and Government Regulations
Endo is involved in, or has been involved in, arbitrations or legal
proceedings which arise from the normal course of its business. Endo cannot
predict the timing or outcome of these claims and proceedings. Currently, Endo
is not involved in any arbitration and/or legal proceeding that Endo expects to
have a material effect on its business, financial condition or results of
operations and cash flows.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. This statement as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133," is in effect for fiscal years
beginning after June 15, 2000, although early adoption is encouraged. Endo has
not yet assessed what the impact of this statement will be on its future
earnings or financial position.
Year 2000
Endo's management is not aware of any year 2000 computer issues which impact
the business and operations of Endo and its suppliers, vendors, service
providers, banks and customers.
Current Directors and Executive Officers of Endo
Set forth below is information regarding each current director and executive
officer of Endo:
<TABLE>
<CAPTION>
Name Age Position and Offices
---- --- --------------------
<S> <C> <C>
Carol A. Ammon.......... 49 President, Chief Executive Officer and Director
Mariann T. MacDonald.... 52 Executive Vice President, Operations
Jeffrey R. Black........ 36 Senior Vice President, Chief Financial Officer and Treasurer
David A.H. Lee, M.D., 50 Senior Vice President, Research & Development
Ph.D...................
Michael B. Goldberg..... 52 Director
David I. Wahrhaftig..... 43 Director
</TABLE>
Employment Agreements and Executive Compensation of Endo Executives
In August 1997, Endo entered into an employment agreement with each of Ms.
Ammon and Ms. MacDonald. In September 1997, Endo entered into an employment
agreement with Mr. Black. In December 1997, Endo entered into an employment
agreement with Dr. Lee. The term of each of these employment agreements is four
years, renewable by the parties for additional one-year periods.
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<PAGE>
The following table summarizes, as of December 31, 1999, the compensation
paid or accrued to each of the named executive officers of Endo.
<TABLE>
<CAPTION>
Other
Annual Restricted All Other
Fiscal Compen- Stock Compen-
Name and Principal Position Year Salary Bonus sation(1) Awards sation(2)
--------------------------- ------------------ -------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Carol A. Ammon........... 1999 $325,000 $146,250 $10,464
President and Chief 1998 325,000 162,500 10,470
Executive Officer 8/26/97 - 12/31/97 108,333 1,851
Mariann T. MacDonald..... 1999 258,331 90,000 10,716
Executive Vice 1998 250,000 100,000 2,400
President-
Operations 8/26/97 - 12/31/97 60,709 1,232
Louis J. Vollmer(3)...... 1999 250,000 90,000 11,397
Executive Vice 1998 250,000 100,000 10,564
President-
Strategic Marketing 8/26/97 - 12/31/97 83,333 2,008
Jeffrey R. Black......... 1999 250,000 67,500 11,040
Senior Vice President- 1998 250,000 75,000 $15,318 10,255
Chief Financial Officer 8/26/97 - 12/31/97 69,231 14,962 3,756
and Treasurer
David A. H. Lee, M.D.,
Ph.D.................... 1999 232,000 69,600 47,180
Senior Vice President- 1998 232,000 40,000 84,470 41,061
Research and
Development 8/26/97 - 12/31/97 10,558 664
</TABLE>
--------
(1) Includes relocation costs.
(2) All other compensation for Mr. Vollmer and Mr. Black includes the dollar
value of premiums paid by Endo with respect to term life insurance and
group life insurance for their benefit and matching contributions made
under Endo's 401(k) Plan. All other compensation for Ms. Ammon and Ms.
MacDonald is matching contributions made under Endo's 401(k) Plan and the
dollar value of premiums paid by Endo with respect to group life insurance.
All other compensation for Dr. Lee includes the dollar value of premiums
paid by Endo with respect to term life insurance and group life insurance
for his benefit, matching contributions under Endo's 401(k) Plan and rental
of an apartment near the research and development facility used by Endo in
Garden City, New York.
(3) Mr. Vollmer's employment with Endo terminated effective as of April 20,
2000 pursuant to a Separation and Release Agreement by and between Mr.
Vollmer, Endo and Endo Pharmaceuticals.
Each of the employment agreements provides that the executive will be
entitled to the above basic compensation as well as additional incentive
compensation. For each fiscal year or part thereof during the employment
period, the company will pay the executive incentive compensation in cash in an
amount equal to a percentage of this executive's salary if Endo Pharmaceuticals
meets the performance targets set by the board of directors for a particular
fiscal year. Ms. Ammon's additional incentive compensation is equal to 50% of
her base salary. Ms. MacDonald's additional incentive compensation is equal to
40% of her base salary. Each of Mr. Black's and Dr. Lee's additional
compensation is equal to 30% of his respective base salary.
Under these employment agreements, the company may terminate each executive
(1) for "cause," (2) for "good reason," or (3) upon the executive's disability,
incapacity or death.
If the company terminates an executive for "cause," he or she will be
entitled to receive his or her salary and incentive compensation prorated
through the effective date of termination. Under the terms of each of these
employment agreements, "cause" means any of the following:
. the executive's continued failure to substantially perform his or her
duties (other than by reason of a disability),
. the debarment of the executive by the FDA,
. the executive's continued material breach of the employment agreement or
the stockholder's agreement or
. the executive's engagement in serious misconduct that has caused
material harm (financial or otherwise) to the company, including:
107
<PAGE>
. the disclosure of material secrets or confidential information of the
company,
. the debarment of the company by the FDA, or
. the revocation of a registration of the company with the DEA or the
denial of an application with the DEA.
In addition, if an executive elects to renew his or her employment
agreement but Endo does not and Endo's election not to renew is not "for
cause," then the executive will be entitled to receive his or her salary for
the remainder of the calendar month in which this termination is effective and
for eighteen consecutive calendar months thereafter.
If an executive terminates his or her employment agreement for "good
reason," the company will:
. pay:
. monthly to the executive his or her salary for the remainder of the
employment period or eighteen months (whichever is longer) and
. the executive's incentive compensation for the fiscal year during
which the termination is effective, prorated through the effective
date of termination, if this incentive compensation is payable and
. continue to provide the executive with benefits for the remainder of the
employment period or eighteen months (whichever is longer).
Under the terms of each of these employment agreements, "good reason" means
any of the following:
. Endo Pharmaceuticals' material breach of the provisions in the
employment agreements relating to the director's and officer's
liability coverage and compensation or Endo Pharmaceuticals'
obligations under the stockholder's agreement for the benefit of the
executive,
. the assignment of the executive, without the executive's consent, to
a position, responsibilities, or duties of a materially lesser status
or degree of responsibility, or
. the sale of all or substantially all of the assets of Endo
Pharmaceuticals, the sale of all or substantially all of the stock of
Endo Pharmaceuticals, the merger of Endo Pharmaceuticals with one or
more other entities, or other similar transaction vesting control of
Endo Pharmaceuticals with a third party or parties.
Description of Endo Stock Option Plans
As the merger agreement contemplates, Endo's current executive and employee
stock option plans will be amended prior to the merger to provide, among other
things, that the stock options granted pursuant to these plans will be
exercisable solely into shares of Endo common stock held by Endo Pharma LLC.
Other than those persons who contributed their shares to Endo Pharma LLC and
to the extent current holders of those options do not consent to this
amendment to the current stock option plans, the ownership by Endo
stockholders will not be diluted on account of the exercise of these options.
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<PAGE>
The following table sets forth information concerning individual grants of
options that have been granted under the currently existing Endo executive
stock option plan as of June 5, 2000, without giving effect to the anticipated
amendment to the Endo option plan or Endo's planned recapitalization:
<TABLE>
<CAPTION>
% of Total
Number of Options
Shares Granted to Exercise
Underlying Employees Price
Options in Fiscal per Date of Expiration
Name Granted Year Share Grant Date
---- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Carol A. Ammon.......... 127,404 0 $100(1) 11/19/1997 12/31/2011
Mariann T. MacDonald.... 94,570 0 $100(2) 11/19/1997 12/31/2011
Louis J. Vollmer........ 94,570(4) 0 $100(2) 11/19/1997 12/31/2011
Jeffrey R. Black........ 28,133 0 $100(3) 11/19/1997 12/31/2011
Osagie O. Imasogie...... 28,133(5) 0 $100(3) 11/19/1997 12/31/2011
David A.H. Lee, M.D.,
Ph.D. ................. 28,133 0 $100(3) 12/15/1997 12/31/2011
</TABLE>
--------
(1) While most of these options do have an exercise price of $100 per share,
options exercisable into 9,691 shares of Endo common stock have an exercise
price of $141.59 per share.
(2) While most of these options do have an exercise price of $100 per share,
options exercisable into 7,190 shares of Endo common stock have an exercise
price of $141.59 per share.
(3) While most of these options do have an exercise price of $100 per share,
options exercisable into 2,236 shares of Endo common stock have an exercise
price of $141.59 per share.
(4) 57,216 of these options expired upon the termination of Mr. Vollmer's
employment with Endo effective as of April 20, 2000.
(5) 20,213 of these options expired upon the termination of Mr. Imasogie's
employment with Endo effective as of March 22, 2000.
Of the outstanding Endo stock options as of December 31, 1999, 48,738 shares
become vested and exercisable ratably over service periods of five years and
54,931 shares become vested and exercisable at the end of nine years from the
date of grant. The vesting and exercisability of these options may be
accelerated at the discretion of the board of directors of Endo or upon the
occurrence of specified events. The remaining 343,198 current Endo stock
options become exercisable only upon satisfaction of other conditions
including:
(1) the occurrence of a sale, disposition or transfer of Endo common stock,
after which Kelso no longer owns any shares of Endo common stock and
(2) the value received by holders of Endo common stock on the date of such
transfer exceeds three to twelve times Kelso's initial investment in
Endo.
On December 31, 1999, there were 18,532 Endo stock options that were vested
and exercisable.
As discussed above, it is anticipated that the stock option plan will be
amended, such that there will be six discrete tranches of options, four of
which will vest only if Endo's stock price exceeds progressive price targets
for a 90-day period and two of which will vest in other circumstances. It is
anticipated that the stock price targets will correspond roughly with the
original return hurdles described in (2) above. Under the anticipated terms of
the amended option plan, plan participants may be vested in options which in
the aggregate entitle the holders to approximately 36% of Endo Pharma LLC's
equity interest in Endo.
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<PAGE>
If these share price targets are achieved resulting in the vesting of each
tranche of options, Endo will record up to four non-cash compensation charges
related to the vesting of certain of the options. Under performance-based
options, the measurement of expense is calculated and recorded as a non-cash
charge at the time performance is achieved as the difference between the fair
market value of the stock and the exercise price of the options. If these
charges are recorded by Endo in connection with the above options, they will be
significant. They will, however, not result in the issuance of additional Endo
shares.
The shares of Endo common stock that the Endo executives receive upon
exercise of their stock options are currently subject to significant
restrictions that are set forth in stockholders agreements. The parties thereto
will amend these stockholders agreements prior to the merger but it is
anticipated that such significant restrictions will remain.
Separation and Release Agreement with Mr. Vollmer
On April 20, 2000, Endo and Endo Pharmaceuticals entered into a separation
and release agreement with Mr. Vollmer. Mr. Vollmer's separation and release
agreement provides that his employment (and employment agreement) with Endo
terminated effective as of April 20, 2000 other than his employment agreement's
non-competition covenant and indemnity provision, which will continue in full
force and effect. The agreement was accounted for during the quarter ended
March 31, 2000 as materially all terms and conditions were known as of March
31, 2000. Under the terms of Mr. Vollmer's separation and release agreement:
. Endo will pay monthly to Mr. Vollmer a severance payment equal to
$1,000,000 over a period of 48 months beginning April 20, 2000.
. Endo will continue to provide Mr. Vollmer certain employee benefits for
an 18-month period beginning on the effective date of his termination of
employment.
. Mr. Vollmer's outstanding Class A, Class B and Class C1 options granted
under the currently existing Endo executive option plan were fully
vested as of April 20, 2000 and exercisable as follows:
. 25% will become exercisable on the earlier of January 20, 2001 or on
the date of an "exit event" (as defined in the currently existing
Endo executive option plan and as will be defined in the new Endo
Pharma LLC option plan) and remain exercisable for the remaining
term of such options;
. 25% will become exercisable on the earlier of April 20, 2001 or on
the date of an exit event and remain exercisable for the remaining
term of such options;
. 25% will become exercisable on the earlier of January 20, 2002 or on
the date of an exit event and remain exercisable for the remaining
term of such options; and
. 25% will become exercisable on the date of an exit event and remain
exercisable for the remaining term of such options.
. Mr. Vollmer's outstanding Class C2 options granted under the currently
existing Endo executive option plan will only be exercisable pursuant to
the terms and conditions of the new Endo Pharma LLC option plan and Mr.
Vollmer's Class C2 stock option agreement with Endo Pharmaceuticals;
provided that Mr. Vollmer's Class C2 options will be exercisable by him
irrespective of whether or not he is an employee of Endo or any other
entity. The Class C2 options were granted under the existing Endo
executive option plan which contains variable plan terms for certain of
the options. Endo will incur additional stock compensation expense for
Mr. Vollmer's Class C2 options if the stock options vest.
. All other options granted to Mr. Vollmer under the currently existing
Endo executive option plan terminated on April 20, 2000.
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<PAGE>
Separation and Release Agreement with Mr. Imasogie
On March 22, 2000, Endo and Endo Pharmaceuticals entered into a separation
and release agreement with Mr. Imasogie. Mr. Imasogie's separation and release
agreement provides that his employment (and employment agreement) with Endo
terminated effective as of April 1, 2000, other than his employment agreement's
non-competition covenant and indemnity provision, which will continue in full
force and effect. Under the terms of Mr. Imasogie's separation and release
agreement:
. Endo will pay:
. monthly to Mr. Imasogie his salary (as in effect immediately prior
to his termination of employment) for a period of 18 months
beginning on April 1, 2000; and
. Mr. Imasogie's incentive compensation for the fiscal year 2000,
prorated through April 1, 2000 (the effective date of his
termination of employment) if this incentive compensation is
payable.
. Endo will continue to provide Mr. Imasogie certain employee benefits for
an 18-month period beginning on April 1, 2000.
. Mr. Imasogie's outstanding Class A, Class B and Class C1 options granted
under the currently existing Endo executive option plan were fully
vested as of April 1, 2000 and exercisable as follows:
. 25% will become exercisable on the earlier of January 1, 2001 or on
the date of an "exit event" (as defined in the currently existing
Endo executive option plan and as will be defined in the new Endo
Pharma LLC option plan) and remain exercisable for the remaining
term of such options;
. 25% will become exercisable on the earlier of April 1, 2001 or on
the date of an exit event and remain exercisable for the remaining
term of such options;
. 25% will become exercisable on the earlier of January 1, 2002 or on
the date of an exit event and remain exercisable for the remaining
term of such options; and
. 25% will become exercisable on the date of an exit event and remain
exercisable for the remaining term of such options.
. All other options granted to Mr. Imasogie under the currently existing
Endo executive option plan terminated on April 1, 2000.
111
<PAGE>
DESCRIPTION OF ENDO CAPITAL STOCK
The following description of the current terms of the capital stock of Endo
is not meant to be complete and is qualified by reference to the forms of
amended and restated certificate of incorporation and amended and restated by-
laws of Endo, which are attached to this proxy statement/prospectus as Appendix
E and Appendix F, respectively.
Authorized Capital Stock
Under its current charter, Endo has the authority to issue up to 2,000,000
shares of Endo common stock, 200,000 shares of class A common stock and 500,000
shares of preferred stock. Prior to the completion of the merger, Endo intends
to amend its certificate of incorporation to eliminate its class A common stock
and to authorize 175,000,000 shares of Endo common stock and 40,000,000 shares
of Endo preferred stock. In connection with this recapitalization, Endo will
issue approximately 70,704,130 shares to its stockholders immediately prior to
the merger.
Endo Common Stock
Endo Common Stock Outstanding
The outstanding shares of Endo common stock are, and the shares of common
stock issued pursuant to the merger will be, duly authorized, validly issued,
fully paid and non-assessable. At February 15, 2000, there were 71,601,780
shares of Endo common stock outstanding, as adjusted to give effect to the
recapitalization.
American Stock Transfer & Trust Company is the transfer agent and registrar
for the Endo common stock. Shares of Endo common stock will be listed on the
NASDAQ and will trade under the symbol "ENDP."
Dividends
Owners of shares of Endo common stock are entitled to receive dividends
when, as and if declared by the Endo board of directors, out of funds legally
available for their payment, subject to the rights of holders of any
outstanding shares of preferred stock.
Voting Rights
Owners of shares of Endo common stock are entitled to one vote per share.
Subject to the rights of the holders of any preferred stock pursuant to
applicable law or the provision of any future certificate of designations
creating a specific series of preferred stock, all voting rights are vested in
the owners of shares of Endo common stock. Owners of shares of Endo common
stock have non-cumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election of directors can elect 100% of
the directors.
Rights Upon Liquidation
In the event of Endo's voluntary or involuntary liquidation, dissolution or
winding up, the owners of shares of Endo common stock will be entitled to share
equally in any assets available for distribution after the payment in full of
all debts and distributions and after the owners of any outstanding Endo
preferred stock have received their liquidation preferences in full.
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<PAGE>
Other Rights
Owners of shares of Endo common stock are not entitled to pre-emptive rights
with respect to the future issuances of Endo common stock. Endo may, however,
enter into contracts with stockholders to grant holders pre-emptive rights.
Shares of Endo common stock are not convertible into shares of any other class
of capital stock. If Endo merges or consolidates with or into another company
and, as a result, the shares of Endo common stock are converted into or
exchangeable for other securities or property including cash, all owners of
shares of Endo common stock will be entitled to receive the same kind and
amount of such consideration for each share of common stock.
Endo Preferred Stock
No shares of preferred stock are outstanding. The board of directors of Endo
may, without further action by the stockholders of Endo, issue a series of Endo
preferred stock and fix the rights and preferences of those shares, including
the dividend rights, dividend rates, conversion rights, exchange rights, voting
rights, terms of redemption, redemption price or prices, liquidation
preferences, the number of shares constituting any series and the designation
of such series.
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<PAGE>
DESCRIPTION OF THE ENDO WARRANTS
Warrants Issued to Current Algos Stockholders in the Merger
The following is a description of the material terms of the warrant
agreement for the warrants that Algos stockholders will receive in the merger.
This description is qualified in its entirety by reference to the warrant
agreement and the April 17, 2000 amendment to the merger agreement. We have
attached a copy of the form of warrant agreement and the April 17, 2000
amendment to the merger agreement to this proxy statement/ prospectus as
Appendices D and B respectively, and these documents are incorporated in this
proxy statement/ prospectus by reference. You should read the text of the
warrant agreement because it, and not this proxy statement/prospectus, is the
legal document that governs the warrants that you will receive in the merger.
In the merger, current Algos stockholders will receive, for each of their
Algos common shares, one Endo warrant exercisable, for $0.01 per share, into a
specified number of shares of Endo common stock depending on the timing of the
FDA's approval of MorphiDex(R) for one or more pain indications.
If the FDA approves MorphiDex(R) on or before March 31, 2002, then upon
exercise of these warrants, each warrant will be exercisable into:
. 1.153846 shares of Endo common stock in the event that the cash gross
profit of Endo for the fiscal year ended December 31, 2000 equals or
exceeds $147.4 million or
. 1.000000 share of Endo common stock in the event that the cash gross
profit of Endo for the fiscal year ended December 31, 2000 does not equal
or exceed $147.4 million and Endo Pharma LLC transfers for no
consideration a specified number of shares of Endo common stock that Endo
Pharma LLC then owned to Endo (increasing the percentage ownership of the
Algos stockholders by five percentage points).
Endo will adjust these ratios prior to the issuance of the Endo warrants in
order to ensure that, in the merger, holders of Algos common shares receive a
total of 35% and 40%, respectively, of the shares of Endo common stock on a
fully diluted basis.
If the FDA approves MorphiDex(R) after March 31, 2002 and on or prior to
September 30, 2002, then upon exercise of these warrants, each warrant will be
exercisable into:
. 0.633803 shares of Endo common stock in the event that the cash gross
profit of Endo for the fiscal year ended December 31, 2000 equals or
exceeds $147.4 million or
. 0.545455 shares of Endo common stock in the event that the cash gross
profit of Endo for the fiscal year ended December 31, 2000 does not equal
or exceed $147.4 million and Endo Pharma LLC transfers for no
consideration a specified number of shares of Endo common stock that Endo
Pharma LLC then owned to Endo (increasing the percentage ownership of the
Algos stockholders by five percentage points).
Endo will adjust these ratios prior to the issuance of the Endo warrants in
order to ensure that, in the merger, holders of Algos common shares receive a
total of 29% and 34%, respectively, of the shares of Endo common stock on a
fully diluted basis.
If the FDA approves MorphiDex(R) after September 30, 2002 and prior to March
31, 2003, then upon exercise of these warrants, each warrant will be
exercisable into:
. 0.263158 shares of Endo common stock in the event that the cash gross
profit of Endo for the fiscal year ended December 31, 2000 equals or
exceeds $147.4 million or
. 0.225352 shares of Endo common stock in the event that the cash gross
profit of Endo for the fiscal year ended December 31, 2000 does not equal
or exceed $147.4 million and Endo Pharma LLC transfers for no
consideration a specified number of shares of Endo common stock that Endo
Pharma
114
<PAGE>
LLC then owned to Endo (increasing the percentage ownership of the Algos
stockholders by five percentage points).
Endo will adjust these ratios prior to the issuance of the Endo warrants in
order to ensure that, in the merger, holders of Algos common shares receive a
total of 24% and 29%, respectively, of the shares of Endo common stock on a
fully diluted basis.
If the FDA does not approve MorphiDex(R) before March 31, 2003, each of
these Endo warrants becomes void and all rights in respect of these Endo
warrants will cease.
Exercisability and Expiration
These warrants become exercisable on the fifth business day following the
date on which Endo receives approval from the FDA with respect to MorphiDex(R)
for the treatment of one or more pain indications. These warrants will remain
exercisable for a period of six months after the exercisability date, at which
time they will expire. If the FDA does not approve MorphiDex(R) by December 31,
2002, each of these Endo warrants expires without any payment therefor.
Transferability
Each Algos stockholder will be able to elect whether to receive transferable
or non-transferable warrants. See "THE MERGER--Material U.S. Federal Income Tax
Consequences of the Merger" and "THE ALGOS SPECIAL MEETING--Voting Rights;
Proxies." Endo will list transferable warrants on the NASDAQ National Market
and these warrants will trade under the symbol "ENDPW" and will be freely
tradeable following the merger. American Stock Transfer & Trust Company is the
transfer agent and registrar for the Endo warrants.
Dividends and Other Distributions
Prior to the Endo warrants becoming exercisable, if Endo authorizes:
. the issuance of subscription rights options or warrants to all holders of
Endo common stock or
. the distribution of indebtedness or assets or cash to all holders of Endo
common stock;
then, upon exercise, each holder of Endo warrants will receive his, her or its
pro rata share of such dividends or other distributions.
Reorganization, Consolidation, Merger or Sale
In the event of any:
. capital reorganization (other than any capital reorganization that does
not result in any reclassification of Endo common stock);
. consolidation or merger of Endo with and into another corporation (other
than a consolidation or merger in which Endo is the continuing
corporation and which does not result in any reclassification of Endo
common stock); or
. sale of all or substantially all of the assets of Endo;
then, upon exercise, each holder of Endo warrants will receive the number of
shares of stock or other securities or property to which they would have been
entitled upon such event if the warrant had been exercised in full immediately
prior to such event.
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<PAGE>
Antidilution Provisions
The number of shares of Endo common stock issuable upon exercise of the
warrants and the exercise price of the warrants are subject to adjustment in
the event that Endo:
. pays a dividend or makes a distribution on its common stock in shares of
Endo common stock or other capital stock of Endo or
. subdivides, splits, combines or reclassifies its outstanding shares of
Endo common stock into a different number of securities of the same
class.
The number of shares of Endo common stock issuable upon exercise of the
warrants and the exercise price of the warrants are also subject to adjustment
in the event that Endo:
. issues or sells to any of its affiliates shares of Endo common stock at a
price per share less than the then current market value of Endo common
stock or
. distributes to any of its affiliates any rights, options or warrants
entitling them to purchase shares of Endo common stock or securities
convertible into or exchangeable for Endo common stock at a price per
share less than the then current market value of Endo common stock,
and prior to such issuance, sale or distribution Endo did not first offer to
issue, sell or distribute such shares, rights, options, warrants or convertible
or exchangeable securities to all holders of Endo common stock on the same
economic terms and on a pro rata basis with the issuance, sale or distribution
to the Endo affiliates.
No Other Rights
No holder of an Endo warrant will be entitled to any of the rights of an
Endo common stockholder, including, without limitation, the right to vote or to
attend or receive any notice of meetings of stockholders or any other
proceedings of Endo.
Warrants Issued to Current Endo Stockholders Immediately Prior to the Merger
Immediately prior to the merger, current Endo stockholders will receive, for
each of their Endo common shares, one Endo warrant exercisable, for $0.01 per
share, into a specified number of shares of Endo common stock if the FDA does
not approve MorphiDex(R) for any pain indication prior to December 31, 2002.
The number of shares issuable depends on whether Endo achieves a cash gross
profit of Endo for the fiscal year ended December 31, 2000 of $147.4 million.
If the FDA does not approve MorphiDex(R) before December 31, 2002, then
these warrants become exercisable and upon exercise, each warrant will be
exercisable into:
. 0.416667 shares of Endo common stock in the event that the cash gross
profit of Endo for the fiscal year ended December 31, 2000 equals or
exceeds $147.4 million or
. 0.250000 shares of Endo common stock in the event that the cash gross
profit of Endo for the fiscal year ended December 31, 2000 does not equal
or exceed $147.4 million and Endo Pharma LLC transfers for no
consideration a specified number of shares of Endo common stock that Endo
Pharma LLC then owned to Endo (increasing the percentage ownership of the
public Endo stockholders by five percentage points).
Endo will adjust these numbers prior to the issuance of these Endo warrants
in order to ensure that, upon exercise, holders of Endo common shares who had
been holders prior to the merger own a total of 85% and 80%, respectively, of
the shares of Endo common stock on a fully diluted basis.
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<PAGE>
Other Terms
All of the other terms of these warrants are substantially identical to the
Endo warrants that Endo will issue to the Algos stockholders in the merger,
which this proxy statement/prospectus describes above.
Series A Warrants
Holders of Algos' outstanding Series A warrants will, to the extent that
they do not exercise their warrants prior to the completion of the merger, hold
warrants to purchase Endo common stock with substantially the same terms and
conditions as their current Series A warrants. Each warrant is exercisable to
purchase one share of Endo common stock and one Endo warrant for each share of
Algos common stock into which this warrant would have been exercisable prior to
the merger. In addition, the warrants will have the same exercise price, which
is currently $1.20 per share. As of May 1, 2000, there were outstanding Series
A warrants to purchase 229,661 shares of Algos common stock.
Exercisability and Expiration
The Series A warrants are currently exercisable, and will remain exercisable
following completion of the merger. These warrants expire on September 25,
2001.
Transferability
Endo will neither register these warrants with the SEC nor list them on any
national securities exchange. In addition, holders of these warrants may not
transfer the warrants without the prior written consent of Endo.
Dividends and other Distributions
Prior to the expiration of these warrants, if there is any stock dividend or
any other distribution other than ordinary cash dividends payable out of
earnings or surplus legally available for dividends, then Endo will adjust the
number of shares of Endo common stock subject to these warrants and the
exercise price of the warrants to reflect this distribution.
Reorganization, Consolidation, Merger or Sale
In the event of any consolidation, merger or sale of all or substantially
all of the assets of Endo, Endo will be required to use reasonable efforts to
make adequate provisions so that the holders of these warrants will be entitled
to purchase the number of shares of stock or other securities or property to
which they would have been entitled upon the event if the warrant holder had
exercised the immediately prior to the event.
Antidilution Provisions
Prior to the expiration of these warrants, if there is any stock split or
other reclassification of the Endo common stock, then Endo will adjust the
number of shares of Endo common stock subject to these warrants and the
exercise price of the warrants to reflect this stock split or reclassification.
No Other Rights
The holders of these warrants will not be entitled to any of the rights of
an Endo common stockholder, including, without limitation, the right to vote or
to attend or receive any notice of meetings of stockholders or any other
proceedings of Endo.
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COMPARISON OF STOCKHOLDER RIGHTS
Both Endo and Algos are Delaware corporations. In addition to the applicable
provisions of the Delaware General Corporation Law, currently Endo's amended
and restated certificate of incorporation and amended and restated by-laws
govern the rights of Endo's stockholders, and Algos' amended and restated
certificate of incorporation and amended and restated by-laws govern the rights
of Algos stockholders.
If we complete the merger, Algos stockholders will become Endo stockholders.
Endo intends to amend and restate its certificate of incorporation and by-laws
immediately prior to the merger and, therefore, after the merger, Endo's
amended and restated certificate of incorporation, amended and restated by-laws
and applicable provisions of the Delaware General Corporation Law the rights of
Algos stockholders.
Set forth below is a description of the material differences between the
rights of Endo's stockholders and the rights of Algos' stockholders. Because
both Endo and Algos are Delaware corporations, differences between the rights
of Endo's stockholders and Algos' stockholders will arise from differences in
the respective certificates of incorporation and by-laws of Endo and Algos,
rather than from differences in applicable state law.
While we believe that this description covers the material differences
between the two companies, this description may not contain all of the
information that is important to you. This description is not intended to be a
complete discussion of the certificates of incorporation and by-laws of Endo
and Algos, and it is qualified in its entirety by reference to applicable
Delaware law as well as to Endo's and Algos' respective certificates of
incorporation and by-laws. You should carefully read this description and the
documents that this description references for a more complete understanding of
the differences between being a stockholder of Endo and a stockholder of Algos.
We have attached copies of forms of Endo's amended and restated certificate of
incorporation and amended and restated by-laws as Appendices E and F,
respectively, to this proxy statement/prospectus and they are incorporated in
this proxy statement/prospectus by reference.
Algos' amended and restated certificate of incorporation and amended and
restated by-laws are on file with the SEC, are incorporated by reference, and
will also be sent to you upon request. See "WHERE YOU CAN FIND MORE
INFORMATION" on page 130.
DESCRIPTION OF MATERIAL DIFFERENCES BETWEEN CURRENT RIGHTS OF
ALGOS STOCKHOLDERS AND RIGHTS THOSE STOCKHOLDERS WILL HAVE AS
ENDO STOCKHOLDERS FOLLOWING THE MERGER
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized Capital The total number of shares of The total number of shares of
Stock authorized capital stock is authorized capital stock is
60,000,000 consisting of: 215,000,000 consisting of:
. 50,000,000 shares of common . 175,000,000 shares of common
stock, par value $.01 per stock, par value $.01 per
share, and share, and
. 10,000,000 shares of preferred . 40,000,000 shares of preferred
stock, par value $.01 per stock, par value $.01 per
share. share.
------------------------------------------------------------------------------------------
Board of Directors
------------------------------------------------------------------------------------------
Size of the Board The by-laws provide that the The certificate of incorporation
of Directors number of directors will be at provides that the number of
least three but not more than directors will be at least seven
nine persons. but not more than eleven persons.
By a vote of a majority of the The by-laws provide that the
directors, the board may increase exact number of directors are to
or decrease the number of be fixed
directors and appoint directors
to newly created directorships.
. by the resolution of the board,
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
------------------------------------------------------------------------------------------
<S> <C> <C>
. by consent executed on behalf
of the stockholders.
. by resolution adopted by the
vote of a majority of the
stockholders of common stock,
or
The current board consists of six The board immediately after the
directors. merger will consist of 9
directors.
------------------------------------------------------------------------------------------
Classification of The board is divided into three No classified board.
the Board of classes and the directors are
Directors elected to three-year terms.
------------------------------------------------------------------------------------------
Election of Directors are chosen by a Directors are chosen by a
Directors plurality of the votes cast by plurality of the votes cast by
the stockholders at the election. the stockholders at the election.
All elections of the directors Election of directors need not be
will be by written ballot. by written ballot.
------------------------------------------------------------------------------------------
Resignation of Directors may resign at any time Directors may resign at any time
Directors by a written resignation. if they give notice to Endo.
------------------------------------------------------------------------------------------
Removal of The by-laws provide that a The certificate of incorporation
Directors director can only be removed for and by-laws are silent regarding
cause by the majority vote of all the requirements for removal of
of the shares of stock directors.
outstanding.
------------------------------------------------------------------------------------------
Vacancies on the Vacancies in the number of The by-laws provide that
Board of directorships may be filled by a vacancies on the board may be
Directors majority vote of the remaining filled by a vote of a majority of
directors, though less than a the remaining board, though less
quorum. than a quorum, or even by a sole
remaining director. The three
Algos directors on the board will
fill any vacancies created by
them for other than cause with a
nominee of the remaining Algos-
nominated directors.
------------------------------------------------------------------------------------------
Quorum A majority of the directors in A majority of the entire board
office will constitute a quorum. will constitute a quorum.
------------------------------------------------------------------------------------------
Special Meetings The president or the secretary, The chairman, the president, or
of the Board of on the written request of two or any director may call a special
Directors more directors, may call a meeting of the board on twenty-
special meeting of the board on four hours' notice, or on a
at least two days' notice to each shorter notice as the person(s)
director. The president or a calling the special meeting may
majority of the members of a deem necessary or appropriate.
committee may call at any time a
special meeting of the committee.
</TABLE>
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119
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
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<S> <C> <C>
Stockholders
Meetings
------------------------------------------------------------------------------------------
Annual Meetings The annual meeting will be held The annual meeting will be held
on a date and at a time and place on a
designated by the board. date and at a time designated by
the board.
------------------------------------------------------------------------------------------
Special Meetings Callable at any time but only by Callable by any officer at the
the chairman of the board, the written request of a majority of
president or the majority of the the board or at the written
whole board. request of stockholders owning a
majority of the capital stock
issued and outstanding and
entitled to vote.
------------------------------------------------------------------------------------------
Advance Notice Stockholders must receive notice Each stockholder entitled to vote
Provisions of a special meeting no more than at a stockholder meeting will
ninety days before the special receive a
meeting and not later than the written notice of the meeting not
later of either (a) sixty days less
before the special meeting or (b) than ten nor more than sixty days
ten days following the public before the date of the meeting.
announcement of the meeting by
the company.
------------------------------------------------------------------------------------------
Quorum The holders of a majority of the Same.
capital stock entitled to vote
pursuant in person or represented
by proxy will constitute a
quorum.
------------------------------------------------------------------------------------------
Voting Rights The certificate of incorporation The holders of common stock are
provides that, subject to the entitled to one vote per share on
laws of Delaware and by-laws, all all matters to be voted on by the
rights to vote and all voting common stockholders.
power will be exclusively vested
in the common stock. Every
stockholder of record will be
entitled at every meeting of the
stockholders to one vote for each
share of common stock.
All questions brought before the All questions brought before the
meeting of stockholders will be meeting of stockholders will be
decided by a majority vote except decided by a majority vote.
regarding (a) certain amendments
to the certificate of
incorporation or by-laws and (b)
a business combination involving
a transaction between the company
and an interested stockholder or
an affiliate of the interested
stockholder; both (a) and (b)
requiring a 66 2/3% affirmative
vote.
</TABLE>
120
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
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<S> <C> <C>
Voting will be by ballot if it is Votes can be cast in person or by
required by law or if it is proxy but no proxy will be voted
demanded by a stockholder on or after three years from its
entitled to vote. If a voting by date, unless the
ballot is not required or proxy provides for a longer
requested, voting may be by voice period. The board or the officer
vote. Votes can be cast by proxy. presiding at a
meeting of stockholders may
require that votes cast in the
stockholder meetings be cast by a
written ballot.
----------------------------------------------------------------------------------------
Action by Any action required or permitted The by-laws provide that actions
Consent of to be taken by stockholders must permitted to be taken at the
Stockholders be effected at a duly called meeting of the stockholders may
annual or special meeting and may be taken without
not be effected by a consent in (a) a meeting, (b) prior notice
writing. and (c) a vote, if a consent in
writing 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 actions at the
stockholder meeting.
----------------------------------------------------------------------------------------
Inspection The secretary will prepare and Same; except that the officer in
Rights make a complete list of charge of the stock ledger will
stockholders entitled to vote at prepare and make the complete
a stockholders' meeting at least list of stockholders entitled to
ten days before the meeting of vote at the meeting of the
the stockholders. The stockholder stockholders.
list will be open to the
examination of stockholders for
purposes germane to the meeting
as long as the examination is
conducted
. during ordinary business hours,
. for a period of at least ten
days before the meeting, and
. either at a place within the
city where the meeting is to be
held or at the place where the
meeting is held.
The stockholder list will be
produced and kept at the place
and duration of the meeting for
the inspection by the
stockholders present at the
meeting.
----------------------------------------------------------------------------------------
</TABLE>
121
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
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<S> <C> <C>
Amendments to
Organizational
Documents
------------------------------------------------------------------------------------------
Certificate of Provisions of the certificate of Provisions of the certificate of
Incorporation incorporation may be amended, incorporation may be amended,
altered, changed or repealed by altered, changed or repealed by
the affirmative vote of the board the affirmative vote of the board
of directors and approval by the of directors and approval by the
holders of a majority of the holders of a majority of the
outstanding voting stock, except outstanding voting stock.
that (a) the amendment or repeal
of the articles relating to
"Action by Consent of
Stockholders" (see above),
"Exculpation and Indemnification"
(see below) and "Amendments," or
(b) the reduction of the number
of authorized shares of common
stock and preferred stock require
the affirmative vote of the
holders of at least 66 2/3% of
the outstanding voting stock.
------------------------------------------------------------------------------------------
By-Laws The by-laws may be altered or The by-laws may be altered,
repealed, or new by-laws may be amended or repealed, or new by-
adopted at the meeting of the laws may be adopted by the
stockholders if notice of the stockholders or by the board.
proposed alteration or repeal of Notice of alteration, amendment
the by-laws is contained in the or repeal of the by-laws or the
notice of the meeting. An adoption of new by-laws will be
affirmative vote of 66 2/3% contained in the notice of the
of the stock issued and meeting of stockholders or the
outstanding and entitled to vote board. All changes to the by-laws
is required at the stockholder must be approved either by the
meeting to alter or repeal by- holders of a majority of the
laws or adopt new by-laws. The outstanding capital stock
by-laws can also be altered or entitled to vote or by a majority
repealed or new by-laws adopted of the entire board.
by the affirmative vote of a
majority of the board at any
meeting if notice of the proposed
alteration or repeal is contained
in the notice of the meeting.
------------------------------------------------------------------------------------------
Dividends and The certificate of incorporation The certificate of incorporation
Other provides that dividends on provides that, when dividends are
Distributions outstanding shares of preferred declared, the holders of the
stock will be paid or declared common stock will be entitled to
and set apart for payment before share equally, share for share,
dividends are paid on the common in the dividends. The board may
stock. The by-laws provide that declare dividends at regular or
the board may: special meetings
. declare and pay dividends or and may decide to pay in cash, in
make other distributions on the property, or in shares of capital
outstanding shares of capital stock. Before payment of the
stock, dividend, the
</TABLE>
122
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
------------------------------------------------------------------------------------------
<S> <C> <C>
. use and apply surplus of the board can set aside out of funds
company in purchasing or of Endo available for dividends,
acquiring the company's sums that in its absolute
securities, and discretion, the board deems
. set aside out of surplus or net necessary for the purpose of a
profits a sum that the board reserve of funds to meet
deems necessary for the purpose contingencies, or for equalizing
of a reserve of funds to meet dividends, or for repairing or
contingencies, or for maintaining the property of Endo.
equalizing dividends, or for
repairing or maintaining the
property of Algos.
If upon liquidation, dissolution Not applicable.
or winding up of the company, the
assets available for distribution
to the holders of preferred stock
are insufficient to pay to those
holders the full preferential
amount, then the assets will be
distributed ratably among the
shares of preferred stock.
------------------------------------------------------------------------------------------
Exculpation and
Indemnification
------------------------------------------------------------------------------------------
Exculpation No director will be personally Same.
liable to the company or the
stockholders for monetary damages
for breach of fiduciary duty,
except for liability
. for a breach of the duty of
loyalty to the company and its
stockholders,
. for acts or omissions not in
good faith or which involve
intentional misconduct or a
knowing violation of law,
. pursuant to section 174 of the
Delaware General Corporation
Law, or
. for transactions from which the
director derived improper
personal benefit.
The certificate of incorporation A contract or transaction between
and by-laws are silent regarding the company and its directors or
the validity of contracts or officers, or between the company
transactions between the company and any other entity in which its
and its directors or officers, or directors or officers are
between the company and any other directors or officers of the
entity in which its directors and company will not be void or
officers are directors or voidable solely for the reason
officers of the company. that
</TABLE>
123
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
------------------------------------------------------------------------------------------
<S> <C> <C>
. it is a contract or a
transaction that involves an
interested director or officer,
. the interested director or
officer is present at or
participates in the meeting of
the board or committee that
authorizes the contract or
transaction, or
. the interested director's votes
are counted in authorizing the
contract or transaction.
However, in order for the
contract or transaction with an
interested director or officer to
be valid, one of the following
conditions must be met:
. Material facts as to the
interested director's or
officer's relationship or
interest are disclosed or are
known to the board or the
committee and the board or the
committee in good faith
authorizes the contract or
transaction by the affirmative
vote of a majority of the
disinterested directors, even
though the disinterested
directors represent less than a
quorum;
. Material facts as to the
interested director's or
officer's relationship or
interest are disclosed or are
known to the stockholders
entitled to vote and the
contract or transaction is
specifically approved in good
faith by the vote of the
stockholders; or
. The contract or transaction is
fair to the company as of the
time it is authorized, approved
or ratified, by the board,
committee or the stockholders.
</TABLE>
124
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
------------------------------------------------------------------------------------------
<S> <C> <C>
Indemnification The company will indemnify its Same; except the right to
directors, officers, employees indemnification is not originally
and agents to the fullest extent extended to employees and agents
authorized or permitted by law of the company. The board may
against expenses, judgments, provide rights to indemnification
fines and amounts paid in and to the advancement of
settlement. expenses to employees and agents
of the company.
The directors' and officers' Same.
right to indemnification
continues to persons who have
ceased to be directors or
officers and to his or her heirs,
executors and personal and legal
representatives.
The board has the express The authorization as to whether a
authority to enter into director or officer should be
indemnification agreements indemnified is made
with present or future directors . by a majority vote of the
and officers. directors who are not parties
to the action, suit or
proceeding, even though less
than
a quorum,
. by independent legal counsel in
a written opinion if there are
no directors who are not
parties to the action, suit or
proceeding, or
. by the stockholders.
However, if a director or officer
has been successful on the merits
or defense of the action, suit or
proceeding, then that person will
be indemnified without
authorization.
Unless a proceeding is authorized Same.
or consented to by the board, the
company is not obligated to
indemnify a director or officer
regarding a proceeding initiated
by the same director or officer.
If a written claim of indemnity If the director or officer is
by an officer, director, employee adjudged to be liable to the
or agent is not paid in full company by a court of law there
within ninety days after the would be no right of
claim is received by the company, indemnification unless the court
then that officer, director, determines upon application that,
employee or agent can bring a despite the adjudication of
suit against the company. If the liability but in view
suit is successful in whole or in of all the circumstances of the
part, the officer, director, case, the director or officer is
employee or agent is entitled to fairly and reasonably entitled to
be paid expenses of prosecuting indemnity.
the suit.
Neither the certificate of Directors or officers may apply
incorporation nor the by-laws to the Court of Chancery in the
contemplate application to the State of Delaware for
Court of Chancery in the State of indemnification.
Delaware for indemnification.
</TABLE>
125
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
----------------------------------------------------------------------------
<S> <C> <C>
The right to indemnification Same.
includes the right to be
reimbursed for the expenses
incurred in defending or
participating in proceedings in
advance of its final disposition.
A repeal or modification of the Same.
indemnification provisions by the
stockholders must not adversely
affect the rights to
indemnification of directors and
officers regarding any acts or
omissions that occurred before
the repeal or modification.
The company may purchase and Same.
maintain insurance on behalf of
persons who are or were directors
or officers whether or not the
company would have the power or
the obligation to indemnify those
persons.
----------------------------------------------------------------------------
Appraisal Rights Under Delaware law, the rights of Same.
dissenting stockholders to obtain
the fair value for their shares,
which are referred to as
appraisal rights, may be
available in connection with a
statutory merger or consolidation
in certain specific situations.
Appraisal rights are not
available to a corporation's
stockholders under Delaware law
when the corporation is to be the
surviving corporation and no vote
of its stockholders is required
to approve the merger.
In addition, unless otherwise
provided in the certificate of
incorporation, no appraisal
rights are available under
Delaware law to holders of shares
of any class of stock which is
either (a) listed on a national
securities exchange or designated
as a national market system
security on an interdealer
quotation system by the NASD or
(b) held of record by more than
2,000 stockholders, unless these
stockholders are required by the
terms of the merger to accept
anything other than:
.shares of stock of the surviving
corporation;
</TABLE>
126
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
---------------------------------------------------------------------------------------
<S> <C> <C>
. shares of stock of another
corporation which, as of the
effective date of the merger or
consolidation, are of the kind
described in clauses (a) and
(b) above;
. cash instead of fractional
shares of such stock; or
. any combination of the above
three bullets.
Appraisal rights are not
available under Delaware law in
the event of the sale of all or
substantially all of a
corporation's assets or the
adoption of an amendment to its
certificate of incorporation,
unless such rights are granted in
the corporation's certificate of
incorporation. The certificate of
incorporation does not grant
these rights.
---------------------------------------------------------------------------------------
Shareholder None. None.
Rights Plan
---------------------------------------------------------------------------------------
Ownership The company may impose on the Neither the certificate of
Limitations holder of restricted capital incorporation nor the by-laws
stock, or the successor or imposes limitations on the
transferee of that holder, a ownership of capital stock.
written restriction on the
transfer or registration of
transfer of the capital stock if
it is (a) permitted by section
202 of the Delaware General
Corporation Law and (b) noted
conspicuously on the stock
certificate. Unless noted
conspicuously on the certificate,
a restriction on the transfer or
registration of transfer will be
ineffective except against the
holders who had actual knowledge
of the restriction. No
restriction will be binding to
the capital stock issued before
the adoption of the restriction
unless the holders of the capital
stock are parties to an agreement
or voted in favor of the
restriction.
If the company securities are Neither the certificate of
offered to a non-United States incorporation nor the by-laws
person, the company will require imposes this requirement.
the non-United States person to
deliver an opinion of counsel
satisfactory to the company that
the transfer of the securities is
permitted under the U.S. federal
securities laws.
</TABLE>
127
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
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<S> <C> <C>
Business A business combination involving The certificate of incorporation
Combinations a transaction between the company states that the company elects
and an interested stockholder or not to be governed by section 203
an affiliate of the interested of the Delaware
stockholder requires the General Corporation Law pursuant
affirmative vote of the holders to section 203(b)(3) of the
of at least 66 2/3% of the Delaware General Corporation Law.
outstanding shares of capital
stock.
A business combination is defined Not applicable.
in the certificate of
incorporation to include the
following transactions between
the company or its subsidiary and
an interested stockholder or its
affiliate:
. a merger or consolidation;
. a sale, lease, exchange,
mortgage, pledge, transfer or
other disposition of the assets
of the company that has an
aggregate fair market value of
more than 25% of the fair value
of the company's common stock;
. the issuance or transfer by the
company or its subsidiary of
the securities of the company
or its subsidiary in exchange
for cash, securities or other
property that has an aggregate
fair market value of more than
25% of the fair value of the
company's common stock;
. the adoption of a plan or
proposal for the liquidation or
dissolution of the company
proposed by an interested
stockholder or an affiliate of
the interested stockholder; or
. a reclassification of
securities, recapitalization of
the company, or a merger or
consolidation of the company
with its subsidiaries that has
the effect of increasing the
proportionate ownership
interest of the interested
stockholder or an affiliate of
the interested stockholder.
</TABLE>
128
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
----------------------------------------------------------------------------
<S> <C> <C>
A business combination will not Not applicable.
require the affirmative vote of
the holders of at least 66 2/3%
of the outstanding shares of
capital stock if either (a) the
business combination has been
approved by a majority of the
whole board of the company or (b)
the aggregate amount of the
consideration to be received per
share by holders of common stock
as a result of the business
combination is at least equal to
the highest of the following:
. the highest share price paid by
the interested stockholder
within the two-year period
prior to the business
combination,
. the fair value per share of
company common stock on the
date on which the interested
stockholder became an
interested stockholder, and
. the fair value per share of
company common stock on the
date of the first public
announcement of any proposed
business combination.
A repeal or amendment of the Not applicable.
business combination provision in
the certificate of incorporation
or adoption of a provision that
is inconsistent with the business
combination provision requires
the affirmative vote of the
holders of at least 66 2/3% of
the voting power of all shares of
the company's capital stock.
</TABLE>
129
<PAGE>
LEGAL MATTERS
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York will pass upon
the validity of the issuance of the Endo common stock and the Endo warrants for
Endo, Latham & Watkins, New York, New York, counsel to Algos, and Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York, counsel to Endo, will be
delivering opinions concerning federal income tax consequences of the merger.
See "THE MERGER--Material U.S. Federal Income Tax Consequences." From time to
time, Skadden, Arps, Slate, Meagher & Flom LLP provides advice to Kelso &
Company. Roger H. Kimmel, a member of the Algos board of directors and a
stockholder of Algos, is a partner at Latham & Watkins. In addition, several
members of Latham & Watkins from time to time own or have owned Algos common
stock.
EXPERTS
The financial statements of Endo Pharmaceuticals Holdings Inc. included in
this proxy statement/prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports, appearing
herein and elsewhere in the registration statement, and are included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing. The financial statements as of December 31, 1996 and
the period from January 1, 1997 to August 26, 1997 of Dupont Pharmaceuticals
Company Generic and U.S. Multi-Source Products included in this proxy
statement/prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing. The financial statements as of
December 31, 1999 and 1998 and for each of the three fiscal years in the period
ending December 31, 1999 of Algos Pharmaceutical Corporation (a development
stage enterprise) included in this proxy statement/prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
FUTURE STOCKHOLDER PROPOSALS
Due to the contemplated consummation of the merger, Algos does not currently
intend to hold an annual meeting of stockholders in 2000. In the event that
Algos holds an annual meeting in 2000, the Secretary of Algos would have had to
have received any proposals that stockholders intend to present at this meeting
no later than December 31, 1999.
SEC rules set forth standards as to the requirements for inclusion of
stockholder proposals in a proxy statement for an annual meeting.
WHERE YOU CAN FIND MORE INFORMATION
Algos files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements
or other information Algos files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Algos'
SEC filings are also available to the public from commercial document retrieval
services and at the Internet world wide web site maintained by the SEC at
www.sec.gov.
As of the date of this proxy statement/prospectus, Endo has filed a
registration statement on Form S-4 to register with the SEC the Endo common
stock and warrants that Endo will issue to Algos stockholders in the merger.
This proxy statement/prospectus is a part of that registration statement and
constitutes a prospectus of Endo, as well as a proxy statement of Algos for its
special meeting.
As allowed by SEC rules, this proxy statement/prospectus does not contain
all the information you can find in the registration statement or the exhibits
to the registration statement.
130
<PAGE>
The SEC allows Algos to "incorporate by reference" information into this
proxy statement/prospectus, which means that Algos can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
proxy statement/prospectus, except for any information superseded by
information contained directly in this proxy statement/prospectus. This proxy
statement/prospectus incorporates by reference the documents set forth below
that Algos has previously filed with the SEC. These documents contain important
information about Algos and its financial condition.
Algos SEC Filings
Annual Reports on Form 10-K:
Year ended December 31, 1999.
Quarterly Reports on Form 10-Q:
Quarter ended March 31, 2000.
Current Reports on Form 8-K:
Filed on November 29, 1999, December 3, 1999 and April 17, 2000.
Proxy Statements on Form 14A:
Dated April 30, 1999.
Algos can also incorporate by reference into this proxy
statements/prospectus additional documents that Algos may file with the SEC
from the date of this proxy statement/prospectus to the date of the special
meeting of Algos stockholders. These include periodic reports, such as Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, as well as proxy statements.
Algos has supplied all information contained or incorporated by reference in
this proxy statement/prospectus relating to Algos.
If you are a stockholder, Algos may have sent you some of the documents
incorporated by reference, but you can obtain any of them through Algos, the
SEC or the SEC's Internet world wide web site as described above. Documents
incorporated by reference are available from Algos without charge, excluding
all exhibits unless Algos has specifically incorporated by reference an exhibit
in this proxy statement/prospectus. Stockholders may obtain documents
incorporated by reference in this proxy statement/prospectus by requesting them
in writing or by telephone from the Algos at the following address:
Algos Pharmaceutical Corporation
1333 Campus Parkway
Neptune, NJ 07753-6815
Attention: Assistant Secretary
If you would like to request documents from us, please do so by July 5, 2000
to receive them before the Algos special meeting.
You should rely on the information contained or incorporated by reference in
this proxy statement/prospectus to vote on the transactions. We have not
authorized anyone to provide you with information that is different from what
is contained in this proxy statement/prospectus. This proxy
statement/prospectus is dated June 14, 2000. You should not assume that the
information contained in this proxy statement/prospectus is accurate as of any
date other than that date, and neither the mailing of this proxy
statement/prospectus to you nor the issuance of Endo common stock and warrants
in the merger shall create any implication to the contrary.
131
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ENDO PHARMACEUTICALS HOLDINGS INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
DECEMBER 31, 1999, 1998 AND 1997
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1999 and 1998 and the Period from August 26, 1997 (Date of Acquisition)
to December 31, 1997.................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999 and 1998 and the Period from August 26, 1997 (Date of
Acquisition) to December 31, 1997....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and the Period from August 26, 1997 (Date of Acquisition) to
December 31, 1997....................................................... F-6
Notes to Consolidated Financial Statements for the Years Ended December
31, 1999 and 1998 and the Period from August 26, 1997 (Date of
Acquisition) to December 31, 1997....................................... F-7
MARCH 31, 2000 AND 1999
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999
(Unaudited)............................................................. F-18
Consolidated Statements of Operations for the Three Months Ended March
31, 2000 and 1999 (Unaudited)........................................... F-19
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 2000 and 1999 (Unaudited)........................................... F-20
Notes to Consolidated Financial Statements for the Three Months Ended
March 31, 2000 (Unaudited).............................................. F-21
</TABLE>
DUPONT PHARMACEUTICALS COMPANY
<TABLE>
<S> <C>
AUGUST 26, 1997 AND DECEMBER 31, 1996
Report of Independent Accountants........................................ F-23
Statements of Earnings for the Year Ended December 31, 1996 and the
Period from January 1, 1997 to August 26, 1997.......................... F-24
Statements of Assets to be Sold as of December 31, 1996 and August 26,
1997.................................................................... F-25
Notes to the Statements of Earnings and Assets to be Sold for the Year
Ended December 31, 1996 and the Period from January 1, 1997 to August
26, 1997................................................................ F-26
ALGOS PHARMACEUTICAL CORPORATION
Report of Independent Accountants......................................... F-32
Balance Sheets as of December 31, 1999 and 1998.......................... F-33
Statements of Operations for the Years Ended December 31, 1999, December
31, 1998 and December 31, 1997 and Cumulative from Inception to December
31, 1999................................................................ F-34
Statements of Cash Flows for the Years Ended December 31, 1999, December
31, 1998 and December 31, 1997 and Cumulative from Inception to December
31, 1999................................................................ F-35
Statements of Changes in Stockholders' Equity for the Period from
Inception to
December 31, 1996 ...................................................... F-36
Statements of Changes in Stockholders' Equity for the Three Years Ended
December 31, 1999....................................................... F-37
Notes to Financial Statements for the Years Ended December 31, 1999,
December 31, 1998 and December 31, 1997................................. F-38
Balance Sheets as of March 31, 2000 and December 31, 1999................ F-46
Statements of Operations for the Three Months Ended March 31, 2000 and
March 31, 1999 and Cumulative from Inception to March 31, 2000.......... F-47
Condensed Statements of Cash Flows for the Three Months Ended March 31,
2000 and March 31, 1999 and Cumulative from Inception to March 31,
2000.................................................................... F-48
Notes to Financial Statements for the Three Months Ended March 31, 2000
and March 31, 1999...................................................... F-49
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Endo Pharmaceuticals Holdings Inc.
We have audited the accompanying consolidated balance sheets of Endo
Pharmaceuticals Holdings Inc. (the "Company") as of December 31, 1999 and 1998
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1999 and 1998 and the period from
August 26, 1997 (Date of Acquisition) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 1998 and the results of their operations and their cash flows for the
years ended December 31, 1999 and 1998 and the period from August 26, 1997
(Date of Acquisition) to December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 28, 2000
(June 9, 2000 as to earnings per share data and Note 13)
F-2
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(In thousands except share data)
<TABLE>
<CAPTION>
1999 1998
-------- --------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 22,028 $ 17,367
Accounts receivable, net of allowance of $444 and $315 at
December 31, 1999 and 1998, respectively................ 62,254 33,009
Inventories.............................................. 21,269 14,461
Prepaid expenses......................................... 3,356 1,925
Deferred income taxes.................................... 9,520 6,278
-------- --------
Total current assets................................... 118,427 73,040
-------- --------
PROPERTY AND EQUIPMENT, Net................................ 5,712 5,014
GOODWILL AND OTHER INTANGIBLES, Net of amortization of
$15,625 and $8,742 at December 31, 1999 and 1998,
respectively.............................................. 192,081 187,964
DEFERRED INCOME TAXES...................................... 8,636 13,876
OTHER ASSETS............................................... 4,580 7,724
-------- --------
TOTAL ASSETS............................................... $329,436 $287,618
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable......................................... $ 19,185 $ 11,951
Accrued expenses......................................... 33,641 23,413
Income taxes payable..................................... 75
Current portion of long-term debt........................ 15,985
-------- --------
Total current liabilities.............................. 68,886 35,364
-------- --------
LONG-TERM DEBT, Less current portion....................... 175,218 170,544
OTHER LIABILITIES.......................................... 6,745 6,352
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 500,000 shares
authorized; none issued
Common Stock, $.01 par value; 2,000,000 shares
authorized; and 929,950 shares issued in 1999 and 1998,
respectively............................................ 9 9
Class A Common Stock, $.01 par value; 200,000 shares
authorized; and 174,560 shares issued in 1999 and 1998,
respectively............................................ 2 2
Additional paid-in capital............................... 110,440 110,440
Accumulated deficit...................................... (31,833) (35,093)
-------- --------
78,618 75,358
Less: Treasury stock, at cost; 290 shares in 1999........ (31)
-------- --------
Total Stockholders' Equity............................. 78,587 75,358
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $329,436 $287,618
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD FROM AUGUST 26, 1997
(DATE OF ACQUISITION) TO DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
NET SALES....................................... $ 138,546 $ 108,370 $ 39,431
COST OF SALES................................... 58,263 54,731 29,779
--------- --------- ---------
GROSS PROFIT.................................... 80,283 53,639 9,652
--------- --------- ---------
COSTS AND EXPENSES:
Selling, general and administrative........... 42,921 25,540 8,707
Research and development...................... 9,373 5,893 2,865
Depreciation and amortization................. 8,309 7,373 2,340
Purchased in-process research and
development.................................. 46,000
--------- --------- ---------
OPERATING INCOME (LOSS)......................... 19,680 14,833 (50,260)
--------- --------- ---------
INTEREST EXPENSE, Net........................... 14,347 14,451 5,352
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX (BENEFIT)....... 5,333 382 (55,612)
--------- --------- ---------
INCOME TAX (BENEFIT)............................ 2,073 181 (20,318)
--------- --------- ---------
NET INCOME (LOSS)............................... $ 3,260 $ 201 $ (35,294)
========= ========= =========
NET INCOME (LOSS) PER SHARE
Basic and Diluted............................. $ 2.95 $ .18 $ (32.09)
========= ========= =========
Weighted average shares (Basic and Diluted)... 1,104,353 1,103,967 1,100,000
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD FROM AUGUST 26, 1997
(DATE OF ACQUISITION) TO DECEMBER 31, 1997
(In thousands except share data)
<TABLE>
<CAPTION>
Class A
Common Common Additional Total
Number Stock at Stock at Paid-in Accumulated Treasury Stockholders'
of Shares Par Value Par Value Capital Deficit Stock Equity
--------- --------- --------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common
Stock.................. 928,800 $ 9 $ 92,871 $ 92,880
Issuance of Class A
Common Stock........... 171,200 $ 2 17,118 17,120
Net Loss................ $(35,294) (35,294)
--------- --- --- -------- -------- --------
BALANCE, DECEMBER 31,
1997 1,100,000 9 2 109,989 (35,294) 74,706
Issuance of Common
Stock.................. 1,150 115 115
Issuance of Class A
Common Stock........... 3,360 336 336
Net Income.............. 201 201
--------- --- --- -------- -------- --------
BALANCE, DECEMBER 31,
1998 1,104,510 9 2 110,440 (35,093) 75,358
Repurchase of Class A
Common Stock--at cost.. (290) $ (31) (31)
Net income.............. 3,260 3,260
--------- --- --- -------- -------- ----- --------
BALANCE, DECEMBER 31,
1999 1,104,220 $ 9 $ 2 $110,440 $(31,833) $ (31) $ 78,587
========= === === ======== ======== ===== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND THE PERIOD FROM AUGUST 26, 1997
(DATE OF ACQUISITION) TO DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).............................. $ 3,260 $ 201 $ (35,294)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ 8,309 7,373 2,340
Purchased in-process research and
development................................. 46,000
Accretion of Promissory Notes................ 2,001 675 79
Deferred income taxes........................ 1,998 164 (20,318)
Amortization of deferred financing costs..... 1,199 1,283 387
Other noncash charges........................ 133 182
Changes in assets and liabilities which
provided (used) cash:
Accounts receivable........................ (29,245) (11,886) (21,438)
Inventories................................ (6,808) (1,368) 10,549
Other assets............................... (3,533) (640)
Accounts payable........................... 7,234 5,099 6,852
Accrued expenses........................... 28,958 18,758 20,614
Other liabilities.......................... 393 500 5,852
------- -------- ---------
Net cash provided by operating
activities.............................. 13,766 20,932 15,165
------- -------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment............. (2,124) (1,487) (1,076)
Acquisition of Licensing Rights................ (6,950) (2,050)
Acquisition of business........................ (267,378)
------- -------- ---------
Net cash used in investing activities.... (9,074) (3,537) (268,454)
------- -------- ---------
FINANCING ACTIVITIES:
Issuance of Common Stock....................... 115 92,880
Issuance of Class A Common Stock............... 336 17,120
Repurchase of Class A Common Stock............. (31)
Deferred financing costs paid.................. (7,190)
Proceeds of long-term debt..................... 165,000
Repayments of long-term debt................... (15,000)
------- -------- ---------
Net cash (used in) provided by financing
activities.............................. (31) (14,549) 267,810
------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........ 4,661 2,846 14,521
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... 17,367 14,521
------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $22,028 $ 17,367 $ 14,521
======= ======== =========
SUPPLEMENTAL INFORMATION:
Interest paid.................................. $12,194 $ 14,401 $ 3,656
======= ======== =========
Income taxes paid.............................. $ 17
=======
SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Promissory note issued in acquisition.......... $ 2,393
=========
Promissory note issued under Manufacturing and
Supply Agreement.............................. $18,655 $ 17,397
======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE PERIOD FROM AUGUST 26, 1997
(DATE OF ACQUISITION) TO DECEMBER 31, 1997
1. ORGANIZATION AND ACQUISITIONS
Endo Pharmaceuticals Holdings Inc. (the "Company") through its wholly owned
subsidiary, Endo Pharmaceuticals Inc. ("Endo"), is engaged in the sales,
marketing, research and development of branded and generic pharmaceutical
products primarily in the United States.
On August 26, 1997, Endo commenced operations by acquiring certain branded
and generic pharmaceutical products, related rights and certain assets of
Dupont Pharmaceuticals Company ("Dupont", formerly The Dupont Merck
Pharmaceutical Company, Dupont Merck Pharma and Endo Laboratories, L.L.C.) (the
"Acquisition"). The purchase price for the Acquisition of approximately $277
million (including approximately $15 million in transaction fees) was financed
with approximately $275 million in cash from (i) borrowings of $165 million
under a credit facility with a group of banks and (ii) the issuance of $110
million of Common Stock and Class A Common Stock of Endo for cash to certain
affiliates and designees of Kelso & Company, Inc. ("Kelso"), management and
certain other investors; and (iii) the issuance of a promissory note to Dupont
of approximately $2 million.
The Acquisition was accounted for using the purchase method of accounting.
In accordance with the purchase method of accounting, the purchase price was
allocated to the underlying assets of the business acquired based on their
estimated fair values at the date of acquisition. The final value of acquired
in-process research and development was $46 million and charged to expense at
the date of the Acquisition. The excess of the purchase price over the tangible
and identifiable intangible assets was allocated to goodwill. In consideration
of services provided by an individual prior to the Acquisition, such individual
was granted contingent consideration of $2 million only upon the occurrence of
certain events. This amount will be expensed in the period the contingency is
resolved.
The final allocation of the purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Inventories........................................................ $ 23,642
Property and equipment............................................. 3,423
Acquired in-process research and development....................... 46,000
Goodwill........................................................... 196,706
Debt issuance costs................................................ 7,190
--------
Total purchase price............................................... $276,961
========
</TABLE>
The Acquisition included various on-going projects to research and develop
innovative new products primarily for pain management. As a result, a portion
of the total purchase price for the Acquisition was allocated to these acquired
in-process research and development projects ("IPRD"). At the time of the
Acquisition, the total number of projects acquired and in various phases of
development was 15. The development program for a new pharmaceutical substance
involves several different phases prior to drug application. Generic and
branded Phase II projects ranged from 20% to 50% completed at the time of the
Acquisition. Branded Phase III projects were approximately 90% completed at the
time of the Acquisition. Drug application must be approved prior to marketing a
new drug. Despite the Company's commitment to completion of the research and
development projects, many factors may arise which could cause a project to be
withdrawn, including a drug being shown as ineffective during the development
process. Upon withdrawal, it is unlikely that the development activities will
have alternative use.
F-7
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The methodology used by the Company in determining the value of IPRD was: 1)
identify the various on-going projects that the Company will prioritize and
continue; 2) project net future cash flows of the identified projects based on
current demand and pricing assumptions, less the anticipated expenses to
complete the development program, drug application, and launch the product
(significant net cash inflows were projected to commence in 1999); 3) discount
these cash flows based on a risk-adjusted discount rate (17%); and 4) apply the
estimated percentage of completion to the discounted cash flow for each
individual project. The discount rate was determined after considering various
uncertainties at the time of the Acquisition, primarily the stage of project
completion.
A summary of the various projects included in IPRD follows (dollars in
thousands). Projects included as IPRD and reflected in the below schedule
include Percocet(R) 2.5/325, Percocet(R) 7.5/500, Percocet(R) 10.0/650,
Zydone(R) and Morphine Sulfate Extended Release Tablets, all of which have been
subsequently completed and commercially launched by the Company. There can be
no assurance that other projects acquired and included in IPRD will prove
successful.
<TABLE>
<CAPTION>
Number of Projects Estimated Value
------------------ ---------------
<S> <C> <C>
Generic projects--Phase II................... 9 $13,000
Branded projects--Phase II................... 4 21,000
Branded projects--Phase III.................. 2 12,000
--- -------
15 $46,000
=== =======
</TABLE>
On November 18, 1997, the Company, a Delaware corporation, was established
for the sole purpose of holding all of the shares of capital stock of Endo. As
of December 1, 1998, the stockholders of Endo became the stockholders of the
Company, owning the same interests in the Company that they formerly owned in
Endo.
On November 19, 1999, the Company formed Endo Inc. as a wholly owned
subsidiary to effect the acquisition of Algos Pharmaceutical Corporation
("Algos"). The stock of Endo and the stock of Endo Inc. are the only assets of
the Company, and the Company has no other operations or business.
On November 29, 1999, the Company and Algos announced that they had entered
into a definitive merger agreement. The merger, which is subject to certain
closing conditions, including Algos shareholder approval, will be accounted for
by the Company using the purchase method of accounting. The merger is expected
to be completed by the second quarter 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of Endo Pharmaceuticals Holdings Inc. (the "Company") and
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
Nature of Operations and Customer and Supplier Concentration--The Company is
engaged in the marketing and sales of pharmaceuticals. The Company's sales are
substantially through wholesale drug distributors who in turn supply products
to pharmacies, hospitals and physicians. The Company is potentially subject to
a concentration of credit risk with respect to its trade receivables. Three
wholesale customers individually accounted for 27%, 20% and 13% of net sales in
1999, and 26%, 21%, and 14% of net sales in 1998. Five wholesale customers
individually accounted for 22%, 18%, 15%, 15% and 12% of net sales in 1997. The
Company performs ongoing credit evaluations of its customers and maintains
sufficient allowances for estimated uncollectible accounts. Generally, the
Company does not require collateral from its customers.
F-8
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has an agreement with DuPont for the manufacture and supply of
substantially all of its existing and new pharmaceutical products (see Note 9).
In the event of any interruption in the manufacture and supply of these
products due to regulatory or other causes, there can be no assurance that the
Company could make alternative arrangements on a timely basis, if at all. Such
interruption could have a material adverse effect on the Company's business,
financial condition and results of operations.
One of the Company's products accounted for approximately 34%, 41% and 43%
of net sales for 1999 and 1998 and the period from August 26, 1997 through
December 31, 1997, respectively.
Revenue Recognition--Revenues are recognized when products are shipped.
Revenues are recorded net of reserves for estimated chargebacks, sales
allowances, returns and losses.
Research and Development--Expenditures for research and development are
expensed as incurred.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity date of three months or less to be cash
equivalents.
Derivative Financial Instruments--The Company uses an interest rate cap
agreement ("Cap"), to manage its exposure to fluctuations in interest rates.
This Cap is matched with debt and periodic cash payments and is accrued on a
net basis as an adjustment to interest expense. Any fee associated with this
instrument is amortized over its term.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. Inventories are comprised
entirely of finished goods.
Property and Equipment--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the estimated useful
lives of the related assets on a straight-line basis. Machinery and equipment
are depreciated over three to ten years, computer equipment over three to five
years, and furniture and fixtures over three to seven years. Computer software
and related third-party design, development and implementation fees which
benefit future periods are capitalized and amortized using the straight-line
method over a useful life of three to five years.
License Fees--The cost of license fees are capitalized and amortized on a
straight-line basis over their estimated useful life of twenty years.
Goodwill--Goodwill, which represents the excess of purchase price over the
fair value of net assets acquired, is being amortized on a straight-line basis
over its estimated useful life of thirty years. The Company assesses the
recoverability and the amortization period of the goodwill by determining
whether the amount can be recovered through undiscounted net cash flows of the
businesses acquired over the remaining amortization period.
Long-Lived Assets--The Company reviews for the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows expected to result
from the use of the asset are less than its carrying amount. Assets are grouped
at the lowest level for which they are identifiable cash flows that are largely
independent from other asset groups. The Company uses the discounted future
expected net cash flows, as its estimate of fair value, to determine the amount
of impairment loss. The Company has not identified any such impairment losses
with respect to long-lived assets for all periods presented.
F-9
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Marketing Costs--Marketing costs, including advertising costs, are expensed
as incurred. Such costs were approximately $9 million and $2.6 million for the
years ended December 31, 1999 and 1998 and $1.0 million for the period from
August 26, 1997 through December 31, 1997.
Deferred Financing Costs--Costs incurred in connection with the issuance of
debt are deferred and amortized as a component of interest expense over the
term of the related debt using the straight-line method.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes.
Use of Estimates--The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Segment Information--The Company reports segment information in accordance
with SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. The Company has one reportable segment, pharmaceutical products.
Recent Accounting Pronouncements--In June 1999, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as "derivatives") and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement, as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. Management has not yet
determined what effect, if any, this statement will have on the Company.
Reclassifications-Certain reclassifications have been made to the prior
year's financial statements to conform to classifications used in 1999.
3. LICENSE AND COLLABORATION AGREEMENTS
In November 1998, the Company entered into a license agreement (the "License
Agreement") with Hind Healthcare Inc. ("Hind") for the sole and exclusive right
to develop, use, market, promote and sell Lidoderm(R) in the United States.
Under the terms of the License Agreement, the Company is required to pay Hind
approximately $10 million (the "License Fee") based upon the achievement of
certain milestones. During 1999 and 1998, the Company paid Hind approximately
$6 million and $2 million, respectively, in accordance with the terms of the
License Agreement. Costs related to the License Agreement are included in
Goodwill and Other Intangible Assets at December 31, 1999. In addition, the
Company will pay Hind royalties based on net sales of the product.
In November 1999, the Company entered into a collaboration agreement with
Lavipharm Laboratories, Inc. pursuant to which the Company obtained exclusive
worldwide rights to Lavipharm's existing drug delivery technology platforms.
Under the terms of this collaboration agreement, the Company paid an upfront
license fee of $1 million.
F-10
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1999, the Company and Algos entered into a collaboration
agreement under which the parties will co-develop oxycodone-based products
using Algos proprietary technology and Endo's established brands.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Machinery and equipment...................................... $3,993 $3,535
Computer equipment and software.............................. 3,475 2,003
Furniture and fixtures....................................... 489 406
------ ------
7,957 5,944
Less accumulated depreciation................................ (2,245) (930)
------ ------
Total........................................................ $5,712 $5,014
====== ======
</TABLE>
5. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangible assets consist of the following at December 31
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Goodwill................................................. $196,706 $196,706
Licenses................................................. 11,000
-------- --------
207,706 196,706
Less accumulated depreciation............................ (15,625) (8,742)
-------- --------
Total.................................................... $192,081 $187,964
======== ========
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Tranche A Term Loan...................................... $ 47,000 $ 47,000
Tranche B Term Loan...................................... 103,000 103,000
Notes payable............................................ 41,203 20,544
-------- --------
191,203 170,544
Less current portion..................................... (15,985)
-------- --------
$175,218 $170,544
======== ========
</TABLE>
On August 26, 1997, the Company entered into a revolving credit and term
loan agreement (the "Credit Agreement") with a group of banks to provide funds
for the Acquisition, working capital and general corporate purposes. The Credit
Agreement is secured by substantially all of the assets of the Company. The
Credit Agreement provided a term loan facility of $165 million and a revolving
commitment of $25 million. The term loans are segregated into two tranches,
Tranche A Term Loan and Tranche B Term Loan. The Tranche A Term Loan is due in
quarterly installments ranging from $2 million to $5 million beginning December
31, 1998, with a final payment due December 31, 2002. On June 3, 1998, the
Company made an optional prepayment of the
F-11
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tranche A Term Loan in the amount of $13 million. The Tranche B Term Loan is
due in quarterly installments ranging from $250,000 to $27 million beginning
December 31, 1998 with a final payment due June 30, 2004. On June 3, 1998, the
Company made an optional prepayment of the Tranche B Term Loan in the amount of
$2 million. The prepayments made for both the Tranche A Term Loan and Tranche B
Term Loan were applied to the most current payments due under the original
payment schedules. The revolving commitment has availability of $25 million and
matures December 31, 2002. No borrowings have been made under the revolving
commitment.
Borrowings under the Tranche A Term Loan bear interest, which is payable at
least quarterly, at a rate equal to the bank's floating alternate base rate
plus a premium ranging from 1.25% to 1.75%, or at a rate equal to LIBOR plus a
premium ranging from 2.25% to 2.75%, depending on the type of borrowing and the
Company's performance against certain criteria. The effective borrowing rate
was 8.4% and 7.4% as of December 31, 1999 and 1998, respectively.
Borrowings under the Tranche B Term Loan bear interest, which is payable at
least quarterly, at a rate equal to the bank's floating alternate base rate
plus a premium ranging from 1.25% to 1.75%, or at a rate equal to LIBOR plus a
premium ranging from 2.25% to 2.75%, depending on the type of borrowing and the
Company's performance against certain criteria. The effective borrowing rate
was 8.9% and 7.9% as of December 31, 1999 and 1998, respectively.
Additionally, fees are charged on the average daily unused amount of the
revolving commitment at a rate ranging from .375% to .50% depending on the
Company's performance against certain criteria. This commitment fee is payable
quarterly.
The Credit Agreement contains limitations and restrictions concerning, among
other things, additional indebtedness, acquisition or disposition of assets,
dividend payments and transactions with affiliates. In addition, the Credit
Agreement requires the Company to maintain certain ratios (as defined therein).
The Company financed a portion of the purchase price of the Acquisition
through the issuance of a promissory note to DuPont. The note has a face value
of $3.9 million and is payable on August 26, 2002. The promissory note bears no
interest and therefore has been discounted in the accompanying financial
statements using 9.75% which approximated the Company's borrowing rate for
similar instruments at the time of borrowing. The promissory note has a balance
of $3.0 million and $2.7 million at December 31, 1999 and 1998, respectively.
On August 26, 1999 and 1998, the Company issued promissory notes to Dupont
in consideration for manufacturing and supply services provided under the
Manufacturing and Supply Agreement (see Note 8). The notes have a face value of
$23 million and are payable on August 26, 2002. The promissory notes bear no
interest and therefore have been discounted in the accompanying financial
statements using 7%, which approximates the Company's borrowing rate for
similar instruments at the time of borrowing. The promissory notes have a
balance of $38.2 million and $17.8 million as of December 31, 1999 and 1998,
respectively.
The aggregate annual maturities of long-term debt for the five years
subsequent to December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000 $15,985
2001 16,509
2002 70,293
2003 44,672
2004 52,441
</TABLE>
F-12
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company entered into an interest rate cap agreement with a notional
amount of $82.5 million and an effective date of February 27, 1998 for the
purpose of minimizing its exposure to fluctuations in interest rates. The
Company does not enter into such transactions for trading or speculative
purposes. The cost of the interest rate cap of $154,000 is amortized over the
term of the agreement as a component of interest expense. The agreement set a
maximum LIBOR rate the Company will pay on the related notional amount of 8.0%.
The unamortized cost for such agreement is included in other assets in the
accompanying balance sheet.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued
Expenses--The carrying amounts of these items are a reasonable estimate of
their fair values because of the current maturities of these instruments.
Notes Payable--The carrying amount of this item is a reasonable estimate of
its fair value. The carrying value and the estimate of fair value were
determined by discounting the future cash flows using rates currently available
to the Company for similar instruments.
Other Long-Term Debt Including Current Portion--The carrying amounts
reported for other long-term debt approximate fair value because the interest
rates on these instruments are subject to changes with market interest rates.
Interest Rate Cap--The carrying amount of this item approximates fair value
as there is no significant difference between the market rate and the cap rate
at December 31, 1999.
8. INCOME TAXES
Income tax (benefit) consists of the following for 1999 and 1998 and the
period from August 26, 1997 to December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ---- --------
<S> <C> <C> <C>
Current:
State .............................................. $ 75 $ 17
Deferred:
Federal ............................................ 1,673 119 $(18,170)
State .............................................. 325 45 (2,148)
------ ---- --------
1,998 164 (20,318)
------ ---- --------
Total income tax (benefit) ........................... $2,073 $181 $(20,318)
====== ==== ========
A reconciliation of income tax (benefit) at the federal statutory income tax
rate to the total income tax provision (benefit) for 1999 and 1998 and the
period from August 26, 1997 to December 31, 1997 is as follows (in thousands):
<CAPTION>
1999 1998 1997
------ ---- --------
<S> <C> <C> <C>
Federal income tax (benefit) at the statutory rate.... $1,813 $130 $(18,908)
State income tax (benefit) ........................... 215 33 (1,835)
Other ................................................ 45 18 425
------ ---- --------
Total income tax (benefit) ........................... $2,073 $181 $(20,318)
====== ==== ========
</TABLE>
F-13
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences which comprise the current and non-
current deferred income tax amounts shown on the balance sheets at December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Purchased in-process research and development ........... $14,734 $13,766
Net operating loss carryforward ......................... 1,398 2,649
Other ................................................... 9,479 6,325
------- -------
Total gross deferred income tax assets ................ 25,611 22,740
------- -------
Deferred tax liabilities:
Depreciation and amortization ........................... (6,829) (2,276)
Other ................................................... (626) (310)
------- -------
Total gross deferred income tax liabilities............ (7,455) (2,586)
------- -------
Net deferred income tax asset ............................. $18,156 $20,154
======= =======
</TABLE>
The Company has evaluated the available evidence about future taxable income
and other possible sources of realization of deferred tax assets and believes
that no valuation allowance is required at December 31, 1999 and 1998. At
December 31, 1999, the Company has $4.1 million in net operating loss
carryforwards for tax purposes which expire through 2018.
9. SERVICE AGREEMENTS
On August 26, 1997, the Company entered into various agreements with Dupont
to provide manufacturing and supply of products (the "Manufacture and Supply
Agreement"), warehousing and distribution (the "Warehousing and Distribution
Agreement"), research and development facilities (the "R&D Lease") and certain
administrative services (the "Administrative Services Agreement").
The Manufacture and Supply Agreement has an original term of five years
through August 26, 2002, with options to renew for up to five additional years
in the aggregate. The Manufacture and Supply Agreement covers substantially all
of the Company's existing and new pharmaceutical products.
The Warehousing and Distribution Agreement had an original term of two
years, with options to renew for up to two additional years in the aggregate.
The Warehousing and Distribution Agreement covers substantially all of the
Company's existing and new pharmaceutical products. During 1999, the Company
extended the Warehousing and Distribution Agreement through May 31, 2000.
The R&D Lease has a term of five years, with options to renew for up to five
additional years in the aggregate provided the Manufacture and Supply Agreement
has been renewed.
The Administrative Services Agreement had a term of up to two years except
for those services that relate to the Manufacture and Supply Agreement and the
R&D Lease which then correspond to the terms of those respective agreements.
The Administrative Services Agreement covered various administrative functions
including customer service, certain accounting functions, medical affairs and
selected regulatory and research and development functions. The Administrative
Services Agreement expired during 1999.
Any interruption or failure by Dupont to meet its obligations under the
aforementioned agreements could have a material adverse effect on the Company's
business, financial condition and results of operations.
F-14
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has entered into various service agreements to provide customer
service support, warehouse and distribution services, certain financial
functions, medical affair services, sales promotion and clinical studies. These
agreements expire from 2001 through 2005.
10. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain members of
management.
The Company leases office and laboratory facilities under certain
noncancelable operating leases that expire through October 2002. These leases
are renewable at the Company's option. A summary of minimum future rental
payments required under operating leases as of December 31, 1999 is as follows
(in thousands):
<TABLE>
<S> <C>
2000.................................................................. $ 601
2001.................................................................. 589
2002.................................................................. 433
------
$1,623
======
</TABLE>
Rent expense incurred under operating leases was $523,000, $452,000 and
$114,000 for the years ended December 31, 1999 and 1998 and the period from
August 26, 1997 to December 31, 1997, respectively.
The Company has entered into certain collaboration agreements with third
parties for the development of pain management products. These agreements
require the Company to share in the development costs of such products and
grant marketing rights to the Company for such products.
The Company is subject to various claims arising out of the normal course of
business with respect to commercial matters, including product liabilities,
governmental regulation and other actions. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position, results of operations or liquidity of the
Company.
11. SAVINGS AND INVESTMENT PLAN
On September 1, 1997, the Company established a defined contribution Savings
and Investment Plan covering all employees. Employee contributions are made on
a pre-tax basis under section 401(k) of the Internal Revenue Code (the "Code").
The Company matches up to six percent of the participants' contributions
subject to limitations under section 401(k) of the Code. Participants are fully
vested with respect to their own contributions. The Company's contributions are
generally fully vested after five years of continuous service. Contributions by
the Company amounted to $329,000, $264,000 and $65,000 for the years ended
December 31, 1999 and 1998 and the period from August 26, 1997 to December 31,
1997, respectively.
12. STOCKHOLDERS' EQUITY
The Company has Common Stock and Class A Common Stock. Rights and privileges
of holders of shares of Class A Common Stock are identical to the rights and
privileges of holders of shares of Common Stock, except that the Class A Common
Stock is non-voting and convertible into the same number of shares of Common
Stock upon or subsequent to any public offering. Payment of dividends is
restricted under terms of the Credit Agreement.
On November 25, 1997, the Company established the 1997 Employee Stock Option
Plan and the 1997 Executive Stock Option Plan (collectively, the "Stock Option
Plans"). The Stock Option Plans reserve an aggregate of 618,750 shares of
Common Stock of the Company for issuance. Stock options granted under the Stock
Option Plans expire at the end of the fifteenth fiscal year of the Company
unless an initial public offering occurs, in which case the stock options
granted will expire on August 26, 2007.
F-15
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the activity under the Stock Option Plans from August 26, 1997
through December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise
Shares Price
------- --------
<S> <C> <C>
Outstanding, August 26, 1997............................... 0
Granted.................................................... 418,232 $103.23
Forfeited.................................................. (101) $104.12
-------
Outstanding, December 31, 1997............................. 418,131 $103.23
Granted.................................................... 23,804 $104.29
Forfeited.................................................. (1,151) $104.16
-------
Outstanding, December 31, 1998............................. 440,784 $103.28
Granted.................................................... 9,296 $104.19
Forfeited.................................................. (3,213) $104.19
-------
Outstanding, December 31, 1999............................. 446,867 $103.29
=======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
Options Outstanding
<TABLE>
--------------------------------------------------------------
<CAPTION>
Weighted
Number Average Weighted
Outstanding Remaining Average
at Contractual Exercise
12/31/99 Life Price
----------- ----------- --------
<S> <C> <C>
391,936 13 years $100.00
54,931 13 years $141.59
---------
446,867
---------
---------
</TABLE>
Of the outstanding stock options as of December 31, 1999, 48,738 shares have
vested and are exercisable ratably over service periods of five years and
54,931 shares have vested and are exercisable at the end of nine years from the
date of grant. The vesting and exercisability of options may be accelerated at
the discretion of the Board of Directors or upon the occurrence of certain
defined events. The remaining 343,198 stock options become exercisable only
upon the satisfaction of certain other conditions including (i) the occurrence
of a sale, disposition or transfer ("Transfer") of Common Stock, after which
Kelso no longer owns any shares of Common Stock and (ii) the value received by
the holders of Common Stock on the date of such Transfer exceeds certain
thresholds. Stock options exercisable as of December 31, 1999 and 1998 were
18,532 and 9,039, respectively.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
while following APB No. 25 and related interpretations in accounting for its
Stock Option Plans. Under APB No. 25, because the exercise price of the
Company's stock options equals at least the fair value of the underlying stock
at the date of grant or a measurement date has not yet been reached, no
compensation expense has been recognized. If the Company were to have adopted
the accounting provisions of SFAS No. 123, it would have been required to
record compensation expense based on the fair value of the stock options on the
date of grant.
F-16
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro-forma information regarding net income is required as if the Company has
accounted for its stock options under the provisions of SFAS No. 123. The
Company estimated the fair value of its stock options, as of the respective
date of grant, using the Black-Scholes option-pricing model. The following
assumptions were used for such estimates: no dividend yield; no expected
volatility as the Company's stock is not publicly traded; risk-free interest
rate of 6.5%, 5.1% and 6.5% for 1999, 1998 and 1997, respectively; and a
weighted average expected life of the options of 5 years. Had the accounting
provisions of SFAS No. 123 been adopted, net income for 1999 and 1998 would
have decreased and net loss for the period ended December 31, 1997 would have
increased to the pro-forma amounts as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- --------
<S> <C> <C> <C>
Net income (loss) as reported....................... $3,260 $ 201 $(35,294)
Net income (loss), pro-forma........................ $3,112 $(249) $(45,796)
</TABLE>
On November 25, 1997, the Company established the 1997 Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan provided
employees the opportunity to purchase shares of Class A Common Stock, par value
$.01 per share at a purchase price of $100 per share. The Stock Purchase Plan
expired on January 23, 1998 with the Company selling 2,860 shares.
During 1999, the Company repurchased 290 shares of Class A Common Stock from
former employees for $31,000.
13. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator of basic
and diluted earnings (loss) per share (in thousands except share and per share
data).
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss) available to common
stockholders........................... $ 3,260 $ 201 $ (35,294)
========== ========== ===========
Denominator:
For basic per share data--weighted
average shares......................... 1,104,353 1,103,967 1,100,000
Effect of dilutive stock options........ -- -- --
For diluted per share data.............. 1,104,353 1,103,967 1,100,000
Basic earnings (loss) per share......... $ 2.95 $ .18 $ (32.09)
========== ========== ===========
Diluted earnings (loss) per share....... $ 2.95 $ .18 $ (32.09)
========== ========== ===========
</TABLE>
The dilutive effect of stock options outstanding excludes the effect of
stock options exercisable only upon satisfaction of certain defined events as
these events have not occurred. The dilutive effect of other stock options have
been determined using the treasury stock method on the basis that the exercise
price equals the fair value of the underlying common stock during the periods.
For loss periods, weighted average common shares are used for calculating both
basic and diluted loss per share.
14. RELATED PARTY TRANSACTIONS
Kelso provides ongoing financial advisory services to the Company for an
annual fee plus the reimbursement of expenses. Payment for these services and
reimbursement of expenses totaled $349,000, $353,000 and $124,000 for the years
ended December 31, 1999 and 1998 and the period from August 26, 1997 to
December 31, 1997, respectively.
*****
F-17
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
(In thousands except share data)
<TABLE>
<CAPTION>
March
31, December 31,
2000 1999
-------- ------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 30,201 $ 22,028
Accounts receivable, net.............................. 36,643 62,254
Inventories........................................... 26,540 21,269
Prepaid expenses...................................... 2,792 3,356
Deferred income taxes................................. 9,370 9,520
-------- --------
Total current assets................................ 105,546 118,427
-------- --------
PROPERTY AND EQUIPMENT, Net............................. 5,539 5,712
GOODWILL AND OTHER INTANGIBLES, Net..................... 190,304 192,081
DEFERRED INCOME TAXES................................... 19,477 8,636
OTHER ASSETS............................................ 4,382 4,580
-------- --------
TOTAL ASSETS............................................ $325,248 $329,436
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable...................................... $ 10,897 $ 19,185
Accrued expenses...................................... 31,114 33,641
Income taxes payable.................................. 75
Current portion of long-term debt..................... 17,862 15,985
-------- --------
Total current liabilities........................... 59,873 68,886
-------- --------
LONG-TERM DEBT, Less current portion.................... 171,837 175,218
OTHER LIABILITIES....................................... 11,756 6,745
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 500,000 shares
authorized; none issued
Common Stock, $.01 par value; 2,000,000 shares
authorized; and 929,950 shares issued in 2000 and
1999, respectively................................... 9 9
Class A Common Stock, $.01 par value; 200,000 shares
authorized; and 174,634 and 174,560 shares issued in
2000 and 1999, respectively.......................... 2 2
Additional paid-in capital............................ 131,229 110,440
Accumulated deficit................................... (49,427) (31,833)
-------- --------
81,813 78,618
Less: Treasury stock, at cost; 290 shares............. (31) (31)
-------- --------
Total Stockholders' Equity.......................... 81,782 78,587
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $325,248 $329,436
======== ========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
NET SALES.............................................. $ 27,000 $ 28,561
COST OF SALES.......................................... 12,062 13,440
---------- ----------
GROSS PROFIT........................................... 14,938 15,121
---------- ----------
COSTS AND EXPENSES:
Selling, general and administrative.................. 12,073 9,663
Research and development............................. 3,028 1,983
Depreciation and amortization........................ 2,151 1,879
Separation benefits.................................. 22,034
---------- ----------
OPERATING (LOSS) INCOME................................ (24,348) 1,596
---------- ----------
INTEREST EXPENSE, Net.................................. 3,937 3,362
---------- ----------
LOSS BEFORE INCOME TAX BENEFIT......................... (28,285) (1,766)
INCOME TAX BENEFIT..................................... 10,691 687
---------- ----------
NET LOSS............................................... $ (17,594) $ (1,079)
========== ==========
NET LOSS PER SHARE:
Basic and Diluted.................................... $ (15.93) $ (.98)
========== ==========
Weighted average shares (Basic and Diluted).......... 1,104,240 1,104,421
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
2000 1999
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(17,594) $(1,079)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 2,150 1,879
Accretion of Promissory Notes........................... 745 381
Deferred income taxes................................... (10,691) (687)
Amortization of deferred financing costs................ 300 304
Compensation related to stock options................... 20,782
Changes in assets and liabilities which provided (used)
cash:
Accounts receivable................................... 25,611 3,174
Inventories........................................... (5,271) (646)
Other assets.......................................... 462 518
Accounts payable...................................... (8,288) (8,252)
Accrued expenses...................................... (2,527) 2,539
Other liabilities..................................... 5,013 4,635
-------- -------
Net cash provided by operating activities........... 10,617 2,766
-------- -------
INVESTING ACTIVITIES:
Purchase of property and equipment........................ (201) (774)
-------- -------
Net cash used in investing activities............... (201) (774)
-------- -------
FINANCING ACTIVITIES:
Issuance of Class A Common Stock.......................... 7
Repurchase of Class A Common Stock........................ (13)
Repayments of long-term debt.............................. (2,250)
-------- -------
Net cash used in financing activities............... (2,243) (13)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,173 1,979
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 22,028 17,367
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 30,201 $19,346
======== =======
SUPPLEMENTAL INFORMATION:
Interest paid............................................. $ 3,257 $ 2,834
======== =======
Income taxes paid......................................... $ 75
========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Endo's management, the accompanying condensed consolidated
financial statements of Endo Pharmaceuticals Holdings Inc. (the "Company") and
subsidiary, which are unaudited, include all normal and recurring adjustments
necessary to present fairly the Company's financial position as of March 31,
2000 and the results of operations and cash flows for the three months ended
March 31, 2000 and March 31, 1999. The accompanying consolidated balance sheet
as of December 31, 1999 is derived from the Company's audited financial
statements. Certain information and footnote disclosure normally included in
financial statements have been condensed or omitted as promulgated by APB
Opinion No. 28 and Rule 10 of Regulation S-X. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto as of and for the year ended December
31, 1999.
2. MERGER AGREEMENT
On November 29, 1999, the Company and Algos Pharmaceutical Corporation
("Algos") announced that they had entered into a definitive merger agreement
(the "Merger"). The merger agreement was subsequently amended on April 17,
2000. The Merger, which is subject to certain closing conditions including
Algos' shareholder approval, will be accounted for by the Company using the
purchase method of accounting. The Merger is expected to be completed in the
second quarter of 2000.
In connection with the Merger, the Company will effect a recapitalization of
its Common Stock, Class A Common Stock and Preferred Stock (the
"Recapitalization"). The Recapitalization will be effected through an
approximate 65.027 to 1 stock split. The actual stock split may be adjusted as
provided in the merger agreement for actual shares of Algos and the Company
outstanding at the effective time of the Merger.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as "derivatives") and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Management has not yet determined what effect,
if any, this statement will have on the Company.
4. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain members of
management.
The Company is subject to various claims arising out of the normal course of
business with respect to commercial matters, including product liabilities,
governmental regulation and other actions. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position, results of operations or liquidity of the
Company.
Kelso provides ongoing financial advisory services to the Company for an
annual fee of $347,000 plus the reimbursement of expenses.
******
F-21
<PAGE>
5. SEPARATION BENEFITS
During the period ended March 31, 2000 and immediately thereafter, the
Company entered separation and release agreements with two executives. The
agreements were accounted for during the period ended March 31, 2000 as all
material terms and conditions were known as of March 31, 2000. Severance and
other termination benefits provided by the agreements amounting to $1,252,000
was accrued as of March 31, 2000.
The agreements provided that certain options granted to the two executives
under existing option plans became fully vested on the effective date of the
agreements. The agreements also provided that other options previously granted
to the executives would terminate. The agreements further provided terms and
conditions for the exercise of the vested options. As a result of the
agreements, the effective number of shares outstanding on March 31, 2000 under
the Company's Stock Option Plans was reduced by 77,429. Cost related to stock
options resulting from the agreements resulted in a charge of $20,782,000
during the period ended March 31, 2000.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Board, and to the Partners of
DuPont Pharmaceuticals Company:
We have audited the accompanying statement of assets to be sold as of August
26, 1997 and December 31, 1996 and the related statement of earnings of Generic
and U.S. Multi-Source Products of DuPont Pharmaceuticals Company (the
"Products") for the period from January 1, 1997 to August 26, 1997 and for the
year ended December 31, 1996 (the "Statements"). These Statements are the
responsibility of management. Our responsibility is to express an opinion on
these Statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the Statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying Statements were prepared to present the assets to be sold
and the earnings associated with the Products, on the basis of presentation
described in Notes 1 and 2, and are not intended to be a complete presentation
of financial position, results of operations or cash flows.
In our opinion, the Statements audited by us present fairly, in all material
respects, the assets to be sold at August 26, 1997 and December 31, 1996 and
the related earnings for the Products for the period from January 1, 1997 to
August 26, 1997 and for the year ended December 31, 1996, in conformity with
generally accepted accounting principles in the United States.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 25, 1999
F-23
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U. S. MULTI-SOURCE PRODUCTS
STATEMENTS OF EARNINGS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the period
from
January 1,
For the year 1997 to
ended August 26,
December 31, 1996 1997
----------------- --------------
<S> <C> <C>
NET SALES AND OTHER OPERATING REVENUE.......... $102,325 $65,077
COST OF GOODS SOLD............................. 48,369 30,551
-------- -------
GROSS MARGIN................................... 53,956 34,526
MARKETING AND SELLING EXPENSES:
Direct....................................... 4,425 1,543
Allocated.................................... 4,577 2,648
RESEARCH AND DEVELOPMENT EXPENSES.............. 6,856 5,253
ALLOCATED ADMINISTRATIVE EXPENSES.............. 3,284 1,430
-------- -------
NET INCOME..................................... $ 34,814 $23,652
-------- -------
UNAUDITED PRO FORMA DATA:
Income before income taxes................... 34,814 23,652
Income taxes................................. 13,926 9,461
-------- -------
NET INCOME..................................... $ 20,888 $14,191
======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U. S. MULTI-SOURCE PRODUCTS
STATEMENT OF ASSETS TO BE SOLD
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, August 26,
1996 1997
------------ ----------
<S> <C> <C>
Assets to be sold:
Finished goods inventories............................ $11,493 $ 9,979
Research equipment, net............................... 3,107 3,423
------- -------
Total assets to be sold............................. $14,600 $13,402
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U. S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM JANUARY 1, 1997 TO
AUGUST 26, 1997
1. DESCRIPTION OF COMPANY AND OF CERTAIN PRODUCTS:
The DuPont Merck Pharmaceutical Company was formed on January 1, 1991 by E.
I. du Pont de Nemours and Company (DuPont) and Merck Enterprises, Inc.,
formerly Calgon Corporation (Merck), an indirect wholly-owned subsidiary of
Merck & Co., Inc., as a joint venture general partnership engaged in the
research, development, manufacturing, distribution, marketing and sale of human
pharmaceutical and radiopharmaceutical products and other related product
lines. On January 1, 1991, DuPont and Merck also formed DuPont Merck Pharma, a
separate joint venture general partnership, which operates in Puerto Rico.
While there is no direct ownership relationship between The DuPont Merck
Pharmaceutical Company and DuPont Merck Pharma (collectively, "DuPont Merck"),
both partnerships are owned beneficially by DuPont and Merck, and their
businesses are highly integrated.
On August 26, 1997, DuPont Merck sold certain products listed below (the
"Generic and U.S. Multi-Source Products" or the "Products"), related rights and
certain assets to Endo Pharmaceuticals Inc. a wholly owned subsidiary of Endo
Pharmaceuticals Holdings Inc. ("Endo"). Since 1994, the Products had been
managed and accounted for within a division of DuPont Merck.
<TABLE>
<CAPTION>
General Products Multi-Source Products
---------------- ---------------------
<S> <C>
Amantadine HCL Carbex(R)
Amiloride HCL/HCTZ Hycodan(R)
Captopril Hycomine(R)
Carbidopa/Levodopa Hycotuss(R)
Chlorothiazide Moban(R)
Cimetidine/Cimetidine HCL Narcan(R)
Cyclobenzaprine HCL Nubain(R)
Dicyclomine HCL Numorphan(R)
Diflunisal Percocet(R)
Endocet(R) Percodan(R)
Endodan(R) Symmetrel(R)
Etodolac Zydone(R)
Glipizide
Hydrocodone Bitartrate/APAP
Hydrochlorothiazide
Hydromorphone
Indomethacin/Indomethacin ER
Methyldopa/Methyldopa/HCTZ
Selegiline HCL
Sunlindac
Timolol Maleate
</TABLE>
The Products are manufactured in DuPont Merck manufacturing facilities in
Garden City, New York, and Manati, Puerto Rico, or are obtained under
contractual arrangements, including supply agreements with Merck (See Note 6).
Other DuPont Merck products are also manufactured at the Garden City, New York
and Manati, Puerto Rico sites.
On July 1, 1998 DuPont acquired Merck's 50 percent interest in the DuPont
Merck partnerships and now operates as the DuPont Pharmaceuticals Company.
F-26
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U.S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD--(Continued)
2. BASIS OF PRESENTATION:
The accompanying statements of earnings for the period from January 1, 1997
to August 26, 1997 and for the year ended December 31, 1996 and statements of
assets to be sold as of August 26, 1997 and December 31, 1996 (the
"Statements") have been prepared for the purpose of presenting the financial
results associated with the Products and the assets to be sold and are not
intended to be a complete presentation of financial position, results of
operations or cash flows.
The Statements include those net sales, other operating revenue, costs and
expenses directly related to the manufacture and distribution of the Products,
including the allocation of certain manufacturing and distribution overhead
costs. The Statements also include direct and allocated expenses for marketing
and selling, general and administrative, research and development and income
taxes. Allocated manufacturing and distribution expenses amounted to
approximately $15,900 in 1996 and $9,900 in 1997 and allocated research and
development expenses amounted to approximately $2,700 in 1996 and $1,700 in
1997. In connection with the original formation of that partnership, no
indebtedness was assumed nor any material indebtedness incurred subsequent to
formation. Accordingly, no interest expense has been charged in the
accompanying statements of earnings given the capital structure of the DuPont
Merck partnership. Management believes the allocations are reasonable, but not
necessarily indicative of the expenses which would have been recognized had the
Products been manufactured and sold by a separate entity.
The statement of earnings also includes an unaudited pro forma provision for
income taxes which would have been recorded if the Products had been owned by a
separate taxable entity, based on tax laws in effect during the period
presented.
The Statements also include the assets to be sold with the Products. These
assets include the finished goods inventory of the Products at the Company's
distribution center in Atlanta, Georgia and certain equipment at a research and
development facility in Garden City, New York.
Under the terms of the sale to Endo Pharmaceuticals Inc., all liabilities
and all assets other than those described above were retained by DuPont Merck.
Under DuPont Merck's centralized cash management system, cash requirements for
the Products were provided directly by DuPont Merck, and cash generated by the
Products was remitted directly to DuPont Merck. Transaction systems (e.g.,
payroll, employee benefits, freight, accounts payable and accounts receivable)
used to record and account for cash disbursements, cash receipts and related
transactions were provided by centralized DuPont Merck and DuPont
organizations. Most of those corporate systems were not designed to track
liabilities, receivables, cash receipts or cash payments on a Products specific
basis. Accordingly, it is not practical to determine liabilities or receivables
associated with the Products for the above items; therefore, such liabilities
and receivables cannot be included in the Financial Statements. Given these
constraints, a Statement of Assets to be Sold is presented in lieu of a
statement of financial position and a statement of cash flows has not been
presented.
In addition, DuPont Merck's sales, manufacturing, research and development
and corporate activities were primarily integrated for all products of DuPont
Merck, not only those products of the generic and U.S. Multi-Source business.
Endo did not acquire the physical assets used to produce the products and these
products continue to be manufactured by DuPont Merck or others under certain
manufacturing, distribution and service agreements. Consequently, there was not
and has not been a segregation of physical production assets associated with
the products by DuPont Merck and accordingly, it is also not practical to
provide limited financing or investing cash flow information, such as capital
expenditures or depreciation.
Historically, financial statements were not prepared for the Products. The
accompanying Statements have been derived from DuPont Merck's historical
records.
F-27
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U.S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD--(Continued)
3. SUMMARY OF ACCOUNTING POLICIES:
Revenue Recognition:
Sales, and the related cost of goods sold, are recognized when products are
invoiced and shipped to the customer. Net sales include the aggregate of the
gross amount invoiced to customers after deducting (to the extent not already
deducted in the amount invoiced), as applicable, cash discounts, Medicaid
rebates, customer incentive programs, chargebacks and other amounts paid on
sale, resale or dispensing of the Products and estimated returns and
allowances. Additionally, other operating revenue, principally royalties, is
recognized when earned under contractual arrangements by the sale of products
by third parties. Such amounts totaled $5,300 and $3,500 in 1996 and 1997,
respectively.
Cost of Goods Sold:
Cost of goods sold includes both the cost of manufacturing and finished
product distribution costs. Cost of manufacturing includes the sum of variable
manufacturing costs (ingredients and direct labor), and an allocation of fixed
manufacturing expenses and other manufacturing expenses incurred by DuPont
Merck at its plant sites and headquarters based primarily on the ratio of
direct labor of the products to other Dupont Merck product. Additionally, cost
of manufacture includes acquisition cost of products purchased from third
parties under contractual arrangements. Finished product distribution costs
include direct freight and other related shipping costs, including an allocated
share of warehousing expenses.
Marketing and Selling Expense:
Direct marketing and selling expenses include expenses directly attributable
to the Products, including advertising and promotion, Food and Drug
Administration user fees and contract fees related to certain selling
activities. Allocated marketing and selling expenses include allocations of
customer service, medical affairs, regulatory affairs, information resource,
and site service expenses based primarily on employee headcount and effort and
utilization. Allocated marketing and selling expenses also include bad debt
expense of $1,550 in 1996 and $80 in 1997, including approximately $1,400 in
1996 related to a specific customer in bankruptcy.
General and Administrative Expenses:
General and administrative expenses include costs for finance, legal, human
resource, business development, public affairs and other corporate level
administrative functions. General and administrative expenses are allocated
based primarily on the ratio of sales of the Products to either U. S. or
worldwide sales of all DuPont Merck products.
Research and Development Expenses:
Research and development costs are expensed when incurred. Research and
development expenses include all expenses directly attributable to the
development of products for the multisource and generic markets, primarily
salaries and benefits of employees at the Garden City, New York research and
development facility, laboratory supplies and clinical trial expenses, and an
allocation of certain expenses, primarily from the Garden City, New York
facility, based primarily on employee headcount and on effort and utilization.
Income Taxes:
As DuPont Merck is a general partnership, it is not subject to federal
income taxes, as the tax effects of its operations accrue directly to the
Partners, and therefore, DuPont Merck does not record a provision for income
F-28
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U.S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD--(Continued)
taxes on income generated in the U. S. or in Puerto Rico. The pro forma
provision for income taxes calculated for these Statements has been separately
determined for the Products and assets to be sold as if the Products had been
owned by a separate taxable entity, based on tax laws in effect during these
periods.
Finished Goods Inventories:
Inventory is valued at the lower of cost or market, with cost being
determined by the average cost method. Elements of cost in inventory include
ingredients, direct labor and manufacturing overhead.
Research Equipment:
Equipment is stated at historical cost. DuPont Merck provides depreciation
over the estimated useful life of the equipment, principally using the
straight-line method. The estimated useful life for research equipment is 15
years, except for computer equipment which has a useful life of 5 years.
Use of Estimates:
Generally accepted accounting principles require management to make
estimates and assumptions that affect assets and liabilities, contingent assets
and liabilities, and revenues and expenses. Actual results could differ from
those estimates.
4. RECONCILIATION OF GROSS SALES TO NET SALES:
<TABLE>
<CAPTION>
For the year For the period
ended ended
December 31, August 26,
1996 1997
------------ --------------
<S> <C> <C>
Gross sales...................................... $161,096 $ 98,558
Less:
Cash discounts................................. (3,616) (2,089)
Medicaid rebates............................... (1,499) (1,087)
Chargebacks.................................... (48,225) (27,468)
Customer incentive programs.................... (5,431) (2,837)
-------- --------
Net sales........................................ $102,325 $ 65,077
======== ========
</TABLE>
5. CHARGEBACKS AND CUSTOMER INCENTIVE PROGRAMS:
Chargebacks represent pricing rebates from the list prices that DuPont Merck
provides to wholesalers based on individual contractual arrangements DuPont
Merck has with third party buying groups that purchase products through the
wholesalers.
Customer incentive programs include shelf price equalization programs
(DuPont Merck has at times offered rebates of the difference between the amount
invoiced to the customer and the current purchase price available), bundling
rebates (DuPont Merck has at times offered a rebate on the stocking of a group
of generic pharmaceutical products), source rebates (wholesalers establish a
"source" program of generic pharmaceuticals which they actively promote and
obtain a rebate on the amount of "source" product purchased), and year-end
rebates (DuPont Merck offered special rebates to customers who stocked the
entire generic product line for the period from January 1, 1997 to August 26,
1997 and for the year ended December 31, 1996).
F-29
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U.S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD--(Continued)
6. RELATED PARTY TRANSACTIONS:
DuPont Merck has various supply and distribution agreements with Merck or
Merck affiliates which include some of the products listed in Note 1.
Effective March 1, 1995, DuPont Merck entered into an agreement for the
distribution of certain generic products manufactured by Merck through December
31, 1999. The agreement also contains a provision for a five-year extension or
renewal period. Under the agreement, Merck supplies generic products to DuPont
Merck generally at a cost of eighty-five percent of the net selling price.
Purchases under this agreement amounted to approximately $7,700 and $6,800 in
1996 and 1997, respectively.
DuPont Merck also purchases Carbidopa/Levodopa from Merck at a cost of
thirty-five percent of DuPont Merck's net sales or Merck's cost of manufacture,
whichever is greater. Purchases of Carbidopa/Levodopa were approximately $2,800
and $1,250 in 1996 and 1997, respectively.
DuPont Merck sells certain of the Products to Merck-Medco Managed Care, Inc.
(Medco), a leading pharmaceutical benefits manager. Medco is a wholly-owned
subsidiary of Merck. Sales of the Products to Medco were approximately $2,300
and $769 in 1996 and 1997, respectively.
7. RESEARCH EQUIPMENT, NET:
DuPont Merck has specifically identified certain research equipment at the
Garden City, New York to be included in the sale of the Products. This research
equipment does not include the research and development facility at Garden
City, New York or certain building improvements made to the site.
<TABLE>
<CAPTION>
December 31, August 26,
1996 1997
------------ ----------
<S> <C> <C>
Research equipment, at cost.......................... $3,755 $4,266
Less: Accumulated depreciation....................... (648) (843)
------ ------
Research equipment, net.............................. $3,107 $3,423
====== ======
</TABLE>
8. SIGNIFICANT COMPETITION:
The Products are subject to intense generic competition. The competitive
factors in the industry can result in significant adverse fluctuations on
operating results, including certain retroactive rebates on previously sold
generic products, as described in Notes 3 and 5.
9. COMMITMENTS AND CONTINGENCIES:
DuPont Merck has entered into certain purchase commitments for raw
materials, supplies and other items directly related to the Products. In the
aggregate, such commitments are not at prices in excess of current market.
F-30
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U.S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD--(Continued)
10. PRO FORMA PROVISION FOR INCOME TAXES (UNAUDITED):
The statement of earnings includes a pro forma provision for income taxes
which would have been recorded if the Products had been owned by a separate
taxable entity, based on tax laws in effect during the period from January 1,
1997 to August 26, 1997 and for the year ended December 31, 1996.
<TABLE>
<CAPTION>
For the year For the
ended period ended
December 31, August 26,
1996 1997
------------ ------------
<S> <C> <C>
Tax expense:
U. S. Federal.................................... $12,185 $8,278
U. S. State...................................... 1,741 1,183
------- ------
Total provision for income taxes............... $13,926 $9,461
======= ======
</TABLE>
An analysis of the effective tax rate follows:
<TABLE>
<CAPTION>
For the year For the
ended period ended
December 31, August 26,
1996 1997
------------ ------------
<S> <C> <C>
Statutory U. S. Federal tax rate................... 35% 35%
U. S. State income taxes........................... 5% 5%
--- ---
Effective tax rate............................... 40% 40%
=== ===
</TABLE>
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors & Stockholders of
Algos Pharmaceutical Corporation:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity, and cash flows present fairly, in all
material respects, the financial position of Algos Pharmaceutical Corporation
(a development stage enterprise) (the "Company") at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 and for the period January 1, 1992
(date of inception) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
February 14, 2000
F-32
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
ASSETS:
-------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 37,025 $ 30,752
Marketable securities, current........................... 9,002 4,011
Interest receivable...................................... 417 207
Prepaid expenses and other current assets................ 684 234
-------- --------
Total current assets................................... 47,128 35,204
Marketable securities, noncurrent........................ 4,053
Restricted cash.......................................... 150 150
Property and equipment, net.............................. 1,099 955
-------- --------
Total assets........................................... $ 52,430 $ 36,309
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY:
-------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable......................................... $ 2,118 $ 3,499
Other current liabilities................................ 794 452
-------- --------
Total current liabilities.............................. 2,912 3,951
-------- --------
Commitments
Stockholders' equity:
Preferred stock.......................................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 17,028,649 and 17,403,895 shares outstanding
as of December 31, 1998 and 1999, respectively.......... 170 174
Additional paid-in-capital............................... 81,627 81,700
Unearned compensation expense............................ (611) (105)
Deficit accumulated during the development stage......... (31,668) (49,411)
-------- --------
Total stockholders' equity............................. 49,518 32,358
-------- --------
Total Liabilities and stockholders' equity................. $ 52,430 $ 36,309
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Cumulative from
For the Year Ended December 31, Inception to
---------------------------------- December 31,
1997 1998 1999 1999
---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Revenues .................. $ 1,000 $ -- $ -- $ 3,311
---------- ---------- ---------- --------
Operating expenses:
Research and development
........................ 9,799 13,086 9,508 38,170
Selling, general and
administrative.......... 2,459 4,813 10,286 22,213
---------- ---------- ---------- --------
Total operating
expenses.............. 12,258 17,899 19,794 60,383
---------- ---------- ---------- --------
Loss from operations ...... (11,258) (17,899) (19,794) (57,072)
Interest income ........... 2,435 2,029 2,051 7,661
---------- ---------- ---------- --------
Net loss .................. (8,823) (15,870) (17,743) (49,411)
========== ========== ========== ========
Net loss per common share,
basic and
diluted .................. $ (0.56) $ (0.98) $ (1.02)
========== ========== ==========
Weighted average common
shares
outstanding, basic and
diluted ................. 15,862,563 16,144,484 17,354,863
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended Cumulative from
December 31, Inception to
---------------------------- December 31,
1997 1998 1999 1999
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $ (8,823) $(15,870) $(17,743) $(49,411)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 51 142 371 676
Amortization of unearned
compensation................ 278 370 299 1,372
Amortization of discount on
marketable securities....... (79) (67) (114) (262)
Common stock issued for
technology.................. 125
Preferred stock issued for
services.................... 25
Preferred stock issued under
license agreement........... 915
Changes in assets and
liabilities:
Interest receivable........ (485) 68 210 (207)
Prepaid expenses........... 14 (368) 450 (234)
Other assets............... 119 90
Accounts payable........... 1,405 256 1,381 3,499
Other current liabilities.. 223 54 (342) 452
-------- -------- -------- --------
Net cash used in operating
activities.................... (7,297) (15,325) (15,488) (43,050)
-------- -------- -------- --------
Cash flows from investing
activities:
Investment in marketable
securities.................... (37,813) (29,097) (9,842) (76,753)
Redemption of Marketable
Securities.................... 16,816 37,037 19,000 72,854
Purchases of property and
equipment..................... (111) (1,095) (227) (1,631)
-------- -------- -------- --------
Net cash used in investing
activities.................... (21,108) 6,845 8,931 (5,530)
-------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
preferred stock, net.......... 6,659
Proceeds from issuance of
common stock, net............. 75 25,259 284 72,673
-------- -------- -------- --------
Net cash provided by financing
activities.................... 75 25,259 284 79,332
-------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents............ (28,330) 16,779 (6,273) 30,752
Cash and cash equivalents,
beginning of period............. 48,576 20,246 37,025
-------- -------- -------- --------
Cash and cash equivalents, end of
period.......................... $ 20,246 $ 37,025 $ 30,752 $ 30,752
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the period from Inception to December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional Unearned During the Total
---------------- ----------------- Paid-In Compensation Development Stockholders'
Shares Amount Shares Amount Capital Expense Stage Equity
-------- ------ ---------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common
Stock, January 1992,
$.10 per share......... 4,841,664 $ 48 $ 452 $ 500
Issuance of Common Stock
for technology, January
1992, $.10 per share... 968,336 10 90 100
Net loss................ (385) (385)
-------- --- ---------- ---- ------- ------- ------- -------
Balance, December 31,
1992................... 5,810,000 58 542 (385) 215
Capital contributions,
including $25,000 of
technology............. 150 150
Net loss................ (257) (257)
-------- --- ---------- ---- ------- ------- ------- -------
Balance, December 31,
1993................... 5,810,000 58 692 (642) 108
Issuance of Series A
Preferred Stock, May
through August 1994,
$10.00 per share, net
of offering costs...... 700,000 7 6,602 6,609
Issuance of Series A
Preferred Stock for
services, May 1994,
$10.00 per share....... 2,500 25 25
Exercise of stock
options................ 415
Net loss................ (1,124) (1,124)
-------- --- ---------- ---- ------- ------- ------- -------
Balance, December 31,
1994................... 702,500 7 5,810,415 58 7,319 (1,766) 5,618
Exercise of stock
options................ 199,615 2 23 25
Net loss................ (2,122) (2,122)
-------- --- ---------- ---- ------- ------- ------- -------
Balance, December 31,
1995................... 702,500 7 6,010,030 60 7,342 (3,888) 3,521
Issuance of Series B
Preferred Stock under
license agreement, June
1996, $9.15 per share.. 100,000 1 914 915
Issuance of Common
Stock, October 1996,
$14.00 per share, net
of offering costs...... 3,625,000 36 46,350 46,386
Exercise of stock
options................ 161,821 2 17 19
Exercise of warrants.... 5,000 50 50
Conversion of Series A
Preferred Stock........ (707,500) (7) 5,872,250 59 (52)
Unearned compensation
expense................ 1,281 (1,281)
Amortization of unearned
compensation expense... 425 425
Net loss................ (3,087) (3,087)
-------- --- ---------- ---- ------- ------- ------- -------
Balance, December 31,
1996................... 100,000 $ 1 15,669,101 $157 $55,902 $ (856) $(6,975) $48,229
======== === ========== ==== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three years ended December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional Unearned During the Total
---------------- ----------------- Paid-In Compensation Development Stockholders'
Shares Amount Shares Amount Capital Expense Stage Equity
-------- ------ ---------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 100,000 $ 1 15,669,101 $157 $55,902 $(856) $ (6,975) $48,229
Exercise of stock
options................ 133,630 1 15 16
Exercise of warrants.... 48,970 1 58 59
Conversion of Series B
Preferred Stock........ (100,000) (1) 100,000 1
Unearned compensation
expense................ 176 (176)
Amortization of unearned
compensation expense... 278 278
Net loss................ (8,823) (8,823)
-------- --- ---------- ---- ------- ----- -------- -------
Balance, December 1997.. 15,951,701 160 56,151 (754) (15,798) 39,759
Exercise of stock
options................ 59,850 291 291
Exercise of warrants.... 17,098 21 21
Issuance of Common Stock
and Warrants, November
1998, net of offering
costs.................. 1,000,000 10 24,937 24,947
Unearned compensation
expense................ 227 (227)
Amortization of unearned
compensation expense... 370 370
Net loss................ (15,870) (15,870)
-------- --- ---------- ---- ------- ----- -------- -------
Balance, December 1998.. 17,028,649 170 81,627 (611) (31,668) 49,518
Exercise of stock
options................ 374,250 4 390 394
Exercise of warrants.... 996 1 1
Costs of stock
issuance............... (111) (111)
Adjustment of unearned
compensation expense
due to forfeitures..... (207) 207
Amortization of unearned
compensation expense... 299 299
Net loss................ (17,743) (17,743)
-------- --- ---------- ---- ------- ----- -------- -------
Balance, December 1999.. $ 17,403,895 $174 $81,700 $(105) $(49,411) $32,358
======== === ========== ==== ======= ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Algos Pharmaceutical Corporation (the "Company"), is engaged primarily in
the development of proprietary analgesic and anesthetic products. Since its
formation in January 1992, the Company has devoted a substantial portion of its
efforts to developing products, licensing technology, filing regulatory
applications and raising capital. The Company is subject to a number of risks
common to companies in similar stages of development. These include, but are
not limited to, the lack of assurance of successful product development and
regulatory approval, the absence of manufacturing, marketing and distribution
capabilities, the risk of technological obsolescence, changes in pricing and
customer demand and the ability to obtain future financing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from
those estimates.
All dollar amounts are in thousands.
Development Stage Enterprise
The accompanying statements have been prepared in accordance with the
provisions of Statement of Financial Accounting Standard (SFAS) No. 7,
"Accounting and Reporting by Development Stage Enterprises."
Cash, Cash Equivalents, and Restricted Cash
The Company considers money market securities that mature within three
months of purchase to be cash equivalents. A bank certificate of deposit that
serves as collateral for an irrevocable letter of credit required by the terms
of the Company's lease agreement is included in restricted cash.
Property and Equipment, Net
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets, which range from three to ten years. Leasehold
improvements are depreciated over the term of the lease. Gains and losses on
depreciable assets retired or sold are recognized in the statement of
operations in the year of disposal. Repairs and maintenance expenditures are
expensed as incurred.
Revenue
License fee revenue is recognized when contract milestones are attained or
when otherwise earned in accordance with the terms of the underlying
agreements.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.
F-38
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Loss Per Share
Basic per share amounts are calculated by dividing the net loss applicable
to common stock by the weighted average number of common shares outstanding
during the period. Diluted per share amounts are calculated by dividing the net
loss applicable to common stock by the sum of the weighted average number of
common shares outstanding and dilutive common share equivalents. Since the
Company incurred losses in all periods presented, options and warrants to
purchase 1,028,405, 1,563,537 and 1,190,901 shares of common stock that were
outstanding at December 31, 1997, 1998, and 1999, respectively, were not
included in diluted per share calculations, as their effect would be
antidilutive.
3. MARKETABLE SECURITIES
Marketable securities at December 31, 1998 and 1999 include the following
debt securities:
<TABLE>
<CAPTION>
Estimated
Amortized Fair Unrealized
Cost Market Value Gains (Losses)
--------- ------------ -------------
<S> <C> <C> <C>
U.S. Treasury and federal agency
debt securities at December 31,
1998.............................. $13,055 $13,035 $(20)
U.S. Treasury and federal agency
debt securities at December 31,
1999.............................. $ 4,011 $ 3,993 $(18)
</TABLE>
The securities are classified as held-to-maturity securities and are stated
at their amortized cost. Noncurrent marketable securities have maturities in
excess of one year and less than two years.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Leasehold improvements........................................ $ 516 $ 505
Office furniture and equipment................................ 631 643
Computer equipment............................................ 257 236
------ ------
1,404 1,384
Less accumulated depreciation................................. 305 429
------ ------
$1,099 $ 955
====== ======
</TABLE>
5. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December
31,
---------
1998 1999
---- ----
<S> <C> <C>
Accrued compensation.............................................. $319 $229
Accrued research expenses......................................... 475 223
---- ----
$794 $452
==== ====
</TABLE>
F-39
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. INCOME TAXES
At December 31, 1999, the Company had available net operating loss
carryforwards and research and development credits for federal income tax
purposes of approximately $48,000 and $1,500, respectively, which expire in the
years 2009 through 2019. At December 31, 1999, the Company had available net
operating loss carryforwards and research and development credits for state
income tax purposes of approximately $48,300 and $1,100, respectively, which
expire in the years 2000 through 2006. The tax benefits related to
approximately $2,922 of the federal and state net operating losses at December
31, 1999 relate to stock option deductions and will be credited to additional
paid-in capital if recognized. The use of federal net operating loss and credit
carryforwards may be subject to limitations under section 382 of the Internal
Revenue Code pertaining to changes in stock ownership. Due to the uncertainty
of their realization, a full valuation allowance has been established for the
potential income tax benefit of net operating loss and credit carryforwards and
temporary differences. The increase in the valuation allowance amounted to
$4,745, $7,563 and $9,587 in 1997, 1998, and 1999, respectively. Deferred tax
assets (liabilities) for federal and state income taxes consist of the
following:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Net operating loss carryforwards......................... $ 12,283 $ 20,662
Research and development tax credits..................... 1,900 2,600
License costs............................................ 339 317
Accrued liabilities and other............................ 225 714
Depreciation and amortization............................ (4) 37
-------- --------
Total deferred tax assets................................ 14,743 24,330
Valuation allowance...................................... (14,743) (24,330)
-------- --------
Net deferred tax assets.................................. $ 0 $ 0
======== ========
</TABLE>
7. COMMITMENTS
License Agreements
The Company has licensed from a university certain patents and pending
patent applications in the field of pain management. The Company is required to
pay royalties equal to 4% of sales of licensed products. In addition, the
Company will pay the university 50% of royalty payments received from any
sublicensees until such payments total $500,000 for a given year, 33% until the
payments total an additional $500,000 for such year and 25% thereafter.
Leases
Minimum payments under the Company's operating lease for its administrative
offices are as follows:
<TABLE>
<S> <C>
2000.................................................................. $ 269
2001.................................................................. 269
2002.................................................................. 269
2003.................................................................. 297
2004.................................................................. 311
Balance of term....................................................... 1,036
</TABLE>
F-40
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The agreement provides the Company with an option to extend the lease term
for an additional five-year period and an option to purchase the building which
is exercisable between April 29, 2001 and April 28, 2003.
Rent expense amounted to $58, $239 and $269 for the years ended December 31,
1997, 1998, and 1999 respectively and $634 cumulatively from the date of
inception.
Research Contracts
The Company routinely contracts with universities, medical centers, contract
research organizations and other institutions for the conduct of research and
clinical studies on the Company's behalf. These agreements are generally for
the duration of the contracted study and contain provisions that allow the
Company to terminate the study prior to its completion.
Employment Agreements
At December 31, 1999, the Company's minimum obligation for base salaries
under employment agreements with officers amounted to approximately $615.
Contingencies
In the normal course of business, the Company is party to claims or
litigation relating to various matters. The Company believes that the outcome
of any current claims or litigation would not have a material adverse effect on
its results of operations, cash flows or financial position.
8. SIGNIFICANT AGREEMENTS
In 1996, the Company entered into a license agreement with McNeil Consumer
Products Company, an affiliate of Johnson & Johnson, which provides McNeil with
exclusive worldwide marketing rights to certain of the Company's products under
development. The Company has received payments amounting to $3,000 through
December 31, 1999 and may receive additional payments based on the achievement
of certain milestones, generally related to product development and patent
issuances, and royalties based on sales of licensed products, if any. McNeil is
responsible for development of the licensed products. In addition, the Company
will receive royalties based on sales of licensed products, if any. McNeil may
terminate the agreement upon 60 days notice.
In 1996, the Company entered into a development and marketing collaboration
and license agreement with Interneuron Pharmaceuticals, Inc. for the
development and commercialization of a product to treat migraine headache. The
agreement grants to Interneuron rights, co-exclusive with Algos, to use Algos
patents and know-how to manufacture and market the product. The development
program is currently in an initial stage in which it is expected that
Interneuron's development costs will exceed those of Algos. The agreement
provides that the companies will generally share equally the remaining
developments costs, including pre-clinical studies, clinical trials, and
regulatory activities, and similarly share in marketing and profits of the
resulting product, if any. After the initial stage of development, the
agreement may be terminated by either party with the terminating party
retaining an interest in any resulting product, either in the form of a royalty
on sales or the repayment of certain of its development costs.
In 1996, the Company contributed certain intangible assets having no book
value to a newly formed company, U.S. Dermatologics, Inc, and received
preferred stock with an aggregate stated value and liquidation preference of
$2,800 and all of the transferee's common stock. The common stock was
subsequently distributed to the Company's stockholders, warrant holders and
certain of its employees. The preferred stock provided for an annual cumulative
dividend of 30%, payable in the form of cash or common stock, and a share of
other earnings. The Company recorded no gain in connection with the
transaction, as management believed that
F-41
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(Continued)
realization was not assured. In 1998, the Company received $198 for certain
consulting and administrative services provided to U.S. Dermatologics, Inc.
during a transitional period, which ended in 1998. In 1999, the preferred stock
was exchanged for shares of U.S. Dermatologics, Inc. common stock representing
approximately 10% of U.S. Dermatologics, Inc.'s total outstanding common stock.
In 1999, the Company and Endo Pharmaceuticals Holdings Inc. entered into a
collaboration agreement, pursuant to which the Company and Endo Pharmaceuticals
will develop, manufacture and commercialize pain management products containing
the combination of oxycodone and dextromethorphan. Pursuant to the
collaboration agreement, each party granted to the other a sole and exclusive
worldwide license to its respective know-how, patent rights and trademark
rights used in connection with the collaboration. The companies will share
equally the costs associated with, and profits generated, by the collaboration,
after adjustments with respect to reduced sales of Endo products resulting from
sales of products that the parties developed under the collaboration agreement.
The collaboration agreement will continue in effect until the parties to the
agreement mutually agree in writing to terminate the agreement or the patent
rights licensed under the collaboration agreement expire.
In 1999, the Company granted a paid-up license under three of the Company's
patents to Cambridge NeuroScience, Inc. to develop products discovered by or on
behalf of Cambridge NeuroScience for the treatment of pain. In exchange, the
Company received the right to negotiate to develop and/or commercialize these
products.
9. STOCKHOLDERS' EQUITY
In May 1996, the Company effected an 8.3-for-1 stock split of its Common
Stock in the form of a stock dividend. All historical Common Stock and per
share data have been restated to reflect the stock split.
Convertible Preferred Stock
The Company is authorized to issue 10,000,000 shares of $.01 par value per
share preferred stock with rights, preferences and limitations determined by
the Board of Directors of the Company.
In 1994, the Company issued a total of 702,500 shares of convertible Series
A Preferred Stock and received net proceeds of $6,609 and services valued at
$25. In 1996, an additional 5,000 shares were issued upon conversion of an
outstanding warrant. In connection with the Company's 1996 initial public
offering of Common Stock, each outstanding share of convertible Series A
Preferred Stock was converted to 8.3 shares of Common Stock.
In 1996, the Company issued 100,000 shares of convertible Series B Preferred
Stock in connection with an amendment to a license agreement with a university
and recorded an administrative expense of $915 for the estimated fair value of
the stock. In 1997, the holders converted each share of convertible Series B
Preferred Stock into one share of Common Stock.
Warrants
In 1994, in connection with the sale of convertible Series A Preferred
Stock, certain selling agents received warrants to purchase an aggregate of
40,750 shares of convertible Series A Preferred Stock. In connection with the
Company's 1996 initial public offering of Common Stock, outstanding warrants to
purchase an aggregate of 35,750 shares of convertible Series A Preferred Stock
were converted to warrants to purchase an aggregate of 296,725 shares of Common
Stock. The warrants entitle the holders to purchase shares of Common Stock at
an exercise price of $1.20 per share and expire in 2001. Of these warrants,
warrants to purchase 230,657 and 229,661 shares of Common Stock were
outstanding and exercisable as of December 31, 1998 and 1999, respectively.
F-42
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1998, the Company sold 1,000,000 shares of its Common Stock together with
a warrant to purchase 250,000 shares of common stock for an aggregate purchase
price of $25,000. For financial statement purposes, the Company has assigned
$2,000 of the aggregate purchase price to the estimated fair value of the
warrant. The warrant, which is outstanding and exercisable at December 31,
1999, entitles the holder to purchase shares of Common Stock at an exercise
price of $25.00 per share and expires in 2003.
Stock Option Plans
The Company's 1996 Stock Option Plan permits the grant of non-qualified
stock options and incentive stock options to purchase an aggregate of 1,215,000
shares of authorized but unissued or reacquired shares of Common Stock. The
Compensation Committee of the Board of Directors has the authority to select
the persons to whom grants are to be made, to designate the number of shares of
Common Stock to be covered by such grants, to determine the exercise price of
options, to establish the vesting period of options, to establish the
contractual life of options, and to take all other actions for the
administration of the 1996 Stock Option Plan. The 1996 Stock Option Plan
permits the Compensation Committee to allow payment of the option exercise
price to be made in cash or by delivery of shares of Common Stock valued at
their fair market value on the date of exercise or delivery of other property,
or by a recourse promissory note payable to the Company, or by a combination of
the foregoing. Unless sooner terminated by the Board of Directors, the 1996
Stock Option Plan will expire in 2006.
The Company's 1996 Non-Employee Director Stock Option Plan (the Director
Plan) covers 283,000 authorized but unissued or reacquired shares of Common
Stock and is intended to assist the Company in attracting and retaining
qualified non-employee directors. The Director Plan is administered by the
Board of Directors and provides for automatic grants of non-qualified stock
options to purchase 10,000 shares of Common Stock to each non-employee director
at the time of initial appointment or Election to the Board of Directors. The
exercise price of the options shall be the fair market value of a share of
Common Stock on the date of grant. Each option shall generally become
exercisable in cumulative annual installments of one-third on each of the first
three annual meetings of the Company's stockholders following the date of grant
so long as the non-employee director continues to serve as a director of the
Company. In addition, each non-employee director shall be granted an option to
purchase 10,000 shares of Common Stock on an annual basis. Unless sooner
terminated by the Board of Directors, the Director Plan will expire in 2006.
Prior to 1997, the Company granted stock options under prior plans.
The following table summarizes stock option activity for the years ended
December 31, 1997, 1998, and 1999:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding January 1, 1997...................... 752,440 $ 1.39
Granted.......................................... 166,500 $16.62
Exercised........................................ (133,630) $ 0.12
Cancelled........................................ (4,660) $ 4.21
---------
Outstanding December 31, 1997.................... 780,650 $ 4.81
Granted.......................................... 382,520 $31.34
Exercised........................................ ( 59,850) $ 4.86
Cancelled........................................ ( 20,440) $15.98
---------
Outstanding December 31, 1998.................... 1,082,880 $13.97
Granted.......................................... 340,200 $26.97
Exercised........................................ (374,250) $ 1.05
Cancelled........................................ (337,590) $29.61
---------
Outstanding December 31, 1999.................... 711,240 $19.56
=========
</TABLE>
F-43
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Options exercisable at December 31, 1997, 1998 and 1999 were 503,216,
656,230 and 409,447 respectively.
A summary of stock options outstanding as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Range of Exercise Number of Weighted Average Weighted Average
Prices: Shares Remaining Contract Life Exercise Price
----------------- --------- ----------------------- ----------------
<S> <C> <C> <C>
$ 0.12--$ 0.13.......... 153,550 1.9 $ 0.13
$10.00--$15.00.......... 86,000 5.4 $14.37
$15.01--$20.00.......... 56,100 6.1 $17.21
$20.01--$25.00.......... 10,840 6.1 $22.47
$25.01--$30.00.......... 264,720 6.0 $26.50
$30.01--$40.00.......... 140,030 6.0 $31.65
-------
711,240 4.8 $19.56
=======
</TABLE>
Stock options exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
Number of Weighted Average
Range of Exercise Prices: Shares Exercise Price
------------------------- --------- ----------------
<S> <C> <C>
$ 0.12--$ 0.13.................................... 153,550 $ 0.13
$10.00--$15.00.................................... 76,400 $14.29
$15.01--$20.00.................................... 43,250 $17.20
$20.01--$25.00.................................... 2,810 $22.52
$25.01--$30.00.................................... 75,107 $26.51
$30.01--$40.00.................................... 58,330 $31.76
-------
409,447 $14.07
=======
</TABLE>
Weighted average exercise price of options granted during the year:
<TABLE>
<CAPTION>
Exercise Price: 1997 1998 1999
--------------- ------ ------ ------
<S> <C> <C> <C>
Equal to market value of stock......................... $16.62 $31.35 $26.89
Less than market value of stock........................ $31.31
Greater than market value of stock..................... $28.43
</TABLE>
Weighted average fair value at grant date of options granted during the
year:
<TABLE>
<CAPTION>
Exercise Price: 1997 1998 1999
--------------- ------ ------ ------
<S> <C> <C> <C>
Equal to market value of stock......................... $11.13 $20.53 $14.94
Less than market value of stock........................ $23.03
Greater than market value of stock..................... $13.69
</TABLE>
The fair value of each option grant in 1997, 1998 and 1999 was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: no dividend yield, expected lives of
five years, expected volatility of 60%, and risk-free interest rates of 6.3%,
5.4% and 4.7% for 1997, 1998 and 1999, respectively.
F-44
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company records compensation expense for stock option grants in
accordance with APB No. 25, "Accounting for Stock Issued to Employees.' Had the
Company elected to record compensation for stock option grants in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation,' the Company's pro
forma net loss and loss per share amounts would be as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net loss....................................... $(9,480) $(18,218) $(20,047)
Net loss per common share, basic and diluted... $ (0.60) $ (1.13) $ (1.16)
</TABLE>
Pro forma amounts are not likely to be representative of amounts in future
years, as additional options are awarded and vested.
In 1998, Algos granted certain options subject to shareholder approval of an
increase of 800,000 in the number of shares of Common Stock issuable under the
1996 Stock Option Plan. Unearned compensation expense was recorded for the
increase in the market value of Common Stock between the grant date and the
June 1998 approval date. Unearned compensation expense related to stock option
grants is amortized over the vesting period of the grants, generally four
years.
10. OTHER RELATED PARTY TRANSACTIONS
Certain directors and shareholders of the Company have been associated with
law firms that rendered various legal services to the Company. The Company
recorded charges of approximately $165, $47 and $900 in 1997, 1998 and 1999
respectively, and $1,737 from the date of inception, for those services,
including services rendered in connection with the issuance of stock. As of
December 31, 1998 and 1999, $14 and $773 of these charges were unpaid,
respectively.
11. MERGER AGREEMENT WITH ENDO PHARMACEUTICALS HOLDINGS INC.
On November 26, 1999, the Company entered into a definitive merger agreement
pursuant to which Algos will merge with a subsidiary of Endo Pharmaceuticals
Holdings Inc. in a tax-free transaction. In the transaction, Algos shareholders
will receive common stock of Endo and warrants to purchase additional shares of
common stock of Endo for nominal consideration. The warrants will become
exercisable only if the U.S. Food and Drug Administration approves Algos' New
Drug Application for MorphiDex by December 31, 2002. The agreement places
restrictions on the Company's ability to enter into certain transactions,
including incurring debt, issuing additional shares of stock, paying dividends,
disposing of assets and entering into certain significant agreements. The
transaction is subject to the approval of Algos shareholders, regulatory
approvals and certain other conditions and is expected to be completed by the
second quarter of 2000.
F-45
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $30,752 $28,247
Marketable securities................................. 4,011 4,002
Interest receivable................................... 207 258
Prepaid expenses and other current assets............. 234 155
------- -------
Total current assets................................ 35,204 32,662
------- -------
RESTRICTED CASH......................................... 150 150
PROPERTY AND EQUIPMENT, net............................. 955 950
------- -------
TOTAL ASSETS............................................ $36,309 $33,762
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 3,499 $ 3,915
Other current liabilities............................. 452 260
------- -------
Total current liabilities........................... 3,951 4,175
------- -------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized, 17,403,095 and 17,421,345 shares issued
and outstanding, respectively........................ 174 174
Additional paid-in capital............................ 81,700 81,805
Unearned compensation expense......................... (105) (105)
Deficit accumulated during the development stage...... (49,411) (52,287)
------- -------
Total stockholders' equity.......................... 32,358 29,587
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $36,309 $33,762
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For the three months ended Cumulative
March 31, from inception
---------------------------- to March 31,
1999 2000 2000
------------- ------------- --------------
<S> <C> <C> <C>
Revenues......................... $ -- $ -- $ 3,311
------------- ------------- --------
Operating expenses:
Research and development....... 2,517 1,935 40,105
Selling, general and
administrative................ 3,462 1,386 23,599
------------- ------------- --------
Total operating expenses..... 5,979 3,321 63,704
------------- ------------- --------
Loss from operations............. (5,979) (3,321) (60,393)
Interest income.................. 568 445 8,106
------------- ------------- --------
Net loss......................... $ (5,411) $ (2,876) $(52,287)
============= ============= ========
Net loss per common share, basic
and diluted..................... $ (0.31) $ (0.17)
============= =============
Weighted average common shares
outstanding, basic and diluted.. 17,299,134 17,416,297
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE CORPORATION)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the three months
ended Cumulative
March 31, from inception
---------------------- to March 31,
1999 2000 2000
---------- ---------- --------------
<S> <C> <C> <C>
Cash flows from operating activities: $ (3,706) $ (2,541) $(45,591)
Cash flows from investing activities:
Purchases of marketable securities... (9,842) (76,753)
Redemption of marketable securities.. 5,000 72,854
Purchases of property and equipment.. (105) (50) (1,681)
---------- ---------- --------
Net cash used in investing activities.. (4,947) (50) (5,580)
---------- ---------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred
stock............................... 6,659
Proceeds from issuance of common
stock............................... 158 86 72,759
---------- ---------- --------
Net cash provided by financing
activities.......................... 158 86 79,418
---------- ---------- --------
Net increase (decrease) in cash and
cash equivalents...................... (8,495) (2,505) 28,247
Cash and cash equivalents, beginning of
period................................ 37,025 30,762 --
---------- ---------- --------
Cash and cash equivalents, end of
period................................ $ 28,530 $ 28,247 $ 28,247
---------- ---------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1.BASIS OF PRESENTATION
The financial statements presented herein have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instruction to Form 10-Q and Article 10 of Regulation S-X and are
unaudited. In the opinion of management, the financial statements reflect all
adjustments (which consist of normal recurring accruals and adjustments)
necessary for a fair statement of the financial position and results of the
interim periods presented.
2.LOSS PER SHARE
Since the Company incurred net losses in all periods presented, outstanding
options and warrants to purchase an aggregate of 1,508,481 and 1,164,231 shares
of Common Stock at March 31, 1999 and 2000, respectively, were not included in
diluted per share calculations, as their effect would be antidilutive.
3.MERGER AGREEMENT WITH ENDO PHARMACEUTICALS HOLDINGS INC.
On November 26, 1999, the Company entered into a definitive merger agreement
pursuant to which Algos will merge with a subsidiary of Endo Pharmaceuticals
Holdings Inc. in a tax-free transaction. In the transition, Algos shareholders
will receive common stock of Endo and warrants to purchase additional shares of
common stock of Endo for nominal consideration. The warrants will become
exercisable only if the U.S. Food and Drug Administration approves Algos' New
Drug Application for MorphiDex(R) by a specified date. the agreement places
restrictions on the Company's ability to enter into certain transaction,
including incurring debt, issuing additional shares of stock, paying dividends,
disposing of assets and entering into certain significant agreements. The
transaction is subject to the approval of Algos shareholders, regulatory
approvals and certain other conditions and is expected to be completed in the
second quarter of 2000. Algos will reimburse Endo for all out-of-pocket
expenses if the Algos shareholders do not approve the merger.
F-49
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
by and among
ENDO PHARMACEUTICALS HOLDINGS INC.,
ENDO INC.
and
ALGOS PHARMACEUTICAL CORPORATION
----------------
Dated as of March 3, 2000
----------------
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
THE MERGER
<C> <S> <C>
Section 1.1 The Merger.................................................. A-9
Section 1.2 Effective Time.............................................. A-9
Section 1.3 Effects of the Merger....................................... A-9
Section 1.4 Directors of the Surviving Corporation...................... A-9
Section 1.5 Officers of the Surviving Corporation....................... A-9
Section 1.6 Charter and By-Laws......................................... A-9
Section 1.7 Conversion of Securities.................................... A-9
Section 1.8 Parent to Make Certificates Available....................... A-10
Section 1.9 Dividends; Transfer Taxes; Withholding...................... A-10
Section 1.10 Dissenting Shares........................................... A-11
Section 1.11 Return of Exchange Fund..................................... A-11
Section 1.12 Adjustment of Conversion Number............................. A-11
Section 1.13 No Further Ownership Rights in Company Common Stock......... A-12
Section 1.14 Closing of Company Transfer Books........................... A-12
Section 1.15 Lost Certificates........................................... A-12
Section 1.16 Affiliates.................................................. A-12
Section 1.17 Further Assurances.......................................... A-12
Section 1.18 Closing..................................................... A-12
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Section 2.1 Organization, Standing and Power............................ A-13
Section 2.2 Capital Structure........................................... A-13
Section 2.3 Authority................................................... A-14
Section 2.4 Consents and Approvals; No Violation........................ A-15
Section 2.5 Financial Statements........................................ A-15
Section 2.6 Registration Statement and Proxy Statement.................. A-16
Section 2.7 Absence of Certain Changes or Events........................ A-16
Section 2.8 Permits and Compliance...................................... A-16
Section 2.9 Tax Matters................................................. A-17
Section 2.10 Actions and Proceedings..................................... A-18
Section 2.11 Certain Agreements.......................................... A-19
Section 2.12 ERISA....................................................... A-19
Section 2.13 Compliance with Certain Laws................................ A-20
Section 2.14 Liabilities................................................. A-22
Section 2.15 Labor Matters............................................... A-22
Section 2.16 Intellectual Property....................................... A-23
Section 2.17 Ownership of Shares......................................... A-25
Section 2.18 Operations of Sub........................................... A-25
Section 2.19 Brokers..................................................... A-25
Section 2.20 State Takeover Statutes..................................... A-25
Section 2.21 Year 2000................................................... A-26
Section 2.22 Accuracy of Information Furnished........................... A-26
Section 2.23 Required Vote of Parent and Sub Stockholders................ A-26
Section 2.24 Interests in Other Entities................................. A-26
</TABLE>
A-2
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
<TABLE>
<C> <S> <C>
Section 3.1 Organization, Standing and Power............................ A-27
Section 3.2 Capital Structure; Subsidiaries............................. A-27
Section 3.3 Authority................................................... A-27
Section 3.4 Consents and Approvals; No Violation........................ A-28
Section 3.5 SEC Documents and Other Reports............................. A-29
Section 3.6 Registration Statement and Proxy Statement.................. A-29
Section 3.7 Absence of Certain Changes or Events........................ A-30
Section 3.8 Permits and Compliance...................................... A-30
Section 3.9 Tax Matters................................................. A-31
Section 3.10 Actions and Proceedings..................................... A-32
Section 3.11 Certain Agreements.......................................... A-32
Section 3.12 ERISA....................................................... A-32
Section 3.13 Compliance with Certain Laws................................ A-33
Section 3.14 Liabilities................................................. A-35
Section 3.15 Labor Matters............................................... A-35
Section 3.16 Intellectual Property....................................... A-36
Section 3.17 Opinion of Financial Advisor................................ A-38
Section 3.18 Required Vote of Company Stockholders....................... A-38
Section 3.19 Ownership of Shares......................................... A-38
Section 3.20 Brokers..................................................... A-38
Section 3.21 State Takeover Statutes..................................... A-39
Section 3.22 Year 2000................................................... A-39
Section 3.23 Interests in Other Entities................................. A-39
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business Pending the Merger...................... A-40
Section 4.2 No Solicitation............................................. A-42
Section 4.3 Tax Representation Letters.................................. A-43
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Stockholder Meeting......................................... A-44
Section 5.2 Preparation of the Registration Statement and the Proxy
Statement................................................... A-44
Section 5.3 Access to Information; Regulatory Communications............ A-44
Section 5.4 Compliance with the Securities Act.......................... A-45
Section 5.5 Designation of Directors.................................... A-45
Section 5.6 NASDAQ Listing.............................................. A-46
Section 5.7 Fees and Expenses........................................... A-46
Section 5.8 Company Stock Options....................................... A-46
Section 5.9 Parent Options.............................................. A-46
Section 5.10 Reasonable Efforts.......................................... A-46
Section 5.11 Public Announcements........................................ A-47
Section 5.12 State Takeover Laws......................................... A-47
Section 5.13 Indemnification; Directors and Officers Insurance........... A-47
Section 5.14 Notification of Certain Matters............................. A-47
</TABLE>
A-3
<PAGE>
<TABLE>
<C> <S> <C>
Section 5.15 Employee Matters......................................... A-48
Section 5.16 Tax Treatment............................................ A-48
Section 5.17 Conveyance Taxes......................................... A-48
Section 5.18 Ownership of Shares...................................... A-48
Section 5.19 Additional Agreements.................................... A-48
Section 5.20 Issuance of Warrants to Parent........................... A-49
Section 5.21 Formation of Parent LLC.................................. A-49
Section 5.22 Effect of Parent Recapitalization........................ A-50
Section 5.23 Appraisal Demands........................................ A-51
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER
Section 6.1 Conditions to Each Party's Obligation to Effect the
Merger................................................... A-52
Section 6.2 Conditions to Obligation of the Company to Effect the
Merger................................................... A-52
Section 6.3 Conditions to Obligations of Parent and Sub to Effect the
Merger................................................... A-53
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination.............................................. A-54
Section 7.2 Effect of Termination.................................... A-55
Section 7.3 Amendment................................................ A-55
Section 7.4 Waiver................................................... A-55
Section 7.5 Procedure for Termination, Amendment, Extension or
Waiver................................................... A-55
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Non-Survival of Representations and Warranties........... A-56
Section 8.2 Notices.................................................. A-56
Section 8.3 Interpretation........................................... A-57
Section 8.4 Counterparts............................................. A-57
Section 8.5 Entire Agreement; No Third-Party Beneficiaries........... A-57
Section 8.6 Governing Law............................................ A-57
Section 8.7 Assignment............................................... A-57
Section 8.8 Severability............................................. A-57
Section 8.9 Enforcement of this Agreement............................ A-57
List of Exhibits
Exhibit A-1 Form of Amended and Restated Certificate of Incorporation
of Parent................................................ A-60
Exhibit A-2 Summary of Parent Recapitalization....................... A-63
Exhibit B Form of Company Voting Agreement......................... A-64
Exhibit C Form of Algos Warrant.................................... A-75
Exhibit D-1 Parent's Year 2000 Representation........................ A-104
Exhibit D-2 Company's Year 2000 Representation....................... A-105
Exhibit E-1 Form of Representation Letter (Parent's)................. A-106
Exhibit E-2 Form of Representation Letter (the Company's)............ A-109
Exhibit F Form of Affiliate Letter (the Company's)................. A-112
Exhibit G Form of Tax Sharing Agreement............................ A-114
Exhibit H Form of Lyle Employment Agreement........................ A-118
Exhibit I Form of Endo Warrant..................................... A-127
</TABLE>
A-4
<PAGE>
Index of Defined Terms
<TABLE>
<CAPTION>
Term Page
---- ----
<S> <C>
Adjustment Event........................................................... A-49
Affiliates................................................................. A-45
Agreement.................................................................. A-8
Applicable Laws............................................................ A-20
Cash Cost of Sales......................................................... A-49
Cash Gross Profit of Parent................................................ A-49
Certificate of Merger...................................................... A-9
Certificates............................................................... A-10
Change in the Company Recommendation....................................... A-44
Charter Amendment.......................................................... A-8
Closing.................................................................... A-12
Closing Date............................................................... A-12
COBRA...................................................................... A-19
Code....................................................................... A-8
Company.................................................................... A-8
Company Business Personnel................................................. A-8
Company By-Laws............................................................ A-27
Company Charter............................................................ A-27
Company Common Stock....................................................... A-8
Company Copyrights......................................................... A-36
Company Designees.......................................................... A-45
Company Disclosure Schedule................................................ A-28
Company Intellectual Property.............................................. A-27
Company License Agreements................................................. A-36
Company Multiemployer Plan................................................. A-32
Company Patents............................................................ A-36
Company Permits............................................................ A-30
Company Plan............................................................... A-34
Company Preferred Stock.................................................... A-27
Company SEC Documents...................................................... A-29
Company Software........................................................... A-36
Company Stock Options...................................................... A-27
Company Stock Plans........................................................ A-27
Company Stockholder Approval............................................... A-28
Company Takeover Proposal.................................................. A-43
Company Technology......................................................... A-36
Company Trademarks......................................................... A-36
Constituent Corporations................................................... A-8
Conversion Number.......................................................... A-9
Credit Agreement........................................................... A-41
Current Endo Options....................................................... A-46
D&O Insurance.............................................................. A-47
DEA........................................................................ A-13
DGCL....................................................................... A-9
Dissenting Shares.......................................................... A-53
Effective Time............................................................. A-9
Endo Products.............................................................. A-9
Endo Warrant Agreement..................................................... A-49
Endo Warrants.............................................................. A-49
Environmental Laws......................................................... A-20
</TABLE>
A-5
<PAGE>
<TABLE>
<S> <C>
ERISA...................................................................... A-19
Exchange Act............................................................... A-15
Exchange Agent............................................................. A-9
Exchange Fund.............................................................. A-9
FDA........................................................................ A-13
FDCA....................................................................... A-21
GAAP....................................................................... A-15
Governmental Entity........................................................ A-15
Hazardous materials........................................................ A-20
HSR Act.................................................................... A-15
IND........................................................................ A-16
Independent Accounting Firm................................................ A-50
IRS........................................................................ A-19
Knowledge of Parent........................................................ A-17
Knowledge of the Company................................................... A-30
Lyle Agreement............................................................. A-48
Material Adverse Change.................................................... A-13
Material Adverse Effect.................................................... A-13
Merger..................................................................... A-8
Merger Consideration....................................................... A-9
MorphiDex(R) Application................................................... A-34
NASDAQ..................................................................... A-15
NDA........................................................................ A-16
Net Sales.................................................................. A-49
NOLs....................................................................... A-31
Non-Transferable Warrants.................................................. A-9
Parent..................................................................... A-8
Parent Business Personnel.................................................. A-22
Parent By-Laws............................................................. A-13
Parent Charter............................................................. A-13
Parent Class A Common Stock................................................ A-13
Parent Common Stock........................................................ A-8
Parent Copyrights.......................................................... A-23
Parent Disclosure Schedule................................................. A-14
Parent Financial Statements................................................ A-15
Parent Incentive Plans..................................................... A-13
Parent Intellectual Property............................................... A-23
Parent License Agreements.................................................. A-23
Parent LLC................................................................. A-49
Parent LLC Agreement....................................................... A-49
Parent Material Contracts.................................................. A-17
Parent Multiemployer Plan.................................................. A-20
Parent Patents............................................................. A-23
Parent Permits............................................................. A-16
Parent Plan................................................................ A-20
Parent Preferred Stock..................................................... A-13
Parent Recapitalization.................................................... A-8
Parent Software............................................................ A-23
Parent Stock Options....................................................... A-14
Parent Stock Plans......................................................... A-13
Parent Stock Purchase Plan................................................. A-13
Parent Technology.......................................................... A-23
</TABLE>
A-6
<PAGE>
<TABLE>
<S> <C>
Parent Trademarks.......................................................... A-23
Permits.................................................................... A-16
Person..................................................................... A-9
Position Paper............................................................. A-49
Proxy Statement............................................................ A-16
Registration Statement..................................................... A-14
SEC........................................................................ A-14
Securities Act............................................................. A-12
State Takeover Approvals................................................... A-15
Stockholder Meeting........................................................ A-44
Stockholder Voting Agreement............................................... A-8
Stockholder Voting Agreements.............................................. A-8
Sub........................................................................ A-8
Subsidiary................................................................. A-13
Superior Company Proposal.................................................. A-44
Surviving Corporation...................................................... A-9
Tax Representation Letters................................................. A-43
Tax Returns................................................................ A-18
Tax Sharing Agreement...................................................... A-48
Taxes...................................................................... A-18
Termination Date........................................................... A-54
Transaction Agreements..................................................... A-8
Warrant Agreement.......................................................... A-9
</TABLE>
A-7
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of March 3, 2000
(this "Agreement"), by and among ENDO PHARMACEUTICALS HOLDINGS INC., a Delaware
corporation ("Parent"), ENDO INC., a Delaware corporation and a newly-formed
wholly-owned subsidiary of Parent ("Sub"), and ALGOS PHARMACEUTICAL
CORPORATION, a Delaware corporation (the "Company") (Sub and the Company being
hereinafter collectively referred to as the "Constituent Corporations").
WITNESSETH:
WHEREAS, Parent, Sub and the Company entered into an agreement and plan of
merger, dated as of November 26, 1999, and the parties wish to amend and
restate such agreement;
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have each determined that the Merger is advisable and in the best interest of
their respective stockholders and is in furtherance of and consistent with
their respective long-term business strategies;
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have each (a) approved and declared advisable the merger of the Company with
and into Sub (the "Merger"), upon the terms and subject to the conditions set
forth herein, whereby each issued and outstanding share of common stock, par
value $.01 per share, of the Company ("Company Common Stock") not owned
directly or indirectly by Parent or the Company (and other than Dissenting
Shares (as defined in Section 1.10 hereof)) will be converted into the Merger
Consideration (as defined in Section 1.7(c) hereof) and (b) approved this
Agreement upon the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of Parent has approved this Agreement and
the Merger and, in its capacity as the sole stockholder of Sub, has approved
this Agreement upon the terms and subject to the conditions set forth herein;
WHEREAS, following the execution of this Agreement and prior to the Closing
(as defined in Section 1.18 hereof), Parent will (a) duly adopt and declare
advisable an amendment and restatement of the Certificate of Incorporation of
Parent substantially in the form attached hereto as Exhibit A-1 (the "Charter
Amendment") and (b) declare and pay a stock dividend to the then current
holders of shares of common stock, par value $.01 per share, of Parent ("Parent
Common Stock") or effect some other form of recapitalization, the results of
which are substantially set forth on Exhibit A-2 attached hereto (the "Parent
Recapitalization");
WHEREAS, simultaneous with the execution and delivery of this Agreement,
Parent and each stockholder of the Company listed on Annex I attached hereto
have each entered into an agreement substantially in the form of Exhibit B
hereto (each, a "Stockholder Voting Agreement" and collectively, "Stockholder
Voting Agreements") pursuant to which such stockholder has agreed to vote the
shares of Company Common Stock beneficially owned by such stockholder in favor
of the Merger (the Stockholder Voting Agreements, the Warrant Agreement (as
defined in Section 1.7(c) hereof) and this Agreement are collectively referred
to herein as the "Transaction Agreements");
WHEREAS, following the execution of this Agreement and prior to the Closing,
Parent and certain stockholders of Parent shall enter into a registration
rights agreement pursuant to which Parent will grant certain rights to such
Persons regarding the registration of Parent Common Stock owned by them
following the Merger;
WHEREAS, for U.S. federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code") and that this
Agreement shall be, and hereby is, adopted as a plan of reorganization for
purposes of Section 368 of the Code;
NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained, the parties hereto agree as
follows:
A-8
<PAGE>
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the Delaware General Corporation Law (the
"DGCL"), the Company shall be merged with and into Sub at the Effective Time
(as hereinafter defined). Following the Merger, the separate corporate
existence of the Company shall cease and Sub shall (i) continue as the
surviving corporation (sometimes referred to herein as the "Surviving
Corporation"), (ii) succeed to and assume all the rights and obligations of the
Company in accordance with the DGCL, (iii) continue to be governed by the laws
of the State of Delaware and (iv) continue under the name "Endo Inc."
Section 1.2 Effective Time. The Merger shall become effective when a
Certificate of Merger (the "Certificate of Merger"), duly executed in
accordance with the relevant provisions of the DGCL, is filed with the
Secretary of State of the State of Delaware; provided, however, that, upon
mutual consent of the Constituent Corporations, the Certificate of Merger may
provide for a later date or time of effectiveness of the Merger. When used in
this Agreement, the term "Effective Time" shall mean the later of the date and
time at which the Certificate of Merger is filed or such later date and time
established by the Certificate of Merger. The filing of the Certificate of
Merger in accordance with the DGCL shall be made on the date of the Closing, or
as promptly thereafter as practicable.
Section 1.3 Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL.
Section 1.4 Directors of the Surviving Corporation. The directors of Sub
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation as of the Effective Time and shall hold office until their
successors are duly appointed or elected in accordance with applicable law and
the Certificate of Incorporation and By-laws of the Surviving Corporation.
Section 1.5 Officers of the Surviving Corporation. The officers of Sub
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation as of the Effective Time and shall hold office until their
successors are duly appointed or elected in accordance with applicable law and
the certificate of incorporation and by-laws of the Surviving Corporation.
Section 1.6 Charter and By-Laws. The Certificate of Incorporation of Sub in
effect immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter changed or amended
as provided therein or by applicable law. The By-laws of Sub as in effect
immediately prior to the Effective Time shall be the By-laws of the Surviving
Corporation until thereafter changed or amended as provided therein or by the
certificate of incorporation of the Surviving Corporation or by applicable law.
Section 1.7 Conversion of Securities. As of the Effective Time, by virtue of
the Merger and without any action on the part of Sub, the Company or the
holders of any securities of the Constituent Corporations:
(a) Each issued and outstanding share of common stock of Sub shall
remain outstanding as one validly issued, fully paid and nonassessable
share of common stock of the Surviving Corporation.
(b) All shares of Company Common Stock that are held in the treasury of
the Company and any shares of Company Common Stock owned by Parent or Sub
shall be canceled and no capital stock of Parent or other consideration
shall be delivered in respect thereof.
(c) Subject to the provisions of Section 1.12 hereof, each share of
Company Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares to be canceled in accordance with Section
1.7(b) hereof and Dissenting Shares) shall be converted into (i) one (the
"Conversion Number") validly issued, fully paid and nonassessable share of
Parent Common Stock and (ii) one warrant which shall be subject to the
terms and conditions of a warrant agreement (the "Warrant Agreement")
A-9
<PAGE>
substantially in the form attached hereto as Exhibit C (an "Algos Warrant"
and, together with the shares of Parent Common Stock referred to in clause
(i), the "Merger Consideration"). All such shares of Company Common Stock,
when so converted, shall no longer be outstanding and shall automatically
be canceled and retired and each holder of a certificate formerly
representing any such shares shall cease to have any rights with respect
thereto, except for the right to receive any dividends and other
distributions in accordance with Section 1.9 hereof, certificates
representing the shares of Parent Common Stock and Algos Warrants into
which such shares are converted upon surrender of such certificates in
accordance with Section 1.8 hereof. Each certificate shall, from and after
the Effective Time until surrendered in exchange for Parent Common Stock
and Algos Warrants, for all purposes be deemed to represent the shares of
Parent Common Stock and Algos Warrants into which such Company Common Stock
was converted in the Merger.
Section 1.8 Parent to Make Certificates Available.
(a) Exchange of Certificates. Parent shall authorize a commercial bank
reasonably acceptable to the Company (or such other Person (as defined in
Section 1.8(a) hereof) or Persons as shall be reasonably acceptable to Parent
and the Company) to act as Exchange Agent hereunder (the "Exchange Agent"). As
soon as practicable after the Effective Time, Parent shall deposit with the
Exchange Agent, in trust for the holders of shares of Company Common Stock
converted in the Merger, certificates representing the shares of Parent Common
Stock and certificates representing the Algos Warrants, including certificates
representing Algos Warrants subject to the transfer restrictions set forth in
the Warrant Agreement (the "Non-Transferable Warrants"), each issuable pursuant
to Section 1.7(c) hereof in exchange for outstanding certificates representing
shares of Company Common Stock (such shares of Parent Common Stock and Algos
Warrants, together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "Exchange Fund"). Except as contemplated
by this Section 1.8, and Section 1.11 hereof, the Exchange Fund shall not be
used for any other purpose. For purposes of determining the Exchange Fund so
deposited, Parent shall assume that no holder of shares of Company Common Stock
will perfect his or her appraisal rights under the DGCL. For purposes of this
Agreement, "Person" means any natural person, firm, individual, corporation,
limited liability company, partnership, association, joint venture, company,
business trust, trust or any other entity or organization, whether incorporated
or unincorporated, including a government or political subdivision or any
agency or instrumentality thereof.
(b) Exchange Procedures. As soon as practicable after the Effective Time,
Parent shall cause the Exchange Agent to mail to each record holder of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock converted in the Merger
(the "Certificates") a letter of transmittal (in customary form), which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon actual delivery of the Certificates to the
Exchange Agent, and shall contain instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Parent Common Stock, certificates representing Algos Warrants. Upon
surrender to the Exchange Agent for cancellation of a Certificate, together
with such letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor (i) a certificate
representing that number of whole shares of Parent Common Stock into which the
shares of Company Common Stock represented by the surrendered Certificate shall
have been converted at the Effective Time pursuant to this Article I, (ii) a
certificate representing that number of Algos Warrants (or, if requested, Non-
Transferable Warrants) into which the shares of Company Common Stock
represented by the surrendered Certificate shall have been converted at the
Effective Time pursuant to this Article I and (iii) any dividends and other
distributions payable in accordance with Section 1.9 hereof, and any
Certificate so surrendered shall forthwith be canceled.
Section 1.9 Dividends; Transfer Taxes; Withholding.
(a) No dividends or other distributions that are declared on or after the
Effective Time on Parent Common Stock, or are payable to the holders of record
thereof on or after the Effective Time, will be paid to any Person entitled by
reason of the Merger to receive a certificate representing Parent Common Stock
and a certificate representing Algos Warrants, until such Person surrenders
such certificates in accordance with Section 1.8
A-10
<PAGE>
hereof. Subject to the effect of applicable law, there shall be paid to each
record holder of a new certificate representing such Parent Common Stock: (i)
at the time of such surrender or as promptly as practicable thereafter, the
amount of any dividends or other distributions theretofore paid with respect to
the shares of Parent Common Stock represented by such new certificate and
having a record date on or after the Effective Time and a payment date prior to
such surrender; (ii) at the appropriate payment date or as promptly as
practicable thereafter, the amount of any dividends or other distributions
payable with respect to such shares of Parent Common Stock and having a record
date on or after the Effective Time, but prior to such surrender and a payment
date on or subsequent to such surrender. In no event shall (1) the Person
entitled to receive such dividends or other distributions be entitled to
receive interest on such dividends or other distributions and (2) any dividends
or distributions be payable on the Algos Warrants or to the holders of record
thereof unless and until such Algos Warrants are exercised in accordance with
the terms of the Warrant Agreement.
(b) If any cash or certificates representing shares of Parent Common Stock
or Algos Warrants are to be paid to or issued in a name other than that in
which the Certificate surrendered in exchange therefor is registered, it shall
be a condition of such exchange that the Certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer, subject to the
limitations set forth in Section 1.8 hereof and in the Warrant Agreement with
respect to Non-Transferable Warrants, and that the Person requesting such
exchange shall pay to the Exchange Agent any transfer or other Taxes (as
defined in Section 2.9 hereof) required by reason of the issuance of
certificates representing such shares of Parent Common Stock or such Algos
Warrants in a name other than that of the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of the Exchange Agent that
such Tax has been paid or is not applicable. Except as otherwise provided in
Section 5.17 hereof, Parent or the Exchange Agent shall be entitled to deduct
and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of shares of Company Common Stock such amounts as
Parent or the Exchange Agent are required to deduct and withhold with respect
to the making of such payment under the Code or under any provision of state,
local or foreign Tax law. To the extent that amounts are so withheld by Parent
or the Exchange Agent, such withheld amounts shall be treated for all purposes
of this Agreement as having been paid to the holder of the Company Common Stock
in respect of which such deduction and withholding were made by Parent or the
Exchange Agent.
Section 1.10 Dissenting Shares. Notwithstanding Section 1.7 hereof or any
other provision of this Agreement, shares of Company Common Stock issued and
outstanding immediately prior to the Effective Time and held by a holder who
has properly exercised and perfected appraisal rights under Section 262 of the
DGCL (the "Dissenting Shares"), shall not be converted into the right to
receive the Merger Consideration, but the holders of Dissenting Shares shall be
entitled to receive such consideration as shall be determined pursuant to
Section 262 of the DGCL; provided, however, that if any such holder shall have
failed to perfect or shall effectively withdraw or lose his or her right to
appraisal and payment under the DGCL, such holder's shares shall thereupon be
deemed to have been converted as of the Effective Time into the right to
receive the Merger Consideration, without any interest thereon, and such shares
shall no longer be Dissenting Shares. Dissenting Shares shall be canceled and
any holder thereof shall cease to have any rights with respect thereto,
including as a stockholder of the Surviving Corporation, Parent or the Company.
Section 1.11 Return of Exchange Fund. Any portion of the Exchange Fund that
remains undistributed to the former stockholders of the Company for six months
after the Effective Time shall be delivered to Parent, upon demand of Parent,
and any such former stockholders who have not theretofore complied with this
Article I shall thereafter look only to Parent for payment of their claim for
Parent Common Stock, Algos Warrants and any dividends or distributions with
respect to Parent Common Stock. Any portion of the Exchange Fund relating to
shares of Company Common Stock for which appraisal rights have been perfected
and not thereafter withdrawn or rescinded shall be returned to Parent upon
demand. Neither Parent nor either Constituent Corporation shall be liable to
any former holder of Company Common Stock for any such shares of Parent Common
Stock, Algos Warrants, cash and dividends and distributions held in the
Exchange Fund which are delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
Section 1.12 Adjustment of Conversion Number. In the event of any
reclassification, recapitalization, stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock) or subdivision with respect to Parent Common Stock, any
change or conversion of
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Parent Common Stock into other securities, any other dividend or distribution
with respect to the Parent Common Stock as the same may be adjusted from time
to time pursuant to the terms of this Agreement (or if a record date with
respect to any of the foregoing should occur), prior to the Effective Time,
appropriate and proportionate adjustments shall be made to the Conversion
Number, and all references to the Conversion Number in this Agreement shall be
deemed to be to the Conversion Number as so adjusted; provided that in no event
shall any such adjustment occur on account of the Charter Amendment or the
Parent Recapitalization.
Section 1.13 No Further Ownership Rights in Company Common Stock. All shares
of Parent Common Stock and all Algos Warrants issued pursuant to the terms
hereof (including any cash paid pursuant to Section 1.10 hereof) shall be
deemed to have been issued in full satisfaction of all rights pertaining to the
shares of Company Common Stock represented by such Certificates.
Section 1.14 Closing of Company Transfer Books. At the Effective Time, the
stock transfer books of the Company shall be closed and no transfer of shares
of Company Common Stock outstanding prior to the Effective Time shall
thereafter be made on the records of the Company. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, the Exchange Agent or
Parent, such Certificates shall be canceled and exchanged as provided in this
Article I.
Section 1.15 Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and, if reasonably
required by the Surviving Corporation, the posting by such Person of a bond, in
such reasonable amount as the Surviving Corporation may direct, as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of Parent Common Stock, the Algos Warrants and any
dividends or other distributions to which the holder thereof is entitled
pursuant to Section 1.9 hereof.
Section 1.16 Affiliates. Certificates surrendered for exchange by each
Affiliate (as defined in Section 5.4 hereof) of the Company for purposes of
Rule 145(c) under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (the "Securities Act") that has been identified and
required to provide an Affiliate letter pursuant to Section 5.4 hereof shall
not be exchanged until Parent has received such Affiliate letter from such
Person as provided in Section 5.4 hereof.
Section 1.17 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 (i) 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, powers, franchises, properties or assets of either of
the Constituent Corporations or (ii) 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 execute and deliver, in the name and
on behalf of either of the Constituent Corporations, all such deeds, bills of
sale, assignments and assurances and to do, in the name and on behalf of either
Constituent Corporation, all such other acts and things as may be necessary,
desirable or proper to vest, perfect or confirm the Surviving Corporation's
right, title or interest in, to or under any of the rights, privileges, powers,
franchises, properties or assets of such Constituent Corporation and otherwise
to carry out the purposes of this Agreement.
Section 1.18 Closing. Subject to the satisfaction or waiver of the
conditions set forth in Article VI hereof, the closing of the transactions
contemplated by this Agreement (the "Closing") and all actions specified in
this Agreement to occur at the Closing shall take place at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP in New York, New York at 10:00 a.m.
(New York time) on a date to be specified by the parties hereto, but no later
than the business day immediately following the satisfaction or waiver of the
conditions set forth in Section 6.1(a), (b), (c) and (d) hereof or at such
other time, date or place as Parent and the Company shall agree. The date on
which the Closing occurs is referred to herein as the "Closing Date."
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub jointly and severally represent and warrant to the Company as
follows:
Section 2.1 Organization, Standing and Power. Each of Parent and Sub is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power and
authority to carry on its business as now being conducted and to enter into and
perform this Agreement and the other Transaction Agreements and the
transactions contemplated hereby and thereby. Each Subsidiary (as hereinafter
defined) of Parent (other than Sub) is duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is organized and
has the requisite corporate or other power and authority to carry on its
business as now being conducted, except where the failure to be so organized,
existing or in good standing or to have such power or authority would not,
individually or in the aggregate, have a Material Adverse Effect (as
hereinafter defined) on Parent. Each of Parent and its Subsidiaries is duly
qualified to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be
so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on Parent. For purposes of this Agreement, (a) each of "Material
Adverse Change" or "Material Adverse Effect" means, when used with respect to
Parent, Sub or the Company, as the case may be, any change or effect that is
materially adverse to the business, assets, liabilities, results of operation
or condition (financial or otherwise) of Parent and its Subsidiaries, taken as
a whole, or the Company, as the case may be, excluding, in either case, any
changes, circumstances or effects resulting from or related to changes or
developments in the economy, financial markets or regulatory or political
climate generally, any changes in conditions or developments generally
applicable to the industries in which Parent and Subsidiaries of Parent or the
Company, as the case may be, are involved, any changes or developments related
to the general relationship of Parent and Subsidiaries of Parent or the
Company, as the case may be, with the U.S. Food and Drug Administration ("FDA")
or the U.S. Drug Enforcement Administration ("DEA") and in the case of the
Company, any change or development relating to MorphiDex(R) or any other of the
Company's products under development (including the FDA or DEA approval process
relating thereto) and except for any such changes or effects resulting from
this Agreement, the transactions contemplated hereby or the announcement
thereof and (b) "Subsidiary" means any corporation, partnership, joint venture
or other legal entity of which Parent or the Company, 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 generally are entitled to vote for the election of the board of
directors or other governing body of such corporation, partnership, joint
venture or other legal entity. Parent has heretofore delivered to the Company
complete and correct copies of Parent's certificate of incorporation ("Parent
Charter") and by-laws ("Parent By-Laws") and Sub's certificate of incorporation
and by-laws, each as in effect on the date of this Agreement.
Section 2.2 Capital Structure. As of the date of this Agreement, the
authorized capital stock of Parent consists of (i) 2,000,000 shares of Parent
Common Stock, (ii) 200,000 shares of class A common stock, par value $.01 per
share, of Parent ("Parent Class A Common Stock") and (iii) 500,000 shares of
preferred stock, par value $.01 per share, of Parent (the "Parent Preferred
Stock"). At the close of business on November 15, 1999, (i) 929,950 shares of
Parent Common Stock were issued and outstanding, all of which were validly
issued, fully paid and nonassessable and free of preemptive rights; (ii)
174,560 shares of Parent Class A Common Stock were issued and outstanding, all
of which were validly issued, fully paid and nonassessable and free of
preemptive rights, and 290 of which are held in the treasury of the Parent;
(iii) 618,750 shares of Parent Common Stock were reserved for future issuance
pursuant to Parent's 1997 Executive Stock Option Plan and Parent's 1997
Employee Stock Option Plan (collectively, the "Parent Stock Plans"); (iv) 6,000
shares of Parent Common Stock were reserved for future issuance pursuant to
Parent's 1997 Employee Stock Purchase Plan (the "Parent Stock Purchase Plan"
and, together with the Parent Stock Plans, the "Parent Incentive Plans"); and
(v) no shares of Parent Preferred Stock were issued or outstanding. All of the
shares of Parent Common Stock and all of the Algos Warrants issuable in
exchange for Company Common Stock at the Effective Time in accordance with this
Agreement will be, when so issued, duly authorized, validly issued, free of
preemptive rights and, in the case of the shares of the Parent Common Stock,
fully paid and nonassessable. Each share of Parent Common Stock issuable upon
exercise of the Algos Warrants will be fully paid and nonassessable at the
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time of exercise. As of the date of this Agreement, except for (a) this
Agreement, (b) stock options covering not in excess of 618,750 shares of Parent
Common Stock (collectively, the "Parent Stock Options") and (c) the Parent
Stock Purchase Plan, there are no options, warrants, calls, rights or
agreements to which Parent or any of its Subsidiaries is a party or by which
any of them is bound obligating Parent or any of its Subsidiaries to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
capital stock of Parent or any of its Subsidiaries, or securities convertible
into or exchangeable for such capital stock, or obligating Parent or any of its
Subsidiaries to grant, extend or enter into any such option, warrant, call,
right or agreement. Since November 15, 1999, Parent has not issued any shares
of its capital stock, or securities convertible into or exchangeable for such
capital stock, other than shares issued in the ordinary course pursuant to the
Parent Stock Plans. Except as set forth in Schedule 2.2 of that separate
disclosure letter delivered by Parent to the Company at or prior to the
execution and delivery by Parent of this Agreement (the "Parent Disclosure
Schedule"), there are no outstanding contractual obligations of Parent or any
of Parent's Subsidiaries (i) restricting the transfer of, (ii) affecting the
voting rights of, (iii) requiring the repurchase, redemption or disposition of,
(iv) requiring the registration for sale of, or (v) granting any preemptive or
antidilutive right with respect to, any shares of Parent Common Stock, Parent
Class A Common Stock, Parent Preferred Stock or any capital stock of any
Subsidiary of Parent. The execution and delivery of the Transaction Agreements
do not, and the consummation of the transactions contemplated hereby and
thereby and the compliance with the provisions hereof and thereof will not,
except as set forth in such Transaction Agreements, give rise to any preemptive
right or antidilutive right of any Person with respect to any shares of Parent
Common Stock, Parent Class A Common Stock, Parent Preferred Stock or any
capital stock of any Subsidiary of Parent. Each outstanding share of capital
stock or other equity interests of each Subsidiary of Parent is duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights, and each such share is owned by Parent or another Subsidiary of Parent,
free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreements, limitations on voting rights, charges and
other encumbrances of any nature whatsoever.
Section 2.3 Authority. Each of Parent and Sub has all requisite corporate
power and authority to enter into the Transaction Agreements to which it is a
party and to consummate the transactions contemplated hereby and thereby. On or
prior to the date of this Agreement, the respective Boards of Directors of
Parent and Sub have each declared the Merger advisable and in the best interest
of their respective stockholders and have each approved execution and delivery
of this Agreement in accordance with applicable law; the Board of Directors of
Sub has recommended to Parent, as the sole stockholder of Sub, that it approve
this Agreement in accordance with the DGCL; the Board of Directors of Parent
has authorized that it approve this Agreement in its capacity as the sole
stockholder of Sub in accordance with the DGCL; and concurrently with the
execution of this Agreement, Parent is approving this Agreement as the sole
stockholder of Sub in accordance with the DGCL. On or prior to the date of this
Agreement, the stockholders of Parent, in accordance with the DGCL and the
Parent Charter, shall have approved the Charter Amendment. The execution and
delivery by each of Parent and Sub of the Transaction Agreements to which it is
a party and the consummation by Parent and Sub of the transactions contemplated
hereby and thereby, including the Share Issuance, have been duly authorized by
all necessary corporate action on the part of Parent and Sub, subject to the
filing of the Certificate of Merger pursuant to the DGCL. Each of Parent and
Sub have duly executed and delivered the Transaction Agreements to which it is
a party and (assuming the valid authorization, execution and delivery thereof
by the other parties thereto) each such Transaction Agreement constitutes the
valid and binding obligation of Parent and Sub enforceable against each of them
in accordance with their terms, except as the enforceability hereof and thereof
may be limited by (1) applicable bankruptcy, insolvency, moratorium,
reorganization or similar laws in effect that affect the enforcement of
creditors rights generally or (2) general principals of equity, whether
considered in a proceeding at law or in equity. Prior to the filing thereof,
the filing of a registration statement on Form S-4 with the Securities and
Exchange Commission ("SEC") by Parent under the Securities Act for the purpose
of registering the shares of Parent Common Stock and the Algos Warrants to be
issued in the Merger and the shares of Parent Common Stock to be issued upon
exercise of the Algos Warrants (together with any amendments or supplements
thereto, whether prior to or after the effective date thereof, the
"Registration Statement") and the taking of all actions in connection therewith
will have been duly authorized by Parent's Board of Directors.
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Section 2.4 Consents and Approvals; No Violation. Assuming that all
consents, approvals, authorizations and other actions described in the second
sentence of this Section 2.4 have been obtained and all filings and obligations
described in the second sentence of this Section 2.4 have been made, the
execution and delivery of the Transaction Agreements do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, conflict with, result in any
violation of, or breach or default (with or without due notice or lapse of
time, or both) under, or give to others a right of termination, cancellation or
acceleration of any obligation or the loss of any benefit under, or result in
the creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets of Parent or any of its Subsidiaries under, any
provision of (i) the Parent Charter or Parent By-Laws, (ii) any provision of
the comparable charter or organization documents of any of Parent's
Subsidiaries, (iii) any loan or credit agreement, note, bond, mortgage, lease,
indenture, or other contract, agreement, instrument, permit, concession,
franchise or license applicable to Parent or any of its Subsidiaries, (iv) any
license, permit or other instrument, contract or agreement granted by, or
entered into with, the FDA or the DEA or (v) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Parent or any of its
Subsidiaries or any of their respective properties or assets, other than, in
the case of clauses (ii), (iii), (iv) or (v), any such conflicts, violations,
breaches, defaults, rights, liens, security interests, charges or encumbrances
that, individually or in the aggregate, would not have a Material Adverse
Effect on Parent, or prevent or materially delay the consummation of any of the
transactions contemplated hereby or thereby. No filing, notification or
registration with, or authorization, consent or approval of, any domestic
(federal and state), or foreign court, commission, governmental body,
regulatory or administrative agency, authority or tribunal (a "Governmental
Entity") is required by or with respect to Parent or any of its Subsidiaries in
connection with the execution, delivery and performance of the Transaction
Agreements by Parent or Sub or is necessary for the consummation of the Merger
and the other transactions contemplated by the Transaction Agreements, except
for (i) in connection, or in compliance, with the provisions of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the
Securities Act and the Securities Exchange Act of 1934, as amended (together
with the rules and regulations promulgated thereunder, the "Exchange Act"),
(ii) the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware and the filing of the appropriate documents with the relevant
authorities of other states in which Parent or any of its Subsidiaries is
qualified to do business, each of which is set forth in Schedule 2.4 of the
Parent Disclosure Schedule, (iii) such filings and consents as may be required
under any environmental, health or safety law or regulation (including any
rules and regulations of the FDA and the DEA ) pertaining to any notification,
disclosure or required approval triggered by the Merger or by the transactions
contemplated by the Transaction Agreements, each of which is set forth in
Schedule 2.4 of the Parent Disclosure Schedule, (iv) such filings,
authorizations, orders and approvals as may be required by state takeover laws
(the "State Takeover Approvals"), each of which is set forth in Schedule 2.4 of
the Parent Disclosure Schedule, (v) applicable requirements, if any, of "blue
sky" laws and the NASDAQ National Market (the "NASDAQ") and (vi) such other
consents, orders, authorizations, registrations, declarations and filings the
failure of which to be obtained or made would not, individually or in the
aggregate, have a Material Adverse Effect on Parent, or prevent or materially
delay the consummation of any of the transactions contemplated by the
Transaction Agreements. The execution and delivery of the Transaction
Agreements do not, and the consummation of the transactions contemplated hereby
and thereby and compliance with the provisions hereof and thereof will not,
conflict with, result in any violation of, or breach or default (with or
without due notice or lapse of time, or both) under, or give to others a right
of termination, cancellation or acceleration of any obligation or the loss of
any benefit under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of Parent or any of
its Subsidiaries under, any of the license agreements to which it is a party,
except for such conflicts, violations, breaches, defaults, rights or liens as
would not, individually or in the aggregate, have a Material Adverse Effect on
Parent. All material license agreements of Parent or any of its Subsidiaries
are listed in Schedule 2.4 of the Parent Disclosure Schedule.
Section 2.5 Financial Statements. Parent has previously provided the Company
with true and accurate copies of (x) Parent's audited financial statements for
the years ended December 31, 1997 and December 31, 1998, and (y) Parent's
unaudited financial statements for the six-month periods ended June 30, 1998
and June 30, 1999 (collectively, the "Parent Financial Statements"). The Parent
Financial Statements, as of their respective dates, fairly present in all
material respects in accordance with generally accepted accounting
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principles ("GAAP") the consolidated financial position of Parent and its
consolidated Subsidiaries as at the respective dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the periods then ended (subject, in the case of unaudited statements, to any
other adjustments described therein and normal year-end audit adjustments and
to any other adjustments described therein). Except as required by GAAP, Parent
has not, since December 31, 1998, made any change in the accounting practices
or policies applied in the preparation of the financial statements. The books
and records of Parent and its Subsidiaries have been, and are being, maintained
in all material respects in accordance with GAAP and other applicable legal and
accounting requirements.
Section 2.6 Registration Statement and Proxy Statement. None of the
information to be supplied by Parent or Sub for inclusion or incorporation by
reference in the Registration Statement or the proxy statement/prospectus
included therein (together with any amendments or supplements thereto, the
"Proxy Statement") relating to the Stockholder Meeting (as hereinafter defined)
will (i) in the case of the Registration Statement, at the time it becomes
effective, 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 not misleading or (ii) in the case of the Proxy Statement,
at the time of the mailing of the Proxy Statement, the time of the Stockholder
Meeting and at the Effective Time, 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 are made, not misleading. If, at any time prior
to the Effective Time, any event with respect to Parent, its officers and
directors or any of its Subsidiaries shall occur which is required to be
described in the Proxy Statement or the Registration Statement, such event
shall be so described, and an appropriate amendment or supplement shall be
promptly filed with the SEC and, as required by law, disseminated to the
stockholders of the Company. The Registration Statement will comply (excluding
any matters relating to the Company, as to which Parent and Sub make no
representations) as to form in all material respects with the provisions of the
Securities Act.
Section 2.7 Absence of Certain Changes or Events. Except as disclosed in
Schedule 2.7 of the Parent Disclosure Schedule, since September 30, 1999, (A)
none of Parent or any of its Subsidiaries has incurred any liability or
obligation (indirect, direct or contingent), or entered into any oral or
written agreement or other transaction, that is not in the ordinary course of
business or that would, individually or in the aggregate, result in a Material
Adverse Effect on Parent, except for any such changes or effects resulting from
this Agreement, the transactions contemplated hereby or the announcement
thereof; (B) none of Parent or any of its Subsidiaries has sustained any loss
or interference with their business or properties from fire, flood, windstorm,
accident or other calamity (whether or not covered by insurance) that would,
individually or in the aggregate, have a Material Adverse Effect on Parent; (C)
there has been no action taken by Parent or any of its Subsidiaries that, if
taken during the period from the date of this Agreement through the Effective
Time, would constitute a material breach of Section 4.1(a) hereof; and (D)
there has been no event, circumstance or development that would, individually
or in the aggregate, have a Material Adverse Effect on Parent.
Section 2.8 Permits and Compliance.
(a) Each of Parent and its Subsidiaries is in possession of all franchises,
grants, authorizations, licenses, permits, easements, variances, exceptions,
consents, certificates, approvals and orders of any Governmental Entity
("Permits") necessary for it to own, lease and operate its properties or to
carry on its business as it is now being conducted (the "Parent Permits"),
except where the failure to have any of the Parent Permits would not,
individually or in the aggregate, have a Material Adverse Effect on Parent,
and, as of the date of this Agreement, no suspension or cancellation of any of
the Parent Permits is pending or, to the Knowledge of Parent (as hereinafter
defined), threatened, except where the suspension or cancellation of any of the
Parent Permits would not, individually or in the aggregate, have a Material
Adverse Effect on Parent; provided that no representation is being made by the
Company in this sentence with respect to any investigational new drug
application (an "IND") or new drug application (an "NDA") of Parent filed with
the FDA (which are the subject of Section 2.13 hereof). None of Parent or any
of its Subsidiaries is in violation of (A) its charter, by-laws or other
organizational documents, (B) any applicable law, ordinance, administrative or
governmental rule or regulation or (C) any order, decree or judgment of any
Governmental Entity having jurisdiction over Parent or any of its Subsidiaries,
except, in the case of clauses (B) and (C), for any violations that,
individually or in the aggregate, would not have a Material Adverse Effect on
Parent.
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(b) Schedule 2.8(b) of the Parent Disclosure Schedule contains a true and
complete list of all written agreements (i) that would be required to be listed
as exhibits to a registration statement of Parent on Form S-1 under the rules
and regulations of the SEC if such registration statement were filed on the
date of this Agreement, (ii) relating to indebtedness for money borrowed by
Parent or any of its Subsidiaries, which, individually or in the aggregate,
represent an amount greater than $1.0 million, excluding trade credit or
payables arising in the ordinary course of business, (iii) creating any
guarantee arrangement or other agreement to be liable for the obligations of a
Person other than Parent or any of its wholly owned Subsidiaries, (iv)
providing for payment or the receipt of payment or the sale of purchase or
exchange of goods worth in excess of $20.0 million, (v) with any distributor or
sales contractor for Parent's products, (vi) providing for any joint venture or
partnership, (vii) with E.I. du Pont de Nemours and Company or The Dupont Merck
Pharmaceutical Company or any of its Subsidiaries or (viii) containing any
provision or covenant materially limiting the ability of Parent or its
Subsidiaries or any of its or their Affiliates to sell any products of or to
any other Person, engage in any line of business or compete with or to obtain
products or services from any Person or materially limiting the ability of any
Person to provide products or services to Parent or any of its Subsidiaries or
Affiliates (collectively, the "Parent Material Contracts"). Parent has
previously provided the Company with true and correct copies of each of the
Parent Material Contracts, as in effect on the date of this Agreement. Except
as disclosed in Schedule 2.8(b) of the Parent Disclosure Schedule, the
execution and delivery of the Transaction Agreements do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, conflict with, result in any
violation of, or breach or default (with or without due notice or lapse of
time, or both) under, or give to others a right of termination, cancellation or
acceleration of any obligation or the loss of any benefit under, or result in
the creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets of Parent or any of its Subsidiaries under, any
indenture, mortgage, loan agreement, note or other agreement or instrument for
borrowed money, any guarantee of any agreement or instrument for borrowed money
or any lease, contractual license or other contract, agreement or instrument to
which Parent or any of its Subsidiaries is a party or by which Parent or any of
its Subsidiaries is bound or to which any of the properties, assets or
operations of Parent or any of its Subsidiaries is subject, other than such
conflicts, violations, breaches, defaults, rights or liens as would not,
individually or in the aggregate, have a Material Adverse Effect on Parent. As
used in this Agreement, "Knowledge of Parent" means the actual knowledge of any
of the Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, General Counsel of Parent or Senior Vice President-Research and
Development.
Section 2.9 Tax Matters.
Except as set forth in Schedule 2.9 of the Parent Disclosure Schedule:
(a) All federal, state, local and foreign Tax Returns required to be
filed (taking into account extensions) by or on behalf of Parent and each
of its Subsidiaries (i) have been timely filed, except for such Tax Returns
that the failure by Parent or such Subsidiary to timely file would not,
individually or in the aggregate, have a Material Adverse Effect on Parent,
and (ii) are true, complete and correct in all material respects.
(b) All Taxes payable by or with respect to Parent and any of its
Subsidiaries have been timely paid, or adequately reserved for (in
accordance with GAAP) in the most recent Parent Financial Statements,
except for Taxes that the failure of which to pay would not, individually
or in the aggregate, have a Material Adverse Effect on Parent.
(c) No deficiencies for any Taxes have been proposed, asserted or
assessed either orally or in writing against Parent or any of its
Subsidiaries that are not adequately reserved for (in accordance with GAAP)
in the most recent Parent Financial Statements, except for such
deficiencies as would not, individually or in the aggregate, have a
Material Adverse Effect on Parent. All assessments for Taxes due and owing
by or with respect to Parent or any of its Subsidiaries with respect to
completed and settled examinations or concluded Litigation have been paid.
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(d) No examinations have been completed or are presently being conducted
with respect to the Parent or any of its Subsidiaries' federal or material
state income Tax Returns.
(e) Parent and each of its Subsidiaries have complied with all rules and
Treasury regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Sections
1441 and 1442 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 Entities all
amounts required to be so withheld and paid over under all Applicable Laws,
except where the failure to be in such compliance or to withhold and pay
over such amounts would not, individually or in the aggregate, have a
Material Adverse Effect on Parent.
(f) Parent and each of its Subsidiaries (i) have not waived any
statutory period of limitations in respect of its or their Taxes or Tax
Returns or (ii) are not a party to, not bound by, or have no obligation
under any agreement, contract or arrangement for the sharing, allocation,
or indemnification of Taxes (other than indemnification agreements where
Taxes incidental to the primary obligation so indemnified are also
indemnified).
(g) No property of Parent or any of its Subsidiaries is "tax-exempt use
property" (as such term is defined in Section 168 of the Code).
(h) Neither Parent nor any of its Subsidiaries has filed a consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a "Subsection (f) asset" (as such
term is defined in Section 341(f)(4) of the Code) owned by Parent or any of
its Subsidiaries.
(i) Parent is not, and has not been for the five years preceding the
Closing, a "United States real property holding company" (as such term is
defined in Section 897(c)(2) of the Code).
(j) Parent has no reason to believe that any condition exists, nor has
Parent, nor any of its Subsidiaries, taken any action or failed to take any
action, that could reasonably be expected to prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Code.
For purposes of this Agreement the term (i) "Taxes" will mean any and all
federal, state, local, foreign, provincial, territorial or other taxes,
imposts, tariffs, fees, levies or other similar assessments or liabilities and
other charges of any kind, including income taxes, ad valorem taxes, excise
taxes, withholding taxes, stamp taxes or other taxes of or with respect to
gross receipts, premiums, real property, personal property, windfall profits,
sales, use, transfers, licensing, employment, social security, workers'
compensation, unemployment, payroll and franchises imposed by or under any Law;
and such terms will include any interest, fines, penalties, assessments or
additions to tax resulting from, attributable to or incurred in connection with
any such tax or any contest or dispute thereof and (ii) "Tax Returns" will mean
any declaration, return, report, schedule, certificate, statement or other
similar document (including relating or supporting information) required to be
filed with a Governmental Entity, or where none is required to be filed with a
Governmental Entity, the statement or other document issued by a Governmental
Entity in connection with any Tax, including, without limitation, any
information return, claim for refund, amended return or declaration of
estimated Tax.
Section 2.10 Actions and Proceedings. Except as set forth in Schedule 2.10
of the Parent Disclosure Schedule, (a) there are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against or
involving Parent or any of its Subsidiaries, against or involving any of the
present directors or officers of Parent or any of its Subsidiaries, as such, or
involving any of its or their properties, assets or business that, individually
or in the aggregate, would have a Material Adverse Effect on Parent and (b) as
of the date of this Agreement, there are no actions, suits or claims or legal,
administrative or arbitrative proceedings or investigations pending or, to the
Knowledge of Parent, threatened against or involving Parent or any of its
Subsidiaries against or involving any of the present directors or officers of
Parent or any of its Subsidiaries, as such, or involving any of its or their
properties, assets or business before any court or arbitration tribunal or
before any Governmental Entity that, individually or in the aggregate, would
have a Material Adverse Effect on Parent. As of the date of this Agreement,
there are no actions, suits, labor disputes
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or other litigation, legal or administrative proceedings or governmental
investigations pending, or, to the Knowledge of Parent, threatened against or
affecting Parent or any of its Subsidiaries or any of its or their present
directors or officers, as such, or any of its or their properties, assets or
business before any court or arbitration tribunal or before any Governmental
Entity relating to the transactions contemplated by the Transaction Agreements.
Section 2.11 Certain Agreements. Schedule 2.11 of the Parent Disclosure
Schedule sets forth each material oral or written stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan to which
Parent or any of its Subsidiaries is a party. Except as set forth in Schedule
2.11 of the Parent Disclosure Schedule, as of the date of this Agreement,
neither Parent nor any of its Subsidiaries is a party to any oral or written
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of
which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement. No holder
of any option to purchase shares of Parent Common Stock, or shares of Parent
Common Stock granted in connection with the performance of services for Parent
or its Subsidiaries, is or will be entitled to receive cash from Parent or any
Subsidiary in lieu of or in exchange for such option or shares as a result of
the transactions contemplated by this Agreement (other than in lieu of
fractional shares). Neither Parent nor any Subsidiary is a party to any
termination benefits agreement or severance agreement or employment agreement
which would be triggered by the consummation of the transactions contemplated
by this Agreement.
Section 2.12 ERISA.
(a) Schedule 2.12(a) of the Parent Disclosure Schedule lists each Parent
Plan (as hereinafter defined). With respect to each material Parent Plan,
Parent has made (or as soon as practicable will make) available to the Company
a true and correct copy of (i) the three most recent annual reports (Form 5500)
filed with the Internal Revenue Service (the "IRS"), (ii) such Parent Plan and
any amendments thereto, (iii) each trust agreement, insurance contract or
administration agreement relating to such Parent Plan and the latest financial
statements thereof, (iv) the most recent summary plan description of each
Parent Plan for which a summary plan description is required, (v) the most
recent actuarial report or valuation relating to a Parent Plan subject to Title
IV of ERISA, (vi) the most recent determination letter, if any, issued by the
IRS with respect to any Parent Plan intended to be qualified under section
401(a) of the Code and (vii) any written description that exists as of the date
of this Agreement of any unwritten Parent Plan. Except as would not,
individually or in the aggregate, have a Material Adverse Effect on Parent, (i)
each Parent Plan complies with all applicable statutes and governmental rules
and regulations, including but not limited to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), the Code and the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), and (ii) no
"reportable event" (within the meaning of Section 4043 of ERISA) has occurred
with respect to any Parent Plan for which the 30-day notice requirement has not
been waived, (iii) none of Parent or its Subsidiaries is or has been obligated
to contribute or otherwise may have any liability with respect to any Parent
Multiemployer Plan (as hereinafter defined), (iv) no action has been taken, or
is currently being considered, to terminate any Parent Plan subject to Title IV
of ERISA, (v) Parent has complied with the continued medical coverage
requirements of COBRA, (vi) no Parent Plan has engaged in a "prohibited
transaction" (as defined in Section 4975 of the Code or Section 406 of ERISA)
and (vii) no liability under Title IV or Section 302 of ERISA or Section 412 of
the Code has been incurred by Parent that has not been satisfied in full, and
no condition exists that presents a risk to Parent of incurring any such
liability. Except as would not, individually or in the aggregate, have a
Material Adverse Effect on Parent, no Parent Plan subject to Title IV of ERISA,
nor any trust created thereunder, has incurred any "accumulated funding
deficiency" (as defined in Section 302 of ERISA), whether or not waived.
(b) With respect to any Parent Plan which is subject to Title IV of ERISA,
the present value of accrued benefit obligations, as determined in accordance
with FAS 87 in accordance with the actuarial assumptions used
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to prepare the most recent reports of such Parent Plan, did not exceed the fair
market value of the Plan assets as of the most recent valuation date for which
an actuarial report has been prepared and to the Knowledge of Parent, there has
not been any material adverse change to such status. All contributions required
to be made with respect to any Parent Plan on or prior to the Closing Date have
been timely made or are reflected on the most recent balance sheet of Parent.
With respect to the Parent Plans, no event has occurred in connection with
which Parent would be subject to any liability under the terms of such Parent
Plans, ERISA, the Code or any other applicable law which would have,
individually or in the aggregate, a Material Adverse Effect on Parent. With
respect to any current or former employee, director, officer, consultant or
contractor of Parent or its Subsidiaries, consummation of the transactions
contemplated by this Agreement shall not result in the payment or provision of
additional compensation or benefits or accelerate the vesting, payment or
funding of any compensation or benefits. No amounts payable by reason of this
transaction under the Parent Plans will fail to be deductible for federal
income tax purposes by virtue of either Section 280G or Section 162(m) of the
Code. All Parent Plans that are intended to be qualified under Section 401(a)
of the Code have been determined by the IRS to be so qualified or a timely
application for such determination is pending, and to the Knowledge of Parent,
there is no reason why any such Parent Plan is not so qualified in operation.
Parent does not have any liability or obligation under any welfare plan to
provide benefits after termination of employment to any employee or dependent
other than as required by ERISA or as disclosed in Schedule 2.12 of the Parent
Disclosure Schedule. There are no pending or, to the Knowledge of Parent,
threatened, claims, suits, audits or investigations related to any Parent Plan
other than claims for benefits in the ordinary course and other than claims,
suits, audits or investigations that would not, individually or in the
aggregate, have a Material Adverse Effect on Parent. As used herein, (i)
"Parent Plan" means each deferred compensation and each bonus or other
incentive compensation, stock purchase, stock option and other equity
compensation or ownership plan, program, agreement or arrangement, each
severance or termination pay, medical, surgical, hospitalization, life
insurance and other "welfare" plan, fund or program (within the meaning of
Section 3(1) of the ERISA); each profit-sharing, stock bonus or other "pension"
plan, fund or program (within the meaning of Section 3(2) of ERISA); each
employment, retention, consulting, termination or severance agreement; and each
other employee benefit plan, fund, program, agreement or arrangement, in each
case, that is sponsored, maintained or contributed to or required to be
contributed to by Parent or its Subsidiaries, including any plan subject to
Title IV of ERISA maintained within the past five (5) years by Parent or any of
its Subsidiaries and (ii) "Parent Multiemployer Plan" means a "multiemployer
plan" (as defined in Section 4001(a)(3) of ERISA) to which Parent is or has
been obligated to contribute or otherwise may have any liability.
Section 2.13 Compliance with Certain Laws.
(a) Except as disclosed in Schedule 2.13(a) of the Parent Disclosure
Schedule, the properties, assets and operations of Parent and its Subsidiaries
are in compliance with all Applicable Laws, except for any violations that,
individually or in the aggregate, would not have a Material Adverse Effect on
Parent. Except as disclosed in Schedule 2.13(a) of the Parent Disclosure
Schedule, with respect to such properties, assets and operations, including any
previously owned, leased or operated properties, assets or operations, there
are no past, present or reasonably anticipated future events, conditions,
circumstances, activities, practices, incidents, actions or plans of Parent or
any of its Subsidiaries that may interfere with or prevent compliance or
continued compliance with all Applicable Laws, other than any such interference
or prevention as would not, individually or in the aggregate with any such
other interference or prevention, have a Material Adverse Effect on Parent. For
purposes of this Agreement, "Applicable Laws" shall mean applicable federal,
state, local and foreign laws, rules and regulations, orders, decrees,
judgments, permits and licenses of all Governmental Entities (including, but
not limited to, those related to public and worker health and safety,
controlled substances and the protection and clean-up of the environment and
activities or conditions related thereto (including, without limitation, those
relating to the generation, handling, disposal, transportation or release of
hazardous materials) (collectively, "Environmental Laws")). The term "hazardous
materials" shall mean those substances that are regulated by or form the basis
for liability under any applicable Environmental Laws. Parent will make
available to the Company such certificates and environmental studies with
respect to such properties as Parent has available on the date of this
Agreement.
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(b) Each of Parent's and its Subsidiaries' manufacturing, distribution,
development and marketing practices are in compliance with all applicable
federal and state laws, rules, regulations, orders, licenses, judgments, writs,
injunctions, decrees or demands, including, without limitation, laws and
regulations administered by the FDA and the DEA, except where the failure to be
in such compliance would not, individually or in the aggregate, have a Material
Adverse Effect on Parent.
(c) Each of Parent and its Subsidiaries possesses FDA approval or allowance
of all material investigational or marketed product applications as are
currently legally required and are necessary for the conduct of its business as
now being conducted, a list of which is attached hereto as Schedule 2.13(c) of
the Parent Disclosure Schedule, true and correct copies of which have been
provided to the Company by Parent.
(d) Since December 1, 1997, none of Parent or any of its Subsidiaries has
used the services of any person debarred under the provisions of the Generic
Drug Enforcement Act of 1992, 21 U.S.C. (S) 335(a)(b). Since December 1, 1997,
none of Parent, its Subsidiaries, nor any of their respective officers,
employees, agents or affiliates, has been convicted of any crime or engaged in
any conduct for which debarment is mandated by 21 U.S.C. (S) 335a(a) or
authorized by 21 U.S.C. (S) 335a(b).
(e) Each of Parent and its Subsidiaries is in compliance with all (i)
federal and state laws applicable to the development, manufacture, processing,
packing, testing and sale of pharmaceutical products to the extent such laws
are applicable to it, (ii) rules and regulations of the FDA and the DEA to the
extent such rules and regulations are applicable to it, and (iii) product
applications (including INDs) has been approved by the FDA under which Parent
or any of its Subsidiaries has sold any product on or after November 1, 1999,
except in each case where the failure to be in such compliance would not,
individually or in the aggregate, have a Material Adverse Effect on Parent. All
manufacturing operations conducted by or for the benefit of Parent or any of
its Subsidiaries have been and are being conducted in compliance with the
current Good Manufacturing Practice regulations set forth in 21 C.F.R. Parts
210 and 211, except where the failure to be in such compliance would not,
individually or in the aggregate, have a Material Adverse Effect on Parent.
(f) As to each drug of Parent for which a product application has been
approved by, or an IND has been filed with, the FDA, the applicant and all
Persons performing operations covered by the application are in compliance with
the requirements of the Food, Drug and Cosmetics Act, as amended (the "FDCA"),
and the implementing regulations of the FDA, respectively, and all terms and
conditions of the application, except where the failure to be in such
compliance would not, individually or in the aggregate, have a Material Adverse
Effect on Parent.
(g) Each of Parent and its Subsidiaries is in material compliance with all
applicable registration and listing requirements set forth in 21 U.S.C. (S) 360
and 21 C.F.R. Part 207. To the extent required, each of Parent and its
Subsidiaries has obtained registrations from the DEA and are in material
compliance with all such registrations and all applicable regulations
promulgated by the DEA.
(h) Neither Parent, any of its Subsidiaries, nor their respective officers,
employees, or agents have made an untrue statement of material fact or
fraudulent statement to the FDA or the DEA, failed to disclose a material fact
required to be disclosed to the FDA or the DEA, or committed an act, made a
statement, or failed to make a statement that could reasonably be expected to
provide a basis for the FDA to invoke its policy respecting "Fraud, Untrue
Statements of Material Facts, Bribery, and Illegal Gratuities," set forth in 56
Fed. Reg. 46191 (September 10, 1991).
(i) Parent has made available to the Company copies of any and all notices
of inspectional observations (FD 483's), establishment inspection reports,
warning letters and any other documents received from or issued by the FDA or
the DEA within the last three years that indicate or suggest lack of compliance
with the FDA or the DEA regulatory requirements by Parent, any Subsidiary of
Parent, or Persons covered by product applications or otherwise performing
services for the benefit of Parent or any of its Subsidiaries with respect to
services or products provided to Parent or any of its Subsidiaries.
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(j) Neither Parent nor any of its Subsidiaries has received any written
notice that the FDA or the DEA has commenced or threatened to initiate (i) any
action to withdraw its approval or request the recall of any product of Parent
or any Subsidiary of Parent, (ii) any action to enjoin (A) production at any
facility owned or used by Parent, any of Parent's Subsidiaries or any Person on
behalf of Parent or any of Parent's Subsidiaries or (B) any facility (including
any clinical facility where testing and/or trials occur) owned or used by
Parent, any of Parent's Subsidiaries or any Person on behalf of Parent or any
of Parent's Subsidiaries, (iii) the withdrawal of approval of any product
application (including any IND), other than such withdrawals of approval that
would not, individually or in the aggregate, have a Material Adverse Effect on
Parent, or (iv) any material civil penalty, injunction, seizure or criminal
action.
(k) To the Knowledge of Parent, as to each article of drug or consumer
product currently manufactured and/or distributed by Parent or any Subsidiary
of Parent, or by any Person on behalf of Parent or any Subsidiary of Parent,
such article is not adulterated or misbranded within the meaning of the FDCA,
21 U.S.C. (S)(S) 301 et seq. and not in violation of 21 U.S.C. (S) 355.
(l) As to each drug referred to in subsection (c) above, Parent, its
Subsidiaries and their respective officers, employees, agents and affiliates
have included or caused to be included in the application for such drug, where
required, the certification described in 21 U.S.C. (S) 335a(k)(1) and the list
described in 21 U.S.C. (S) 335a(k)(2), and such certification and such list was
in each case true and accurate when made and remained true and accurate
thereafter.
(m) All pre-clinical trials and clinical trials Parent or its Subsidiaries
has conducted or has had conducted for it by third parties, to the Knowledge of
Parent, complies in all material respects with the requirements of Good
Clinical Practice, Informed Consent, and all requirements relating to
protection of human subjects, found in 21 C.F.R. (S)(S) 50, 54 and 56 and that
all nonclinical laboratory testing complies with the requirements of 21 C.F.R.
(S) 58.
(n) As to each product application submitted to, but not approved by, the
FDA, and not withdrawn by Parent or one of its Subsidiaries, or applicants
acting on its behalf as of the date of this Agreement, each of Parent and its
Subsidiaries has complied in all material respects with the requirements of the
FDCA and implementing FDA regulations and has provided, or will provide, all
additional information and taken, or will take, all additional action that has
been deemed appropriate by Parent in connection with the application.
(o) Parent and each of its Subsidiaries represent and warrant that in
connection with the exportation of certain FDA regulated products, it is in
compliance with the requirements of 21 U.S.C. (S)(S) 381 and 382 of the FDCA.
Section 2.14 Liabilities. Except as fully reflected or reserved against in
the consolidated balance sheet of Parent and its Subsidiaries as of December
31, 1998 (included in the Parent Financial Statements) or as disclosed in
Schedule 2.14 of the Parent Disclosure Schedule, Parent and its Subsidiaries
have no liabilities (including, without limitation, tax liabilities) absolute
or contingent, that would be required to be reflected on a balance sheet or in
notes thereto prepared in accordance with GAAP, other than liabilities incurred
in the ordinary course of business or that, individually or in the aggregate,
would not have a Material Adverse Effect on Parent.
Section 2.15 Labor Matters. Except as set forth in Schedule 2.15 of the
Parent Disclosure Schedule, neither Parent nor any of its Subsidiaries is a
party to any collective bargaining agreement or labor contract. Neither Parent
nor any of its Subsidiaries has engaged in any unfair labor practice with
respect to any Persons employed by or otherwise performing services for Parent
or any of its Subsidiaries (the "Parent Business Personnel"), and there is no
unfair labor practice complaint or grievance against Parent or any of its
Subsidiaries by the National Labor Relations Board or any comparable state
agency pending or, to Parent's Knowledge, threatened in writing with respect to
the Parent Business Personnel, except where such unfair labor practices,
complaints or grievances would not, individually or in the aggregate, have a
Material Adverse Effect
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on Parent. There is no labor strike, dispute, slowdown or stoppage pending or,
to the Knowledge of Parent, threatened against or affecting Parent or any of
its Subsidiaries which may interfere with the respective business activities of
Parent or any of its Subsidiaries, except where such disputes, strikes or work
stoppages would not, individually in the aggregate, have a Material Adverse
Effect on Parent. Parent and its Subsidiaries are in compliance with all labor,
employment and wage payment-related laws, regulations and rules, except where
the failure to be in such compliance would not, individually or in the
aggregate, have a Material Adverse Effect on Parent.
Section 2.16 Intellectual Property.
(a) Except as set forth in Schedule 2.16(a) of the Parent Disclosure
Schedule or as would not, individually or in the aggregate, have a Material
Adverse Effect on Parent, Parent and each of its Subsidiaries are the owners of
or have the valid and enforceable right to make, use, sell, offer to sell and
import all Parent Intellectual Property to the extent used in or necessary for
the conduct of Parent or any of its Subsidiaries' business, free and clear of
all liens, security interests, charges or encumbrances of any kind and, except
for the Parent License Agreements set forth in Schedule 2.16(b) of the Parent
Disclosure Schedule, free and clear of all licenses to third parties granting
any right to use or practice any rights under any Parent Intellectual Property.
As used in this Agreement, the term "Parent Intellectual Property" shall mean:
(i) Parent's or any of its Subsidiaries' registered and unregistered
trademarks, service marks (including registrations, recordings and applications
in the United States Patent and Trademark Office, any state of the United
States or any other Governmental Entity worldwide), slogans, trade names, logos
and trade dress (collectively, together with the good will symbolized thereby
or associated with each, "Parent Trademarks"); (ii) all of Parent's or any of
its Subsidiaries' national (including, but not limited to, the United States)
and multinational statutory invention registrations, patents, patent
registrations and patent applications (including, but not limited to, all
reissues, divisions, continuations, continuations-in-part, extensions and
reexaminations, and all rights therein provided by law, multinational treaties
or conventions) (collectively, "Parent Patents"); (iii) all of Parent's or any
of its Subsidiaries' national and multinational registered and material
unregistered copyrights, including, but not limited to, copyrights in software
programs and databases (collectively, "Parent Copyrights"); (iv) Parent's or
any of its Subsidiaries' software programs documentation and manuals used in
connection therewith and databases (together, "Parent Software"); (v) all of
Parent's or any of its Subsidiaries' (A) inventions, whether patentable or not
patentable, whether or not reduced to practice, and not yet made the subject of
a pending patent application or applications, (B) ideas and conceptions of
potentially patentable subject matter, including, without limitation, any
patent disclosures, whether or not reduced to practice and not yet made the
subject of a patent application, (C) trade secrets and confidential, technical
information (including ideas, formulas, compositions, inventions and
conceptions of inventions whether patentable or not patentable and whether or
not reduced to practice), (D) technology (including, without limitation, know-
how and show-how), manufacturing and production processes and techniques,
service and repair manuals, research and development information, drawings,
specifications, designs, plans, proposals, technical data and copyrightable
works, whether secret or confidential or not, and all proprietary or
confidential business information, (E) all rights to obtain and rights to apply
for patents, and to register trademarks and copyrights and (F) all records
(including, but not limited to, laboratory, research and testing notebooks) in
any accessible format (including, but not limited to, paper records,
photographs, audio and visual tape recordings and computer storage media and
other information storage media) pertaining to patentable or potentially
patentable subject matter and all technical manuals and documentation made or
used in connection with any of the foregoing (collectively, "Parent
Technology"); and (vi) agreements pursuant to which Parent or any of its
Subsidiaries has obtained or granted the right to use any of the foregoing
(collectively, and together with other agreements to which Parent or any of its
Subsidiaries are a party relating to the development, acquisition, use, sale,
offer for sale or importation of Parent Intellectual Property, "Parent License
Agreements").
(b) Schedule 2.16(b) of the Parent Disclosure Schedule sets forth a true,
complete and accurate list of the following Parent Intellectual Property items
owned by or under obligation of assignment to Parent or any of its
Subsidiaries: (i) all registrations of and applications to register Parent
Trademarks material to the business of
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Parent or any of its Subsidiaries as conducted on the date of this Agreement;
(ii) all unregistered Parent Trademarks which are material to the business of
Parent or any of its Subsidiaries as conducted on the date of this Agreement;
(iii) all Parent Patents; (iv) all registrations of and applications to
register any Parent Copyrights; (v) all Parent Software; and (vi) all Parent
License Agreements, other than off-the-shelf Parent Software licenses.
(c) Except as set forth in Schedule 2.16(c) of the Parent Disclosure
Schedule, either Parent or one of its Subsidiaries is the sole and exclusive
owner of Parent Intellectual Property items set forth in Schedule 2.16(b) of
the Parent Disclosure Schedule and Parent or one of its Subsidiaries, as
applicable, is listed in the records of the appropriate Governmental Entity as
the sole owner of record. Except as set forth in Schedule 2.16(c) of the Parent
Disclosure Schedule, there is no lien, security interest, charge or encumbrance
of any kind on the right of Parent or any of its Subsidiaries to transfer any
of Parent Intellectual Property. Except as otherwise indicated in Schedule
2.16(b) of the Parent Disclosure Schedule, (i) all issued patents set forth
thereon are valid and enforceable and (ii) (A) as of the date of this
Agreement, no such trademark registrations, trademark applications, issued
patents or patent applications set forth in Schedule 2.16(b) of the Parent
Disclosure Schedule are subject to any pending proceedings, including
opposition, cancellation, interference or similar adversarial proceeding by or
before any Governmental Entity and no such proceedings are threatened and (B)
at the Effective Time, no such trademark registrations, trademark applications,
issued patents or patent applications set forth in Schedule 2.16(b) of the
Parent Disclosure Schedule are subject to any pending proceedings, including
opposition, cancellation, interference or similar adversarial proceeding by or
before any Governmental Entity and no such proceedings are threatened, other
than such proceedings that would not, individually or in the aggregate, have a
Material Adverse Effect on Parent.
(d) There are no royalties, honoraria, fees or other payments payable by
Parent or any of its Subsidiaries in respect of the use or the right to use any
Parent Intellectual Property to any Person or Governmental Entity (excluding
Taxes, governmental or attorneys' fees required in the normal course of
obtaining patent, trademark or copyright rights and excluding governmental
maintenance fees), except as set forth in the Parent License Agreements listed
in Schedule 2.16(b) of the Parent Disclosure Schedule and pursuant to off-the-
shelf Parent Software licenses. The Parent License Agreements set forth in
Schedule 2.16(b) of the Parent Disclosure Schedule are valid and binding
obligations of the parties thereto, enforceable in accordance with their terms,
except as the enforceability thereof may be limited by (1) applicable
bankruptcy, insolvency, moratorium, reorganization or similar laws in effect
that affect the enforcement of creditors rights generally or (2) general
principals of equity, whether considered in a proceeding at law or in equity,
and there exists no event or condition which will result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both)
a default by Parent or any of its Subsidiaries (or, to the Knowledge of Parent
or any of its Subsidiaries, any other party thereto) under any Parent License
Agreement, except where such violations, breaches or defaults would not,
individually or in the aggregate, have a Material Adverse Effect on Parent.
(e) Except as disclosed in Schedule 2.16(e) of the Parent Disclosure
Schedule or as would not, individually or in the aggregate, have a Material
Adverse Effect on Parent, (i) none of the use by Parent or any of its
Subsidiaries of any Parent Intellectual Property, the exercise of rights
relating to Parent Patents, Parent Trademarks and Parent Copyrights contained
within Parent Intellectual Property or the conduct of the business of Parent or
any of its Subsidiaries infringes or otherwise violates any intellectual
property rights (either directly or indirectly, such as through contributory
infringement or inducement to infringe) of any third party and (ii) no such
claims have been asserted or, to the Knowledge of Parent, threatened against
Parent or any of its Subsidiaries which have not been resolved. Except as
disclosed in Schedule 2.16(e) of Parent Disclosure Schedule, (A) as of the date
of this Agreement, (i) to the Knowledge of Parent, no third party is infringing
or otherwise violating any Parent Intellectual Property rights of Parent or any
of its Subsidiaries and (ii) no such claims are pending or threatened by Parent
or any of its Subsidiaries against any third party and (B) at the Effective
Time, (i) to the Knowledge of Parent, no third party is infringing or otherwise
violating any Parent Intellectual Property rights of Parent that are material
to the business of Parent as conducted or proposed to be conducted on the date
of this Agreement and (ii) no such claims are pending or threatened by Parent
against
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any third party, which involve any Parent Intellectual Property that is
material to the business of Parent as conducted or proposed to be conducted on
the date of this Agreement.
(f) Except as disclosed in Schedule 2.16(f) of the Parent Disclosure
Schedule, (i) as of the date of this Agreement, there are no suits or any other
proceedings pending or, to the Knowledge of Parent, threatened before any
Governmental Entity to which Parent or any of its Subsidiaries is a party
challenging (A) Parent's or such Subsidiary's rights to own or use any Parent
Intellectual Property or (B) the validity, enforceability or scope of the
Parent Intellectual Property and (ii) at the Effective Time, there are no such
suits to which Parent or any of its Subsidiaries is a party challenging (A)
Parent's or such Subsidiary's rights to own or use any Parent Intellectual
Property that is material to the business of the Company as conducted or
proposed to be conducted on the date of this Agreement or (B) the validity,
enforceability or scope of the Parent Intellectual Property that is material to
the business of the Company as conducted or proposed to be conducted on the
date of this Agreement. There are no settlement agreements, consents,
judgments, orders, forebearances to sue or similar obligations which materially
restrict any rights of Parent or any of its Subsidiaries to (i) make, use,
sell, offer for sale, import or license under any Parent Intellectual Property
or (ii) conduct its business in order to accommodate a third party's
intellectual property rights.
(g) Parent and each of its Subsidiaries employ reasonable measures to
protect the confidentiality of the Parent Technology. Parent and each of its
Subsidiaries require employees with access to the Parent Technology to execute
a nondisclosure agreement substantially in accordance with the form(s)
previously provided by Parent to the Company. Except as set forth in Schedule
2.16(g) of the Parent Disclosure Schedule, none of the current or former
employees, officers or directors of Parent or any of its Subsidiaries (i) is
suspected to be in violation of any such agreement or (ii) is suspected of
having disclosed any Parent Technology to any third party except subject to an
appropriate confidentiality agreement or as required by a Governmental Entity.
(h) Except as set forth in Schedule 2.16(h) of the Parent Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not result in the loss or impairment of any rights of Parent or any of its
Subsidiaries to own, use or license any Parent Intellectual Property, except
where such losses or impairments would not, individually or in the aggregate,
have a Material Adverse Effect on Parent.
(i) Except as set forth in Schedule 2.16(i) of the Parent Disclosure
Schedule, since December 1, 1997, none of Parent or any of its Subsidiaries has
disposed of or permitted to lapse any rights to the use of any Parent
Intellectual Property, or disposed of or disclosed to any Person other than
representatives of the Company any Parent trade secret, formula, process or
know-how not theretofore a matter of public knowledge other than in the
ordinary course of business or pursuant to secrecy agreement.
Section 2.17 Ownership of Shares. As of the date of this Agreement, none of
Parent, any Person deemed acting in concert with Parent or any of its
Subsidiaries or any of Parent's Subsidiaries owns any shares of Company Common
Stock.
Section 2.18 Operations of Sub. Sub is a direct, wholly-owned subsidiary of
Parent, was formed solely for the purpose of engaging in the transactions
contemplated hereby, has engaged in no other business activities and has
conducted its operations only as contemplated hereby.
Section 2.19 Brokers. No broker, investment banker or other Person (other
than (a) Goldman, Sachs & Co. and Salomon Smith Barney, the fees and expenses
of which have been previously disclosed to the Company and will be paid by
Parent and (b) Kelso & Co. (or an Affiliate thereof) to whom a fee (in an
amount previously disclosed to the Company) will be paid in connection with the
transactions contemplated by this Agreement), is entitled to any broker's,
finder's or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Parent.
Section 2.20 State Takeover Statutes. Assuming the accuracy of the Company's
representations and warranties contained in Section 3.19 hereof (Ownership of
Shares), as of the date of this Agreement, no state
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takeover statutes or other state statutes, including, without limitation, any
business combination act, with respect to Parent or Sub are applicable to the
Merger or the Transaction Agreements.
Section 2.21 Year 2000. With respect to year 2000, Parent and Sub represent
and warrant that the statement contained in Exhibit D-1 hereto is true and
accurate.
Section 2.22 Accuracy of Information Furnished. No representation or
warranty of Parent and Sub contained in this Agreement (taken together with the
other Transaction Agreements and the exhibits, schedules, certificates and
lists attached hereto or specifically referred to herein or delivered by or on
behalf of Parent or Sub pursuant to this Agreement) contains or will contain,
in light of the circumstances in which they were made, any untrue statement of
a material fact, or omits or will omit to state any material fact that is
necessary to make the statement contained herein or therein not misleading.
Section 2.23 Required Vote of Parent and Sub Stockholders. Under applicable
Delaware law and the Parent Charter and Parent By-laws and the certificate of
incorporation and by-laws of Sub, respectively, the affirmative vote of the
holder(s) of (A) not less than a majority of the outstanding shares of Parent
Common Stock and (B) not less than a majority of the outstanding shares of
common stock of Sub is in each case required to approve the Merger. Such votes
have been obtained as of the date of this Agreement. No other vote of the
stockholders of Parent or of Sub is required by law, the Parent Charter, the
Parent By-laws or the certificate of incorporation or by-laws of Sub or
otherwise for Parent and Sub to consummate the Merger and the transactions
contemplated hereby.
Section 2.24 Interests in Other Entities. As of the date of this Agreement,
none of Parent or its Subsidiaries, directly or indirectly, own or have the
right to acquire any equity interest in any other corporation, partnership,
joint venture or other business organization (other than any such equity
interest that is 1% or less of the equity interest of such a public
corporation). None of Parent or its Subsidiaries has made any material
investment in or advance of cash or other extension of credit to any Person, or
has any material commitment or obligation to do so.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
Section 3.1 Organization, Standing and Power. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite corporate power and authority to carry
on its business as now being conducted and to enter into and perform this
Agreement and the other Transaction Agreements and the transactions
contemplated hereby and thereby. The Company is duly qualified to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of their activities makes
such qualification necessary, except where the failure to be so qualified would
not, individually or in the aggregate, have a Material Adverse Effect on the
Company. The Company has heretofore delivered to Parent complete and correct
copies of the Company's Certificate of Incorporation ("Company Charter") and
by-laws ("Company By-Laws"), as in effect on the date of this Agreement.
Section 3.2 Capital Structure; Subsidiaries.
(a) The authorized capital stock of the Company consists of 50,000,000
shares of Company Common Stock, par value $.01 per share, and 10,000,000 shares
of Company preferred stock, par value $.01 per share (the "Company Preferred
Stock"). At the close of business on November 22, 1999, (i) 17,403,895 shares
of Company Common Stock were issued and outstanding, all of which were validly
issued, fully paid and nonassessable and free of preemptive rights, (ii) no
shares of Company Common Stock were held in the treasury of the Company, (iii)
not more than 23,240 and 1,146,100 shares of Company Common Stock were reserved
for future issuance pursuant to the Company's 1994 Stock Option Plan and the
Company's 1996 Stock Option Plan, respectively, (v) 283,000 shares of Company
Common Stock were reserved for issuance pursuant to the 1996 Non-Employee
Director Stock Option Plan (collectively with the Company's 1994 Stock Option
Plan and the Company's 1996 Stock Option Plan, the "Company Stock Plans") and
(vi) no shares of Company Preferred Stock were issued and outstanding. As of
the date of this Agreement, except for (a) stock options covering not in excess
of 767,315 shares of Company Common Stock issued under the Company Stock Plans
(collectively, the "Company Stock Options") and (b) warrants exercisable into
479,661 shares of Company Common Stock, there are no options, warrants, calls,
rights or agreements to which the Company is a party or by which any of them is
bound obligating the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of the Company or
securities convertible into or exchangeable for such capital stock, or
obligating the Company to grant, extend or enter into any such option, warrant,
call, right or agreement. Except as disclosed in the Company SEC Documents (as
hereinafter defined) filed prior to the date of this Agreement, since November
15, 1999, the Company has not issued any shares of its capital stock, or
securities convertible into or exchangeable for such capital stock, other than
shares issued in the ordinary course pursuant to the Company Stock Plans.
Except as disclosed in the Company SEC Documents filed prior to the date of
this Agreement or as set forth in Schedule 3.2 of the disclosure letter
delivered by the Company to Parent at or prior to the execution of this
Agreement (the "Company Disclosure Schedule"), there are no outstanding
contractual obligations of the Company (i) restricting the transfer of, (ii)
affecting the voting rights of, (iii) requiring the repurchase, redemption or
disposition of, (iv) requiring the registration for sale of or (v) granting any
preemptive or antidilutive right with respect to, any shares of Company Common
Stock. The execution and delivery of the Transaction Documents do not, and the
consummation of the transactions contemplated hereby and thereby and the
compliance with the provisions hereof and thereof will not, give rise to any
preemptive right or antidilutive right of any Person with respect to any shares
of the Company Common Stock.
(b) The Company has no Subsidiaries.
Section 3.3 Authority. The Board of Directors of the Company has on or prior
to the date of this Agreement (a) declared the Merger advisable and in the best
interest of the Company and its stockholders and
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approved this Agreement in accordance with applicable law, (b) resolved to
recommend the approval of this Agreement by the Company's stockholders and (c)
directed that this Agreement be submitted to the Company's stockholders for
approval. The Company has all requisite corporate power and authority to enter
into the Transaction Agreements to which it is a party and, subject to approval
by the stockholders of the Company of this Agreement (which approval, for all
purposes in this Agreement, shall be deemed to include any necessary approval
of amendments to the Company's Stock Plans) (collectively, the "Company
Stockholder Approval"), to consummate the transactions contemplated hereby and
thereby. The execution and delivery of the Transaction Agreements to which it
is a party by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of the Company, subject to (x) Company
Stockholder Approval and (y) the filing of the Certificate of Merger pursuant
to the DGCL. The Transaction Agreements to which it is a party have been duly
executed and delivered by the Company and (assuming the valid authorization,
execution and delivery thereof by the other parties thereto) each such
Transaction Agreement constitutes the valid and binding obligation of the
Company enforceable against the Company in accordance with their terms, except
as the enforceability thereof may be limited by (1) applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws in effect that affect
the enforcement of creditors rights generally or (2) general principals of
equity, whether considered in a proceeding at law or in equity. Prior to the
filing thereof, the filing of the Proxy Statement with the SEC and the taking
of all actions in connection therewith will have been duly authorized by the
Company's Board of Directors.
Section 3.4 Consents and Approvals; No Violation. Assuming all consents,
approvals, authorizations and other actions described in the second sentence of
this Section 3.4 have been obtained and all filings and obligations described
in the second sentence of this Section 3.4 have been made and except as set
forth in Schedule 3.4 of the Company Disclosure Schedule, the execution and
delivery of the Transaction Agreements do not, and the consummation of the
transactions contemplated hereby and thereby and compliance with the provisions
hereof and thereof will not, conflict with, result in any violation of, or
breach or default (with or without due notice or lapse of time, or both) under,
or give to others a right of termination, cancellation or acceleration of any
obligation or the loss of any benefit under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company under, any provision of (a) the Company Charter or
Company By-Laws, (b) any loan or credit agreement, note, bond, mortgage, lease,
indenture or other contract, agreement, instrument, permit, concession,
franchise or license applicable to the Company, (c) any license, permit or
other instrument, contract or agreement granted by, or entered into with, the
FDA or the DEA or (d) any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to the Company or any of its properties or
assets, other than, in the case of clauses (b), (c) or (d), any such conflicts,
violations, breaches, defaults, rights, liens, security interests, charges or
encumbrances that, individually or in the aggregate, would not have a Material
Adverse Effect on the Company, or prevent or materially delay the consummation
of any of the transactions contemplated hereby or thereby. No filing,
notification or registration with, or authorization, consent or approval of,
any Governmental Entity is required by or with respect to the Company in
connection with the execution, delivery and performance of the Transaction
Agreements by the Company or is necessary for the consummation of the Merger
and the other transactions contemplated by the Transaction Agreements, except
for (i) in connection, or in compliance, with the provisions of the HSR Act,
the Securities Act and the Exchange Act, (ii) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware and the filing of
appropriate documents with the relevant authorities of other states in which
the Company is qualified to do business, each of which is set forth in Schedule
3.4 of the Company Disclosure Schedule, (iii) such filings and consents as may
be required under any environmental, health or safety law or regulation
pertaining to any notification, disclosure or required approval triggered by
the Merger or by the transactions contemplated by the Transaction Agreements,
each of which is set forth in Schedule 3.4 of the Company Disclosure Schedule,
(iv) such filings, authorizations, orders and approvals as may be required to
obtain the State Takeover Approvals, each of which is set forth in Schedule 3.4
of the Company Disclosure Schedule, (v) applicable requirements, if any, of
"blue sky" laws and the NASDAQ Composite Index and (vi) such other consents,
orders, authorizations, registrations, declarations and filings the failure of
which to be obtained or made would not, individually or in the aggregate, have
a
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Material Adverse Effect on the Company or prevent or materially delay the
consummation of any of the transactions contemplated hereby or thereby or by
any other Transaction Agreement. The execution and delivery of the Transaction
Agreements do not, and the consummation of the transactions contemplated hereby
and thereby and compliance with the provisions hereof and thereof will not,
conflict with, result in any violation of, or breach or default (with or
without due notice or lapse of time, or both) under, or give to others a right
of termination, cancellation or acceleration of any obligation or the loss of a
material benefit under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company under, any of the license agreements to which it is a party, except for
such conflicts, violations, breaches, defaults, rights or liens as would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company. All license agreements of the Company are listed in Schedule 3.4 of
the Company Disclosure Schedule.
Section 3.5 SEC Documents and Other Reports. The Company has filed with the
SEC all documents required by the Exchange Act to be filed by the Company since
September 25, 1996 (the "Company SEC Documents"). As of their respective dates,
the Company SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and, at the respective times they were filed, none of the Company SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (except, to the extent that any Company SEC Documents were
subsequently amended or modified by a filing prior to the date of this
Agreement, such representation is given only with respect to such Company SEC
Document as so amended or modified as of the date of such amendment or
modification). The financial statements (including, in each case, any notes
thereto) of the Company included in the Company SEC Documents complied as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, were prepared
in accordance with GAAP (except, in the case of the unaudited statements, as
permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated therein or in the notes thereto)
and fairly present in all material respects in accordance with GAAP the
financial position of the Company as at the respective dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments and to any other adjustments described therein).
Except as disclosed in the Company SEC Documents or as required by GAAP, the
Company has not, since December 31, 1998, made any change in the accounting
practices or policies applied in the preparation of its financial statements.
The books and records of the Company have been, and are being, maintained in
accordance with GAAP and other applicable legal and accounting requirements.
Section 3.6 Registration Statement and Proxy Statement. None of the
information to be supplied by the Company for inclusion or incorporation by
reference in the Registration Statement or the Proxy Statement will (i) in the
case of the Registration Statement, at the time it becomes effective, 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 not misleading or include any statement that is materially different
from the representations and warranties of the Company contained in this
Agreement or the other Transaction Agreements or that discloses a liability,
condition or event that would constitute a Material Adverse Effect on the
Company, which liability, condition or event is not otherwise disclosed in the
representations and warranties of the Company contained in this Agreement or in
the Company Disclosure Schedule or (ii) in the case of the Proxy Statement, at
the time of the mailing of the Proxy Statement, the time of the Stockholder
Meeting and at the Effective Time, 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 are made, not misleading or include any
statement that is materially different from the representations and warranties
of the Company contained in this Agreement or the other Transaction Agreements
or that discloses a liability, condition or event that would constitute a
Material Adverse Effect on the Company, which liability, condition or event is
not otherwise disclosed in the representations and warranties of the Company
contained in this Agreement or in the Company Disclosure Schedule. If, at any
time prior to the Effective Time, any event with respect to the
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Company, its officers or directors shall occur which is required to be
described in the Proxy Statement or the Registration Statement, such event
shall be so described, and an appropriate amendment or supplement shall be
promptly filed with the SEC and, as required by law, disseminated to the
stockholders of the Company. The Proxy Statement will comply (excluding any
matters relating to Parent and Sub, as to which the Company makes no
representations) as to form in all material respects with the provisions of the
Exchange Act.
Section 3.7 Absence of Certain Changes or Events. Except as disclosed in the
Company SEC Documents filed with the SEC prior to the date of this Agreement or
in Schedule 3.7 of the Company Disclosure Schedule, since December 31, 1998,
(A) the Company has not incurred any liability or obligation (indirect, direct
or contingent), or entered into any oral or written agreement or other
transaction, that is not in the ordinary course of business or that would,
individually or in the aggregate, result in a Material Adverse Effect on the
Company, except for any such changes or effects resulting from this Agreement,
the transactions contemplated hereby or the announcement thereof; (B) the
Company has not sustained any loss or interference with their business or
properties from fire, flood, windstorm, accident or other calamity (whether or
not covered by insurance) that would, individually or in the aggregate, have a
Material Adverse Effect on the Company; (C) there has been no action taken by
the Company, that, if taken during the period from the date of this Agreement
through the Effective Time, would constitute a material breach of Section
4.1(b) hereof; and (D) there has been no event, circumstance or development
that would have a Material Adverse Effect on the Company.
Section 3.8 Permits and Compliance.
(a) The Company is in possession of all Permits necessary for it to own,
lease and operate its properties or to carry on its business as it is now being
conducted (the "Company Permits"), except where the failure to have any of the
Company Permits would not, individually or in the aggregate, have a Material
Adverse Effect on the Company, and, as of the date of this Agreement, no
suspension or cancellation of any of the Company Permits is pending or, to the
Knowledge of the Company (as hereinafter defined), threatened, except where the
suspension or cancellation of any of the Company Permits would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company; provided that no representation is being made by the Company in this
sentence with respect to any IND or NDA of the Company filed with the FDA
(which are the subject of Section 3.13 hereof). The Company is not in violation
of (A) the Company Charter or the Company By-Laws, (B) any applicable law,
ordinance, administrative or governmental rule or regulation or (C) any order,
decree or judgment of any Governmental Entity having jurisdiction over the
Company, except, in the case of clauses (B) and (C), for any violations that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Company.
(b) Except as disclosed in the Company SEC Documents filed prior to the date
of this Agreement or in Schedule 3.8(a) of the Company Disclosure Schedule, as
of the date of this Agreement, there is no contract or agreement that is
material to the business, financial condition or results of operations of the
Company. Except as set forth in the Company SEC Documents filed prior to the
date of this Agreement or in Schedule 3.8(b) of the Company Disclosure
Schedule, the execution and delivery of the Transaction Agreements do not, and
the consummation of the transactions contemplated hereby and thereby and
compliance with the provisions hereof and thereof will not, conflict with,
result in any violation of, or breach or default (with or without due notice or
lapse of time, or both) under, or give to others a right of termination,
cancellation or acceleration of any obligation or the loss of any benefit
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company under, any
indenture, mortgage, loan agreement, note or other agreement or instrument for
borrowed money, any guarantee of any agreement or instrument for borrowed money
or any lease, contractual license or other contract, agreement or instrument to
which the Company is a party or by which the Company is bound or to which any
of the properties, assets or operations of the Company is subject, other than
such conflicts, violations, breaches, defaults, rights or liens as would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company. As used in this Agreement "Knowledge of the Company" means the actual
knowledge of any of the Chief Executive Officer,
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the Chief Financial Officer, the General Counsel of the Company or Executive
Vice President, Research and Development.
Section 3.9 Tax Matters.
Except as set forth in Schedule 3.9 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 (i)
have been timely filed, except for such Tax Returns that the failure by the
Company to timely file would not, individually or in the aggregate, have a
Material Adverse Effect on the Company, and (ii) are true, complete and
correct in all material respects.
(b) All Taxes payable by or with respect to the Company have been timely
paid, or adequately reserved for (in accordance with GAAP) in the most
recent financial statements contained in the Company SEC Documents, except
for Taxes that the failure of which to pay would not, individually or in
the aggregate, have a Material Adverse Effect on the Company.
(c) No deficiencies for any Taxes have been proposed, asserted or
assessed either orally or in writing against the Company that are not
adequately reserved for (in accordance with GAAP) in the most recent
financial statements contained in the Company SEC Documents, except for
such deficiencies as would not, individually or in the aggregate, have a
Material Adverse Effect on the Company. All assessments for Taxes due and
owing by or with respect to the Company with respect to completed and
settled examinations or concluded Litigation have been paid.
(d) No examinations have been completed or are presently being conducted
with respect to the Company's federal or material state income Tax Returns.
(e) The Company has complied with all rules and Treasury regulations
relating to the payment and withholding of Taxes (including, without
limitation, withholding of Taxes pursuant to Sections 1441 and 1442 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 Entities all amounts required to be so
withheld and paid over under all Applicable Laws, except where the failure
to be in such compliance or to withhold and pay over such amounts would
not, individually or in the aggregate, have a Material Adverse Effect on
the Company.
(f) The Company (i) has not waived any statutory period of limitations
in respect of its or their Taxes or Tax Returns or (ii) is not a party to,
not bound by, or has no obligation under any agreement, contract or
arrangement for the sharing, allocation, or indemnification of Taxes (other
than indemnification agreements where Taxes incidental to the primary
obligation so indemnified are also indemnified).
(g) The net operating losses ("NOLs") of the Company 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 Treasury regulations
otherwise limiting the use of the NOLs of the Company.
(h) No property of the Company is "tax-exempt use property" (as such
term is defined in Section 168 of the Code).
(i) The Company has not filed a consent pursuant to Section 341(f) of
the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a "Subsection (f) asset" (as such term is defined in Section
341(f)(4) of the Code) owned by the Company.
(j) The Company is not, and has not been for the five years preceding
the Closing, a "United States real property holding company" (as such term
is defined in Section 897(c)(2) of the Code).
(k) The Company has no reason to believe that any condition exists nor
has the Company taken any action or failed to take any action that could
reasonably be expected to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
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Section 3.10 Actions and Proceedings. Except as set forth in the Company SEC
Documents filed prior to the date of this Agreement or in Schedule 3.10 of the
Company Disclosure Schedule, there are no outstanding orders, judgments,
injunctions, awards or decrees of any Governmental Entity against or involving
the Company, against or involving any of the present directors or officers of
the Company, as such, or involving any of its or their properties, assets or
business that, individually or in the aggregate, would have a Material Adverse
Effect on the Company. Except as set forth in the Company SEC Documents filed
prior to the date of this Agreement or in Schedule 3.10 of the Company
Disclosure Schedule, as of the date of this Agreement, there are no actions,
suits or claims or legal, administrative or arbitrative proceedings or
investigations pending or, to the Knowledge of the Company, threatened against
or involving the Company against or involving any of the present directors or
officers of the Company as such, or involving any of its or their properties,
assets or business before any court or arbitration tribunal or before any
Governmental Entity that, individually or in the aggregate, would have a
Material Adverse Effect on the Company. As of the date of this Agreement, there
are no actions, suits, labor disputes or other litigation, legal or
administrative proceedings or governmental investigations pending, or, to the
Knowledge of the Company, threatened against or affecting the Company or any of
its present directors or officers, as such, or any of its or their properties,
assets or business before any court or arbitration tribunal or before any
Governmental Entity relating to the transactions contemplated by the
Transaction Agreements.
Section 3.11 Certain Agreements. Schedule 3.11 of the Company Disclosure
Schedule sets forth each material oral or written stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan to which
the Company is a party. Except as set forth in Schedule 3.11 of the Company
Disclosure Schedule, as of the date of this Agreement, the Company is not a
party to any oral or written agreement or plan, including any stock option
plan, stock appreciation rights plan, restricted stock plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions
contemplated by this Agreement. No holder of any option to purchase shares of
Company Common Stock, or shares of Company Common Stock granted in connection
with the performance of services for the Company, is or will be entitled to
receive cash from the Company in lieu of or in exchange for such option or
shares as a result of the transactions contemplated by this Agreement (other
than in lieu of fractional shares). The Company is not a party to any
termination benefits agreement or severance agreement or employment agreement
which would be triggered by the consummation of the transactions contemplated
by this Agreement, except as set forth in Schedule 3.11 of the Company
Disclosure Schedule.
Section 3.12 ERISA.
(a) Schedule 3.12(a) of the Company Disclosure Schedule lists each Company
Plan (as hereinafter defined). With respect to each material Company Plan, the
Company has made (or as soon as practicable will make) available to Parent a
true and correct copy of (i) the three most recent annual reports (Form 5500)
filed with the IRS, (ii) such Company Plan and any amendments thereto, (iii)
each trust agreement, insurance contract or administration agreement relating
to such Company Plan and the latest financial statements thereof, (iv) the most
recent summary plan description of each Company Plan for which a summary plan
description is required, (v) the most recent actuarial report or valuation
relating to a Company Plan subject to Title IV of ERISA, (vi) the most recent
determination letter, if any, issued by the IRS with respect to any Company
Plan intended to be qualified under Section 401(a) of the Code and (vii) any
written description that exists as of the date of this Agreement of any
unwritten Company Plan. Except as would not, individually or in the aggregate,
have a Material Adverse Effect on the Company, (i) each Company Plan complies
with all applicable statutes and governmental rules and regulations, including
but not limited to ERISA, the Code and COBRA, (ii) no "reportable event"
(within the meaning of Section 4043 of ERISA) has occurred with respect to any
Company Plan for which the 30-day notice requirement has not been waived, (iii)
the Company is not or has not been obligated to contribute or otherwise may not
have any liability with respect to any Company Multiemployer Plan (as
hereinafter defined), (iv) no action has been taken, or is currently being
considered, to terminate any Company Plan subject to Title IV of ERISA, (v) the
Company has complied with the continued medical
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coverage requirements of COBRA, (vi) no Company Plan has engaged in a
"prohibited transaction" (as defined in Section 4975 of the Code and Section
406 of ERISA) and (vii) no liability under Title IV or Section 302 of ERISA or
Section 412 of the Code has been incurred by the Company that has not been
satisfied in full, and no condition exists that presents a risk to the Company
of incurring any such liability. Except as would not, individually or in the
aggregate, have a Material Adverse Effect on the Company, no Company Plan
subject to Title IV of ERISA, nor any trust created thereunder, has incurred
any "accumulated funding deficiency" (as defined in Section 302 of ERISA),
whether or not waived.
(b) Except as disclosed in Schedule 3.12(b) of the Company Disclosure
Schedule, with respect to any Company Plan which is subject to Title IV of
ERISA, the present value of accrued benefit obligations, as determined in
accordance with FAS 87 in accordance with the actuarial assumptions used to
prepare the most recent reports of such Company Plan, did not exceed the fair
market value of the Plan assets as of the most recent valuation date for which
an actuarial report has been prepared, and to the Knowledge of the Company,
there has not been any material adverse change to such status. All
contributions required to be made with respect to any Company Plan on or prior
to the Closing Date have been made or are reflected on the most recent balance
sheet of the Company.
(c) With respect to the Company Plans, no event has occurred in connection
with which the Company would be subject to any liability under the terms of
such Company Plans, ERISA, the Code or any other applicable law which would
have, individually or in the aggregate, a Material Adverse Effect on the
Company. Except as disclosed in the Company SEC Documents or set forth in
Schedule 3.12(c) of the Company Disclosure Schedule, with respect to any
current or former employee, director, officer, consultant or contractor of the
Company, consummation of the transactions contemplated by this Agreement shall
not result in the payment or provision of additional compensation or benefits
or accelerate the vesting, payment or funding of any compensation or benefits.
Except as disclosed in the Company SEC Documents or set forth in Schedule
3.12(c) of the Company Disclosure Schedule, no amounts payable by reason of
this transaction under the Company Plans will fail to be deductible for federal
income tax purposes by virtue of either Section 280G or Section 162(m) of the
Code. Except as set forth in Schedule 3.12(c) of the Company Disclosure
Schedule, Company Plans that are intended to be qualified under Section 401(a)
of the Code have been determined by the IRS to be so qualified, or a timely
application for such determination is now pending, and to the Knowledge of the
Company, there is no reason why any Company Plan is not so qualified in
operation. Except as disclosed in the Company SEC Documents filed prior to the
date of this Agreement or set forth in Schedule 3.12(c) of the Company
Disclosure Schedule or as required by ERISA, the Company does not have any
liability or obligation under any welfare plan to provide benefits after
termination of employment to any employee or dependent. There are no pending,
or to the Knowledge of the Company, threatened, claims, suits, audits or
investigations related to any Company Plan other than claims for benefits in
the ordinary course and other than claims, suits, audits or investigations that
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company. As used herein, (i) "Company Plan" means each deferred
compensation and each bonus or other incentive compensation, stock purchase,
stock option and other equity compensation or ownership plan, program,
agreement or arrangement, each severance or termination pay, medical, surgical,
hospitalization, life insurance and other "welfare" plan, fund or program
(within the meaning of Section 3(1) of the ERISA); each profit-sharing, stock
bonus or other "pension" plan, fund or program (within the meaning of Section
3(2) of ERISA); each employment, retention, consulting, termination or
severance agreement; and each other employee benefit plan, fund, program,
agreement or arrangement, in each case, that is sponsored, maintained or
contributed to or required to be contributed to by the Company, including any
plan subject to Title IV of ERISA maintained within the past five (5) years by
the Company and (ii) "Company Multiemployer Plan" means a "multiemployer plan"
(as defined in Section 4001(a)(3) of ERISA) to which the Company is or has been
obligated to contribute or otherwise may have any liability.
Section 3.13 Compliance with Certain Laws.
(a) Except as disclosed in Schedule 3.13(a) of the Company Disclosure
Schedule, the properties, assets and operations of the Company are in
compliance with all Applicable Laws, except for any violations that
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individually or in the aggregate would not have a Material Adverse Effect on
the Company. Except as disclosed in Schedule 3.13(a) of the Company Disclosure
Schedule, with respect to such properties, assets and operations, including any
previously owned, leased or operated properties, assets or operations, there
are no past, present or reasonably anticipated future events, conditions,
circumstances, activities, practices, incidents, actions or plans of the
Company that may interfere with or prevent compliance or continued compliance
with all Applicable Laws, other than interference or prevention that would not
individually or in the aggregate with any other such interference or prevention
have a Material Adverse Effect on the Company. The Company will make available
to Parent such certificates and environmental studies with respect to such
properties as the Company has available on the date of this Agreement.
(b) The Company's manufacturing, distribution, development and marketing
practices are in compliance with all applicable federal and state laws, rules,
regulations, orders, licenses, judgments, writs, injunctions, decrees or
demands, including, without limitation, laws and regulations administered by
the FDA and the DEA, except where the failure to be in such compliance would
not, individually or in the aggregate, have a Material Adverse Effect on the
Company.
(c) The Company has filed an NDA for MorphiDex(R) with the FDA (the
"MorphiDex(R) Application"), and on August 2, 1999, the Company received
notification from the FDA that such application was not approvable. The
MorphiDex(R) Application is the only NDA of the Company on file with the FDA.
Schedule 3.13(c) of the Company Disclosure Schedule sets forth all INDs and
license agreements of the Company.
(d) The Company has not used the services of any person debarred under the
provisions of the Generic Drug Enforcement Act of 1992, 21 U.S.C. (S)
335(a)(b). Neither the Company nor any of its officers, employees, agents or
affiliates, has been convicted of any crime or engaged in any conduct for which
debarment is mandated by 21 U.S.C. (S) 335a(a) or authorized by 21 U.S.C. (S)
335a(b).
(e) The Company is in compliance with all (i) federal and state laws
applicable to the development, manufacture, processing, packing, testing and
sale of pharmaceutical products to the extent such laws are applicable to it,
(ii) rules and regulations of the FDA and the DEA to the extent such rules and
regulations are applicable to it, and (iii) product applications (including
INDs) in which the Company has sold any product on or after November 1, 1999,
except in each case where the failure to be in such compliance would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company. All manufacturing operations conducted by or for the benefit of the
Company have been and are being conducted in substantial compliance with the
current Good Manufacturing Practice regulations set forth in 21 C.F.R. Parts
210 and 211.
(f) As to each drug of the Company for which a product application has been
approved by, or any IND has been filed with, the FDA, which drugs are described
in Schedule 3.13(f) of the Company Disclosure Schedule, the applicant and all
Persons performing operations covered by the application are in compliance with
the requirements of the FDCA and the implementing regulations of the FDA,
respectively, and all terms and conditions of the application, except where the
failure to be in such compliance would not, individually or in the aggregate,
have a Material Adverse Effect on the Company.
(g) The Company is in material compliance with all applicable registration
and listing requirements set forth in 21 U.S.C. (S) 360 and 21 C.F.R. Part 207.
To the extent required, the Company has obtained registrations from the DEA and
is in material compliance with all such registrations and all applicable
regulations promulgated by the DEA.
(h) None of the Company or any of its officers, employees, or agents has
made an untrue statement of material fact or fraudulent statement to the FDA or
the DEA, failed to disclose a material fact required to be disclosed to the FDA
or the DEA, or committed an act, made a statement, or failed to make a
statement that could reasonably be expected to provide a basis for the FDA to
invoke its policy respecting "Fraud, Untrue Statements of Material Facts,
Bribery, and Illegal Gratuities," set forth in 56 Fed. Reg 46191 (September 10,
1991).
(i) The Company has made available to Parent copies of any and all notices
of inspectional observations (FD 483's), establishment inspection reports,
warning letters and any other documents received from or issued
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by the FDA or the DEA within the last three years that indicate or suggest lack
of compliance with the FDA or the DEA regulatory requirements by the Company or
Persons covered by product applications or otherwise performing services for
the benefit of the Company with respect to services or products provided to the
Company.
(j) The Company has not received any written notice that the FDA or the DEA
has commenced or threatened to initiate (i) any action to withdraw its approval
or request the recall of any product of the Company, or (ii) any action to
enjoin (A) production at any facility (including any clinical facility where
testing and/or trials occur) owned or used by the Company or any Person on
behalf of the Company or (B) any facility (including any clinical facility
where testing and/or trials occur) owned or used by the Company or any Person
on behalf of the Company, (iii) the withdrawal of approval of any product
application (including any IND), other than such withdrawals of approval that
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company, or (iv) any material civil penalty, injunction, seizure or
criminal action.
(k) To the Knowledge of the Company, as to each article of drug or consumer
product currently manufactured and/or distributed by the Company, which
products are described in Schedule 3.13(k) of the Company Disclosure Schedule,
or by any Person on behalf of the Company, such article is not adulterated or
misbranded within the meaning of the FDCA, 21 U.S.C. (S)(S) 301 et seq. and not
in violation of 21 U.S.C. (S) 355.
(l) As to each drug referred to in subsection (c) above, the Company and its
officers, employees, agents and affiliates have included or caused to be
included in the application for such drug, where required, the certification
described in 21 U.S.C. (S) 335a(k)(1) and the list described in 21 U.S.C. (S)
335a(k)(2), and such certification and such list was in each case true and
accurate when made and remained true and accurate thereafter.
(m) Except as set forth in Schedule 3.13(m) of the Company Disclosure
Schedule, all pre-clinical trials and clinical trials the Company has conducted
or has had conducted for it by third parties, to the Knowledge of the Company,
complies in all material respects with the requirements of Good Clinical
Practice, Informed Consent, and all requirements relating to protection of
human subjects, found in 21 C.F.R. (S)(S) 50, 54 and 56 and that all
nonclinical laboratory testing complies with the requirements of 21 C.F.R. (S)
58.
(n) Except as set forth in Schedule 3.13(n) of the Company Disclosure
Schedule, as to each product application submitted to, but not approved by, the
FDA, and not withdrawn by the Company or applicants acting on its behalf as of
the date of this Agreement, the Company has complied in all material respects
with the requirements of the FDCA and implementing FDA regulations and has
provided, or will provide, all additional information and taken, or will take,
all additional action either that has been deemed appropriate by both the
Company and Parent in connection with the application.
(o) The Company exports no FDA regulated products.
Section 3.14 Liabilities. Except as fully reflected or reserved against in
the balance sheet of the Company as of December 31, 1998 (included in the
Company SEC Documents) or as reflected in the Company SEC Documents filed prior
to the date of this Agreement, or set forth in Schedule 3.14 of the Company
Disclosure Schedule, the Company has no liabilities (including, without
limitation, tax liabilities) absolute or contingent, that would be required to
be reflected on a balance sheet or in notes thereto prepared in accordance with
GAAP, other than liabilities incurred in the ordinary course of business or
that, individually or in the aggregate, would not have a Material Adverse
Effect on the Company.
Section 3.15 Labor Matters. Except as set forth in Schedule 3.15 of the
Company Disclosure Schedule or in the Company SEC Documents filed prior to the
date of this Agreement, the Company is not a party to any collective bargaining
agreement or labor contract. The Company has not engaged in any unfair labor
practice with respect to any Persons employed by or otherwise performing
services primarily for the Company (the "Company Business Personnel"), and
there is no unfair labor practice complaint or grievance against the Company by
the National Labor Relations Board or any comparable state agency pending or
threatened in
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writing with respect to the Company Business Personnel, except where such
unfair labor practices, complaints or grievances would not, individually or in
the aggregate, have a Material Adverse Effect on the Company. There is no labor
strike, dispute, slowdown or stoppage pending or, to the Knowledge of the
Company, threatened against or affecting the Company which may interfere with
the business activities of the Company, except where such disputes, strikes or
work stoppages would not, individually or in the aggregate, have a Material
Adverse Effect on the Company. The Company is in compliance with all labor,
employment and wage payment-related laws, regulations and rules, except where
the failure to be in such compliance would not, individually or in the
aggregate, have a Material Adverse Effect on Parent.
Section 3.16 Intellectual Property.
(a) Except as set forth in Schedule 3.16(a) of the Company Disclosure
Schedule or as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company, the Company is the owner of or has the valid and
enforceable right to make, use, sell, offer to sell and import all Company
Intellectual Property to the extent used in or necessary for the conduct of the
Company's business, free and clear of all liens, security interests, charges or
encumbrances of any kind and, except for the Company License Agreements set
forth in Schedule 3.16(b) of the Company Disclosure Schedule, free and clear of
all licenses to third parties granting any right to use or practice any rights
under any Company Intellectual Property. As used in this Agreement, the term
"Company Intellectual Property" shall mean: (i) the Company's registered and
material unregistered trademarks, service marks (including registrations,
recordings and applications in the United States Patent and Trademark Office,
any state of the United States or any other Governmental Entity worldwide),
slogans, trade names, logos and trade dress (collectively, together with the
good will symbolized thereby or associated with each, "Company Trademarks");
(ii) all of the Company's national (including, but not limited to, the United
States) and multinational statutory invention registrations, patents, patent
registrations and patent applications (including, but not limited to, all
reissues, divisions, continuations, continuations-in-part, extensions and
reexaminations, and all rights therein provided by law, multinational treaties
or conventions) (collectively, "Company Patents"); (iii) all of the Company's
national and multinational registered and material unregistered copyrights,
including, but not limited to, copyrights in software programs and databases
(collectively, "Company Copyrights"); (iv) the Company's software programs
documentation and manuals used in connection therewith and databases (together,
"Company Software"); (v) all of the Company's (A) inventions, whether
patentable or not patentable, whether or not reduced to practice, and not yet
made the subject of a pending patent application or applications, (B) ideas and
conceptions of potentially patentable subject matter, including, without
limitation, any patent disclosures, whether or not reduced to practice and not
yet made the subject of a patent application, (C) trade secrets and
confidential, technical information (including ideas, formulas, compositions,
inventions and conceptions of inventions whether patentable or not patentable
and whether or not reduced to practice), (D) technology (including, without
limitation, know-how and show-how), manufacturing and production processes and
techniques, service and repair manuals, research and development information,
drawings, specifications, designs, plans, proposals, technical data and
copyrightable works, whether secret or confidential or not, and all proprietary
or confidential business information, (E) all rights to obtain and rights to
apply for patents, and to register trademarks and copyrights and (F) all
records (including, but not limited to, laboratory, research and testing
notebooks) in any accessible format (including, but not limited to, paper
records, photographs, audio and visual tape recordings and computer storage
media and other information storage media) pertaining to patentable or
potentially patentable subject matter and all technical manuals and
documentation made or used in connection with any of the foregoing
(collectively, "Company Technology"); and (vi) agreements pursuant to which the
Company has obtained or granted the right to use any of the foregoing
(collectively, and together with other agreements to which the Company is a
party relating to the development, acquisition, use, sale, offer for sale or
importation of Company Intellectual Property, "Company License Agreements").
(b) Schedule 3.16(b) of the Company Disclosure Schedule sets forth a true,
complete and accurate list of the following Company Intellectual Property items
owned by or under obligation of assignment to the Company: (i) all
registrations of and applications to register Company Trademarks material to
the Company;
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(ii) all unregistered Company Trademarks which are material to the Company;
(iii) all Company Patents; (iv) all registrations of and applications to
register any Company Copyrights; (v) all Company Software; and (vi) all Company
License Agreements, other than off-the-shelf Company Software licenses.
(c) Except as set forth in Schedule 3.16(b) of the Company Disclosure
Schedule, the Company is the sole and exclusive owner of the Company
Intellectual Property items set forth in Schedule 3.16(b) of the Company
Disclosure Schedule and the Company is listed in the records of the
Governmental Entities set forth in Schedule 3.16(b) of the Company Disclosure
Schedule as the sole owner of record. Except as set forth in Schedule 3.16(c)
of the Company Disclosure Schedule, there is no lien, security interest, charge
or encumbrance of any kind on the right of the Company to transfer to the
Surviving Corporation any of the Company Intellectual Property, as contemplated
by this Agreement. Except as otherwise indicated in Schedule 3.16(b) of the
Company Disclosure Schedule, (i) all issued patents set forth thereon are valid
and enforceable and (ii) (A) as of the date of this Agreement, no such
trademark registrations, trademark applications, issued patents or patent
applications set forth in Schedule 3.16(b) of the Company Disclosure Schedule
are subject to any pending proceedings, including opposition, cancellation,
interference or similar adversarial proceeding by or before any Governmental
Entity and no such proceedings are threatened and (B) at the Effective Time, no
such trademark registrations, trademark applications, issued patents or patent
applications set forth in Schedule 3.16(b) of the Company Disclosure Schedule
are subject to any pending proceedings, including opposition, cancellation,
interference or similar adversarial proceeding by or before any Governmental
Entity and no such proceedings are threatened, other than such proceedings that
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company.
(d) There are no royalties, honoraria, fees or other payments payable by the
Company in respect of the use or the right to use any of the Company
Intellectual Property to any Person or Governmental Entity (excluding Taxes,
governmental or attorneys' fees required in the normal course of obtaining
patent, trademark or copyright rights and excluding governmental maintenance
fees), except as set forth in the Company License Agreements listed in Schedule
3.16(b) of the Company Disclosure Schedule and pursuant to off-the-shelf
Company Software licenses. The Company License Agreements set forth in Schedule
3.16(b) of the Company Disclosure Schedule are valid and binding obligations of
the parties thereto, enforceable in accordance with their terms, except as the
enforceability thereof may be limited by (a) applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws in effect that affect the
enforcement of creditors rights generally or (b) general principals of equity,
whether considered in a proceeding at law or in equity, and there exists no
event or condition which will result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default by the Company
(or, to the Knowledge of the Company, any other party thereto) under any
Company License Agreement, except where such violations, breaches or defaults
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company. Except as set forth in Schedule 3.16(d) of the Company Disclosure
Schedule, no consent is required to be obtained in connection with the right of
the Company to transfer any Company License Agreement to Parent or Sub pursuant
to the Merger.
(e) Except as disclosed in Schedule 3.16(e) of the Company Disclosure
Schedule or as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company, (i) none of the use by the Company of any
Company Intellectual Property, the exercise of rights relating to Company
Patents, Company Trademarks and Company Copyrights contained within the Company
Intellectual Property or the conduct of the business of the Company infringes
or otherwise violates any intellectual property rights (either directly or
indirectly, such as through contributory infringement or inducement to
infringe) of any third party and (ii) no such claims have been asserted or, to
the Knowledge of the Company, threatened against the Company which have not
been resolved. Except as disclosed in Schedule 3.16(e) of the Company
Disclosure Schedule, (A) as of the date of this Agreement, (i) to the Knowledge
of the Company, no third party is infringing or otherwise violating any Company
Intellectual Property rights of the Company and (ii) no such claims are pending
or threatened by the Company against any third party and (B) at the Effective
Time, (i) to the Knowledge of the Company, no third party is infringing or
otherwise violating any Company Intellectual Property rights of the Company
that are material to the business of the Company as conducted or proposed to be
conducted on the
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date of this Agreement and (ii) no such claims are pending or threatened by
the Company against any third party, which involve any Company Intellectual
Property that is material to the business of the Company as conducted or
proposed to be conducted on the date of this Agreement.
(f) Except as disclosed in Schedule 3.16(f) of the Company Disclosure
Schedule, (i) as of the date of this Agreement, there are no suits or any
other proceedings pending or, to the Knowledge of the Company, threatened
before any Governmental Entity to which the Company is a party challenging (A)
the Company's rights to own or use any Company Intellectual Property or (B)
the validity, enforceability or scope of the Company Intellectual Property and
(ii) at the Effective Time, there are no such suits to which the Company is a
party challenging (A) the Company's rights to own or use any Company
Intellectual Property that is material to the business of the Company as
conducted or proposed to be conducted on the date of this Agreement or (B) the
validity, enforceability or scope of the Company Intellectual Property that is
material to the business of the Company as conducted or proposed to be
conducted on the date of this Agreement. There are no settlement agreements,
consents, judgments, orders, forebearances to sue or similar obligations which
materially restrict any rights of the Company to (i) make, use, sell, offer
for sale, import or license under any Company Intellectual Property or (ii)
conduct its business in order to accommodate a third party's intellectual
property rights.
(g) The Company employs reasonable measures to protect the confidentiality
of the Company Technology. The Company requires employees with access to the
Company Technology to execute a nondisclosure agreement substantially in
accordance with the form(s) previously provided by the Company to Parent.
Except as set forth in Schedule 3.16(g) of the Company Disclosure Schedule,
none of the current or former employees, officers or directors of the Company
(i) is suspected to be in violation of any such agreement or (ii) is suspected
of having disclosed any Company Technology to any third party except subject
to an appropriate confidentiality agreement or as required by a Governmental
Entity.
(h) Except as set forth in Schedule 3.16(h) of the Company Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not result in the loss or impairment of any rights of the Company to own,
use or license any Company Intellectual Property, except where such losses or
impairments would not, individually or in the aggregate, have a Material
Adverse Effect on the Company.
(i) Except as set forth in Schedule 3.16(i) of the Company Disclosure
Schedule, since September 25, 1996, the Company has not disposed of or
permitted to lapse any rights to the use of any Company Intellectual Property,
or disposed of or disclosed to any Person other than representatives of Parent
any Company trade secret, formula, process or know-how not theretofore a
matter of public knowledge other than in the ordinary course of business or
pursuant to secrecy agreement.
Section 3.17 Opinion of Financial Advisor. The Company has received the
written opinion of Credit Suisse First Boston dated the date hereof, to the
effect that, as of the date hereof, the Merger Consideration is fair to the
Company's stockholders from a financial point of view, a copy of which opinion
will be made available to Parent promptly after the date of this Agreement.
Section 3.18 Required Vote of Company Stockholders. Under applicable
Delaware law and the Company Charter and Company By-laws, the affirmative vote
of the holders of not less than a majority of the outstanding shares of
Company Common Stock is required to approve the Merger. No other vote of the
stockholders of the Company is required by law, the Company Charter or Company
By-Laws or otherwise for the Company to consummate the Merger and the
transactions contemplated hereby.
Section 3.19 Ownership of Shares. The Company does not own any Shares of
Parent Common Stock.
Section 3.20 Brokers. No broker, investment banker or other Person, other
than Credit Suisse First Boston, the fees and expenses of which will be paid
by the Company (and are reflected in agreements between Credit Suisse First
Boston and the Company, copies of which have been furnished to Parent), is
entitled to any broker's, finder's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company.
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Section 3.21 State Takeover Statutes. Assuming the accuracy of Parent's
representations and warranties contained in Section 2.17 hereof (Ownership of
Shares), the Board of Directors of the Company has taken all action so that,
prior to the execution hereof, the Board of Directors has approved both
pursuant to Section 203 of the DGCL and Article VIII of the Company Charter (a)
the Merger, this Agreement and each Stockholder Voting Agreement and the
transactions contemplated hereby and thereby prior to the execution hereof and
thereof, (b) a fee (in an amount previously disclosed to the Company) paid to
Kelso & Co. (or an Affiliate thereof) in connection with the transactions
contemplated by this Agreement and (c) the possible purchase by an Affiliate of
Parent (other than Parent and so long as such purchase would not be treated for
U.S. federal income tax purposes as a purchase, in whole or in part, by a
Person who is related to Parent within the meaning of Treasury Regulation
Section 1.368-1(e)(3)) of shares of Company Common Stock from John W. Lyle and
Frank S. Caruso pursuant to that certain side letter dated of even date
herewith between each of such executives and Parent. Prior to the execution of
this Agreement, the Company has delivered to Parent a true and accurate copy of
the resolutions of the Board of Directors of the Company approving such
transactions. As of the date of this Agreement, no other state takeover
statutes, including without limitation, any business combination act or
supermajority Company Charter provisions are applicable to the Merger or the
Transaction Agreements.
Section 3.22 Year 2000. With respect to year 2000, the Company represents
and warrants that the statement contained in Exhibit D-2 hereto is true and
accurate.
Section 3.23 Interests in Other Entities. Except as set forth in Schedule
3.23 of the Company Disclosure Schedule, the Company does not, directly or
indirectly, own or have the right to acquire any equity interest in any other
corporation, partnership, joint venture or other business organization (other
than any such equity interest that is 1% or less of the equity interest such
public corporation). The Company has not made any investment in or advance of
cash or other extension of credit to any Person, or has any commitment or
obligation to do so.
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ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business Pending the Merger.
(a) Actions by Parent. Notwithstanding anything herein to the contrary, (1)
prior to the Effective Time, the Parent Recapitalization shall occur and (2)
contemporaneously with the Closing, Parent shall duly adopt and declare
advisable the Charter Amendment. During the period from the date of this
Agreement through the Effective Time, Parent shall, and shall cause each of its
Subsidiaries to, in all material respects carry on its business in the ordinary
course as currently conducted and, to the extent consistent therewith, use
reasonable best efforts to preserve intact its current business organizations,
keep available the services of its current officers and employees and preserve
its relationships with customers, suppliers and others having business dealings
with it. Without limiting the generality of the foregoing, and except as
otherwise contemplated by this Agreement (including the Parent Recapitalization
as consummated in accordance with the terms set forth on Exhibit A-2 hereto),
from the date of this Agreement to the Effective Time, Parent, shall not, and
shall not permit any of its Subsidiaries to, without the prior written consent
of the Company:
(i) (w) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to its stockholders in their
capacity as such (other than dividends and other distributions by
Subsidiaries), (x) other than in the case of any Subsidiary, split, combine
or reclassify any of its capital stock or issue or authorize the issuance
of any other securities in respect of, in lieu of or in substitution for
shares of its capital stock, (y) other than pursuant to any existing
stockholders agreement (copies of which have been previously provided to
the Company), purchase, redeem or otherwise acquire any shares of capital
stock of Parent or any other securities thereof or the capital stock of any
Subsidiary or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities or (z) institute or
amend any share repurchase program;
(ii) issue, deliver, sell, pledge, dispose of, grant, transfer or
otherwise encumber any shares of its capital stock, any other voting
securities or equity equivalent or any securities convertible or
exchangeable into, or exercisable for, or any rights, warrants or options
to acquire any such shares, voting securities, equity equivalent or
convertible securities, other than (A) subject to Section 4.3 hereof, the
issuance of stock options and shares of Parent Common Stock to employees of
Parent or any of its Subsidiaries under the Parent Incentive Plans and in
the ordinary course of business consistent with past practice between the
date hereof and the Effective Date, (B) the issuance by any wholly-owned
Subsidiary of Parent of its capital stock to Parent or another wholly-owned
Subsidiary of Parent and (C) as set forth in Schedule 4.1(a)(ii) of the
Parent Disclosure Schedule;
(iii) amend its charter or by-laws;
(iv) except for inventory, merchandise, finished goods and accounts
receivable acquired in the ordinary course of business, acquire or agree to
acquire by merging or consolidating with, or by purchasing a portion of the
assets of or equity in, or by making an investment in or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof or otherwise acquire or agree to
acquire any assets, other than acquisitions of assets in the ordinary
course of business consistent with past practice in an amount not to exceed
$20 million;
(v) sell, lease or otherwise dispose of, or agree to sell, lease or
otherwise dispose of, any of its rights or other assets, other than (A)
sales of inventory, merchandise and finished goods in the ordinary course
of business and (B)transactions that are in the ordinary course of business
consistent with past practice and that, individually or in the aggregate,
are not material to Parent and its Subsidiaries taken as a whole;
(vi) incur any indebtedness for borrowed money, guarantee any such
indebtedness or make any loans, advances or capital contributions to, or
other investments in, any other Person, other than (A) indebtedness
incurred in the ordinary course of business consistent with past practice
in an amount not to exceed $20 million, (B) indebtedness, loans, advances,
capital contributions and investments between Parent and any
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of its wholly-owned Subsidiaries or between any of such wholly-owned
Subsidiaries, (C) such indebtedness as may be necessary to fund actions
allowed under Section 4.1(a)(iv) hereof and (D) in connection with a
refinancing of the Credit Agreement, dated as of August 26, 1997 (the
"Credit Agreement"), among Endo Pharmaceuticals Inc., the lenders party
thereto and The Chase Manhattan Bank (provided that such indebtedness
incurred in connection with such a refinancing does not exceed indebtedness
allowed under the Credit Agreement);
(vii) knowingly violate or knowingly fail to perform any material
obligation or duty imposed upon it or any Subsidiary by any applicable
federal, state or local law, rule, regulation, guideline or ordinance;
(viii) take any action, other than reasonable and usual actions in the
ordinary course of business consistent with past practice, with respect to
accounting policies or procedures and other than actions required to be
taken by GAAP; or
(ix) enter into any contract, agreement, commitment or arrangement to
take any action prohibited by this Section 4.1(a).
(b) Actions by the Company. During the period from the date of this
Agreement through the Effective Time, the Company shall, in all material
respects, carry on its business in the ordinary course as currently conducted
and, to the extent consistent therewith, use reasonable best efforts to
preserve intact its current business organizations, keep available the services
of its current officers and employees and preserve its relationships with
customers, suppliers and others having business dealings with it. Without
limiting the generality of the foregoing, and except as otherwise expressly
contemplated by this Agreement, from the date of this Agreement to the
Effective Time, the Company shall not, without the prior written consent of
Parent:
(i) (w) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to its stockholders in their
capacity as such, (x) split, combine or reclassify any of its capital stock
or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of its capital stock, (y)
purchase, redeem or otherwise acquire any shares of capital stock of the
Company or any other securities thereof or any rights, warrants or options
to acquire any such shares or other securities or (z) institute or amend
any share repurchase program;
(ii) issue, deliver, sell, pledge, dispose of, grant, transfer or
otherwise encumber any shares of its capital stock, any other voting
securities or equity equivalent or any securities convertible or
exchangeable into, or exercisable for, or any rights, warrants or options
to acquire any such shares, voting securities, equity equivalent or
convertible securities, other than the issuance of shares of Company Common
Stock upon the exercise of Company Stock Options outstanding on the date of
this Agreement in accordance with their current terms;
(iii) amend the Company Charter or Company By-Laws;
(iv) except for inventory, merchandise, finished goods and accounts
receivable acquired in the ordinary course of business, acquire or agree to
acquire by merging or consolidating with, or by purchasing a portion of the
assets of or equity in, or by any other manner, any business or any
corporation, partnership, association or other business organization or
division thereof or otherwise acquire or agree to acquire any assets other
than acquisitions of assets in the ordinary course of business consistent
with past practice, the value of which do not exceed $500,000 in the
aggregate;
(v) sell, lease or otherwise dispose of, or agree to sell, lease or
otherwise dispose of, any of its rights or other assets other than (A)
sales of inventory, merchandise and finished goods in the ordinary course
of business and (B) transactions that are in the ordinary course of
business consistent with past practice, not material to the Company and in
an aggregate amount greater than $250,000;
(vi) incur any indebtedness for borrowed money, guarantee any such
indebtedness or make any loans, advances or capital contributions to, or
other investments in (other than investments in accordance with clause (iv)
above), any other Person, other than indebtedness incurred in the ordinary
course of business consistent with past practice in an amount not to exceed
$50,000 in the aggregate;
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(vii) alter (through merger, liquidation, reorganization, restructuring
or in any other fashion) the corporate structure or ownership of the
Company other than as a result of the trading of the Company Common Stock
on the NASDAQ;
(viii) enter into or adopt, or amend any existing, severance plan,
agreement or arrangement or enter into or amend any Company Plan or
employment or consulting agreement, other than (A) as required by
applicable law, (B) as expressly contemplated by this Agreement or (C) stay
bonuses as reasonably approved by Parent;
(ix) increase the compensation payable or to become payable to its
officers, employees or directors except for increases in the ordinary
course of business consistent with past practice in salaries or wages of
employees of the Company who are not officers of the Company, or grant any
additional rights to severance or termination pay to, or enter into any
employment or severance agreement with, any director or officer of the
Company, or establish, adopt, enter into, or, except as set forth in
Schedule 4.1(b)(ix) of the Company Disclosure Schedule or as may be
required to comply with applicable law, amend or take action in any such
case in a manner so as to enhance or accelerate any rights or benefits
under, any labor, collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director, officer
or employee;
(x) knowingly violate or knowingly fail to perform any material
obligation or duty imposed upon it by any applicable federal, state or
local law, rule, regulation, guideline or ordinance;
(xi) take any action, other than reasonable and usual actions in the
ordinary course of business consistent with past practice, with respect to
accounting policies or procedures (other than actions required to be taken
by GAAP);
(xii) make any Tax election, change its method of accounting, or settle
or compromise any material federal, state, local or foreign income Tax
liability or refund;
(xiii) except as set forth in Schedule 4.1(b)(xiii) of the Company
Disclosure Schedule, enter into any contract that cannot be canceled on 30
days' notice pursuant to which it is obligated in an amount in excess of
$500,000;
(xiv) make any capital expenditure in the aggregate in excess of
$100,000, other than expenditures (and contracts for such expenditures) set
forth in the Company's current capital budget included as Schedule
4.1(b)(xiv) of the Company Disclosure Schedule;
(xv) enter into any agreement, arrangement or contract that provides for
the allocation, sharing or indemnification for Taxes; or
(xvi) enter into any contract, agreement, commitment or arrangement to
take any action prohibited by this Section 4.1(b).
(c) Other Actions. The Company and Parent shall not, and Parent shall not
permit any of its Subsidiaries to, take any action that would, or that could
reasonably be expected to, result in (i) any of the representations and
warranties of such party set forth in this Agreement that is qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
that is not so qualified becoming untrue in any material respect or (iii)
except as otherwise permitted by Section 4.2 hereof with regard to the Company,
any condition to the Merger set forth in Article VI hereof not being satisfied.
Section 4.2 No Solicitation.
(a) The Company shall not, and it will use its best efforts to cause its
officers, directors, employees, investment bankers, consultants, attorneys,
accountants, agents, advisors or representatives not to, directly or
indirectly, (i) take any action to solicit, initiate, encourage or facilitate
any Company Takeover Proposal (as hereinafter defined) or any inquiry with
respect thereto, (ii) enter into or approve any agreement or agreement-in-
principle providing for or with respect to any Company Takeover Proposal or
(iii) participate or engage in any
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discussions or negotiations regarding, or furnish to any Person any information
with respect to or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Company Takeover Proposal, including affording access to the Company's
properties, books or records; provided, however, that prior to the approval of
this Agreement by the stockholders of the Company, to the extent required by
the fiduciary obligations of the Board of Directors of the Company, as
determined in good faith by it after consultation with outside counsel, the
Company may, in response to a Company Takeover Proposal that was not solicited
by the Company and that did not otherwise result from a breach or a deemed
breach of this Section 4.2(a), and subject to compliance with the provisions of
this Agreement, (x) furnish information with respect to the Company to any
Person pursuant to a customary confidentiality agreement and (y) if the Company
is in compliance with Section 4.2(b) hereof, participate or engage in
discussions or negotiations with such Person regarding any Company Takeover
Proposal. Without limiting the foregoing, it is agreed that any violation of
the restrictions set forth in the preceding sentence by any executive officer
of the Company or any director or investment banker, attorney or other advisor
or representative of the Company, whether or not such Person is purporting to
act on behalf of the Company or otherwise, shall be deemed to be a breach of
this Section 4.2(a) by the Company. For purposes of this Agreement, "Company
Takeover Proposal" means any proposal for a merger or other business
combination involving the Company or the acquisition or purchase of more than
25% of any class of equity securities of the Company, or any tender offer
(including self-tenders) or exchange offer that, if consummated, would result
in any Person beneficially owning more than 25% of any class of equity
securities of the Company, or a majority of the assets of the Company, other
than the transactions contemplated by this Agreement. Nothing contained in this
Section 4.2 shall prohibit the Company or the Company's Board of Directors from
(i) taking and disclosing to the Company's stockholders a position with respect
to a tender or exchange offer by a third party pursuant to Rules 14d-9 and 14e-
2(a) promulgated under the Exchange Act or (ii) making any disclosure required
by applicable law.
(b) The Company promptly shall advise Parent orally and in writing of its
receipt of any public or private Company Takeover Proposal or any inquiry with
respect to or that could reasonably be expected to lead to any Company Takeover
Proposal, the identity of the Person making any such Company Takeover Proposal
or inquiry and the material terms of any such Company Takeover Proposal. The
Company shall (i) keep Parent fully informed of the status, including any
change to the terms and conditions of, any such Company Takeover Proposal or
inquiry and (ii) provide to Parent as soon as practicable after receipt or
delivery thereof with copies of all correspondence and other written material
sent or provided to the Company from any third party in connection with any
Company Takeover Proposal or sent or provided by the Company to any third party
in connection with any Company Takeover Proposal.
Section 4.3 Tax Representation Letters. For purposes of the tax opinions
described in Sections 6.2(b) and 6.3(c) hereof, Parent and the Company shall
provide representation letters reasonably customary in scope and substance,
substantially in the respective forms of Exhibits E-1 and E-2 attached hereto
(the "Tax Representation Letters"), dated as of the date that is two business
days prior to the date the Proxy Statement is mailed to stockholders of the
Company and reissued as of the date of Closing.
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ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Stockholder Meeting. The Company shall call a meeting of its
stockholders to be held as promptly as practicable after the date on which the
Registration Statement becomes effective for the purpose of considering the
approval of this Agreement (such meeting and any adjournments or postponements
thereto, the "Stockholder Meeting"). Neither the Board of Directors of the
Company nor any committee thereof shall withdraw or modify, or propose to
withdraw or modify, in a manner adverse to Parent or Sub, the approval or
recommendation by the Board of Directors of the Company or any such committee
thereof of this Agreement or the Merger, or approve or recommend, or propose to
approve or recommend, any Company Takeover Proposal (each, a "Change in the
Company Recommendation"), unless such proposal is a Superior Company Proposal.
For purposes of this Agreement, a "Superior Company Proposal" means any
proposal made by a third party to acquire a majority of the equity securities
or assets of the Company, pursuant to a tender or exchange offer, a merger, a
sale of all or substantially all its assets or otherwise, on terms which the
Company Board of Directors determines in its good faith judgment to be superior
from a financial point of view to the holders of Company Common Stock (based on
the written opinion, with only customary qualifications, of the Company's
independent financial advisor), taking into account all the terms and
conditions of such proposal and this Agreement. Notwithstanding any Change in
the Company Recommendation, a proposal to approve the Merger and adopt this
Agreement shall be submitted to the stockholders of the Company at the
Stockholder Meeting in order to give the Company's stockholders the opportunity
to vote on the Merger and this Agreement in order to obtain the requisite
approval of the Company's stockholders and nothing contained in this Agreement
shall be deemed to relieve the Company of such obligation.
Section 5.2 Preparation of the Registration Statement and the Proxy
Statement. The Company and Parent shall promptly prepare the Proxy Statement
and the Registration Statement in which the Proxy Statement will be included,
and thereafter the Company shall promptly file with the SEC the Proxy Statement
and Parent shall promptly file with the SEC such Registration Statement. The
Company and Parent shall cooperate with each other in connection with the
preparation of the foregoing documents (including, without limitation,
providing each other any information that is necessary to be included in such
documents). Each of Parent and the Company shall use its reasonable best
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing. As promptly as
practicable after the Registration Statement shall have become effective, the
Company shall mail the Proxy Statement to its stockholders. Parent shall also
take any action (other than qualifying to do business in any jurisdiction in
which it is now not so qualified) required to be taken under any applicable
state securities laws in connection with the issuance of Parent Common Stock
and Algos Warrants in the Merger and the issuance of Parent Common Stock upon
the exercise of the Algos Warrants, and the Company shall furnish all
information concerning the Company and the holders of Company Common Stock as
may be reasonably requested in connection with any such action. No amendment or
supplement to the Proxy Statement or the Registration Statement will be made by
Parent or the Company without the prior approval of the other party. Parent and
the Company each will advise the other, promptly after it receives notice
thereof, of the time when the Registration Statement has become effective or
any supplement or amendment has been filed, of the issuance of any stop order,
of the suspension of the qualification of the Parent Common Stock or Algos
Warrants issuable in connection with the Merger or the Parent Common Stock
issuable upon the exercise of the Algos Warrants for offering or sale in any
jurisdiction, or of any request by the SEC for amendment of the Proxy Statement
or the Registration Statement or comments thereon and responses thereto or
requests by the SEC for additional information.
Section 5.3 Access to Information; Regulatory Communications.
(a) Subject to currently existing contractual and legal restrictions
applicable to the Company or Parent or any of Parent's Subsidiaries, each of
Parent and the Company shall, and Parent shall cause each of its Subsidiaries
to, afford to the accountants, counsel, financial advisors and other
representatives of the other party hereto reasonable access to, and permit them
to make such inspections as they may reasonably require of,
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during normal business hours during the period from the date of this Agreement
through the Effective Time, all their respective properties, books, contracts,
commitments and records (including, without limitation, the work papers of
independent accountants, if available and subject to the consent of such
independent accountants) and, during such period, Parent and the Company shall,
and Parent shall cause each of its Subsidiaries to, furnish promptly to the
other (i) a copy of each report, schedule, registration statement and other
document filed by it during such period pursuant to the requirements of federal
or state securities laws and (ii) all other information concerning its
business, properties and personnel as the other may reasonably request. No
investigation pursuant to this Section 5.3(a) shall affect any representation
or warranty in this Agreement of any party hereto or any condition to the
obligations of the parties hereto. Notwithstanding the foregoing, the Company
agrees to fully cooperate with Parent and its advisors in their investigation
and evaluation of the Company Intellectual Property and the Company further
agrees that such cooperation shall include, but not be limited to, the Company
making available to Parent and its advisors those documents requested by Parent
as well as scientific personnel of the Company who are familiar with the
Company Intellectual Property.
(b) The Company (i) shall keep Parent promptly informed of (A) any
communication (written or oral) with or from the FDA or the DEA and (B) any
communications (written or oral) received from any Person relating to the
Company Intellectual Property and (ii) shall not make any submissions to, or
have discussions with, the FDA or the DEA without either the prior consultation
or the inclusion of Parent; provided, however, that in the event the Company
(i) is verbally contacted by the FDA and (ii) has made a good faith effort to
include representatives of Parent in such discussion without success, then the
Company shall be allowed to participate in such discussions without Parent and
shall promptly inform Parent of the content of such discussions. Parent shall
keep the Company promptly informed of any communications from the FDA or DEA
relating to any of the drugs set forth in Schedule 5.3(b) of the Parent
Disclosure Schedule.
Section 5.4 Compliance with the Securities Act. Prior to mailing the Proxy
Statement, the Company shall deliver to Parent a list of names and addresses of
those Persons who, in the opinion of the Company, may, at the time of the
Stockholder Meeting, be deemed to be "affiliates" of the Company within the
meaning of Rule 145 under the Securities Act ("Affiliates"). The Company shall
provide to Parent such information and documents as each shall reasonably
request for purposes of reviewing such lists. There shall be added to such
lists the names and addresses of any other Person that the Company reasonably
identifies (by written notice to the other party within ten business days after
receipt of such list) as being a Person who may be deemed to be an Affiliate of
the Company. Except as set forth in Schedule 5.4 of the Company Disclosure
Schedule, the Company shall exercise all reasonable efforts to deliver or cause
to be delivered to Parent, not later than 30 days prior to the Effective Time,
from each of such Affiliates of the Company identified on the foregoing list,
an affiliate letter in the form attached hereto as Exhibit F.
Section 5.5 Designation of Directors. At the Effective Time, Parent shall
take all actions necessary to cause (a) three (3) designees of the Company
(each of whom shall be satisfactory to Parent) to be appointed to its Board of
Directors (such person and any subsequent designees thereof, the "Company
Designees"), to serve until their terms expire or until their successors have
been duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Parent Charter or Parent By-laws
and (b) John W. Lyle to be appointed a Non-Executive Chairman of Parent's Board
of Directors. During the three-year period from and including the Effective
Date, (A) Parent shall use its reasonable best efforts to cause at least three
(3) Company Designees to be on the Board of Directors of Parent at all times,
(B) at any meeting of stockholders for the purpose of electing the members of
Parent's Board of Directors, Parent shall cause to be nominated for election
the Company Designees, (C) the Parent LLC (as defined in Section 5.21) shall
vote the shares of Parent Common Stock owned by it in favor of the Company
Designees, (D) the Parent Charter or the Parent By-Laws shall provide that any
vacancies created by any Company Designee upon such Company Designee's death,
resignation or removal that are not filled pursuant to a Parent stockholder
vote shall be filled by a nominee of the remaining Company Designees and (E)
one Company Designee shall be appointed as a member of any compensation
committee of Parent's Board of Directors or any other committee of such Board
having the responsibility or power with respect to the granting of employee
stock options.
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Section 5.6 NASDAQ Listing. Parent shall use its reasonable best efforts to
have authorized for listing on the NASDAQ, subject to official notice of
issuance, the shares of Parent Common Stock, the Algos Warrants to be issued in
connection with the Merger and the Endo Warrants (as defined in Section 5.20
hereof).
Section 5.7 Fees and Expenses.
(a) Except as provided in this Section 5.7, whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby, including, without limitation, the
fees and disbursements of counsel, financial advisors and accountants, shall be
paid by the party incurring such costs and expenses; provided that all filing
fees and printing expenses for the Proxy Statement and Registration Statement
shall be shared equally by the Company and Parent.
(b) The Company shall reimburse Parent and Sub for all their out-of-pocket
expenses actually incurred in connection with this Agreement and the other
Transaction Agreements, the Merger and any other transactions contemplated
hereby and thereby if this Agreement is terminated pursuant to Section 7.1(e)
hereof, or terminated pursuant to Section 7.1(b) or (c) hereof based on a
breach of the Company. Such reimbursement shall be paid upon demand following
such termination.
(c) Parent and Sub shall reimburse the Company for all of its out-of-pocket
expenses actually incurred in connection with this Agreement and the other
Transaction Agreements, the Merger and any other transactions contemplated
hereby and thereby if this Agreement is terminated pursuant to Section 7.1(b)
or (c) hereby based on a breach of Parent or Sub. Such reimbursement shall be
paid upon demand following such termination.
Section 5.8 Company Stock Options. The Company shall cause each unexpired
and unexercised Company Stock Option under the Company Stock Plans to become
fully vested and exercisable for the thirty (30)-day period immediately prior
to the Effective Time. To the extent any Company Stock Option is unexpired and
unexercised at the end of such period, the Company shall cause such Company
Stock Option to terminate as of the Effective Time.
Section 5.9 Parent Options. Parent shall take all action necessary, and
shall use its reasonable best efforts to obtain as soon as practicable the
consent of option holders to provide that each Parent Stock Option (to purchase
shares of Parent Common Stock under the Parent Incentive Plans) which is
outstanding at the Effective Time (whether or not such Parent Stock Option is
then vested and exercisable) shall, subject to the following sentence, be
following the Effective Time exercisable solely into shares of Parent Common
Stock that are beneficially owned by certain holders of Parent Common Stock
immediately following the Parent Recapitalization and prior to the Effective
Time (the "Current Endo Options"). The parties hereto also agree and
acknowledge that following the date of this Agreement, current holders of
Parent Common Stock and current holders of Parent Stock Options will enter into
amendments to their current stockholders agreements, Parent Incentive Plans and
Parent Stock Options, as the case may be, in order to accomplish the foregoing.
Section 5.10 Reasonable Efforts.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, including, with regard to the Company, Section 4.2 hereof, each of
the parties agrees to use reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with the
other parties in doing, all things necessary, proper or advisable to consummate
and make effective, in the most expeditious manner practicable, the Merger and
the other transactions contemplated by this Agreement, including, but not
limited to: (i) the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from all Governmental Entities and the making of all
necessary registrations and filings (including filings with Governmental
Entities) and the taking of all reasonable steps as may be necessary to obtain
an approval or waiver from, or to avoid an action or proceeding by, any
Governmental Entity (including those in connection with the HSR Act and State
Takeover Approvals), (ii) the obtaining of all necessary consents, approvals or
waivers from third parties, (iii) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed and (iv) the execution and delivery of
any additional instruments necessary to consummate the transactions
contemplated by this Agreement. Parent and the Company shall cooperate with
each other in connection with the making of
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such filings, including providing copies of all such documents to the non-
filing party and its advisors prior to filing and, if requested, accepting all
reasonable suggestions in connection therewith.
(b) The parties hereto will consult and cooperate with one another, and
consider in good faith the views of one another, in connection with any
analyses, appearances, presentations, memoranda, briefs, arguments, opinions
and proposals made or submitted by or on behalf of any party hereto in
connection with proceedings under or relating to the HSR Act or any other
federal, state or foreign antitrust or fair trade law. Each party shall
promptly notify the other party of any communication to that party from any
Governmental Entity in connection with any required filing with, or approval or
review by, such Governmental Entity in connection with the Merger and permit
the other party to review in advance any such proposed communication to any
Governmental Entity. Neither party shall agree to participate in any meeting
with any Governmental Entity in respect of any such filings, investigation or
other inquiry unless it consults with the other party in advance and, to the
extent permitted by such Governmental Entity, gives the other party the
opportunity to attend and participate thereat.
(c) Each party shall use all reasonable efforts to not take any action, or
enter into any transaction, which would cause any of its representations or
warranties contained in this Agreement to be untrue or result in a breach of
any covenant made by it in this Agreement.
Section 5.11 Public Announcements. The initial press release shall be a
joint press release and thereafter the Company and Parent each shall obtain the
prior consent of the other prior to issuing any press releases or otherwise
making public announcements with respect to the Merger and the other
transactions contemplated by this Agreement and prior to making any filings
with any third party and/or any Governmental Entity (including any national
securities exchange or interdealer quotation service) with respect thereto,
except as may be required by law or by obligations pursuant to any listing
agreement with or rules of the NASDAQ.
Section 5.12 State Takeover Laws. If any "fair price," "business
combination" or "control share acquisition" statute or other similar statute or
regulation shall become applicable to the transactions contemplated hereby,
Parent and the Company and their respective Boards of Directors shall use their
reasonable best efforts to grant such approvals and take such actions as are
necessary so that the transactions contemplated hereby may be consummated as
promptly as practicable on the terms contemplated hereby and otherwise act to
minimize the effects of any such statute or regulation on the transactions
contemplated hereby.
Section 5.13 Indemnification; Directors and Officers Insurance. For not less
than six (6) years from and after the Effective Time, Parent agrees to, and to
cause the Surviving Corporation to, indemnify and hold harmless all past and
present directors, officers and employees of the Company to the same extent
such Persons are indemnified as of the date of this Agreement by the Company
pursuant to the Company Charter and Company By-Laws and indemnification
agreements, if any, in existence on the date of this Agreement with any
directors, officers and employees of the Company for acts or omissions
occurring at or prior to the Effective Time; provided, however, that Parent
agrees to, and to cause the Surviving Corporation to, indemnify and hold
harmless such Persons to the fullest extent permitted by law for acts or
omissions occurring in connection with the approval of this Agreement and the
consummation of the transactions contemplated hereby. Parent shall cause the
Surviving Corporation to provide, for an aggregate period of not less than six
(6) years from the Effective Time, the Company's current directors and officers
an insurance and indemnification policy that provides coverage for events
occurring prior to the Effective Time (the "D&O Insurance") that is no less
favorable than the Company's existing policy or, if substantially equivalent
insurance coverage is unavailable, the best available coverage; provided,
however, that the Surviving Corporation shall not be required to pay an annual
premium for the D&O Insurance in excess of 200 percent of the last annual
premium paid prior to the date of this Agreement, which premium the Company
represents and warrants to be approximately $195,740.
Section 5.14 Notification of Certain Matters. Parent shall use its
reasonable best efforts to give prompt notice to the Company, and the Company
shall use its reasonable best efforts to give prompt notice to Parent, of: (i)
the occurrence, or non-occurrence, of any event the occurrence, or non-
occurrence, of which it is aware
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and which would be reasonably likely to cause (x) any representation or
warranty contained in this Agreement to be untrue or inaccurate in any material
respect or (y) any covenant, condition or agreement contained in this Agreement
not to be complied with or satisfied in all material respects, (ii) any failure
of Parent or the Company, as the case may be, to comply in a timely manner with
or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder, (iii) any material litigation, any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated) or (iv) any change or event which
would be reasonably likely to have a Material Adverse Effect on Parent or the
Company, as the case may be; provided, however, that the delivery of any notice
pursuant to this Section 5.14 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
Section 5.15 Employee Matters. Except to the extent necessary to avoid the
duplication of benefits, Parent will, or will cause the Surviving Corporation
to, give Continuing Employees full credit for purposes of eligibility and
vesting under any employee benefit plans or arrangements maintained by Parent,
the Surviving Corporation or any Subsidiary of Parent in which such Continuing
Employee is eligible to participate for such Continuing Employees' service with
the Company to the same extent recognized by the Company immediately prior to
the Effective Time. Parent will, or will cause the Surviving Corporation to,
(i) waive all limitations as to preexisting conditions exclusions and waiting
periods with respect to participation and coverage requirements applicable to
the Continuing Employees under any welfare plan that such employees may be
eligible to participate in after the Effective Time, other than limitations or
waiting periods that are already in effect with respect to such employees and
that have not been satisfied as of the Effective Time under any welfare plan
maintained for the Continuing Employees immediately prior to the Effective
Time, and (ii) provide each Continuing Employee with credit for any co-payments
and deductibles paid prior to the Effective Time in satisfying any applicable
deductible or out-of-pocket requirements under any welfare plans that such
employees are eligible to participate in after the Effective Time.
Section 5.16 Tax Treatment. Parent and the Company will each use reasonable
efforts before and after the Closing to cause the Merger to qualify as a
reorganization within the meaning of Section 368(a) of the Code, and will not
take or fail to take, and will use reasonable efforts to prevent any Affiliate
of such party from taking or failing to take, any actions which would
jeopardize the qualification of the Merger as such a reorganization, and will
take such action as is available and may be reasonably required to negate the
impact of any past actions or failures by such party or its respective
Affiliates which would reasonably be expected to adversely impact the
qualification of the Merger as a reorganization within the meaning of Section
368(a) of the Code.
Section 5.17 Conveyance Taxes. Parent and the Company shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications,
or other documents regarding (i) any real property transfer gains, sales, use,
transfer, value-added, stock transfer (subject to Section 1.9(b) hereof), and
stamp Taxes, (ii) any recording, registration and other fees and (iii) any
similar Taxes or fees that become payable in connection with the transactions
contemplated hereby. The Taxes described in clause (i) above shall be paid by
the Company, without deduction or withholding from any amounts payable to the
holders of Company Common Stock.
Section 5.18 Ownership of Shares. None of Parent, any Person deemed acting
in concert with Parent or any of its Subsidiaries or any of Parent's
Subsidiaries has acquired the beneficial ownership of any shares of Company
Common Stock other than in compliance with Section 3.21 hereof and any other
Applicable Law.
Section 5.19 Additional Agreements. At or before Closing, (a) each of Parent
and the Parent LLC shall enter into a tax sharing agreement in substantially
the form attached hereto as Exhibit G (the "Tax Sharing Agreement") and (b)
each of Parent and John W. Lyle shall enter into an agreement in substantially
the form attached hereto as Exhibit H (the "Lyle Agreement").
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Section 5.20 Issuance of Warrants to Parent. Immediately prior to Closing,
Parent shall issue one warrant (collectively, the "Endo Warrants") with respect
to each share of Parent Common Stock then outstanding, which warrant shall be
subject to the terms and conditions of a warrant agreement (the "Endo Warrant
Agreement") substantially in the form attached hereto as Exhibit I.
Section 5.21 Formation of Parent LLC.
(a) Immediately prior to the Effective Time, a limited liability company
(the "Parent LLC") shall be formed to which Parent shall use its reasonable
best efforts to cause each of the then current holders of Parent Common Stock
to contribute all of the shares of Parent Common Stock beneficially owned by it
in exchange for membership interests in such Parent LLC; provided that this
covenant shall be deemed to have occurred if holders of at least 85% of the
Parent Common Stock so contribute their shares of Parent Common Stock to the
Parent LLC.
(b) On March 31, 2001, Parent will determine the Cash Gross Profit of Parent
(as defined below) and the Adjustment Event (as defined below) shall be deemed
to have occurred or not occurred (as appropriate) on such date. Among other
things, the limited liability company agreement for the Parent LLC (the "Parent
LLC Agreement") will provide that (i) in the event (A) the Cash Gross Profit of
Parent (as defined below) for the fiscal year ended December 31, 2000 does not
equal or exceed $147.4 million and (B) the Exercisability Date (as defined in
the Algos Warrant) has occurred prior to March 31, 2001, then 13,769,573 shares
of Parent Common Stock that are then owned by the Parent LLC shall be
transferred for no consideration to Parent (which shall deposit the same in its
treasury) and (ii) in the event (A) the Cash Gross Profit of Parent for the
fiscal year ended December 31, 2000 does not equal or exceed $147.4 million and
(B) the Exercisability Date has not occurred prior to March 31, 2001, then
17,900,445 shares of Parent Common Stock that are then owned by the Parent LLC
shall be transferred for no consideration to Parent (which shall deposit the
same in its treasury) (the actions contemplated by clause (i) or clause (ii)
shall be adjustments to the Merger Consideration and shall be referred to as an
"Adjustment Event").
(c) The number of shares that are required to be transferred in the event of
an Adjustment Event shall be appropriately adjusted (i) such that, at the
Effective Time, the numbers in clauses (b)(i)(B) and (b)(ii)(B) of this Section
5.21 shall represent that number of shares of Parent Common Stock such that if
such shares were no longer outstanding at the Effective Time, the shares
issuable under the Algos Warrants in the aggregate (if such Algos Warrants were
then immediately exercisable), together with shares of Parent Common Stock
issued to the Company stockholders in the Merger would represent 40% of the
outstanding Parent Common Stock on a fully diluted basis (excluding the Endo
Warrants) and (ii) without duplicating clause (i) above, if Parent pays a
dividend or makes a distribution on the Parent Common Stock in shares of Parent
Common Stock or other capital stock of Parent or subdivides, splits, combines
or reclassifies its outstanding shares of Parent Common Stock into a different
number of securities of the same class, then the number of shares of Parent
Common Stock required to be transferred under this Section 5.21 shall be
appropriately adjusted to give the effect specified in clause (i) of this
sentence as if such events occurred immediately prior to the Effective Time.
(d) For such purposes, "Cash Gross Profit of Parent" shall mean the
difference between Net Sales (as defined below) and Cash Cost of Sales (as
defined below) for the fiscal year ended December 31, 2000. "Net Sales" shall
mean the gross invoice price of Endo Products (as defined below) sold to any
third party (excluding Affiliates of Parent) less (i) cash, trade, promotional,
or quantity discounts and/or rebates, and chargebacks, (ii) retroactive price
reductions, (iii) sales, use or other excise taxes and (iv) returns and
allowances, all as reflected on the audited statement of operations of Parent
attributable to the Endo Products determined in accordance with GAAP
consistently applied for the fiscal year ended December 31, 2000. "Cash Cost of
Sales" shall mean the Cost of Sales (determined in accordance with GAAP and
consistent with the past practices used by Parent in 1998 as previously
disclosed to the Company) as reflected on the audited statement of operations
of Parent for the fiscal year ended December 31, 2000 attributable to the Endo
Products less all non-recurring charges and non-cash charges included in Cost
of Sales (including, but not limited to, depreciation, amortization and other
non-cash manufacturing charges). "Endo Products" shall include current
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and future internally developed products sold or marketed by Parent or its
Subsidiaries (other than products developed or being developed by the Company)
to any third party (including products from which Parent has revenues on
account of royalties and license fees). The Parent LLC Agreement shall further
provide that the definition of the Cash Gross Profit of Parent shall be based
solely on the audited financial statements of Parent for the fiscal year ended
December 31, 2000. Any determinations regarding the satisfaction of such
obligation or any amendments, modifications or waivers of such provisions by
Parent shall be effective only if approved by a majority of the members of the
Board of Directors of Parent who do not then (by themselves or through an
Affiliate) have a financial interest in the Parent LLC. Any dispute relating to
the calculation of the Cash Gross Profit of Parent shall be resolved by the
Independent Accounting Firm (as defined below) acting as arbitrator, and such
determination shall be final and binding on the parties. The Parent LLC and
Parent (by a majority of the members of the Board of Directors of Parent who do
not then (by themselves or through an Affiliate) have a financial interest in
the Parent LLC) shall mutually select a nationally recognized firm of certified
public accountants then having no significant ongoing relationship with either
Parent or the Parent LLC or their respective Affiliates, but if the Parent LLC
and Parent cannot mutually agree on the identity of such firm, then the Parent
LLC and Parent shall each submit to the other party's independent auditor the
name of a national accounting firm other than any firm that has in the prior
two years provided services to the Parent LLC, Parent or any of their
respective Affiliates, and a firm shall be selected by lot from these two firms
by the independent auditors of the two parties. The accounting firm selected
pursuant to the foregoing procedures shall be referred to as the "Independent
Accounting Firm." (If no national accounting firm shall be willing to serve as
the Independent Accounting Firm, then an arbitrator qualified under the rules
of the American Arbitration Association shall be selected to serve as such,
such selection to be according to the above procedures.) Within five (5) days
of the submission of the dispute to the Independent Accounting Firm, each of
the Parent LLC and Parent (by a majority of the members of the Board of
Directors of Parent who do not then (by themselves or through an Affiliate)
have a financial interest in the Parent LLC) shall submit a written position
paper (the "Position Paper") to the Independent Accounting Firm outlining such
party's calculations and/or objections that are the subject of dispute. The
Independent Accounting Firm shall be instructed to use every reasonable effort
to perform its services within thirty (30) days of submission of the Position
Papers to it and, in any case, as promptly as practicable after such
submission. The determination of the Independent Accounting Firm shall be final
and binding on the parties without further right of appeal.
Section 5.22 Effect of Parent Recapitalization. Parent covenants that the
Parent Recapitalization shall have the effect of adjusting the outstanding
Parent Common Stock such that those Persons who had been holders of Company
Common Stock immediately prior to the Effective Time shall, following the
Parent Recapitalization and at the Effective Time, hold, in the aggregate, 20%
of the outstanding Parent Common Stock (on a fully diluted basis, excluding the
effect of the Algos Warrants and the Endo Warrants) and those Persons who had
been holders of Parent Common Stock immediately prior to the Effective Time
shall, following the Parent Recapitalization and at the Effective Time, hold,
in the aggregate, 80% of the outstanding Parent Common Stock (on a fully
diluted basis, excluding the effect of the Algos Warrants and the Endo
Warrants). For purposes of calculating this 20/80 split, (a) any repurchases by
Parent between the date of this Agreement and the Effective Time of any Parent
Common Stock or Parent Stock Options from current holders thereof pursuant to
any current stockholders or options agreements or plans and any issuances of
Parent Common Stock or Parent Stock Options between the date of this Agreement
and the Effective Time to any Parent employee shall be taken into account in
determining the 80% to be owned by holders of Parent Common Stock and the 20%
to be owned by holders of Company Common Stock and (b) the shares of Parent
Common Stock underlying any Parent Stock Options, the holders of which do not
consent to amend such Parent Stock Options pursuant to Section 5.9 hereof,
shall not be counted as part of the 80% to be owned by holders of Parent Common
Stock nor as part of the 20% to be owned by holders of Company Common Stock and
shall be treated as if such Parent Stock Options did not exist for purposes of
this calculation and in calculating the number of fully diluted shares;
provided, however, that such treatment will not apply to the shares underlying
the Parent Stock Options held by the six executives listed in Schedule 5.22 of
the Parent Disclosure Schedule, which Parent Stock Options shall be taken into
account in determining the 80% to be owned by the current holders of Parent
Common Stock if such Parent Stock Options are not amended pursuant
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to Section 5.9 hereof. If any of such executives fails to abide by the terms of
that certain side letter agreement between each of them and the Company,
mutually agreed upon arrangements will be made so that the Parent Stock Options
held by such Persons will only affect the 80% held at the Effective Time by the
current Parent stockholders. Each of the Algos Warrants and the Endo Warrants
shall be exercisable into a number of shares of Parent Common Stock that is
necessary to achieve the effect specified in the form of each such Warrant in
Section 7 of the Warrant Agreement and Section 7 of the Endo Warrant Agreement,
respectively.
Section 5.23 Appraisal Demands. Immediately prior to the taking of the vote
at the Stockholder Meeting, the Company will deliver to Parent copies of all
written demands received by the Company seeking an appraisal of shares of
Company Common Stock pursuant to Section 262 of the DGCL.
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ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment or, to the extent permitted by applicable law, waiver at or
prior to the Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement shall have been duly approved by
the requisite vote of stockholders of the Company in accordance with applicable
law and the Company Charter and Company By-Laws.
(b) Listing on the NASDAQ. The Parent Common Stock issuable in the Merger
shall have been authorized for listing on the NASDAQ, subject to official
notice of issuance.
(c) HSR. The waiting period (and any extensions thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(d) Registration Statement. The Registration Statement shall have become
effective in accordance with the provisions of the Securities Act. 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 or, to the Knowledge of Parent or the Knowledge of the Company,
threatened by the SEC. All necessary state securities or "blue sky"
authorizations (including State Takeover Approvals) shall have been received.
(e) No Governmental Action/Order. There shall not be pending any action,
suit or proceeding brought by any Governmental Entity which challenges or seeks
to enjoin the Merger or the other transactions contemplated hereby. No court or
other Governmental Entity having jurisdiction over the Company or Parent, or
any of Parent's Subsidiaries, shall have enacted, issued, promulgated, enforced
or entered any law, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is then in
effect and has the effect of making the Merger or any of the transactions
contemplated hereby illegal.
Section 6.2 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment or, to the extent permitted by applicable law, waiver at or
prior to the Effective Time of the following additional conditions:
(a) Performance of Obligations; Representations and Warranties. Each of
Parent and Sub shall have performed in all material respects each of its
covenants and agreements contained in this Agreement required to be performed
on or prior to the Effective Time, each of the representations and warranties
of Parent and Sub contained in this Agreement that is qualified by materiality
shall be true and correct on and as of the Effective Time as if made on and as
of such date (other than representations and warranties that address matters
only as of a certain date which shall be true and correct as of such certain
date) and each of the representations and warranties that is not so qualified
shall be true and correct in all material respects on and as of the Effective
Time as if made on and as of such date (other than representations and
warranties that address matters only as of a certain date which shall be true
and correct in all material respects as of such certain date), in each case
except as contemplated or permitted by this Agreement, and the Company shall
have received a certificate signed on behalf of each of Parent and Sub by its
Chief Executive Officer or its Chief Financial Officer to such effect.
(b) Tax Opinion. The Company shall have received an opinion of Latham &
Watkins in form and substance reasonably satisfactory to the Company, dated the
Effective Time, substantially to the effect that on the basis of facts,
representations and assumptions set forth in such opinion (including as
provided in the Tax Representation Letters) which are consistent with the state
of facts existing as of the Effective Time, for U.S. federal income tax
purposes:
(i) the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and the Company, Sub and Parent will each be a
party to that reorganization within the meaning of Section 368(b) of the
Code; and
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(ii) no gain or loss will be recognized by Parent or the Company as a
result of the Merger.
The issuance of such opinion shall be conditioned on the receipt by Latham &
Watkins of the Tax Representation Letters, upon which Latham & Watkins will
rely in rendering its opinion, from each of Parent, Sub and the Company, in
each case, in form and substance reasonably satisfactory to such tax counsel.
The specific provisions of each such representation letter shall be in form and
substance reasonably satisfactory to such tax counsel rendering such opinion,
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.
(c) Formation of Parent LLC. The formation of the Parent LLC in accordance
with Section 5.21 hereof shall have occurred.
Section 6.3 Conditions to Obligations of Parent and Sub to Effect the
Merger. The obligations of Parent and Sub to effect the Merger shall be subject
to the fulfillment or, to the extent permitted by applicable law, waiver at or
prior to the Effective Time of the following additional condition:
(a) Performance of Obligations; Representations and Warranties. The Company
shall have performed in all material respects each of its agreements contained
in this Agreement required to be performed on or prior to the Effective Time,
each of the representations and warranties of the Company contained in this
Agreement that is qualified by materiality shall be true and correct on and as
of the Effective Time as if made on and as of such date (other than
representations and warranties that address matters only as of a certain date
which shall be true and correct as of such certain date) and each of the
representations and warranties that is not so qualified shall be true and
correct in all material respects on and as of the Effective Time as if made on
and as of such date (other than representations and warranties that address
matters only as of a certain date which shall be true and correct in all
material respects as of such certain date), in each case except as contemplated
or permitted by this Agreement, and Parent shall have received a certificate
signed on behalf of the Company by its Chief Executive Officer or its Chief
Financial Officer to such effect.
(b) Affiliate Letters. The letters from Affiliates required by Section 5.4
hereof shall have been executed and delivered.
(c) Tax Opinion. Parent shall have received an opinion of Skadden, Arps,
Slate, Meagher & Flom LLP in form and substance reasonably satisfactory to
Parent, dated the Effective Time substantially to the effect that on the basis
of facts, representations and assumptions set forth in such opinion (including
as provided in the Tax Representation Letters) which are consistent with the
state of facts existing as of the Effective Time, for U.S. federal income tax
purposes:
(i) the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and that the Company, Sub and Parent will each
be a party to that reorganization within the meaning of Section 368(b) of
the Code; and
(ii) no gain or loss will be recognized by Parent or the Company as a
result of the Merger.
The issuance of such opinion shall be conditioned on the receipt by Skadden,
Arps, Slate, Meagher & Flom LLP of the Tax Representation Letters, upon which
Skadden, Arps, Slate, Meagher & Flom LLP will rely in rendering its opinion,
from each of Parent, Sub, and the Company, in each case, in form and substance
reasonably satisfactory to such tax counsel. The specific provisions of each
such representation letter shall be in form and substance reasonably
satisfactory to such tax counsel rendering such opinion, 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.
(d) Dissenting Shares. The Company shall not have received before the taking
of the vote at the Stockholder Meeting written demands in accordance with
Section 262 of the DGCL seeking an appraisal of more than 12% of the shares of
Company Common Stock outstanding at such time, which demands have not been
rescinded or abandoned by written notice thereof to the Company.
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ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after any approval of the matters
presented in connection with the Merger by the stockholders of the Company:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company (provided such party is not then in
material breach) if the other party shall have failed to comply in any material
respect with any of its covenants or agreements contained in this Agreement
required to be complied with prior to the date of such termination, which
failure to comply has not been cured within ten business days following receipt
by such other party of written notice of such failure to comply; provided,
however, that if any such breach is curable by the breaching party through the
exercise of the breaching party's best efforts and for so long as the breaching
party shall be so using its best efforts to cure such breach, the non-breaching
party may not terminate this Agreement pursuant to this paragraph;
(c) by either Parent or the Company (provided such party is not then in
material breach) if there has been (i) a breach by the other party (in the case
of Parent, including any breach by Sub) of any representation or warranty that
is not qualified as to materiality which has the effect of making such
representation or warranty not true and correct in all material respects or
(ii) a breach by the other party (in the case of Parent, including any breach
by Sub) of any representation or warranty that is qualified as to materiality,
in each case which breach has not been cured within ten business days following
receipt by the breaching party of written notice of the breach; provided,
however, that if any such breach is curable by the breaching party through the
exercise of the breaching party's best efforts and for so long as the breaching
party shall be so using its best efforts to cure such breach, the non-breaching
party may not terminate this Agreement pursuant to this paragraph;
(d) by Parent or the Company:
(i) if any Governmental Entity issues an order, decree or ruling or
takes any other action permanently enjoining, restraining or otherwise
prohibiting the Merger and such order, decree or ruling shall have become
final and nonappealable;
(ii) if any condition to the obligation of such party to consummate the
Merger set forth in Article VI hereof becomes incapable of satisfaction
prior to the Termination Date (as hereinafter defined) (provided that the
terminating party is not then in material breach of any representation,
warranty or covenant contained in this Agreement); or
(iii) if the Merger has not been effected on or prior to the close of
business on June 30, 2000 (the "Termination Date"); provided, however, that
the right to terminate this Agreement pursuant to this Section 7.1(d)(iii)
shall not be available to any party whose failure to fulfill any of its
obligations contained in this Agreement has been the cause of, or resulted
in, the failure of the Merger to have occurred on or prior to the aforesaid
date;
(e) by Parent or the Company if the stockholders of the Company do not
approve this Agreement at the Stockholder Meeting or any adjournment or
postponement thereof (so long as Parent and its Affiliates have voted the
proxies that they are entitled to vote in favor of this Agreement); and
(f) by Parent, if Parent, in its good faith, on or before January 25, 2000,
determines that any representation set forth in Section 3.16 of the Merger
Agreement is inaccurate or untrue (other than solely by reason of the Company's
act of disclosing information to Parent after November 26, 1999 and prior to
December 17, 1999), provided further that such representation must be
materially inaccurate or untrue if not qualified by materiality therein.
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The right of any party hereto to terminate this Agreement pursuant to this
Section 7.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any Person
controlling any such party or any of their respective officers or directors,
whether prior to or after the execution of this Agreement.
Section 7.2 Effect of Termination. In the event of termination of this
Agreement by either Parent or the Company as provided in Section 7.1 hereof,
this Agreement shall forthwith terminate and there shall be no liability
hereunder on the part of the Company, Parent, Sub or their respective officers
or directors (except for Section 5.7 and Article VIII hereof which shall
survive the termination); provided, however, that nothing contained in this
Section 7.2 shall relieve any party hereto from any liability for any willful
breach of a representation or warranty contained in this Agreement or the
breach of any covenant contained in this Agreement.
Section 7.3 Amendment. This Agreement may be amended by the parties hereto
at any time before or after approval of the matters presented in connection
with the Merger by the stockholders of the Company; provided, however, after
any such approval, no amendment shall be made which by law requires further
approval by such stockholders without such further approval. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
Section 7.4 Waiver. At any time prior to the Effective Time, the parties
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) subject to the proviso of Section 7.3 hereof, waive
compliance with any of the agreements or conditions contained herein which may
legally be waived. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
Section 7.5 Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 7.1 hereof, an amendment of
this Agreement pursuant to Section 7.3 hereof or an extension or waiver
pursuant to Section 7.4 hereof shall, to be effective, require in the case of
Parent, Sub or the Company, action by its Board of Directors or the duly
authorized designee of its Board of Directors.
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ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Non-Survival of Representations and Warranties. The
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall terminate at the Effective Time or, subject to
Section 7.2 hereof, upon the termination of this Agreement pursuant to Section
7.1 hereof.
Section 8.2 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given when delivered personally, one day after
being delivered to an overnight courier or when telecopied (with a confirmatory
copy sent by overnight courier) to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
Endo Pharmaceuticals Holdings Inc.
223 Wilmington-West Chester Pike
Chadds Ford, PA 19317
Attn.: Carol A. Ammon
Fax No.: (610) 558-9683
with copies to:
Kelso & Company
320 Park Avenue, 24th Floor
New York, New York 10022
Attn.: James J. Connors, II
Fax No.: (212) 223-2379
and
Skadden, Arps, Slate, Meagher & Flom LLP
4 Times Square
New York, NY 10036
Attn.: Eileen Nugent
Fax No.: (212) 735-2000
(b) if to the Company, to:
Algos Pharmaceuticals Corporation
1333 Campus Parkway
Neptune, NJ 07753-6815
Attn.: General Counsel
Fax No.: (732) 938-2825
with copies to:
Latham & Watkins
885 Third Avenue
Suite 1000
New York, NY 10022
Attn.: Raymond Y. Lin
Fax No.: (212) 751-4864
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Section 8.3 Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation."
Section 8.4 Counterparts. This Agreement may be executed in counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
Section 8.5 Entire Agreement; No Third-Party Beneficiaries. Except for the
Mutual Confidentiality and Non-Disclosure Agreement between the parties dated
October 21, 1998, this Agreement (together with the Company Disclosure
Schedule, the Parent Disclosure Schedule, the Stockholder Voting Agreements and
the exhibits and annexes attached hereto and thereto) constitute the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof and
thereof. In the event of any conflict between this Agreement and any of the
Company Disclosure Schedule, the Parent Disclosure Schedule, the Stockholder
Voting Agreements and the exhibits and annexes attached hereto and thereto,
this Agreement shall control. Other than Sections 5.5, 5.8, 5.9, 5.13, 5.15 and
5.21(c) hereof and the obligation of the Parent LLC to transfer shares of
Parent Common Stock pursuant to Section 5.21(b) hereof (taking into account
Section 5.21(d) hereof), this Agreement is not intended to confer upon any
Person other than the parties hereto any rights or remedies hereunder.
Section 8.6 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, THE COMPANY, OR SUB IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF.
Section 8.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties.
Section 8.8 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 and legal
substance of the transactions contemplated hereby are 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 shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
may be consummated as originally contemplated to the fullest extent possible.
Section 8.9 Enforcement of this Agreement.
(a) The parties acknowledge and agree that any payment made pursuant to
Section 5.7 hereof does not relieve either party from any liability it
otherwise may have for breach of this Agreement.
(b) The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, such remedy being in addition to any other remedy to which
any party is entitled at law or in equity. Each party hereto hereby irrevocably
and unconditionally consents to submit to the exclusive
A-57
<PAGE>
jurisdiction of the United States District Court located in the State of
Delaware (unless such courts assert no jurisdiction, in which case the parties
hereto consent to the exclusive jurisdiction of the courts of the State of
Delaware) for any actions, suits or proceedings arising out of or relating to
this Agreement and the transactions contemplated hereby (and each party hereto
agrees not to commence any action, suit or proceeding relating thereto except
in such courts), and further agrees that service of any process, summons,
notice or document by U.S. registered mail to the addresses set forth herein
shall be effective service of process for any such action, suit or proceeding
brought against each party in such court. Each party hereto hereby irrevocably
and unconditionally waives any objection to the laying of venue of any action,
suit or proceeding arising out of this Agreement or the transactions
contemplated hereby, in the United States District Courts located in the State
of Delaware (unless such courts assert no jurisdiction, in which case each
party consents to the exclusive jurisdiction of the courts of the State of
Delaware). Each party hereby further irrevocably and unconditionally waives and
agrees not to plead or to claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.
Each of the parties hereto also agrees that any final and unappealable judgment
against a party hereto in connection with any action, suit or other proceeding
shall be conclusive and binding on such party and that such award or judgment
may be enforced in any court of competent jurisdiction, either within or
outside of the United States. A certified or exemplified copy of such award or
judgment shall be conclusive evidence of the fact and amount of such award or
judgment.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized all as of the
date first written above.
ENDO PHARMACEUTICALS HOLDINGS INC.
/s/ Carol A. Ammon
By: _________________________________
Name:Carol A. Ammon
Title:President & Chief Executive
Officer
ENDO INC.
/s/ Carol A. Ammon
By: _________________________________
Name:Carol A. Ammon
Title:President & Chief Executive
Officer
ALGOS PHARMACEUTICAL CORPORATION
/s/ John W. Lyle
By: _________________________________
Name:John W. Lyle
Title:President
A-58
<PAGE>
Annex I
COMPANY STOCKHOLDERS ENTERING INTO A STOCKHOLDER VOTING AGREEMENT
<TABLE>
<CAPTION>
Number of Shares
Subject to Stockholder
Registered Holder Voting Agreements
----------------- ----------------------
<S> <C>
Karen B. Lyle....................................... 1,344,416
Michael Hyatt (N.B. does not include shares owned by
the Kimmel Trusts listed below).................... 829,551
Trust Under the Will of Inez Kimmel................. 657,193
Todd Kimmel Trust................................... 171,530
Melissa Kimmel Trust................................ 155,000
Anita Hyatt Family Trust............................ 20,750
Frank S. Caruso..................................... 370,200
John W. Lyle........................................ 224,100
Hyatt Family Trust.................................. 221,332
Roger H. Kimmel (N.B. does not include shares owned
by the Hyatt Trusts listed above).................. 30,000
Frank S. Caruso Irrevocable Trust................... 24,900
James R. Ledley..................................... 109,450
Donald G. Drapkin................................... 8,300
Donald Drapkin...................................... 8,300
Patricia Caruso..................................... 1,000
---------
Total............................................. 4,176,022
=========
</TABLE>
A-59
<PAGE>
Exhibit A-1 to the Agreement and Plan of Merger
FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ENDO PHARMACEUTICALS HOLDINGS INC.
FIRST: The name of the Corporation is Endo Pharmaceuticals Holdings Inc.
(hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at that address is the Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the
"GCL").
FOURTH: The total number of shares of capital stock which the Corporation
shall have authority to issue is 215,000,000 shares, consisting of (i)
175,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock") and (ii) 40,000,000 shares of Preferred Stock, par value $.01 per share
(the "Preferred Stock").
A. Common Stock. Except as otherwise provided in this Article FOURTH or as
otherwise required by law, shares of Common Stock shall be identical and shall
entitle the holders thereof to the same rights and privileges, subject to the
same qualifications, limitations and restrictions.
1. Voting Rights. Except as otherwise required by applicable law, the
holders of Common Stock will be entitled to one vote per share on all
matters to be voted on by the Corporation's Common Stockholders.
2. Dividends. When and as dividends are declared thereon, whether
payable in cash, property or securities of the Corporation, the holders of
Common Stock will be entitled to share equally, share for share, in such
dividends.
B. Preferred Stock. The Board of Directors is expressly authorized to
provide for the issuance of all or any shares of the Preferred Stock in one or
more classes or series, and to fix for each such class or series such voting
powers, full or limited, or no voting powers, and such distinctive
designations, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions thereof, as
shall be stated and expressed in the resolution or resolutions adopted by the
Board of Directors providing for the issuance of such class or series and as
may be permitted by the GCL, including, without limitation, the authority to
provide that any such class or series may be (i) subject to such mandatory or
optional redemption at such time or times and at such price or prices, or, if
appropriate, not subject to such mandatory or optional redemption, (ii)
entitled to receive dividends (which may be cumulative or non-cumulative) at
such rates, on such conditions, and at such times, and payable in preference
to, or in such relation to, the dividends payable on any other class or classes
or any other series, (iii) entitled to such rights upon the dissolution of, or
upon any distribution of the assets of, the Corporation, or (iv) convertible
into, or exchangeable for, shares of any other class or classes of stock, or of
any other series of the same or any other class or classes of stock, of the
Corporation at such price or prices or at such rates of exchange and with such
adjustments, all as may be stated in such resolution or resolutions.
A-60
<PAGE>
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(1) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors.
(2) The directors shall have concurrent power with the stockholders to
make, alter, amend, change, add to or repeal the By-Laws of the
Corporation, as amended and restated from time to time (the "By- Laws").
(3) The number of directors of the Corporation shall not be less than
seven (7) nor more than eleven (11), the exact number of directors to be
fixed from time to time by, or in the manner provided in, the By-Laws of
the Corporation. The number of directors constituting the Board of
Directors shall be fixed at nine (9) as of the date hereof. Election of
directors need not be by written ballot unless the By-Laws so provide.
(4) No director shall be personally liable to the Corporation or any of
its stockholders for monetary damages for breach of 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) pursuant to Section 174 of the GCL or (iv) for any
transaction from which the director derived an improper personal benefit.
Any repeal or modification of this Article FIFTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such
repeal or modification.
(5) In addition to the powers and authority hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Certificate of Incorporation, and any By-Laws
adopted by the stockholders; provided, however, that no By-Laws hereafter
adopted by the stockholders shall invalidate any prior act of the directors
which would have been valid if such By-Laws had not been adopted.
SIXTH: The name and mailing address of the Sole Incorporator is as follows:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Deborah M. Reusch P.O. Box 636
Wilmington, DE 19899
</TABLE>
SEVENTH: The Corporation shall indemnify its directors and officers to the
fullest extent authorized or permitted by law, as now or hereafter in effect,
and such right to indemnification shall continue as to a person who has ceased
to be a director or officer of the Corporation and shall inure to the benefit
of his or her heirs, executors and personal and legal representatives;
provided, however, that, except for proceedings to enforce rights to
indemnification, the Corporation shall not be obligated to indemnify any
director or officer (or his or her heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated by
such person unless such proceeding (or part thereof) was authorized or
consented to by the Board of Directors. The right to indemnification conferred
by this Article SEVENTH shall include the right to be paid by the Corporation
the expenses incurred in defending or otherwise participating in any proceeding
in advance of its final disposition.
The Corporation may, to the extent authorized from time to time by the Board
of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article SEVENTH to directors and officers of the Corporation.
A-61
<PAGE>
The rights to indemnification and to the advance of expenses conferred in
this Article SEVENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under this Certificate of Incorporation, the By-
Laws, any statute, agreement, vote of stockholders or disinterested directors
or otherwise.
Any repeal or modification of this Article SEVENTH by the stockholders of
the Corporation shall not adversely affect any rights to indemnification and to
the advancement of expenses of a director or officer of the Corporation
existing at the time of such repeal or modification with respect to any acts or
omissions occurring prior to such repeal or modification.
EIGHTH: Meetings of stockholders may be held within or without the State of
Delaware, as the By-Laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the GCL) outside the State of Delaware
at such place or places as may be designated from time to time by the Board of
Directors or in the By-Laws.
NINTH: The Corporation hereby elects not to be governed by Section 203 of
the GCL pursuant to Section 203(b)(3) therein.
TENTH: The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the GCL, do make this Certificate,
hereby declaring and certifying that this is my act and deed and the facts
herein stated are true, and accordingly have hereunto set my hand this day of
, .
_____________________________________
Deborah M. Reusch
Sole Incorporator
A-62
<PAGE>
Exhibit A-2--Summary of Parent Recapitalization
ENDO PHARMACEUTICALS HOLDINGS INC.
SHARE RECAPITALIZATION SCHEDULE
<TABLE>
<CAPTION>
Authorized Issued Treasury Outstanding
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Common Stock
Shares........................... 2,000,000 929,950 -- 929,950
Exchange Class A to Common
Stock........................... 200,000 174,560 (290) 174,270
----------- ---------- ------- ----------
Adjusted Shares................ 2,200,000 1,104,510 (290) 1,104,220
Recapitalization Ratio........... 64.844x 64.844x 64.844x 64.844x
----------- ---------- ------- ----------
Total Post-Recapitalization
Shares........................ 142,656,279 71,620,585 (18,805) 71,601,780
=========== ========== ======= ==========
Class A Common Stock
Shares........................... 200,000 174,560 (290) 174,270
Exchange Class A to Common
Stock........................... (200,000) (174,560) 290 (174,270)
----------- ---------- ------- ----------
Adjusted Shares................ -- -- -- --
Recapitalization Ratio........... 64.844x 64.844x 64.844x 64.844x
----------- ---------- ------- ----------
Total Post-Recapitalization
Shares........................ -- -- -- --
=========== ========== ======= ==========
Preferred Stock
Shares........................... 500,000 -- -- --
Exchange Preferred to Common
Stock........................... -- -- -- --
----------- ---------- ------- ----------
Adjusted Shares................ 500,000 -- -- --
Recapitalization Ratio........... 64.844x 64.844x 64.844x 64.844x
----------- ---------- ------- ----------
Total Post-Recapitalization
Shares........................ 32,421,882 -- -- --
=========== ========== ======= ==========
Totals
Total Pre-Recapitalization
Shares.......................... 2,700,000 1,104,510 (290) 1,104,220
Recapitalization Ratio........... 64.844x 64.844x 64.844x 64.844x
----------- ---------- ------- ----------
Total Post-Recapitalization
Shares.......................... 175,078,160 71,620,585 (18,805) 71,601,780
=========== ========== ======= ==========
</TABLE>
--------
Note: The numbers set forth in this exhibit A-2 assume Algos has 17,900,445
fully diluted shares outstanding and are subject to adjustment after the
date of the Merger Agreement to the extent necessary to give effect to
the requirements set forth in Section 5.22 of the Merger Agreement.
A-63
<PAGE>
Exhibit B--Form of Company Voting Agreement
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of November , 1999, by and
among ENDO PHARMACEUTICALS HOLDINGS INC., a Delaware corporation ("Parent"),
ENDO INC., a Delaware corporation and a newly-formed wholly-owned subsidiary of
Parent ("Sub"), and the stockholder party hereto (the "Stockholder").
W I T N E S S E T H :
WHEREAS, concurrently with the execution and delivery of this Agreement, an
Agreement and Plan of Merger (as such agreement may be amended from time to
time, the "Merger Agreement") is being entered into by and among Parent, Sub
and ALGOS PHARMACEUTICAL CORPORATION, a Delaware corporation (the "Company"),
pursuant to which Company has agreed to merge with and into Sub, with Sub
continuing as the surviving corporation (the "Merger"); and
WHEREAS, as a condition to, and in consideration for, Parent's and Sub's
willingness to enter into the Merger Agreement and to consummate the
transactions contemplated thereby, Parent and Sub have required that the
Stockholder enter into this Agreement and certain other stockholders to enter
into similar agreements.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Definitions. For purposes of this Agreement:
"Company Securities" shall mean the Company's common stock, par value $.01
per share.
"Stockholder Shares" shall mean (i) the Existing Securities (as defined in
Section 5(a)(i) hereof) set forth on Schedule I hereto, (ii) any shares of
Company Securities distributed prior to the termination of this Agreement in
respect of the Stockholder Shares by reason of a stock dividend, split-up,
recapitalization, reclassification, combination, merger, exchange of shares or
otherwise and (iii) any other shares of the Company Securities of which the
Stockholder acquires ownership, either directly or indirectly, after the date
of this Agreement and prior to the Effective Time.
"Person" shall mean an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity.
Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Merger Agreement.
2. Agreement to Vote Shares. The Stockholder shall, at any meeting of the
holders of any class or classes of Company Securities, however such meeting is
called and regardless of whether such meeting is a special or annual meeting of
the stockholders of the Company, or in connection with any written consent of
the stockholders of the Company, vote (or cause to be voted) the Stockholder
Shares, (i) in favor of the Merger, the execution and delivery by the Company
of the Merger Agreement and the approval of the terms thereof and each of the
other actions contemplated by the Merger Agreement and this Agreement and any
actions required in furtherance thereof and hereof and (ii) against the
following actions (other than the Merger and the transactions contemplated by
the Merger Agreement): (1) any extraordinary corporate transaction, such as a
merger, consolidation or other business combination involving the Company; (2)
a sale, lease or transfer of a material amount of assets of the Company or a
reorganization, recapitalization, dissolution or liquidation of the
A-64
<PAGE>
Company; (3) (a) any change in the majority of the board of directors of the
Company; (b) any material change in the present capitalization of the Company
or any amendment of the certificate of incorporation or similar governing
document of the Company; (c) any other material change in the corporate
structure or business of the Company; or (d) any other action, which, in the
case of each of the matters referred to in clauses (a), (b) and (c) above, is
intended, or could reasonably be expected, to impede, interfere with, delay,
postpone, discourage or materially adversely affect the contemplated economic
benefits to Parent or Sub of the Merger or the transactions contemplated by the
Merger Agreement or this Agreement.
3. Grant of Irrevocable Proxy; Appointment of Proxy.
(a) The Stockholder hereby irrevocably grants to, and appoints, Carol Ammon,
Jeffrey Black and Osagie Imasogie, or any one of them, in their respective
capacities as officers of Parent, and any individual who shall hereafter
succeed to any such office of Parent, and each of them individually, the
Stockholder's proxy and attorney-in-fact (with full power of substitution), for
and in the name, place and stead of the Stockholder, to vote the Stockholder
Shares held at the time of the relevant stockholder vote as set forth in
Section 2 hereof. The Stockholder will cause any record holder of Stockholder
Shares to grant substantially similar proxies as requested in accordance with
Section 8(e) hereof.
(b) The Stockholder represents that any proxies heretofore given in respect
of the Stockholder Shares are not irrevocable, and that any such proxies are
hereby revoked.
(c) The Stockholder understands and acknowledges that Parent and Sub are
entering into the Merger Agreement in reliance upon the Stockholder's execution
and delivery of this Agreement. The Stockholder hereby affirms that the
irrevocable proxy set forth in this Section 3 is given in connection with the
execution of the Merger Agreement, and that such irrevocable proxy is given to
secure the performance of the duties of the Stockholder under this Agreement.
The Stockholder hereby further affirms that the irrevocable proxy is coupled
with an interest and may under no circumstances be revoked. Such irrevocable
proxy is executed and intended to be irrevocable in accordance with the
provisions of Section 212(e) of the Delaware General Corporation Law.
4. Covenants of the Stockholders. The Stockholder hereby agrees and
covenants that:
(a) Restriction on Transfers. Except as may otherwise be agreed by Parent in
writing and as contemplated by those agreements or understandings set forth on
Schedule II hereto, the Stockholder shall not (i) transfer (which term shall
include, without limitation, any sale, gift, pledge or other disposition), or
consent to any transfer of, any or all of the Stockholder Shares, or any
interest therein if such transfer would result in the Stockholder no longer
having the power to vote or cause to be voted the Stockholder Shares or (ii)
enter into any contract, option or other agreement or understanding with
respect to any such transfer of any or all of the Stockholder Shares, or any
interest therein.
(b) Restrictions on Proxies and Voting Arrangements. Except as otherwise
provided herein, the Stockholder shall not (i) grant any proxy, power-of-
attorney or other authorization in or with respect to the Stockholder Shares or
(ii) deposit the Stockholder Shares into a voting trust or enter into a voting
agreement or arrangement with respect to the Stockholder Shares.
(c) Stop Transfer. The Stockholder shall not request that the Company
register the transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of the Stockholder's Existing
Securities (as defined in Section 6(a)(i) hereof), unless such transfer is made
in compliance with this Agreement. In the event of any dividend or
distribution, or any change in the capital structure of the Company by reason
of any non-cash dividend, split-up, recapitalization, combination, exchange of
securities or the like, the term "Existing Securities" shall refer to and
include the Existing Securities as well as all such dividends and distributions
of securities and any securities into which or for which any or all of the
Existing Securities may be changed, exchanged or converted.
A-65
<PAGE>
(d) Waiver of Appraisal Rights. The Stockholder hereby waives any rights of
appraisal or rights to dissent from the Merger that the Stockholder may have.
(e) No Inconsistent Arrangements. The Stockholder shall not take any other
action that would in any way restrict, limit or interfere with the performance
of the Stockholder's obligations hereunder or the transactions contemplated
hereby or by the Merger Agreement.
5. Representations and Warranties.
(a) The Stockholder hereby represents and warrants to Parent and Sub as
follows:
(i) Ownership of Securities. On the date hereof, the Stockholder owns,
directly or indirectly, or has the power to direct the voting of, the
Company Securities set forth next to the Stockholder's name on Schedule I
hereto (the "Existing Securities"), and the Existing Securities are owned
of record by the Stockholder or certain of the Stockholder's subsidiaries
or nominees (together, the "Record Holders"). On the date hereof, the
Existing Securities constitute all of the shares of voting capital stock of
the Company owned of record or otherwise by such Stockholder or as to which
such Stockholder has the power to direct the voting of the shares. Each
Record Holder has sole voting power and sole power to issue instructions
with respect to the matters set forth in Section 2 hereof, sole power of
disposition, sole power of conversion, sole power (if any) to demand
appraisal rights and sole power to agree to all of the matters set forth in
this Agreement, in each case with respect to all of such Record Holder's
Existing Securities with no limitations, qualifications or restrictions on
such rights, subject to applicable securities laws and the terms of this
Agreement.
(ii) Power; Binding Agreement. The Stockholder has the power (or, if
applicable, corporate power) and authority to enter into and perform all of
the Stockholder's obligations under this Agreement. The execution, delivery
and performance of this Agreement by the Stockholder will not violate any
other agreement to which the Stockholder is a party including, without
limitation, any voting agreement, proxy arrangement, pledge agreement,
shareholders agreement, voting trust or trust agreement. This Agreement has
been duly and validly executed and delivered by the Stockholder and
constitutes a valid and binding agreement of the Stockholder, enforceable
against the Stockholder in accordance with its terms, except as the
enforceability thereof may be limited by (a) applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws in effect that
affect the enforcement of creditors rights generally or (b) general
principles of equity, whether considered in a proceeding at law or in
equity. There is no beneficiary or holder of a voting trust certificate or
other interest of any trust of which the Stockholder is a trustee whose
consent is required for the execution and delivery of this Agreement or the
compliance by the Stockholder with the terms hereof.
(iii) No Conflicts. No filing with, and no permit, authorization,
consent or approval of, any Governmental Entity is required for the
execution of this Agreement by the Stockholder and the consummation by the
Stockholder of the transactions contemplated hereby, except in connection,
or in compliance, with the provisions of (i) Section 16 and Section 13D or
13G of the Exchange Act and (ii) the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), none of the execution
and delivery of this Agreement by the Stockholder, the consummation by the
Stockholder of the transactions contemplated hereby or compliance by the
Stockholder with any of the provisions hereof shall (A) conflict with, or
result in any breach of, any organizational documents applicable to the
Stockholder, (B) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
loan agreement, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or obligation of
any kind to which the Stockholder is a party or by which the Stockholder or
any of the Stockholder's properties or assets may be bound, or (C) violate
any order, writ, injunction, decree, judgment, order, statute, arbitration
award, rule or regulation applicable to the Stockholder or any of the
Stockholder's properties or assets.
A-66
<PAGE>
(iv) No Liens. Except as established hereby, the Existing Securities are
now and, at all times during the term hereof, will be held by the
Stockholder, or by a nominee or custodian for the benefit of the
Stockholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever.
(v) No Solicitation. The Stockholder hereby agrees, in the Stockholder's
capacity as stockholder of the Company, that neither the Stockholder nor
any of the Stockholder's subsidiaries, if applicable, shall (and the
Stockholder shall use best efforts to cause the Stockholder's officers,
directors, employees, investment bankers, consultants, attorneys,
accountants, agents, advisors or representatives not to), directly or
indirectly, take any action to solicit, initiate, encourage, facilitate,
participate in or initiate discussions or negotiations with, or provide any
information to, any Person (other than Parent, Sub or any of their
Affiliates or representatives) concerning any Company Takeover Proposal;
provided that nothing contained in this Section 5(a)(v) shall restrict any
officer, director or employee of the Stockholder or the Stockholder's
subsidiaries, if applicable, from taking any action in his or her capacity
as a director, officer or employee of the Company which is permitted to be
taken pursuant to Section 4.2 of the Merger Agreement.
(b) Parent and Sub jointly and severally hereby represent and warrant to the
Stockholder as follows:
(i) Power; Binding Agreement. Each of Parent and Sub has the corporate
power and authority to enter into and perform all of its obligations under
this Agreement. The execution, delivery and performance of this Agreement
by each of Parent and Sub will not violate any material agreement to which
Parent or Sub, as the case may be, is a party. This Agreement has been duly
and validly executed and delivered by each of Parent and Sub and
constitutes a valid and binding agreement of each of Parent and Sub,
enforceable against each of them in accordance with its terms, except as
the enforceability thereof may be limited by (a) applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws in effect that
affect the enforcement of creditors rights generally or (b) general
principles of equity, whether considered in a proceeding at law or in
equity.
(ii) No Conflicts. No filing with, and no permit, authorization, consent
or approval of, any Governmental Entity is required for the execution of
this Agreement by each of Parent and Sub and the consummation by each of
them of the transactions contemplated hereby, except in connection, or in
compliance, with the provisions of (i) Section 16 and Section 13D or 13G of
the Exchange Act and (ii) the HSR Act, and none of the execution and
delivery of this Agreement by each of Parent and Sub, the consummation by
each of them of the transactions contemplated hereby or compliance by each
of them with any of the provisions hereof shall (A) conflict with or result
in any breach of any organizational documents applicable to Parent or Sub,
respectively, (B) result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default (or give rise to
any third party right of termination, cancellation, material modification
or acceleration) under any of the terms, conditions or provisions of any
material note, loan agreement, bond, mortgage, indenture, license,
contract, commitment, arrangement, understanding, agreement or other
instrument or obligation of any kind to which Parent or Sub is a party or
by which Parent or Sub or any of their respective properties or assets may
be bound, or (C) violate any order, writ, injunction, decree, judgment,
order, statute, arbitration award, rule or regulation applicable to Parent
or Sub or any of their respective properties or assets.
6. Best Efforts. Subject to the terms and conditions of this Agreement, each
of the parties hereto agrees to use its best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement and the Merger
Agreement; provided that nothing contained in this Section 6 shall restrict any
officer, director or employee of the Stockholder or the Stockholder's
Subsidiaries from taking any action in his or her capacity as a director,
officer or employee of the Company which is permitted to be taken pursuant to
Section 4.2 of the Merger Agreement.
A-67
<PAGE>
7. Termination. Other than Section 8 hereof (which shall survive in any
event), this Agreement and the covenants, representations and warranties,
agreements and irrevocable proxy or proxies contained herein or granted
pursuant hereto shall terminate upon the earlier to occur of (i) the
termination of the Merger Agreement in accordance with Article VII thereof and
(ii) the consummation of the transactions contemplated by the Merger Agreement.
Upon any termination of this Agreement, this Agreement shall thereupon become
void and of no further force and effect, and there shall be no liability in
respect of this Agreement or of any transactions contemplated hereby or by the
Merger Agreement on the part of any party hereto or any of its directors,
officers, partners, stockholders, employees, agents, advisors, representatives
or Affiliates; provided, however, that nothing herein shall relieve any party
from any liability for such party's willful breach of this Agreement; and
provided, further, that nothing herein shall limit, restrict, impair, amend or
otherwise modify the rights, remedies, obligations or liabilities of any person
under any other contract or agreement, including, without limitation, the
Merger Agreement.
8. Miscellaneous.
(a) Specific Performance. Each party hereto recognizes and agrees that if
for any reason any of the provisions of this Agreement are not performed by the
other parties in accordance with their specific terms or are otherwise
breached, immediate and irreparable harm or injury would be caused to the non-
breaching parties for which money damages would not be an adequate remedy.
Accordingly, the parties agree that, in addition to any other available
remedies, the non-breaching parties shall be entitled to an injunction
restraining any violation or threatened violation of the provisions of this
Agreement without the necessity of the non-breaching parties posting a bond or
other form of security. In the event that any action should be brought in
equity to enforce the provisions of this Agreement, the breaching party will
not allege, and the breaching party hereby waives the defense, that there is an
adequate remedy at law.
(b) Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. Without limiting the
foregoing, with respect to any provision of this Agreement, if it is determined
by a court of competent jurisdiction to be excessive as to duration or scope,
it is the parties' intention that such provision nevertheless be enforced to
the fullest extent which it may be enforced.
(c) Attorneys' Fees. If any action at law or equity, including an action for
declaratory relief, is brought by a party to this Agreement to enforce or
interpret any provision of this Agreement, the prevailing party shall be
entitled to recover reasonable attorneys' fees and expenses from the other
party, which fees and expenses shall be in addition to any other relief which
may be awarded.
(d) Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws
thereof. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE ACTIONS OF PARENT, THE COMPANY, OR SUB IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF.
(e) Further Assurances. From time to time, at the request of Parent or Sub,
the Stockholder shall execute and deliver to Parent and Sub or cause other
Record Holders to execute and deliver to Parent and Sub such additional
instruments containing grants of proxy with respect to the Stockholder Shares
(which grants of proxy will be in substantially the form of Section 3(a)
hereof) as Parent or Sub may reasonably request in connection with the
Stockholder's obligations under this Agreement.
A-68
<PAGE>
(f) Entire Agreement. This Agreement constitutes the entire agreement among
the parties hereto with respect to the subject matter hereof and supersedes all
other prior agreements and understandings, both written and oral, among the
parties or any of them with respect to the subject matter hereof.
(g) Consent to Jurisdiction, Etc. Each party hereto hereby irrevocably and
unconditionally consents to submit to the exclusive jurisdiction of the United
States District Court located in the State of Delaware (unless such courts
assert no jurisdiction, in which case the parties hereto consent to the
exclusive jurisdiction of the courts of the State of Delaware) for any actions,
suits or proceedings arising out of or relating to this Agreement and the
transactions contemplated hereby (and each party hereto agrees not to commence
any action, suit or proceeding relating thereto except in such courts), and
further agrees that service of any process, summons, notice or document by U.S.
registered mail to the addresses set forth herein shall be effective service of
process for any such action, suit or proceeding brought against each party in
such court. Each party hereto hereby irrevocably and unconditionally waives any
objection to the laying of venue of any action, suit or proceeding arising out
of this Agreement or the transactions contemplated hereby, in the United States
District Courts located in the State of Delaware (unless such courts assert no
jurisdiction, in which case each party consents to the exclusive jurisdiction
of the courts of the State of Delaware). Each party hereby further irrevocably
and unconditionally waives and agrees not to plead or to claim in any such
court that any such action, suit or proceeding brought in any such court has
been brought in an inconvenient forum. Each of the parties hereto also agrees
that any final and unappealable judgment against a party hereto in connection
with any action, suit or other proceeding shall be conclusive and binding on
such party and that such award or judgment may be enforced in any court of
competent jurisdiction, either within or outside of the United States. A
certified or exemplified copy of such award or judgment shall be conclusive
evidence of the fact and amount of such award or judgment.
(h) Notices. All notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person, by overnight courier, by
facsimile (which is confirmed), or by registered or certified mail (postage
prepaid, return receipt requested) to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
(a) if to the Stockholder, to the addresses set forth next to the
Stockholder's name on Schedule II hereto and
(b) if to Parent or Sub, to:
Endo Pharmaceuticals Holdings Inc.
223 Wilmington-West Chester Pike
Chadds Ford, PA 19317
Attn.: Carol A. Ammon
Fax No.: (610) 558-9683
with copies to:
Kelso & Company
320 Park Avenue, 24th Floor
New York, NY 10022
Attn.: James J. Connors, II
Fax No.: (212) 223-2379
A-69
<PAGE>
and
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Attn.: Eileen Nugent Simon, Esq.
Fax No.: (212) 735-2000
and
(c) if to the Company, to:
Algos Pharmaceuticals Corporation
1333 Campus Parkway
Neptune, NJ 07753-6815
Attn.: General Counsel
Fax No.: (732) 938-2825
with copies to:
Latham & Watkins
885 Third Avenue
New York, New York 10022
Attn.: Raymond Y. Lin, Esq.
Fax No.: (212) 751-4864
(i) Descriptive Headings; Interpretation. The descriptive headings herein
are inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.
(j) Assignment; Binding Agreement. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other party hereto;
provided, however, that Parent and Sub shall be permitted to assign, in whole
or in part, this Agreement or any of the rights, interests or obligations
hereunder to any of their Subsidiaries or Affiliates.
(k) Amendment, Modification and Waiver. This Agreement may not be amended,
modified or waived except by an instrument or instruments in writing signed and
delivered on behalf of the party hereto against whom such amendment,
modification or waiver is sought to be entered.
(l) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
A-70
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Stockholder have caused this
Agreement to be duly executed as of the day and year first above written.
ENDO Pharmaceuticals Holdings Inc.
By: _________________________________
Name:
Title:
ENDO Inc.
By: _________________________________
Name:
Title:
[Stockholder]
By: _________________________________
Name:
Title:
A-71
<PAGE>
SCHEDULE I
LIST OF EXISTING SECURITIES
STOCKHOLDERS' HOLDINGS OF COMPANY COMMON STOCK
<TABLE>
<CAPTION>
Number of
Registered Holder Shares Held
----------------- -----------
<S> <C>
Karen B. Lyle.................................................. 1,344,416
Michael Hyatt (N.B. does not include shares owned by the Kimmel
Trusts listed below).......................................... 829,551
Trust Under the Will of Inez Kimmel............................ 657,193
Todd Kimmel Trust.............................................. 171,530
Melissa Kimmel Trust........................................... 155,000
Anita Hyatt Family Trust....................................... 20,750
Frank S. Caruso................................................ 370,200
John W. Lyle................................................... 224,100
Hyatt Family Trust............................................. 221,332
Roger H. Kimmel (N.B. does not include shares owned by the
Hyatt Trusts listed above).................................... 30,000
Frank S. Caruso Irrevocable Trust.............................. 24,900
James R. Ledley................................................ 109,450
Donald G. Drapkin.............................................. 8,300
Donald Drapkin................................................. 8,300
Patricia Caruso................................................ 1,000
---------
Total........................................................ 4,176,022
=========
</TABLE>
A-72
<PAGE>
SCHEDULE II
NOTICES
<TABLE>
<CAPTION>
Stockholder Party Notice To: With A Copy To:
----------------- ---------- ---------------
<S> <C> <C>
Michael Hyatt Michael Hyatt Michael Hyatt
Bear Stearns & Co. Inc. Bear Stearns & Co. Inc.
245 Park Avenue 245 Park Avenue
New York, NY 10167 New York, NY 10167
Michael Hyatt as Michael Hyatt Michael Hyatt
Trustee for the Bear Stearns & Co. Inc. Bear Stearns & Co. Inc.
Trust Under the 245 Park Avenue 245 Park Avenue
Will of Inez L. New York, NY 10167 New York, NY 10167
Kimmel
Michael Hyatt as Michael Hyatt Michael Hyatt
Trustee for The Bear Stearns & Co. Inc. Bear Stearns & Co. Inc.
Todd Kimmel Trust 245 Park Avenue 245 Park Avenue
New York, NY 10167 New York, NY 10167
Michael Hyatt as Michael Hyatt Michael Hyatt
Trustee for Bear Stearns & Co. Inc. Bear Stearns & Co. Inc.
the Melissa 245 Park Avenue 245 Park Avenue
Kimmel Trust New York, NY 10167 New York, NY 10167
Michael Hyatt as Michael Hyatt Michael Hyatt
Trustee for Bear Stearns & Co. Inc. Bear Stearns & Co. Inc.
the Anita Hyatt 245 Park Avenue 245 Park Avenue
Family Trust New York, NY 10167 New York, NY 10167
Roger H. Kimmel Roger H. Kimmel Roger H. Kimmel
Latham & Watkins Latham & Watkins
885 Third Avenue, Suite 1000 885 Third Avenue, Suite 1000
New York, NY 10022 New York, NY 10022
Roger H. Kimmel as Roger H. Kimmel Roger H. Kimmel
Trustee for the Latham & Watkins Latham & Watkins
Hyatt 885 Third Avenue, Suite 1000 885 Third Avenue, Suite 1000
Family Trust New York, NY 10022 New York, NY 10022
James R. Ledley James R. Ledley James R. Ledley
26 Hardscrabble Hill 26 Hardscrabble Hill
Chappaqua, NY 10514 Chappaqua, NY 10514
Donald Drapkin Donald Drapkin Donald Drapkin
35 East 62nd 35 East 62nd
New York, NY 10021 New York, NY 10021
Donald G. Drapkin Donald Drapkin Donald Drapkin
35 East 62nd 35 East 62nd
New York, NY 10021 New York, NY 10021
John W. Lyle John Lyle John Lyle
28 Inlet Terrace 28 Inlet Terrace
Belmar, NJ 07719 Belmar, NJ 07719
</TABLE>
A-73
<PAGE>
<TABLE>
<CAPTION>
Stockholder Party Notice To: With A Copy To:
----------------- ---------- ---------------
<S> <C> <C>
Karen B. Lyle Karen Lyle Karen Lyle
4 Dayna Lane 4 Dayna Lane
Lawrenceville, NJ 08648 Lawrenceville, NJ 08648
Frank S. Caruso Frank S. Caruso, Ph. D. Frank S. Caruso, Ph. D.
2 Bowling Green 2 Bowling Green
Colts Neck, NJ 07722 Colts Neck, NJ 07722
Frank S. Caruso, Jr. as Frank S. Caruso, Jr. Frank S. Caruso, Ph. D.
Trustee for the Frank S. USA Datanet 2 Bowling Green
Caruso Irrevocable Trust 318 South Clinton St. Colts Neck, NJ 07722
Suite 300
Syracuse, NY 13202
Patricia Caruso Patricia Caruso Patricia Caruso
2 Bowling Green 2 Bowling Green
Colts Neck, NJ 07722 Colts Neck, NJ 07722
</TABLE>
A-74
<PAGE>
Exhibit C--Form of Algos Warrant
FORM OF WARRANT AGREEMENT
by and between
ENDO PHARMACEUTICALS HOLDINGS INC.
and
UNITED STATES TRUST COMPANY OF NEW YORK,
as
Warrant Agent
----------------
Dated as of , 2000
----------------
A-75
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 1. Appointment of Warrant Agent............................... A-77
Section 2. Warrant Certificates....................................... A-77
Section 3. Execution of Warrant Certificates.......................... A-78
Section 4. Registration and Countersignature.......................... A-78
Section 5. Transfer and Exchange of Warrants.......................... A-78
Section 6. Registration of Transfers and Exchanges.................... A-79
Section 7. Terms of Warrants; Exercise of Warrants.................... A-81
Section 8. Payment of Taxes........................................... A-84
Section 9. Mutilated or Missing Warrant Certificates.................. A-84
Section 10. Reservation of Warrant Shares.............................. A-84
Section 11. Obtaining Stock Exchange Listings.......................... A-84
Adjustment of Exercise Price and Number of Warrant Shares
Section 12. Issuable................................................... A-84
Section 13. Fractional Interests....................................... A-89
Section 14. Notices to Warrant Holders; Reservation of Dividends....... A-89
Section 15. Notices to the Company and Warrant Agent................... A-90
Section 16. Supplements and Amendments; Actions........................ A-91
Section 17. Concerning the Warrant Agent............................... A-91
Section 18. Change of Warrant Agent.................................... A-92
Section 19. Successors................................................. A-93
Section 20. Termination................................................ A-93
Section 21. GOVERNING LAW.............................................. A-93
Section 22. Benefits of This Agreement................................. A-93
Section 23. Counterparts............................................... A-93
Section 24. Headings................................................... A-93
Exhibit A. Form of Warrant Certificate................................ A-95
Exhibit B. Certificate to be Delivered Upon Transfer.................. A-99
</TABLE>
A-76
<PAGE>
WARRANT AGREEMENT (the "Agreement"), dated as of , 2000, by and between
Endo Pharmaceuticals Holdings Inc., a Delaware corporation (together with any
successors and assigns, the "Company"), and United States Trust Company of New
York, as Warrant Agent (the "Warrant Agent").
WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated as of
November 26, 1999 (as may be amended and restated from time to time, the
"Merger Agreement"), by and among the Company, Endo Inc., a Delaware
corporation and wholly owned subsidiary of the Company ("Sub"), and Algos
Pharmaceutical Corporation, a Delaware corporation ("Algos"), the Company
proposes to issue warrants (each a "Warrant," and collectively, the "Warrants")
for the purchase of an aggregate of up to 20,713,968/1/ shares of common stock,
par value $.01 per share, of the Company (the "Common Stock," and the shares of
Common Stock issuable upon exercise of the Warrants being referred to herein as
the "Warrant Shares");
WHEREAS, there shall be two classes of Warrants, Class A which shall be
transferable ("Class A Transferable Warrants") and Class B which shall not be
transferable ("Class B Non-Transferable Warrants") and each holder of shares of
common stock of Algos at the time of the stockholder vote relating to the
Merger Agreement may elect to receive all or a portion of such holder's
Warrants to be Class A Transferable Warrants or all or a portion of such
holder's Warrants to be Class B Non-Transferable Warrants and in the event any
such holder of shares of common stock of Algos does not make such an election,
then such holder shall be issued Class A Transferable Warrants. Such election,
once made, will be irrevocable;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company and the Warrant Agent is willing to act in connection with the
issuance, transfer, exchange and exercise of Warrants as provided herein; and
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein, the Company and the Warrant Agent hereby agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
Section 2. Warrant Certificates. The Class A Transferable Warrants will
initially be issued in global form (the "Global Warrants"), substantially in
the form of Exhibit A hereto. Any certificates evidencing the Global Warrants
to be delivered pursuant to this Agreement (the "Class A Warrant Certificates")
shall be substantially in the form set forth in Exhibit A hereto. Such Global
Warrants shall represent such of the outstanding Class A Transferable Warrants
as shall be specified therein and each shall provide that it shall represent
the aggregate amount of outstanding Class A Transferable Warrants from time to
time endorsed thereon and that the aggregate amount of outstanding Class A
Transferable Warrants represented thereby may from time to time be reduced or
increased, as appropriate. Any endorsement of a Global Warrant to reflect the
amount of any increase or decrease in the amount of outstanding Class A
Transferable Warrants represented thereby shall be made by the Warrant Agent
and the Depositary (as defined below) in accordance with instructions given by
the holder thereof. The Depository Trust Company shall act as the Depositary
with respect to the Global Warrants until a successor shall be appointed by the
Company. Upon written request, a Warrant holder who holds Class A Transferable
Warrants may receive from the Depositary and Warrant Agent Class A Transferable
Warrants in registered form as definitive Warrant Certificates (the "Definitive
Warrants") as set forth in Section 6 below. Class B Non-Transferable Warrants
will be issued in certificated form in the form of Exhibit B hereto, in the
name of and in the denomination as set forth in the applicable letter of
transmittal accompanying the shares of common stock of Algos surrendered by the
holder thereof in connection with the merger of Algos with and into Sub
pursuant to the Merger Agreement.
--------
(1) These numbers may be adjusted in the final Endo Warrant. See footnotes 2-5
below.
A-77
<PAGE>
Section 3. Execution of Warrant Certificates. Warrant Certificates shall be
signed on behalf of the Company by its Chairman of the Board, its President,
Chief Executive Officer, Chief Operating Officer, Chief Financial Officer or
Treasurer or a Vice President and by its Secretary or an Assistant Secretary.
Each such signature upon the Warrant Certificates may be in the form of a
facsimile signature of the present or any future Chairman of the Board,
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, Vice President, Secretary or Assistant Secretary and may be
imprinted or otherwise reproduced on the Warrant Certificates and for that
purpose the Company may adopt and use the facsimile signature of any person who
shall have been Chairman of the Board, President, Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, Treasurer, a Vice President,
Secretary or an Assistant Secretary, notwithstanding the fact that at the time
the Warrant Certificates shall be countersigned and delivered or disposed of
such person shall have ceased to hold such office.
In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer before the Warrant Certificates so
signed shall have been countersigned by the Warrant Agent, or disposed of by
the Company, such Warrant Certificates nevertheless may be countersigned and
delivered or disposed of as though such person had not ceased to be such
officer of the Company; and any Warrant Certificate may be signed on behalf of
the Company by any person who, at the actual date of the execution of such
Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Warrant
Agreement any such person was not such officer.
Warrant Certificates shall be dated the date of countersignature by the
Warrant Agent.
Section 4. Registration and Countersignature. The Warrants shall be numbered
and shall be registered on the books of the Company maintained at the principal
office of the Warrant Agent located at 114 West 47th Street, 25th Floor, New
York, New York, 10036, Attention: Corporate Trust Division (the "Warrant
Register") as they are issued.
Warrant Certificates shall be manually countersigned by the Warrant Agent
and shall not be valid for any purpose unless so countersigned. The Warrant
Agent shall, upon written instructions of the Chairman of the Board, the
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, a Vice President, the Secretary or an Assistant Secretary
of the Company, initially countersign and deliver Warrants entitling the
holders thereof to purchase not more than the number of Warrant Shares referred
to above in the first recital hereof and shall thereafter countersign and
deliver Warrants as otherwise provided in this Agreement.
The Company and the Warrant Agent may deem and treat the registered holders
(the "Holders") of the Warrant Certificates as the absolute owners thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone) for all purposes, and neither the Company nor the Warrant Agent shall
be affected by any notice to the contrary.
Section 5. Transfer and Exchange of Warrants. The Warrant Agent shall from
time to time, subject to the limitations of Section 6 hereof, register the
transfer of any outstanding Warrants upon the records to be maintained by it
for that purpose, upon surrender thereof duly endorsed or accompanied (if so
required by it) by a written instrument or instruments of transfer in form
satisfactory to the Warrant Agent, duly executed by the registered Holder or
Holders thereof or by the duly appointed legal representative thereof or by a
duly authorized attorney; provided that Class B Non-Transferable Warrants may
only be transferred (i) as the result or assignment by operation of law (such
as death or merger or otherwise) or (ii) as required by law or any court of
competent jurisdiction (such as in connection with divorce, bankruptcy or
liquidation). A request for a transfer of a Class B Non-Transferable Warrant
shall be accompanied by such documentation establishing satisfaction of the
conditions set forth in clause (i) or (ii) above, as applicable, as may be
reasonably requested by the Company (including opinions of counsel, if
appropriate). Upon receipt of documentation reasonably satisfactory to the
Company, the Company shall authorize the Warrant Agent to permit the transfer
of a Class B Non-Transferable Warrant. The Warrant Agent shall not permit the
transfer of a Class B Non-Transferable Warrant until it is so authorized by the
Company. Unless otherwise authorized by the Company, Class B
A-78
<PAGE>
Non-Transferable Warrant Certificate may only be transferred for another Class
B Non-Transferable Warrant Certificate. Subject to the terms of this Agreement,
each Warrant Certificate may be exchanged for another certificate or
certificates entitling the Holder thereof to purchase a like aggregate number
of Warrant Shares as the certificate or certificates surrendered then entitle
each Holder to purchase. Any Holder desiring to exchange a Warrant Certificate
or Certificates shall make such request in writing delivered to the Warrant
Agent, and shall surrender, duly endorsed or accompanied (if so required by the
Warrant Agent) by a written instrument or instruments of transfer in form
satisfactory to the Warrant Agent, the Warrant Certificate or Certificates to
be so exchanged.
Upon registration of transfer, the Warrant Agent shall countersign and
deliver by certified or first class mail a new Warrant Certificate or
Certificates to the persons entitled thereto. The Warrant Certificates may be
exchanged at the option of the Holder thereof, when surrendered at the office
or agency of the Company maintained for such purpose, which initially will be
the corporate trust office of the Warrant Agent located at 770 Broadway, 13th
Floor, New York, New York, 10003, Attention: Corporate Trust Services, for
another Warrant Certificate, or other Warrant Certificates of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Warrant Shares.
No service charge shall be made for any exchange or registration of transfer
of Warrant Certificates, but the Company may require payment of a sum
sufficient to cover any stamp or other tax or other governmental charge that is
imposed in connection with any such exchange or registration of transfer.
Section 6. Registration of Transfers and Exchanges.
(a) Transfer and Exchange of Definitive Warrants. When Definitive Warrants
are presented to the Warrant Agent with a request:
(i) to register the transfer of the Definitive Warrants; or
(ii) to exchange such Definitive Warrants for an equal number of
Definitive Warrants of other authorized denominations,
the Warrant Agent shall register the transfer or make the exchange as requested
if its requirements under this Agreement are met; provided, however, that the
Definitive Warrants presented or surrendered for registration of transfer or
exchange shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Warrant Agent, duly executed by the Holder
thereof or by such Holder's attorney, duly authorized in writing; provided that
a transfer of Definitive Warrants that are Class B Non-Transferable Warrants
shall be subject to the requirements of Section 5 hereof.
(b) Restrictions on Transfer of a Definitive Warrant for a Beneficial
Interest in a Global Warrant. The Warrant Agent may exchange a Definitive
Warrant for a beneficial interest in a Global Warrant only if the Warrant Agent
has received such Definitive Warrant, duly endorsed or accompanied by
appropriate instruments of transfer, in form satisfactory to the Warrant Agent,
together with written instructions directing the Warrant Agent to make, or to
direct the Depositary to make, an endorsement on the Global Warrant to reflect
an increase in the aggregate amount of the Warrants represented by the Global
Warrant. If such conditions have been satisfied, the Warrant Agent shall cancel
such Definitive Warrant and cause, or direct the Depositary to cause, in
accordance with the standing instructions and procedures existing between the
Depositary and the Warrant Agent, the number of Warrant Shares represented by
the Global Warrant to be increased accordingly. If no Global Warrant is then
outstanding, the Company shall issue and the Warrant Agent shall countersign a
new Global Warrant in the appropriate amount.
(c) Transfer and Exchange of Global Warrants. The transfer and exchange of
Global Warrants or beneficial interests therein shall be effected through the
Depositary, in accordance with this Warrant Agreement (including the
restrictions on transfer set forth herein) and the procedures of the Depositary
therefor.
A-79
<PAGE>
(d) Transfer of a Beneficial Interest in a Global Warrant for a Definitive
Warrant.
(i) Any person having a beneficial interest in a Global Warrant may upon
his, her or its request exchange such beneficial interest for a Definitive
Warrant. Upon receipt by the Warrant Agent of written instructions (or such
other form of instructions as is customary for the Depositary) from the
Depositary or its nominee on behalf of any person having a beneficial
interest in a Global Warrant and upon receipt by the Warrant Agent of a
written order or such other form of instructions as is customary for the
Depositary or the person designated by the Depositary as having such a
beneficial interest containing registration instructions, then the Warrant
Agent will cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Warrant Agent, the
aggregate amount of the Global Warrant to be reduced and, following such
reduction, the Company will execute and, upon receipt of a
countersignature, the Warrant Agent will countersign and deliver to the
transferee a Definitive Warrant. All such Warrants shall be Class A
Transferable Warrants.
(ii) Definitive Warrants issued in exchange for a beneficial interest in
a Global Warrant pursuant to this Section 6(d) shall be registered in such
names and in such authorized denominations as the Depositary, pursuant to
instructions from its direct or indirect participants or otherwise, shall
instruct the Warrant Agent in writing, provided such designation is in
accordance with this Section 6(d). The Warrant Agent shall deliver such
Definitive Warrants to the persons in whose names such Definitive Warrants
are registered.
(e) Restrictions on Transfer and Exchange of Global
Warrants. Notwithstanding any other provisions of this Warrant Agreement (other
than the provisions set forth in subsection (f) of this Section 6), a Global
Warrant may not be transferred as a whole except by the Depositary to a nominee
of the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) Authentication of Definitive Warrants in Absence of Depositary. If at
any time:
(i) the Depositary for the Global Warrants notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the Global
Warrant and a successor Depositary for the Global Warrant is not appointed
by the Company within 90 days after delivery of such notice; or
(ii) the Company, at its sole discretion, notifies the Warrant Agent in
writing that it elects to cause the issuance of Definitive Warrants under
this Warrant Agreement,
then the Company will execute, and the Warrant Agent, upon receipt of an
officers' certificate, signed by the President, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer or a Vice President of the Company,
requesting the countersignature and delivery of Definitive Warrants, will
countersign and deliver Definitive Warrants, in an aggregate number equal to
the aggregate number of Warrants represented by the Global Warrant, in exchange
for such Global Warrant.
(g) Cancellation and/or Adjustment of a Global Warrant. At such time as all
beneficial interests in a Global Warrant have either been exchanged for
Definitive Warrants, redeemed, repurchased or cancelled, such Global Warrant
shall be returned to or retained and cancelled by the Warrant Agent. At any
time prior to such cancellation, if any beneficial interest in a Global Warrant
is exchanged for Definitive Warrants, redeemed, repurchased or cancelled, the
number of Warrants represented by such Global Warrant shall be reduced and an
endorsement shall be made on such Global Warrant, by the Warrant Agent to
reflect such reduction.
(h) Obligations with Respect to Transfers and Exchanges of Definitive
Warrants.
(i) To permit registrations of transfers and exchanges in accordance
with the terms of this Agreement, the Company shall execute, and the
Warrant Agent shall countersign Definitive Warrants and Global Warrants.
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(ii) All Definitive Warrants and Global Warrants issued upon any
registration, transfer or exchange of Definitive Warrants or Global
Warrants shall be the valid obligations of the Company, entitled to the
same benefits under this Warrant Agreement as the Definitive Warrants or
Global Warrants surrendered upon the registration of transfer or exchange.
(iii) Prior to due presentment for registration of transfer of any
Warrant, the Warrant Agent and the Company may deem and treat the person in
whose name any Warrant is registered as the absolute owner of such Warrant,
and neither the Warrant Agent nor the Company shall be affected by notice
to the contrary.
Section 7. Terms of Warrants; Exercise of Warrants. Subject to the terms of
this Agreement, each Warrant Holder shall have the right, which may be
exercised commencing on or after the Exercisability Date (as defined below) and
until 5:00 p.m., New York City time, on the six-month anniversary of the
Exercisability Date (the "Expiration Date"), to receive from the Company the
number of fully paid and nonassessable Warrant Shares which the Holder may at
the time be entitled to receive on exercise of such Warrants and payment of the
Exercise Price (as defined below) then in effect for such Warrant Shares
together, if applicable, with cash payable as provided in Section 13 hereof and
any dividends or distributions payable as provided in Section 14 hereof. If the
Exercisability Date is on or prior to March 31, 2002, the Holders shall then be
entitled to receive from the Company (on exercise of such Warrants and payment
of the Exercise Price then in effect for such Warrant Shares) (together, if
applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
20,713,968 Warrant Shares (in the aggregate) (with each Warrant being
exercisable for 1.153846 Warrant Shares)/2/ in the event the Adjustment Event
(as defined in the Merger Agreement) has not occurred prior to the
Exercisability Date or (b) 17,952,106 Warrant Shares (in the aggregate) (with
each Warrant being exercisable for 1.000000 Warrant Shares)/3/ in the event the
Adjustment Event has occurred prior to the Exercisability Date. If the
Exercisability Date is after March 31, 2002 and on or prior to September 30,
2002, the Holder shall then be entitled to receive from the Company (on
exercise of such Warrants and payment of the Exercise Price then in effect for
such Warrant Shares) (together, if applicable, with cash payable as provided in
Section 13 hereof and any dividends or distributions payable as provided in
Section 14 hereof) (a) 11,378,095 Warrant Shares (in the aggregate) (with each
Warrant being exercisable for 0.633803 Warrant Shares)/4/ in the event the
Adjustment Event has not occurred prior to the Exercisability Date or (b)
9,792,058 Warrant Shares (in the aggregate) (with each
--------
(2) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 35% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants as if no Adjustment Event had occurred).
(3) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 40% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants and after giving effect to the Adjustment Event as if it had
occurred).
(4) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 29% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants as if no Adjustment Event had occurred).
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Warrant being exercisable for 0.545455 Warrant Shares)/5/ in the event the
Adjustment Event has occurred prior to the Exercisability Date. If the
Exercisability Date is after September 30, 2002 and on or prior to March 31,
2003 (the "Ultimate Expiration Date"), the Holders shall then be entitled to
receive from the Company (on exercise of such Warrants and payment of the
Exercise Price then in effect for such Warrant Shares) (together, if
applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
4,724,238 Warrant Shares (in the aggregate) (with each Warrant being
exercisable for 0.263158 Warrant Shares)/6/ the event the Adjustment Event has
not occurred prior to the Exercisability Date or (b) 4,045,545 Warrant Shares
(in the aggregate) (with each Warrant being exercisable for 0.225352 Warrant
Shares)/7/ in the event the Adjustment Event has occurred prior to the
Exercisability Date. Each Warrant not exercised prior to the Expiration Date
shall become void and all rights thereunder and all rights in respect thereof
under this Agreement shall cease as of the Expiration Date. Without limiting
the foregoing, in the event the Ultimate Expiration Date occurs before the
Exercisability Date, each Warrant shall become void and all rights thereunder
and all rights in respect thereof under this Agreement shall cease as of the
Ultimate Expiration Date. If applicable, dividends and other distributions will
be made upon exercise of the Warrants as set forth in Section 14 hereof.
"Exercisability Date" shall mean the fifth (5th) Business Day (as defined
below) following the date on which the Company (or any of its subsidiaries)
receives approval from the U.S. Food and Drug Administration (the "FDA") with
respect to its New Drug Application for MorphiDex(R) for the treatment of one
or more pain indications. In addition to the notices required by Section 14
hereof, the Company shall give prompt written notice to the Warrant Agent that
the Exercisability Date has occurred and shall cause the Warrant Agent, on
behalf of and at the expense of the Company, within 5 Business Days after such
notification is received by the Warrant Agent, to mail by first class mail,
postage prepaid, to each Holder a notice specifying that the Exercisability
Date has occurred and that the Warrant has become exercisable pursuant to its
terms and that the Warrant will expire at 5:00 p.m., New York City time, on the
Expiration Date. In addition, the Company shall post appropriate notices of the
Exercisability Date on its web pages and issue press releases to wire services.
A "Business Day" is a day that is not a Legal Holiday. A "Legal Holiday" is a
Saturday, a Sunday, a federally recognized holiday or a day on which banking
institutions are not required to be open in the State of New York.
From and after the Effective Time, Parent agrees to use its reasonable
efforts to continue to process the FDA application for MorphiDex(R) in a timely
fashion. The parties acknowledge that there are many variables in the process
of obtaining FDA approval in such a situation and many different approaches
which may be used by an applicant in order to obtain such approval; as a
result, the parties hereto agree that all determinations relating to such
process and all actions taken in connection with seeking such approval shall be
in the sole
--------
(5) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 34% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants and after giving effect to the Adjustment Event as if it had
occurred).
(6) These numbers shall be adjusted in the final Agreement and Warrant in order
to reflect that at the Effective Time such aggregate number, when taken
together with the shares of Parent Common Stock issuable to holders of
Company Common Stock in the Merger, shall equal 24% of the shares of Parent
Common Stock on a fully diluted basis (excluding the effect of the Algos
Warrants as if no Adjustment Event had occurred).
(7) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 29% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants and after giving effect to the Adjustment Event as if it had
occurred).
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discretion of Parent and shall be binding upon the parties for all purposes.
The parties further acknowledge that (i) on August 2, 1999, the Company
received notification from the FDA that such application was not approvable,
(ii) the failure to obtain such approval, either at all or on or before a
certain date, shall not be deemed a breach by Parent of the provisions hereof
and (iii) in any event Parent shall have no responsibility in connection with
the provisions of this paragraph, except for its willful breach hereof.
The initial price per share at which Warrant Shares shall be purchasable
upon exercise of Warrants (the "Exercise Price") shall equal $0.01. A Warrant
may be exercised upon surrender at the office or agency of the Company
maintained for such purpose, which initially will be the corporate trust office
of the Warrant Agent or its agents located at 114 West 47th Street, 25th Floor,
New York, New York, 10036, Attention: Corporate Trust Division, of the Warrant
Certificate(s) evidencing the Warrants to be exercised with the form of
election to purchase on the reverse thereof duly filled in and signed, which
signature shall be guaranteed by a participant in a recognized Signature
Guarantee Medallion Program, and upon payment to the Warrant Agent for the
account of the Company of the Exercise Price, as adjusted as herein provided,
for the number of Warrant Shares together, if applicable, with cash payable as
provided in Section 13 hereof and any dividends or distributions as provided in
Section 14 hereof in respect of which such Warrants are then exercised. Payment
of the Exercise Price may be made (a) in the form of cash or by certified or
official bank check payable to the order of the Company in New York Clearing
House Funds, (b) by delivering to the Company a written notice accompanying the
surrender of a Warrant to, at the time of exercise, apply to the payment of the
Exercise Price such number of Warrant Shares as shall be specified in such
notice, in which case an amount equal to the excess of the Current Market Value
(as defined in Section 12(d) hereof) of such Warrant Shares on the date of
exercise over the Exercise Price required for such exercise shall be deemed to
have been paid to the Company and the number of Warrant Shares issuable upon
such exercise shall be reduced by such specified number (a "Cashless Exercise")
or (c) any combination of (a) and (b) above.
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause
to be delivered with all reasonable dispatch to or upon the written order of
the Holder and in such name or names as the Warrant Holder may designate a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 13
hereof. Such certificate or certificates shall be deemed to have been issued
and any person so named therein shall be deemed to have become a holder of
record of such Warrant Shares as of the date of the surrender of such Warrants
and payment of the Exercise Price.
On or after the Exercisability Date, the Warrants shall be exercisable, at
the election of the Holders thereof, either in full or from time to time in
part and, in the event that a certificate evidencing Warrants is exercised in
respect of fewer than all of the Warrant Shares issuable on such exercise at
any time prior to the Expiration Date, a new certificate evidencing the
remaining Warrant or Warrants will be issued, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrant
Certificate or Certificates pursuant to the provisions of this Section 7 and of
Section 3 hereof, and the Company, whenever required by the Warrant Agent, will
promptly supply the Warrant Agent with Warrant Certificates duly executed on
behalf of the Company for such purpose.
All Warrant Certificates surrendered upon exercise of Warrants shall be
cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall then
be either delivered to the Company or disposed of by the Warrant Agent in a
manner consistent with the Warrant Agent's customary procedure for such
disposal and in a manner reasonably satisfactory to the Company. The Warrant
Agent shall account promptly to the Company with respect to Warrants exercised
and concurrently pay to the Company all monies received by the Warrant Agent
for the purchase of the Warrant Shares through the exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by the Holders during normal business hours at its office. The
Company shall supply the Warrant Agent from time to time with such numbers of
copies of this Agreement as the Warrant Agent may request.
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Section 8. Payment of Taxes. The Company will pay all documentary stamp
taxes attributable to the initial issuance of Warrant Shares upon the exercise
of Warrants; provided, however, that the Company shall not be required to pay
any tax or taxes which may be payable in respect of any transfer involved in
the issue of any Warrant Certificates or any certificates for Warrant Shares in
a name other than that of the registered Holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
Section 9. Mutilated or Missing Warrant Certificates. In case any of the
Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company
may in its discretion issue and the Warrant Agent may countersign, in exchange
and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing
an equivalent number of Warrants, but only upon receipt of evidence
satisfactory to the Company and the Warrant Agent of such loss, theft or
destruction of such Warrant Certificate and indemnity, if requested, also
satisfactory to them. Applicants for such substitute Warrant Certificates shall
also comply with such other reasonable regulations and pay such other
reasonable charges as the Company or the Warrant Agent may prescribe.
Section 10. Reservation of Warrant Shares. The Company will at all times
reserve and keep available, free from preemptive rights, out of the aggregate
of its authorized but unissued Common Stock or its authorized and issued Common
Stock held in its treasury, for the purpose of enabling it to satisfy any
obligation to issue Warrant Shares upon exercise of Warrants, the maximum
number of shares of Common Stock which may then be deliverable upon the
exercise of all outstanding Warrants.
The Company will keep a copy of this Agreement on file with the transfer
agent for the Common Stock (the "Transfer Agent") and with every subsequent
transfer agent for any shares of the Company's capital stock issuable upon the
exercise of the rights of purchase represented by the Warrants. The Warrant
Agent is hereby irrevocably authorized to requisition from time to time from
such Transfer Agent the stock certificates required to honor outstanding
warrants upon exercise thereof in accordance with the terms of this Agreement.
The Company will supply such Transfer Agent with duly executed certificates for
such purposes and will provide or otherwise make available any cash which may
be payable as provided in Section 13 hereof. The Company will furnish such
Transfer Agent a copy of all notices of adjustments and certificates related
thereto transmitted to each Holder pursuant to Section 14 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon payment of the Exercise Price therefor and
issue, be validly authorized and issued, fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security
interests with respect to the issuance thereof. The Company will use its
reasonable best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations under this
Agreement.
Section 11. Obtaining Stock Exchange Listings. The Company will from time to
time take all action which may be necessary so that the Warrants and,
immediately upon their issuance upon exercise of the Warrants, the Warrant
Shares will be listed on the principal securities exchanges and markets within
the United States of America, if any, on which other shares of Common Stock are
then listed.
Section 12. Adjustment of Exercise Price and Number of Warrant Shares
Issuable.
(a) If the Company:
(i) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock or other capital stock of the Company; or
(ii) subdivides, splits, combines or reclassifies its outstanding shares
of Common Stock into a different number of securities of the same class,
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then the number of shares of Common Stock issuable upon the exercise of each
Warrant (the "Exercise Rate") in effect immediately prior to such action shall
be proportionately adjusted so that the Holder of any Warrant thereafter
exercised may receive the aggregate number and kind of shares of capital stock
of the Company which such Holder would have owned immediately following such
action if such Warrant had been exercised immediately prior to such action and
the Exercise Price in effect immediately prior to such action shall be adjusted
to a price determined by multiplying the Exercise Price in effect immediately
prior to such action by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding before giving effect to such action and
the denominator of which shall be the number of shares of Common Stock and/or
such other capital stock outstanding referred to in the foregoing clause (a)(1)
after giving effect to such action.
An adjustment pursuant to this Section 12(a) shall become effective
immediately after the record date in the case of a dividend or distribution and
immediately after the effective date in the case of a subdivision, combination
or reclassification.
If, after an adjustment pursuant to this Section 12(a), a Holder of a
Warrant upon exercise of it may receive shares of two or more classes of
capital stock of the Company, the board of directors of the Company shall
determine the allocation of the adjusted Exercise Price between the classes of
capital stock. After such allocation, the exercise privilege and the Exercise
Price of each class of capital stock shall thereafter be subject to adjustment
on terms comparable to those applicable to Common Stock in this Section 12.
Such adjustment shall be made successively whenever any event listed above
shall occur.
(b) Adjustment for Certain Issuances of Common Stock. If the Company issues
or sells to any Affiliate (as defined in Section 12(d) hereof) of the Company
shares of its Common Stock or distributes to any Affiliate of the Company any
rights, options or warrants entitling them to purchase shares of Common Stock,
or securities convertible into or exchangeable for Common Stock, in each case,
at a price per share less than the Current Market Value on the record date for
determining entitlements of such Affiliates to participate in such issuance,
sale or distribution (the "Time of Determination") and prior to such issuance,
sale or distribution the Company did not first offer to issue, sell or
distribute such shares of its Common Stock or such rights, options or warrants
or such securities convertible into or exchangeable for Common Stock to all
holders of Common Stock on the same economic terms and on a pro rata basis with
the issuance, sale or distribution to the Affiliates of the Company, then the
Exercise Rate shall be adjusted in accordance with the formula:
E' = E x O + N
-------
O + N x P
-----
M
and the Exercise Price shall be adjusted in accordance with the following
formula:
EP' = EP x E
---
E'
where:
E' = the adjusted Exercise Rate.
E = the Exercise Rate immediately prior to the Time of Determination
for any such issuance, sale or distribution.
EP' = the Adjusted Exercise Price.
EP = the Exercise Price immediately prior to the Time of Determination
for any such issuance, sale or distribution.
O = the number of Fully Diluted Shares (as defined below) outstanding
immediately prior to the Time of Determination for any such
issuance, sale or distribution.
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N = the number of additional shares of Common Stock issued, sold or
issuable upon exercise of such rights, options or warrants.
P = the per share price received and receivable by the Company in the
case of any issuance or sale of Common Stock or rights, options
or warrants as to which such adjustment is being made, inclusive
of the exercise price per share of Common Stock payable upon
exercise of such rights, options or warrants.
M = the Current Market Value per share of Common Stock on the Time of
Determination for any such issuance, sale or distribution.
For purposes of this Section 12(b), the term "Fully Diluted Shares" shall
mean (i) the shares of Common Stock outstanding as of a specified date, and
(ii) the shares of Common Stock into or for which rights, options, warrants or
other securities of the Company outstanding as of such date are exercisable or
convertible (other than the Warrants).
Any adjustments shall be made successively whenever any such rights, options
or warrants are issued and shall become effective immediately after the
relevant Time of Determination. Notwithstanding the foregoing, the Exercise
Rate and the Exercise Price shall not be subject to adjustment in connection
with (i) the issuance of any shares of Common Stock upon exercise of any such
rights, options or warrants which have previously been the subject of an
adjustment under this Agreement for which the required adjustment has been made
and (ii) any exercise of the Warrants. If at the end of the period during which
any such rights, options or warrants are exercisable, not all rights, options
or warrants shall have been exercised, the Warrant shall be immediately
readjusted to what it would have been if "N" in each of the above formulas had
been the number of shares actually issued.
(c) When De Minimis Adjustment May Be Deferred. No adjustment in the
Exercise Rate need be made unless the adjustment would require an increase or
decrease of at least 1% in the Exercise Rate. Notwithstanding the foregoing,
any adjustments that are not made shall be carried forward and taken into
account in any subsequent adjustment, provided that no such adjustment shall be
deferred beyond the date on which a Warrant is exercised.
All calculations under this Section 12 shall be made to the nearest cent or
to the nearest 1/100th of a share, as the case may be.
(d) Certain Definitions. "Current Market Value" per share of Common Stock or
of any other security (herein collectively referred to as a "Security") at any
date shall be:
(1) if the Security is not registered under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), (i) the value of the Security
determined in good faith by the board of directors of the Company and
certified in a board resolution, based on the most recently completed
arm's-length transaction between the Company and a person other than an
Affiliate of the Company and the closing of which occurs on such date or
shall have occurred within the six months preceding such date or (ii) if no
such transaction shall have occurred on such date or within such six-month
period, the value of the Security determined as of a date within 30 days
preceding such date by an Independent Financial Expert (as defined below),
or
(2) if the Security is registered under the Exchange Act, the average of
the daily closing bid prices of such Security for 30 consecutive Business
Days selected by the Company from the period of 45 Business Days preceding
such date, but only if such Security shall have been listed on a national
securities exchange or the Nasdaq National Market or traded through an
automated quotation system during such entire 45-Business Day period.
The "closing bid price" for any Security on each Business Day means the
closing price, regular way, on such day on the principal exchange on which such
Security is traded, or if no sale takes place on such day, the average of the
closing bid and asked prices on such day.
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"Independent Financial Expert" shall mean any nationally recognized
investment banking firm that is not an Affiliate of the Company. Any such
person may receive customary compensation and indemnification by the Company
for opinions or services it provides as an Independent Financial Expert.
"Affiliate" of any specified person means any other person which directly or
indirectly through one or more intermediaries controls or is controlled by, or
is under common control with, such specified person. For the purposes of this
definition, "control" (including with correlative meanings, the terms
"controlling," "controlled by" and "under common control with") as used with
respect to any person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
person, whether through the ownership of voting securities, by agreement or
otherwise.
"Ordinary Cash Distribution" means any quarterly cash dividend on the Common
Stock to the extent that the aggregate cash dividend per share of Common Stock
in any calendar quarter does not exceed the greater of (x) the amount per share
of Common Stock of the next preceding quarterly cash dividend on the Common
Stock (as adjusted to reflect subdivisions or combinations of the Common Stock)
and (y) 3.0% of the average of the last reported sales prices of the Common
Stock during the ten trading days immediately prior to the date of declaration
of such dividend.
(e) When No Adjustment Required. If an adjustment is made upon the
establishment of a record date for an issuance, sale or distribution subject to
subsection (a) or (b) hereof and such issuance, sale or distribution is
subsequently cancelled or is not otherwise made, the Exercise Rate and Exercise
Price then in effect shall be readjusted, effective as of the date when the
board of directors of the Company determines to cancel such issuance, sale or
distribution or when it is otherwise evident that such issuance, sale or
distribution will not be so made, to that which would have been in effect if
such record date had not been fixed. If an adjustment would be required under
both subsections (a) and (b) above, such adjustments will be determined without
duplication.
To the extent the Warrants become convertible into cash, no adjustment need
be made thereafter as to the amount of cash into which such Warrants are
exercisable. Interest will not accrue on the cash.
(f) Notice of Adjustment. Whenever the Exercise Rate or Exercise Price is
adjusted, the Company shall provide the notices required by Section 14 hereof.
(g) Voluntary Reduction. The Company from time to time may increase the
Exercise Rate or reduce the Exercise Price by any amount for any period of time
(including, without limitation, permanently) if the period is at least 20
Business Days after the Company has given notice of such increase or reduction
in accordance with Section 14 hereof.
An increase of the Exercise Rate or reduction in the Exercise Price under
this subsection (g) (other than a permanent increase) does not change or adjust
the Exercise Rate otherwise in effect for purposes of subsection (a) and (b) of
this Section 12.
(h) When Issuance or Payment May Be Deferred. In any case in which this
Section 12 shall require that an adjustment in the Exercise Rate or Exercise
Price be made effective as of a record date for a specified event, the Company
may elect to defer until the occurrence of such event (i) issuing to the Holder
of any Warrant exercised after such record date the Warrant Shares and other
capital stock of the Company, if any, issuable upon such exercise over and
above the Warrant Shares and other capital stock of the Company, if any,
issuable upon such exercise on the basis of the Exercise Rate prior to such
adjustment, and (ii) paying to such Holder any amount in cash in lieu of a
fractional share pursuant to Section 13 hereof; provided, however, that the
Company shall deliver to the Warrant Agent and shall cause the Warrant Agent,
on behalf of and at the expense of the Company, to deliver to such Holder a due
bill or other appropriate instrument evidencing such Holder's right to receive
such additional Warrant Shares, other capital stock and cash upon the
occurrence of the event requiring such adjustment.
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(i) Reorganizations. In case of (i) any capital reorganization, other than
in the cases referred to in Section 12(a) and (b) hereof and other than any
capital reorganization that does not result in any reclassification of the
outstanding shares of Common Stock into shares of other stock or other
securities or property, or (ii) the consolidation or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock into shares of other
stock or other securities or property), or (iii) the sale of all or
substantially all of the assets of the Company (collectively such actions being
hereinafter referred to as "Reorganizations"), there shall thereafter be
deliverable upon exercise of any Warrant in accordance with the terms hereof
(in lieu of the number of shares of Common Stock theretofore deliverable) the
number of shares of stock or other securities or property to which a holder of
the number of shares of Common Stock that would otherwise have been deliverable
upon the exercise of such Warrant would have been entitled upon such
Reorganization if the Exercisability Date had occurred and such Warrant had
been exercised in full immediately prior to such Reorganization. In case of any
Reorganization, appropriate adjustment, as determined in good faith by the
board of directors of the Company, whose determination shall be described in a
duly adopted resolution certified by the Company's Secretary or Assistant
Secretary, shall be made in the application of the provisions herein set forth
with respect to the rights and interests of Holders so that the provisions set
forth herein shall thereafter be applicable, as nearly as possible, in relation
to any such shares or other securities or property thereafter deliverable upon
exercise of Warrants.
The Company shall not effect any such Reorganization unless prior to or
simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such Reorganization or the corporation
or other entity purchasing such assets shall expressly assume, by a
supplemental warrant agreement or other acknowledgment executed and delivered
to the Warrant Agent, the obligation to deliver to the Warrant Agent and to
cause the Warrant Agent to deliver to each such Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
Holder may be entitled to purchase in accordance with the terms hereof upon the
occurrence of the Exercisability Date, and the due and punctual performance and
observance of each and every covenant, condition, obligation and liability
under this Agreement to be performed and observed by the Company in the manner
prescribed herein.
The foregoing provisions of this Section 12(i) shall apply to successive
Reorganization transactions.
(j) Form of Warrants. Irrespective of any adjustments in the number or kind
of shares purchasable upon the exercise of the Warrants, Warrants theretofore
or thereafter issued may continue to express the same price and number and kind
of shares as are stated in the Warrants initially issuable pursuant to this
Agreement.
(k) Warrant Agent's Disclaimer. The Warrant Agent has no duty to determine
when an adjustment under this Section 12 should be made, how it should be made
or what it should be. The Warrant Agent has no duty to determine whether any
provisions of a supplemental warrant agreement under subsection (i) of this
Section 12 are correct. The Warrant Agent makes no representation as to the
validity or value of any securities or assets issued upon exercise of Warrants.
The Warrant Agent shall not be responsible for the Company's failure to comply
with this Section 12.
(l) Miscellaneous. For purpose of this Section 12 the term "shares of Common
Stock" shall mean (i) shares of the class of stock designated as the Common
Stock, par value $.01 per share, of the Company as of the date of this
Agreement, and (ii) shares of any other class of stock resulting from
successive changes or reclassification of such shares consisting solely of
changes in par value, or from par value to no par value, or from no par value
to par value. In the event that at any time, as a result of an adjustment made
pursuant to this Section 12, the Holders of Warrants shall become entitled to
purchase any securities of the Company other than, or in addition to, shares of
Common Stock, thereafter the number or amount of such other securities so
purchasable upon exercise of each Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in subsections (a)
through (l) of this Section 12, inclusive, and the provisions of Sections 7, 8,
10 and 13 with respect to the Warrant Shares or the Common Stock shall apply on
like terms to any such other securities.
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Section 13. Fractional Interests. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same Holder,
the number of full Warrant Shares which shall be issuable upon the exercise
thereof shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of the Warrants so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 13, be
issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the excess of the Current Market
Value of a Warrant Share over the Exercise Price on the day immediately
preceding the date the Warrant is presented for exercise, multiplied by such
fraction.
Section 14. Notices to Warrant Holders; Reservation of Dividends. No later
than April 6, 2001, the Company shall give written notice of the occurrence or
non-occurrence of the Adjustment Event to the Warrant Agent and shall cause the
Warrant Agent, on behalf of and at the expense of the Company, within 10 days
after such notification is received by the Warrant Agent, to mail by first
class mail, postage prepaid, to each Holder a notice of such occurrence or non-
occurrence of the Adjustment Event. Upon any adjustment pursuant to Section 12
hereof, the Company shall give prompt written notice of such adjustment to the
Warrant Agent and shall cause the Warrant Agent, on behalf of and at the
expense of the Company, within 10 days after notification is received by the
Warrant Agent of such adjustment, to mail by first class mail, postage prepaid,
to each Holder a notice of such adjustment(s) and shall deliver to the Warrant
Agent a certificate of the Chief Financial Officer of the Company, setting
forth in reasonable detail (i) the number of Warrant Shares purchasable upon
the exercise of each Warrant and the Exercise Price of such Warrant after such
adjustment(s), (ii) a brief statement of the facts requiring such adjustment(s)
and (iii) the computation by which such adjustment(s) was made. Where
appropriate, such notice may be given in advance and included as a part of the
notice required under the other provisions of this Section 14.
In case the Exercisability Date has occurred and:
(a) the Company shall authorize the issuance to all holders of shares of
Common Stock of rights, options or warrants to subscribe for or purchase
shares of Common Stock or of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets or cash;
or
(c) of any consolidation or merger to which the Company is a party and
for which approval of any stockholders of the Company is required, or of
the conveyance or transfer of the properties and assets of the Company
substantially as an entirety, or of any reclassification or change of
Common Stock issuable upon exercise of the Warrants (other than a change in
par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), or a tender offer
or exchange offer for shares of Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or winding
up of the Company; or
(e) the Company proposes to take any action that would require an
adjustment to the Exercise Rate pursuant to Section 12 hereof;
then the Company shall give prompt written notice to the Warrant Agent and
shall cause the Warrant Agent, on behalf of and at the expense of the Company
to give to each of the registered holders of the Warrant Certificates at his,
her or its address appearing on the Warrant Register, at least 30 days (or 20
days in any case specified in clauses (a) or (b) above) prior to the applicable
record date hereinafter specified, or the date of the event in the case of
events for which there is no record date, by first-class mail, postage prepaid,
a written notice stating (i) the date as of which the holders of record of
shares of Common Stock to be entitled to receive any such rights, options,
warrants or distribution are to be determined, or (ii) the initial expiration
date set forth in any tender offer or exchange offer for shares of Common
Stock, or (iii) the date on which any such consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up is expected to become
effective or consummated, and the date as of which it is expected that holders
of record of shares of Common
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Stock shall be entitled to exchange such shares for securities or other
property, if any, deliverable upon such reclassification, consolidation,
merger, conveyance, transfer, dissolution, liquidation or winding up. The
failure by the Company or the Warrant Agent to give such notice or any defect
therein shall not affect the legality or validity of any distribution, right,
option, warrant, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any action.
The Company shall give prompt written notice to the Warrant Agent and shall
cause the Warrant Agent, on behalf of and at the expense of the Company to give
to each Holder written notice of any determination to make a distribution or
dividend to the holders of its Common Stock of any assets (including cash
(other than any Ordinary Cash Distribution)), debt securities, preferred stock,
or any rights or warrants to purchase debt securities, preferred stock, assets
or other securities (other than Common Stock, or rights, options, or warrants
to purchase Common Stock) of the Company, which notice shall state the nature
and amount of such planned dividend or distribution and the record date
therefor, and shall be given by the Company at least 20 days prior to such
record date therefor.
At any time prior to the date that is 30 Business Days after the
Exercisability Date, with respect to any distribution or dividend made by the
Company to all of the holders of its Common Stock for which notice to the
Holders of the Warrants under this Section 14 would be required had such
dividend or distribution occurred after the Exercisability Date and except for
such distributions or dividends as are provided for in Section 12 hereof, the
Company shall hold in reserve the amount of any such dividend or distribution
that would have been payable to the Holders in respect of their Warrant Shares
had the Holders exercised their Warrants immediately prior to such dividend or
distribution. The Company shall release to each Holder of Warrants his, her or
its pro rata share of such reserved dividends or distributions upon the
exercise of such Holder's Warrants pursuant to Section 7 hereof. Any notice
delivered to the Holders by the Company pursuant to this Section 14 shall state
the nature and amount of such dividend or distribution that shall be held in
reserve.
Nothing contained in this Agreement or in any Warrant Certificate shall be
construed as conferring upon the Holders the right to vote or to consent or to
receive notice as stockholders in respect of the meetings of stockholders or
the election of directors of the Company or any other matter, or any rights
whatsoever as stockholders of the Company.
Section 15. Notices to the Company and Warrant Agent. Any notice or demand
authorized by this Agreement to be given or made by the Warrant Agent or by any
Holder to or on the Company shall be sufficiently given or made when received
at the office of the Company expressly designated by the Company as its office
for purposes of this Agreement (until the Warrant Agent is otherwise notified
in accordance with this Section 15 by the Company), as follows:
Endo Pharmaceuticals Holdings Inc.
c/o Kelso & Company
320 Park Avenue
24th Floor
New York, New York 10022
Attention: Managing Director
with a copy to General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
Attention: Eileen T. Nugent, Esq.
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Any notice pursuant to this Agreement to be given by the Company or by any
Holder(s) to the Warrant Agent shall be sufficiently given when received by the
Warrant Agent at the address appearing below (until the Company is otherwise
notified in accordance with this Section by the Warrant Agent).
United States Trust Company of New York
114 West 47th Street, 25th Floor
New York, New York 10036
Attention: Corporate Trust Division
Section 16. Supplements and Amendments; Actions. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Warrants in order to cure any ambiguity or to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions
in regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not in any way
adversely affect the rights of any holder of Warrants hereunder. Any amendment
or supplement to this Agreement that has a material adverse effect on the
rights of holders hereunder shall require the written consent of registered
holders of a majority of the then outstanding Warrants, which consent shall
then be effective against all the Holders of Warrants hereunder. The consent of
each holder of a Warrant affected shall be required for any amendment pursuant
to which the Exercise Price would be increased or the number of Warrant Shares
purchasable upon exercise of Warrants would be decreased (not including
adjustments contemplated hereunder). The Warrant Agent shall be entitled to
receive and shall be fully protected in relying upon an officers' certificate
and opinion of counsel as conclusive evidence that any such amendment or
supplement is authorized or permitted hereunder, that it is not inconsistent
herewith, and that it will be valid and binding upon the Company in accordance
with its terms.
Any actions seeking enforcement of the rights of Holders hereunder
(including paragraph 3 of Section 7 hereof) may be brought either by the
Warrant Agent or the Holders of more than 50% of the Warrants issued hereunder
and then outstanding.
Section 17. Concerning the Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the Holders, by their acceptance of
Warrants, shall be bound:
(a) The statements contained herein and in the Warrant Certificate shall
be taken as statements of the Company, and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as
describe the Warrant Agent or any action taken by it. The Warrant Agent
assumes no responsibility with respect to the distribution of the Warrants
except as herein otherwise provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with the covenants contained in this Agreement or in the
Warrants to be complied with by the Company.
(c) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself
(through its employees) or by or through its attorneys or agents (which
shall not include its employees) and shall not be responsible for the
misconduct of any agent appointed with due care.
(d) The Warrant Agent may consult at any time with legal counsel
satisfactory to it (who may be counsel for the Company), and the Warrant
Agent shall incur no liability or responsibility to the Company or to any
Holder in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such
counsel.
(e) Whenever in the performance of its duties under this Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless such evidence in respect
thereof be herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed by the Chairman of the
Board, the President, Chief Financial Officer, one of the Vice Presidents,
the Treasurer or the Secretary of the Company and delivered to the Warrant
Agent; and such certificate shall
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be full authorization to the Warrant Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon
such certificate.
(f) The Company agrees to pay the Warrant Agent reasonable compensation
for all services rendered by the Warrant Agent in the performance of its
duties under this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent (including reasonable fees and
expenses of the Warrant Agent's counsel and agents) in the performance of
its duties under this Agreement, and to indemnify the Warrant Agent and
save it harmless against any and all liabilities, including judgments,
costs and counsel fees, for anything done or omitted by the Warrant Agent
in the performance of its duties under this Agreement, except as a result
of the Warrant Agent's negligence or bad faith.
(g) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to
involve expense unless the Company or one or more Holders shall furnish the
Warrant Agent with reasonable security and indemnity satisfactory to the
Warrant Agent for any costs and expenses which may be incurred, but this
provision shall not affect the power of the Warrant Agent to take such
action as the Warrant Agent may consider proper, whether with or without
any such security or indemnity. All rights of action under this Agreement
or under any of the Warrants may be enforced by the Warrant Agent without
the possession of any of the Warrants or the production thereof at any
trial or other proceeding relative thereto, and any such action, suit or
proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable
benefit of the Holders, as their respective rights or interests may appear.
(h) The Warrant Agent and any stockholder, director, officer or employee
of the Warrant Agent may buy, sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily interested in any
transactions in which the Company may be interested, or contract with or
lend money to the Company or otherwise act as fully and freely as though it
were not Warrant Agent under this Agreement or such director, officer or
employee. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity including,
without limitation, acting as Transfer Agent or as a lender to the Company
or an Affiliate thereof.
(i) The Warrant Agent shall act hereunder solely as agent, and its
duties shall be determined solely by the provisions hereof. The Warrant
Agent shall not be liable for anything which it may do or refrain from
doing in connection with this Agreement except for its own negligence or
bad faith.
(j) The Warrant Agent will not incur any liability or responsibility to
the Company or to any Holder for any action taken in reliance on any
notice, resolution, waiver, consent, order, certificate, or other paper,
document or instrument reasonably believed by it to be genuine and to have
been signed, sent or presented by the proper party or parties.
(k) The Warrant Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant (except its countersignature thereof);
nor shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Warrant Shares (or other stock) to be issued pursuant to this Agreement or
any Warrant, or as to whether any Warrant Shares (or other stock) will,
when issued, be validly issued, fully paid and nonassessable, or as to the
Exercise Price or the number or amount of Warrant Shares or other
securities or other property issuable upon exercise of any Warrant.
(l) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from
the Chairman of the Board, the President, any Vice President or the
Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and shall not be liable for any
action taken or suffered to be taken by it in good faith and without
negligence in accordance with instructions of any such officer or officers.
Section 18. Change of Warrant Agent. The Warrant Agent may resign at any
time and be discharged from its duties under this Agreement by giving to the
Company 30-days' notice in writing. The Warrant Agent
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may be removed by like notice to the Warrant Agent from the Company. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of 30 days after
such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by any Holder
(who shall with such notice submit his, her or its Warrant for inspection by
the Company), then any Holder may apply to any court of competent jurisdiction
for the appointment of a successor to the Warrant Agent. Pending appointment of
a successor warrant agent, either by the Company or by such court, the duties
of the Warrant Agent shall be carried out by the Company. Any successor warrant
agent, whether appointed by the Company or such a court, shall be a bank or
trust company in good standing, incorporated under the laws of the United
States of America or any State thereof or the District of Columbia and having
at the time of its appointment as warrant agent a combined capital and surplus
of at least $10,000,000. After appointment, the successor warrant agent shall
be vested with the same powers, rights, duties and responsibilities as if it
had been originally named as Warrant Agent without further act or deed; but the
former Warrant Agent shall deliver and transfer to the successor warrant agent
any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for such purpose. Failure
to file any notice provided for in this Section 18, however, or any defect
therein, shall not affect the legality or validity of the resignation or
removal of the Warrant Agent or the appointment of the successor warrant agent,
as the case may be. In the event of such resignation or removal, the Company or
the successor warrant agent shall mail by first class mail, postage prepaid, to
each Holder, written notice of such removal or resignation and the name and
address of such successor warrant agent.
Section 19. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company, the Warrant Agent or any holder of
Warrants shall bind and inure to the benefit of their respective successors and
assigns hereunder.
Section 20. Termination. This Agreement shall terminate at 5:00 p.m., New
York City time, on the Expiration Date. Notwithstanding the foregoing, this
Agreement will terminate on any earlier date if all Warrants have been
exercised pursuant to this Agreement.
Section 21. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT CERTIFICATE
ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE
STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF SAID STATE, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF.
Section 22. Benefits of This Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered Holders of the Warrant Certificates any legal
or equitable right, remedy or claim under this Agreement; but this Agreement
shall be for the sole and exclusive benefit of the Company, the Warrant Agent
and the registered Holders of the Warrant Certificates.
Section 23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 24. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
ENDO PHARMACEUTICALS HOLDINGS INC.
By: _________________________________
Name:
Title:
UNITED STATES TRUST
COMPANY OF NEW YORK,
as Warrant Agent
By: _________________________________
Name:
Title:
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EXHIBIT A
[Form of Warrant Certificate]
[Face]
THIS SECURITY IS A GLOBAL CERTIFICATE AND IS REGISTERED IN THE NAME OF A
DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS
SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON
OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE WARRANT AGREEMENT, DATED AS OF , 2000, BY AND BETWEEN
THE COMPANY AND THE WARRANT AGENT (THE "WARRANT AGREEMENT"), AND NO TRANSFER OF
THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE
DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO
THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT
IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (A NEW YORK CORPORATION) ("DTC") TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
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EXERCISABLE ON OR AFTER THE EXERCISABILITY DATE
AND ON OR BEFORE THE EXPIRATION DATE
No. _________ ___ Class A Transferable Warrants
Class A Transferable Warrant Certificate
ENDO PHARMACEUTICALS HOLDINGS INC.
This Warrant Certificate certifies that , or registered assigns, is the
registered holder of Class A Transferable Warrants expiring on or before the
Expiration Date (the "Warrants") to purchase shares of Common Stock, par value
$.01 per share (the "Common Stock"), of Endo Pharmaceuticals Holdings Inc., a
Delaware corporation (the "Company"). Each Warrant entitles the holder upon
exercise to receive from the Company on or after the Exercisability Date and on
or before 5:00 p.m. New York City Time on the six-month anniversary of the
Exercisability Date (the "Expiration Date") a number of fully paid and
nonassessable shares of Common Stock (each such share, a "Warrant Share") as
determined in the following paragraph at the initial exercise price (the
"Exercise Price") equal to $0.01 payable upon surrender of this Warrant
Certificate and payment of the Exercise Price in the manner set forth in the
Warrant Agreement, subject only to the conditions set forth herein and in the
Warrant Agreement referred to on the reverse hereof.
If the Exercisability Date is on or prior to March 31, 2002, the Holder
shall then be entitled to receive from the Company (on exercise of such
Warrants and payment of the Exercise Price then in effect for such Warrant
Shares) (together, if applicable, with cash payable as provided in Section 13
hereof and any dividends or distributions payable as provided in Section 14
hereof) (a) 1.153846/8/ Warrant Shares in the event the Adjustment Event (as
defined in that certain Agreement and Plan of Merger, dated as of November 26,
1999, as may be amended and restated from time to time, by and among the
Company, Endo Inc., a Delaware corporation and wholly owned subsidiary of the
Company, and Algos Pharmaceutical Corporation, a Delaware corporation) has not
occurred prior to the Exercisability Date or (b) 1.000000/9/ Warrant Shares in
the event the Adjustment Event has occurred prior to the Exercisability Date.
If the Exercisability Date is after March 31, 2002 and on or prior to September
30, 2002, the Holder shall then be entitled to receive from the Company (on
exercise of such Warrants and payment of the Exercise Price then in effect for
such Warrant Shares) (together, if applicable, with cash payable as provided in
Section 13 hereof and any dividends or distributions payable as provided in
Section 14 hereof) (a) 0.633803/10/ Warrant Shares in the event the Adjustment
Event has not occurred prior to the Exercisability Date
--------
(8) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 35% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
(9) This number shall be adjusted in the final Agreements and Warrant in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 40% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
(10) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 29% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
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or (b) 0.545455/11/ Warrant Shares in the event the Adjustment Event has
occurred prior to the Exercisability Date. If the Exercisability Date is after
September 30, 2002 and on or prior to March 31, 2003, the Holders shall then be
entitled to receive from the Company (on exercise of such Warrants and payment
of the Exercise Price then in effect for such Warrant Shares) (together, if
applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
0.263158/12/ Warrant Shares in the event the Adjustment Event has not occurred
prior to the Exercisability Date or (b) 0.225352/13/ Warrant Shares in the
event the Adjustment Event has occurred prior to the Exercisability Date.
The Exercise Price and number of Warrant Shares issuable upon exercise of
the Warrants are subject to adjustment upon the occurrence of certain events as
set forth in the Warrant Agreement.
No Warrant may be exercised before the Exercisability Date or after 5:00
p.m., New York City Time, on the Expiration Date and to the extent not
exercised by such time such Warrants shall become void.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent, as such term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
--------
(11) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 34% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
(12) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 24% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
(13) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 29% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
A-97
<PAGE>
IN WITNESS WHEREOF, Endo Pharmaceuticals Holdings Inc. has caused this
Warrant Certificate to be signed by an officer and by its Secretary, each by a
facsimile of his or her signature, and has caused a facsimile of its corporate
seal to be affixed hereunto or imprinted hereon.
Dated: ,
ENDO PHARMACEUTICALS HOLDINGS INC.
By: _________________________________
Name:
Title:
By: _________________________________
Name:
Title:Secretary
Countersigned:
UNITED STATES TRUST COMPANY
OF NEW YORK,
as Warrant Agent
By: _________________________________
Name:
Title:
A-98
<PAGE>
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring on the "Expiration Date," entitling the
holder on exercise to receive shares of Common Stock, par value $.01 per share,
of the Company (the "Common Stock"), and are issued or to be issued pursuant to
a Warrant Agreement dated as of , 2000 (the "Warrant Agreement"), duly
executed and delivered by the Company to United States Trust Company of New
York, as warrant agent (the "Warrant Agent"), which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Warrant Agent, the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants. A copy of the Warrant Agreement may be
obtained by the holder hereof upon written request to the Company.
Warrants may be exercised at any time on or after the "Exercisability Date"
and on or before the "Expiration Date." The holder of Warrants evidenced by
this Warrant Certificate may exercise them by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon properly
completed and executed, together with payment in the manner provided for in the
Warrant Agreement at the office of the Warrant Agent. In the event that upon
any exercise of Warrants evidenced hereby, the number of Warrants exercised
shall be less than the total number of Warrants evidenced hereby, there shall
be issued to the holder hereof or his, her or its assignee a new Warrant
Certificate evidencing the number of Warrants not exercised.
The Warrant Agreement provides that upon the occurrence of certain events
the number of Warrants set forth on the face hereof and the Exercise Price may,
subject to certain conditions, be adjusted. No fractions of a share of Common
Stock will be issued upon the exercise of any Warrant, but the Company will pay
the cash value thereof determined as provided in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Warrant Agent by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided in the Warrant
Agreement, without charge except for any tax or other governmental charge
imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder(s) thereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, of any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
A-99
<PAGE>
[Form of Election to Purchase]
(To Be Executed upon Exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant Certificate, to receive shares of Common Stock and herewith
tenders payment for such shares to the order of Endo Pharmaceuticals Holdings
Inc. in the amount of $ payable in (select one or more: (i) cash and/or (ii)
pursuant to a Cashless Exercise) in accordance with the terms hereof and of the
Warrant Agreement. The undersigned requests that a certificate for such shares
be registered in the name of , whose address is and that such shares be
delivered to whose address is . If said number of shares is less than
all of the shares of Common Stock purchasable hereunder, the undersigned
requests that a new Warrant Certificate representing the remaining balance of
such shares be registered in the name of , whose address is , and that
such Warrant Certificate be delivered to , whose address is .
Signature:
Date:
Signature Guaranteed:
A-100
<PAGE>
SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS
The following exchanges of a part of this Global Warrant for certificated
Warrants have been made:
<TABLE>
<CAPTION>
Number of
Warrants of
Amount of Amount of this Global
decrease in increase in Warrant Signature of
Number of Number of following authorized
Date of Warrants of this Warrants of this such decrease officer of
Exchange Global Warrant Global Warrant (or increase) Warrant Agent
-------- ---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
</TABLE>
A-101
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF
CLASS A TRANSFERABLE WARRANTS
Re: Class A Transferable Warrants to Purchase Common Stock (the "Warrants") of
Endo Pharmaceuticals Holdings Inc.
This Certificate relates to Warrants held in* book-entry or *
certificated form by (the "Transferor").
The Transferor:*
[_]has requested the Warrant Agent by written order to deliver in exchange
for its beneficial interest in the Global Warrant held by the depository
a Warrant or Warrants in definitive, registered form equal to its
beneficial interest in Warrants represented by such Global Warrant (or
the portion thereof indicated above); or
[_]has requested the Warrant Agent by written order to deliver in exchange
or register the transfer of a Warrant or Warrants.
_____________________________________
[INSERT NAME OF TRANSFEROR]
By: _________________________________
Date: ______________________
*Check applicable box.
A-102
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Affiliate.................................................................. A-87
Agreement.................................................................. A-77
Algos...................................................................... A-77
Business Day............................................................... A-82
Cashless Exercise.......................................................... A-83
closing bid price.......................................................... A-86
Common Stock............................................................... A-77
Company.................................................................... A-77
Current Market Value....................................................... A-86
Definitive Warrants........................................................ A-77
Exchange Act............................................................... A-86
Exercisability Date........................................................ A-82
Exercise Price............................................................. A-83
Exercise Rate.............................................................. A-85
Expiration Date............................................................ A-81
FDA........................................................................ A-82
Fully Diluted Shares....................................................... A-86
Global Warrants............................................................ A-77
Holders.................................................................... A-78
Independent Financial Expert............................................... A-87
Legal Holiday.............................................................. A-82
Merger Agreement........................................................... A-77
Ordinary Cash Distribution................................................. A-87
Reorganizations............................................................ A-88
Security................................................................... A-86
shares of Common Stock..................................................... A-88
Sub........................................................................ A-77
Time of Determination...................................................... A-85
Transfer Agent............................................................. A-84
Ultimate Expiration Date................................................... A-82
Warrant.................................................................... A-77
Warrant Agent.............................................................. A-77
Warrant Certificates....................................................... A-77
Warrant Register........................................................... A-78
Warrant Shares............................................................. A-77
Warrants................................................................... A-77
</TABLE>
A-103
<PAGE>
Exhibit D-1
Parent Year 2000 Plan
Parent has evaluated the impact of the Year 2000 Issue and completed
upgrading or modifying critical applications and systems to accommodate Year
2000 dating. This includes all computer systems, office machines, phone and
security systems, off-the-shelf systems and applications, custom software
applications, and accounting systems. Parent believes that the financial and
operational systems of Parent, as currently used, will function adequately with
respect to the Year 2000 Issue.
Parent has limited information concerning the compliance status of its
third-party contractors. Parent's current third party contractors generally
test Parent products and provide Parent with the results of those tests and
manufacture drug supplies. Parent has initiated formal communications with all
of its significant suppliers and vendors to determine the extent to which
Parent may be vulnerable if those third parties fail to remediate their own
Year 2000 issues. Parent is continually receiving and evaluating written
assurances from all significant suppliers and vendors that they have completed,
or are working on Year 2000 projects with deadlines well in advance of December
1999. To date, approximately all suppliers and vendors contacted, have reported
that they will be fully operational on January 1, 2000.
Parent is not significantly reliant on computer software applications and
systems during its developmental stage.
As part of the commercialization of products, Parent has third parties
manufacture and distribute its products. Parent places significant dependence
on such third parties' computer systems for purchasing, production, customer
order entry and invoicing and other related activities. A disruption in these
systems could result in lost revenue from inventory shortages, improper
execution of customer orders and/or delays in the resolution and collection of
outstanding invoices. Parent may make significant additions to and changes in
its existing computer software applications and systems and/or the use of such
systems. If Parent makes any such additions or changes, it would affect
Parent's exposure to the Year 2000 Issue since Parent would become more reliant
on its computer software applications and systems.
At this time, Parent does not expect that the cost of its Year 2000 Issue
compliance program will be material to its business, financial condition or
results of operations and does not currently anticipate any material disruption
in its operations.
A-104
<PAGE>
Exhibit D-2
Company Year 2000 Plan
The Company has evaluated the impact of the Year 2000 Issue and completed
upgrading or modifying critical applications and systems to accommodate Year
2000 dating. This includes all computer systems, office machines, phone and
security systems, off-the-shelf systems and applications, custom software
applications, and accounting systems. The Company believes that the financial
and operational systems of the Company, as currently used, will function
adequately with respect to the Year 2000 Issue.
The Company has limited information concerning the compliance status of its
third-party contractors. The Company's current third party contractors
generally test the Company products and provide the Company with the results of
those tests and manufacture drug supplies. The Company has initiated formal
communications with all of its significant suppliers and vendors to determine
the extent to which the Company may be vulnerable if those third parties fail
to remediate their own Year 2000 issues. The Company is continually receiving
and evaluating written assurances from all significant suppliers and vendors
that they have completed, or are working on Year 2000 projects with deadlines
well in advance of December 1999. To date, approximately all suppliers and
vendors contacted, have reported that they will be fully operational on January
1, 2000.
The Company is not significantly reliant on computer software applications
and systems during its developmental stage.
As part of the possible future commercialization of products, the Company
intends to have third parties manufacture and distribute its products. The
Company will place significant dependence on such third parties' computer
systems for purchasing, production, customer order entry and invoicing and
other related activities. A disruption in these systems could result in lost
revenue from inventory shortages, improper execution of customer orders and/or
delays in the resolution and collection of outstanding invoices. In preparation
for the possible future commercialization of products, the Company may make
significant additions to and changes in its existing computer software
applications and systems and/or the use of such systems. If the Company makes
any such additions or changes, it would affect the Company's exposure to the
Year 2000 Issue since the Company would become more reliant on its computer
software applications and systems.
At this time, the Company does not expect that the cost of its Year 2000
Issue compliance program will be material to its business, financial condition
or results of operations and does not currently anticipate any material
disruption in its operations.
A-105
<PAGE>
Exhibit E-1
Form of Representation Letter
CERTIFICATE OF ENDO PHARMACEUTICALS HOLDINGS, INC.
, 2000
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036-6522
Latham & Watkins
53rd at Third, Suite 1000
885 Third Avenue
New York, NY 10022-4802
Re: Merger pursuant to the Agreement and Plan of Merger dated as of
November 26, 1999 (as may be amended and restated from time to
time, the "Merger Agreement") by and among Endo Pharmaceuticals
Holdings, Inc., a Delaware corporation ("Parent"), Algos
Pharmaceutical Corporation, a Delaware corporation (the "Company")
and Endo Inc., a Delaware corporation ("Sub").
This certificate is supplied to you in connection with your rendering of
opinions regarding certain federal income tax consequences of the merger (the
"Merger") of the Company with and into Sub pursuant to the Merger Agreement.
Unless otherwise indicated, capitalized terms not defined herein have the
meanings set forth in the Merger Agreement.
A. Representations. After consulting with its counsel and auditors
regarding the meaning of and factual support for the following
representations, the undersigned hereby certifies and represents the following
facts will be true at the Effective Time:
1. Pursuant to the Merger Agreement, the Company will merge with and
into Sub, and Sub will acquire all of the assets and liabilities of the
Company;
2. Parent is participating in the Merger for good and valid business
reasons and not for tax purposes;
3. Except for cash paid in lieu of fractional shares of Parent Common
Stock and with respect to any shares of Company Common Stock as to which a
Company stockholder perfects appraisal rights, all shares of Company Common
Stock will be exchanged solely for Parent Common Stock and Parent Warrants.
In addition, no shares of Sub will be issued to any shareholder of the
Company in the Merger, and Parent will issue the Parent Common Stock and
Parent Warrants that are to be received by each Company Common shareholder
in the Merger;
4. The sum of the fair market value of the Parent Warrants and the fair
market value of Parent Common Stock to be received by each shareholder of
the Company pursuant to Section 1.7(c) of the Merger Agreement will be
approximately equal to the fair market value of Company Common Stock
surrendered in exchange therefor. In connection with the Merger no holder
of Company Common Stock will receive in exchange for Company Common Stock,
directly or indirectly, any consideration from Parent other than Parent
Common Stock, Parent Warrants, and cash in lieu of a fractional share of
Parent Common Stock;
5. Neither Parent nor any person related to Parent, as defined in Treas.
Reg. (S) 1.368-1(e)(3), (i) has acquired any stock of the Company or (ii)
has a plan or intention to redeem or otherwise reacquire any Parent Common
Stock issued in the Merger to the shareholders of the Company;
6. Prior to the Merger, Parent will be in control of Sub within the
meaning of Section 368(c) of the Internal Revenue Code of 1986, as amended
(the "Code");
7. At the time of the Merger, Sub will not have outstanding any
warrants, options, convertible securities, or any other type of right
pursuant to which any person could acquire common stock in Sub
A-106
<PAGE>
that, if exercised or converted, would affect Parent's retention of control
of Sub within the meaning of Section 368(c) of the Code;
8. Following the Merger, Sub will not issue additional shares of its
stock that would result in Parent losing control of Sub within the meaning
of Section 368(c) of the Code;
9. As of the Effective Time, neither Parent nor any corporation
affiliated with Parent: (i) will be under any obligation, or will have
entered into any agreement to redeem or repurchase any shares of Parent
Common Stock issued in the Merger or to make any extraordinary
distributions in respect of Parent Common Stock; or (ii) will have any plan
or intention to reacquire shares of Parent Common Stock issued in the
Merger. After the Merger, no dividends or distributions will be made to the
former Company stockholders by Parent other than regular, normal dividends
or distributions made to all holders of Parent Common Stock;
10. Except for dispositions made in the ordinary course of business and
transfers described in Section 368(a)(2)(C) of the Code and Treas. Reg.
Section 1.368-2(k)(1), Parent has no plan or intention to cause Sub to sell
or otherwise dispose of the assets acquired from the Company in the Merger;
11. Following the Merger, Sub will continue the "historic business" of
the Company or use a "significant portion" of the Company's "historic
business assets" in a business, as each such term is used in Treas. Reg.
Section 1.368-1(d);
12. Parent, Sub, the Company and the shareholders of the Company will
each pay their respective expenses incurred in connection with the Merger,
provided that all filing fees and printing expenses for the Proxy Statement
and Registration Statement shall be shared equally by the Company and the
Parent. Neither Parent nor Sub has agreed to assume, nor will it directly
or indirectly assume, any expense or other liability, whether fixed or
contingent, of any holder of Company Common Stock;
13. Parent has no plan or intention: (i) to liquidate Sub, (ii) to merge
Sub with and into another corporation or (iii) to sell or otherwise dispose
of the stock of Sub;
14. There is no intercorporate indebtedness existing between the Company
and Parent that was issued, acquired, or will be settled at a discount as a
result of the Merger, and Parent will assume no liability of any
shareholder of the Company in connection with the Merger;
15. None of the compensation received by any shareholder-employee of the
Company will be separate consideration for, or allocable to, any of their
shares of Company Common Stock; none of the Parent Common Stock or the
Parent Warrants to be received by any shareholder-employee of the Company
will be separate consideration for, or allocable to, any employment
agreement; and the compensation to be paid to any such shareholder-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;
16. As of the Effective Time, neither Parent nor any corporation
affiliated with Parent will own, directly or indirectly, nor has Parent or
any such affiliated corporation owned during the past five years, directly
or indirectly, any shares of stock of the Company or securities, options,
warrants or instruments giving the holder thereof the right to acquire
Company stock or other securities issued by the Company;
17. Neither Parent nor Sub are investment companies as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code;
18. Parent is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code;
19. The fair market value of the assets of the Company to be transferred
to Sub in the Merger will equal or exceed the sum of the liabilities
assumed by Sub plus the amount of liabilities to which the transferred
assets are subject;
20. Parent will not assume any of the Company's liabilities in the
Merger;
21. The payment of cash in lieu of 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
A-107
<PAGE>
represent separately bargained for consideration. The total consideration
that will be paid in the Merger to the shareholders of the Company in lieu
of fractional shares of Parent Common Stock will not exceed one percent
(1%) of the total consideration that will be issued in the Merger to
shareholders of the Company in exchange for their Company Common Stock. The
fractional share interests of each shareholder of the Company will be
aggregated and no shareholder will receive cash in an amount greater than
the value of one full share of Parent Common Stock;
22. The Merger Agreement and the transactions contemplated therein
represent the full and complete agreement among Parent, Sub and the Company
regarding the Merger, and there are no other written or oral agreements
regarding the Merger and to which the Company is a party other than those
expressly referred to or contemplated in the Merger Agreement;
23. The terms of the Merger Agreement and all other agreements entered
into in connection therewith are the product of arm's-length negotiations;
24. To the best of the undersigned's knowledge and belief, the sum of
the fair market value of the Parent Warrants and the fair market value of
any consideration paid by the Company to persons who perfect their
appraisal rights will not exceed 60% of the total consideration that will
be paid in the Merger;
25. The facts relating to the Merger, as such facts are described in the
Form S-4 are, insofar as such pertain to Parent, true, complete and
accurate in all material respects and each of the representations made by
Parent in the Merger Agreement and other documents associated therewith is
true and accurate; and
26. Parent is authorized to make all of the representations set forth
herein.
B. Reliance by Latham & Watkins and Skadden, Arps, Slate, Meagher & Flom LLP
in Rendering Opinion: Limitation on the Opinion.
1. The undersigned recognizes and agrees that (i) the opinion of Latham
& Watkins and the opinion of Skadden, Arps, Slate, Meagher & Flom LLP (the
"Opinions") will be based on the representations set forth herein and will
assume that all of the representations and statements set forth herein are
true without regard to any qualification as to knowledge or belief and will
be based on the statements contained in the Merger Agreement and the
documents related thereto, (ii) the Opinions will be subject to certain
limitations and qualifications including that they may not be relied upon
if any such representations are not accurate in all material respects
without regard to any qualification as to knowledge or belief, and (iii)
notwithstanding any provisions of the Merger Agreement to the contrary, the
representations set forth in this letter shall survive without limitation.
2. The undersigned recognizes and agrees that the Opinions will not
address any tax consequences of the Merger or any action taken in
connection therewith except as expressly set forth in such opinion.
3. The undersigned hereby undertakes to inform Latham & Watkins,
Skadden, Arps, Slate, Meagher & Flom LLP, and the Company immediately
should any of the statements or representations set forth in this letter
become untrue, incorrect or incomplete in any respect on or prior to the
Effective Time.
In witness whereof, Endo Pharmaceuticals Holdings, Inc. executed this
certificate as of the date and year first above-written.
ENDO PHARMACEUTICALS HOLDINGS INC.,
a Delaware corporation
By: _________________________________
Name:
Title:
A-108
<PAGE>
Exhibit E-2
Form of Representation Letter
CERTIFICATE OF ALGOS PHARMACEUTICAL CORPORATION
, 2000
Skadden, Arps, Slate, Meagher, & Flom LLP
Four Times Square
New York, NY 10036-6522
Latham & Watkins
53rd at Third, Suite 1000
885 Third Avenue
New York, NY 10022-4802
Re: Merger pursuant to the Amended and Restated Agreement and Plan of
Merger dated as of November 26, 1999 (as may be amended and
restated from time to time, the "Merger Agreement") by and among
Endo Pharmaceuticals Holdings, Inc., a Delaware corporation
("Parent"), Algos Pharmaceutical Corporation, a Delaware
corporation (the "Company") and Endo Inc., a Delaware corporation
("Sub").
This certificate is supplied to you in connection with your rendering of
opinions regarding certain federal income tax consequences of the merger (the
"Merger") of the Company with and into Sub pursuant to the Merger Agreement.
Unless otherwise indicated, capitalized terms not defined herein have the
meanings set forth in the Merger Agreement.
A. Representations. After consulting with its counsel and auditors regarding
the meaning of and factual support for the following representations, the
undersigned hereby certifies and represents the following facts will be true at
the Effective Time:
1. Pursuant to the Merger Agreement, the Company will merge with and
into Sub, and Sub will acquire all of the assets and liabilities of the
Company;
2. The Company is participating in the Merger for good and valid
business reasons and not for tax purposes;
3. Except for cash paid in lieu of fractional shares of Parent Common
Stock and with respect to any shares of Company Common Stock as to which a
Company stockholder perfects appraisal rights, all shares of Company Common
Stock will be exchanged solely for Parent Common Stock and Parent Warrants.
In addition, no shares of Sub will be issued to any shareholder of the
Company in the Merger;
4. The sum of the fair market value of the Parent Warrants and the fair
market value of Parent Common Stock to be received by each shareholder of
the Company pursuant to Section 1.7(c) of the Merger Agreement will be
approximately equal to the fair market value of Company Common Stock
surrendered in exchange therefor. In connection with the Merger no holder
of Company Common Stock will receive in exchange for Company Common Stock,
directly or indirectly, any consideration from Parent other than Parent
Common Stock, Parent Warrants, and cash in lieu of a fractional share of
Parent Common Stock;
5. Neither the Company nor any person related to the Company, as defined
in Treas. Reg. Section 1.368-1(e)(3), determined without regard to Treas.
Reg. Section 1.368-1(e)(3)(i)(A), has (i) redeemed or otherwise acquired
any stock of the Company with consideration other than stock of the Company
prior to the Merger or (ii) made any extraordinary distribution (within the
meaning of Treas. Reg. Section 1.368-1T(e)(1)(ii)(A)) with respect to any
stock of the Company;
6. The Company has made no transfer of its assets (including any
distribution of assets with respect to, or in redemption of, stock) in
contemplation of the Merger or during the period beginning with the
commencement of negotiations (whether formal or informal) with Parent or
Sub regarding the Merger and ending at the Effective Time other than (i) in
the ordinary course of business and (ii) payments made in connection with
the Merger;
A-109
<PAGE>
7. Parent, Sub, the Company and the shareholders of the Company will
each pay their respective expenses incurred in connection with the Merger,
provided that all filing fees and printing expenses for the Proxy Statement
and Registration Statement shall be shared equally by the Company and the
Parent. Neither Parent nor Sub has agreed to assume, nor will it directly
or indirectly assume, any expense or other liability, whether fixed or
contingent, of any holder of Company Common Stock;
8. There is no intercorporate indebtedness existing between the Company
and Parent or between the Company and Sub that was issued, acquired, or
will be settled at a discount as a result of the Merger, and Parent and Sub
will assume no liability of any shareholder of the Company in connection
with the Merger;
9. None of the compensation received by any shareholder-employee of the
Company will be separate consideration for, or allocable to, any of their
shares of Company Common Stock; none of the Parent Common Stock or the
Parent Warrants to be received by any shareholder-employee of the Company
will be separate consideration for, or allocable to, any employment
agreement; and the compensation to be paid to any such shareholder-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;
10. The business currently carried on by the Company is its "historic
business" within the meaning of Treas. Reg. Section 1.368-1(d) and no
assets of the Company have been sold, transferred or otherwise disposed of
which would prevent Sub from continuing the "historic business" of the
Company or from using a "significant portion" of the Company's "historic
business" assets in a business following the Merger, as such terms are used
in Treas. Reg. Section 1.368-1(d);
11. The Company is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986, as amended
(the "Code");
12. The Company is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of Section 368(a)(3)(A) of the Code;
13. The fair market value of the assets of the Company to be transferred
to Sub in the Merger will equal or exceed the sum of the liabilities
assumed by Sub plus the amount of liabilities to which the transferred
assets are subject. In addition, the liabilities of the Company assumed by
Sub and the liabilities to which the transferred assets of the Company are
subject were incurred by the Company in the ordinary course of its
business;
14. Parent will not assume any of the Company's liabilities in the
Merger;
15. At least 90 percent of the fair market value of the net assets and
at least 70 percent of the fair market value of the gross assets held by
the Company immediately prior to the Merger will be acquired by Sub in the
Merger. For purposes of determining the percentage of the Company's net and
gross assets to be acquired by Sub pursuant to the Merger, the following
assets will be treated as held by the Company immediately prior, but not
acquired by Sub pursuant to the Merger: (i) assets disposed of by the
Company prior to the Merger and in contemplation thereof (including,
without limitation, any asset disposed of by the Company, other than in the
ordinary course of business, pursuant to a plan or intention existing
during the period ending on the Effective Date and beginning with the
earlier of the commencement of negotiations (whether formal or informal)
with Parent or Sub regarding the Merger), (ii) assets used by the Company
to pay shareholders, if any, who perfect appraisal rights, (iii) assets
used by the Company to pay reorganization expenses or other liabilities
incurred in connection with the Merger and (iv) assets used to make
distributions, redemptions or other payments in respect of the Company's
stock (including payments treated as such for tax purposes) that are made
prior to the Merger and are part of the plan of the Merger;
16. The payment of cash in lieu of 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 consideration that will be paid in
the Merger to the shareholders of the Company in lieu of fractional shares
of Parent Common Stock will not exceed one percent (1%) of the total
consideration that will be issued in the Merger to shareholders of the
Company in exchange for their Company Common Stock. The fractional share
interests of each shareholder of the Company will be aggregated and no
shareholder will receive cash in an amount greater than the value of one
full share of Parent Common Stock;
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17. The Merger Agreement and the transactions contemplated therein
represent the full and complete agreement among Parent, Sub and the Company
regarding the Merger, and there are no other written or oral agreements
regarding the Merger and to which the Company is party other than those
expressly referred to or contemplated in the Merger Agreement;
18. The terms of the Merger Agreement and all other agreements entered
into in connection therewith are the product of arm's-length negotiations;
19. The facts relating to the Merger, as such facts are described in the
Form S-4 are, insofar as such pertain to the Company, true, complete and
accurate in all material respects and each of the representations made by
the Company in the Merger Agreement and other documents associated
therewith is true and accurate;
20. To the best of the undersigned's knowledge and belief, the sum of
the fair market value of the Parent Warrants and the fair market value of
any consideration paid by the Company to persons who perfect their
appraisal rights will not exceed 60% of the total consideration that will
be paid in the Merger;
21. The Company is not currently, and during the five years preceding
the Effective Time will not have been, a "United States real property
holding corporation" within the meaning of Section 897(c)(2)of the Code;
and
22. The Company is authorized to make all of the representations set
forth herein.
B. Reliance by Latham & Watkins and Skadden, Arps, Slate, Meagher & Flom
LLP in Rendering Opinion: Limitation on the Opinion.
1. The undersigned recognizes and agrees that (i) the opinion of Latham
& Watkins and the opinion of Skadden, Arps, Slate, Meagher & Flom LLP (the
"Opinions") will be based on the representations set forth herein and will
assume that all of the representations and statements set forth herein are
true without regard to any qualification as to knowledge or belief and will
be based on the statements contained in the Merger Agreement and the
documents related thereto, (ii) the Opinions will be subject to certain
limitations and qualifications including that they may not be relied upon
if any such representations are not accurate in all material respects
without regard to any qualification as to knowledge or belief, and (iii)
notwithstanding any provisions of the Merger Agreement to the contrary, the
representations set forth in this letter shall survive without limitation.
2. The undersigned recognizes and agrees that the Opinions will not
address any tax consequences of the Merger or any action taken in
connection therewith except as expressly set forth in such opinion.
3. The undersigned hereby undertakes to inform Latham & Watkins,
Skadden, Arps, Slate, Meagher & Flom LLP, and Parent immediately should any
of the statements or representations set forth in this letter become
untrue, incorrect or incomplete in any respect on or prior to the Effective
Time.
In witness whereof, Algos Pharmaceutical Corporation executed this
certificate as of the date and year first above-written.
Algos Pharmaceutical Corporation,
a Delaware corporation
By: _________________________________
Name:
Title:
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EXHIBIT F
FORM OF AFFILIATE LETTER
-------------------------
-------------------------
-------------------------
Attention
------------------
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Endo Pharmaceuticals Holdings Inc., a Delaware corporation
("Parent"), as the term "affiliate" is defined for purposes of paragraphs (c)
and (d) of Rule 145 of the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). Pursuant to the terms of the
Agreement and Plan of Merger, dated as of November 26, 1999 (as may be amended
and restated from time to time, the "Agreement"), by and among Parent, Endo
Inc., a newly-formed, wholly-owned subsidiary of Parent ("Sub"), and Algos
Pharmaceutical Corporation, a Delaware corporation (the "Company"), pursuant to
which the Company has agreed to merge with and into Sub, with Sub continuing as
the surviving corporation (the "Merger").
I represent, warrant and covenant to the Company that in the event I receive
shares of common stock, par value $.01, of Parent ("Parent Common Stock") as a
result of the Merger:
A. I shall not make any sale, transfer or other disposition of the
Parent Common Stock in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Agreement and discussed the
requirements of such documents and other applicable limitations upon my
ability to sell, transfer or otherwise dispose of Parent Common Stock to
the extent I felt necessary, with my counsel or counsel for Parent.
C. I have been advised that the issuance of Parent Common Stock to me
pursuant to the Merger has been registered with the Commission under the
Act on a Registration Statement on Form S-4. However, I have also been
advised that, because at the time the Merger is submitted for a vote of the
stockholders of the Company, I may be deemed to be an affiliate of Parent,
I may not sell, transfer or otherwise dispose of Parent Common Stock issued
to me in the Merger unless (i) such sale, transfer or other disposition is
made in conformity with the volume and other limitations of Rule 145
promulgated by the Commission under the Act, (ii) such sale, transfer or
other disposition has been registered under the Act or (iii) in the opinion
of counsel reasonably acceptable to the Company, such sale, transfer or
other disposition is otherwise exempt from registration under the Act.
D. I understand that Parent is under no obligation to register the sale,
transfer or other disposition of the Parent Common Stock by me or on my
behalf under the Act or to take any other action necessary in order to make
compliance with an exemption from such registration available solely as a
result of the Merger.
E. I also understand that there will be placed on the certificates for
the Parent Common Stock issued to me, or any substitutions therefor, a
legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE
TRANSFERRED IN A REGISTERED PUBLIC OFFERING OR IN ACCORDANCE WITH THE
RESALE PROVISIONS OF RULE 145 PROMULGATED UNDER THE SECURITIES ACT."
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F. I also understand that unless a sale or transfer is made in
conformity with the provisions of Rule 145, or pursuant to a registration
statement, Parent reserves the right to put the following legend on the
certificates issued to any transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED
BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933
AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend after one year unless the provisions of Rule 145(d)(2) have been amended
to require a longer period than one year.
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of Parent as described in the first paragraph of this
letter, as or a waiver of any rights I may have to object to any claim that I
am such an affiliate or on after the date of this letter.
Very truly yours,
By: _________________________________
Name:
Title:
Accepted this day of :
By: _________________________________
Name:
Title:
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Exhibit G
FORM OF TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT (the "Agreement") by and among Endo
Pharmaceuticals Holdings Inc., a Delaware corporation ("Endo"), Endo Inc., a
Delaware corporation and wholly owned subsidiary of Endo, and Endo Pharma LLC,
a Delaware limited liability company ("Endo LLC"), is effective as of this
day of , .
WHEREAS the members of Endo LLC have agreed to exchange the shares of common
stock, par value $.01 per share, of Endo ("Endo Common Stock") currently
beneficially owned by them for membership interests of Endo LLC;/1/
WHEREAS under the Parent Plan certain officers and employees of Endo have
been granted stock options exercisable against Endo to purchase newly issued
shares of Endo Common Stock in certain circumstances;
WHEREAS Endo and Sub entered into an Agreement and Plan of Merger with Algos
Pharmaceutical Corporation, a Delaware corporation, on November 26, 1999 (as
may be amended and restated from time to time, the "Merger Agreement");
WHEREAS, in connection with the Merger, employee stock options granted or to
be granted under the Parent Plan will be amended as provided in Section 5.9 of
the Merger Agreement in order to provide that such options will be exercisable
solely into shares of Parent Common Stock that are beneficially owned by
certain holders of Parent Common Stock immediately following the Parent
Recapitalization and prior to the Effective Time (such amended options, the
"Endo LLC Options");
WHEREAS the shares of Endo Common Stock to be delivered upon exercise of the
Endo LLC Options will be provided entirely by Endo LLC and not directly or
indirectly by Endo or any other Endo stockholder; and
WHEREAS under the Internal Revenue Code of 1986, as amended (the "Code") and
the Treasury Regulations, rulings and other interpretations thereunder,
deductible compensation expense resulting from the exercise of a Endo LLC
Option by an Endo officer or employee is treated for income tax purposes as a
deduction of Endo;
NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained, the parties agree as follows:
ARTICLE I
PAYMENTS
Section 1.1 Payments to Endo LLC.
(a) Upon the occurrence of a Liquidity Event, Endo (or any successor entity)
shall pay to Endo LLC or its designees by wire transfer in immediately
available funds in U.S. dollars the Tax Benefit Amount to the extent such Tax
Benefit Amount has not previously resulted in a payment under this Section 1.1.
(b) For purposes of this Agreement, "Liquidity Event" shall mean any
transaction or series of transactions resulting in (A) a sale of greater than
20% on a fully diluted basis of the common equity of Endo through (i) a
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primary offering by Endo, (ii) a secondary sale of Endo Common Stock by Endo
LLC or other holders of Endo Common Stock pursuant to a registration rights
agreement or (iii) a combination of primary and secondary offerings described
in clauses (i) and (ii) of this subsection, (B) a Change of Control or (C) a
sale of all or substantially all of the assets of Endo.
(c) For purposes of this Agreement, "Change of Control" shall mean (i) any
merger, consolidation or other business combination that requires the approval
of holder of Endo Common Stock, (ii) any transaction or series of transactions
resulting in an acquisition by any Person (or Persons acting in concert)
unrelated to Endo LLC or its Affiliates of greater than 50% of the equity of
Endo measured by vote or value on a fully diluted basis or (iii) the
consummation by Endo of a plan of complete liquidation or a dissolution of
Endo.
(d) For purposes of this Agreement, "Tax Benefit Amount" means the
cumulative excess (if any) of (A) the Taxes that would have been payable by
Endo and its Subsidiaries for all taxable periods or portions thereof after the
Effective Date if none of the Endo LLC Options had been exercised over (B) the
actual Taxes payable by Endo and its Subsidiaries for such periods. For the
avoidance of doubt and for purposes of this Section 1(d), in order to determine
the Tax Benefit Amount for any taxable period of Endo and its Subsidiaries in
which a net operating loss carryforward deduction ("NOL") is utilized, the
portion of the NOL attributable to deductions resulting from the exercise of
Endo LLC Options shall be treated as utilized last. By way of example, and
solely for the avoidance of doubt, if Endo has a loss for tax purposes in Year
1 of $100, consisting of $65 of deductions attributable to the exercise of Endo
LLC Options and $35 of deductions attributable to interest expense, and in Year
2 Endo has $40 of taxable income prior to application of the NOL, $35 of the
$40 NOL applied against Year 2 income will be deemed to be attributable to the
interest expense and $5 of the NOL will be deemed attributable to the exercise
of the Endo LLC Options. Therefore, the Tax Benefit Amount would be the Taxes
that would have been payable by Endo if its NOL in Year 2 had been only $35.
The NOL carryforward to Year 3 of $60 would then be treated as consisting
entirely of deductions resulting from the exercise of the Endo LLC Options.
(e) The parties hereby agree that no payments shall be made and no rights to
any payment shall accrue to Endo LLC under this Agreement until the occurrence
of a Liquidity Event, if any, and that Endo and its Subsidiaries shall not
credit to an account of Endo LLC or any other Person, set aside any funds or
assets, or otherwise make available to or subject to a claim of Endo LLC or any
other Person any amounts hereunder until such amounts become payable to Endo
LLC pursuant to Section 1.1(a) hereof.
(f) The parties hereby agree that, notwithstanding anything herein to the
contrary, (i) any payments made pursuant to this Section 1.1 shall be treated
as payments described in Section 302 of the Code and shall take no position
inconsistent with this treatment for any tax purpose and (ii) no amount shall
be payable hereunder, and Endo LLC shall not be entitled to any payment
hereunder, to the extent any such payment is not permitted under Endo's Senior
Credit Facility, unless or until such time as such payment is either permitted
under the Senior Credit Facility or the Senior Credit Facility is terminated.
For purposes hereof, "Senior Credit Facility" shall mean the Credit Agreement
dated as of August 26, 1997, by and between Endo Pharmaceuticals Inc. and The
Chase Manhattan Bank, as amended, restated, modified, renewed, refunded,
replaced, or refinanced, in whole or in part, from time to time.
ARTICLE II
GENERAL PROVISIONS
Section 2.1 Survival This Agreement shall survive until the later of (a) the
close of the last taxable period of Endo or any successor to Endo in which a
deduction may be allowable to Endo or its Subsidiaries or their successors as a
result of or attributable to the exercise of an Option or (b) the payment by
Endo of all amounts payable under Section 1.1 hereof.
Section 2.2 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given when delivered personally, one day after
being delivered to an overnight courier or when
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telecopied (with a confirmatory copy sent by overnight courier) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to Endo or Sub, to:
Endo Pharmaceuticals Holdings Inc.
223 Wilmington-West Chester Pike
Chadds Ford, PA 19317
Attn.: Carol A. Ammon
Fax No.: (610) 558-9683
(b) if to Endo LLC or Kelso & Company:
Kelso & Company
320 Park Avenue, 24th Floor
New York, New York 10022
Attn.: James J. Connors, II, Esq.
Fax No.: (212) 223-2379
and with copies to:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036-6522
Attn.: Eileen T. Nugent, Esq. and David Rievman, Esq.
Fax No.: (212) 735-2000
Section 2.3 Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. 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. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation."
Section 2.4 Counterparts. This Agreement may be executed in counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
Section 2.5 Entire Agreement; No Third-Party Beneficiaries. Except for the
Merger Agreement and the Mutual Confidentiality and Non-Disclosure Agreement
between the parties dated October 21, 1998, this Agreement is the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof. This
Agreement is not intended to confer upon any Person other than the parties
hereto any rights or remedies hereunder.
Section 2.6 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF ENDO, ENDO LLC, OR SUB IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF.
Section 2.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
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Section 2.8 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 and legal
substance of the transactions contemplated hereby are 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 shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this Agreement
may be consummated as originally contemplated to the fullest extent possible.
Section 2.9 Modifications, Supplements and Amendment. This Agreement may be
modified, supplemented or amended from time to time by the parties hereto;
provided that any such modification, supplement or amendment must be approved
by a majority of the members of the Board of Directors of Endo who do not then
(by themselves or through an Affiliate) have a financial interest in the Parent
LLC or otherwise have a financial interest in any payments that may be made by
Parent or any successor to Parent hereunder).
Section 2.10 Definitions. Terms not otherwise defined herein have the
meaning given such terms in the Merger Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized all as of the
date first written above.
ENDO PHARMACEUTICALS HOLDINGS INC.
By: _________________________________
Name:
Title:
ENDO INC.
By: _________________________________
Name:
Title:
ENDO PHARMA LLC
By: _________________________________
Name:
Title:
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Exhibit H
FORM OF EMPLOYMENT AGREEMENT
Parties
This Employment Agreement (the "Agreement") made as of , 2000 is entered
into by and between Endo Pharmaceuticals Holdings Inc., with its principal
business address at 223 Wilmington-West Chester Pike, Chadds Ford, Pennsylvania
19317 (the "Company"), and John W. Lyle, residing at 28 Inlet Terrace, Belmar,
New Jersey 07719 ("Executive").
Recitals
A. The Company has entered into an Agreement and Plan of Merger, dated as of
November 26, 1999, (as may be amended and restated from time to time, the
"Merger Agreement"), among the Company, Endo Inc., a Delaware corporation and a
newly formed wholly owned subsidiary of the Company ("Sub"), and Algos
Pharmaceutical Corporation, a Delaware Corporation ("Algos"), pursuant to
which, among other things, Algos will merge with and into Sub.
B. The Company desires to retain Executive to provide the services
hereinafter set forth.
C. Executive is willing to continue to provide such services to the Company
on the terms and conditions hereinafter set forth.
Terms of Agreement
The parties agree as follows:
1. Employment.
1.1 The Company hereby retains Executive's employment (subject to the
provisions of Section 6) in a senior executive capacity with the Company. The
Executive shall perform such duties and services, consistent with his
positions, as may be assigned to him from time to time by the Board of
Directors of the Company or its designee. In furtherance of the foregoing, the
Executive hereby agrees to perform well and faithfully the aforesaid duties and
responsibilities and the other reasonable senior executive duties and
responsibilities assigned to him from time to time by the Board of Directors of
the Company or its designee. During the Employment Period, the Company shall
provide the Executive with an office, secretarial and other support services
comparable to those provided to other senior executive officers of the Company
at its headquarters and at the Company's facility at 1333 Campus Parkway,
Neptune, New Jersey 07753 for so long as the Company maintains such facility
and afterward at another facility of the Company convenient to the Executive to
be chosen at Executive's discretion.
1.2 Executive hereby accepts this employment on and subject to the terms and
conditions set forth in this Agreement, and shall use his reasonable best
efforts to promote the Company's interests.
2. Compensations Benefits.
2.1 Salary. During the Employment Period, as compensation for Executive's
performance of Executive's duties under this Agreement, the Company shall pay
Executive a Base Salary ("Base Salary") at the annual rate of $325,000 from the
date of this Agreement through December 31, 2000. Thereafter, the Base Salary
shall be subject to increase at the option and in the sole discretion of the
Board of Directors of the Company annually. The Base Salary shall be payable in
installments pursuant to the Company's executive payroll policies in force at
the time of payment (but not less frequently than monthly) for the month or
shorter pay period then ended, subject to applicable withholding for FICA,
income taxes and other required payroll deductions.
2.1.1 The Executive's Base Salary will be supplemented by payment of
performance bonuses at the option and in the sole discretion of the Board
of Directors of the Company annually.
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2.2 Expenses. During the Employment Period, to the extent such expenditures
meet the requirements and the policies of the Company for senior executives,
the Company shall reimburse Executive promptly for all reasonable travel,
entertainment, parking, business meeting and similar expenditures in pursuance
and furtherance of the Company's business, upon presentation of proper vouchers
or receipts therefor and in accordance with the Company's customary procedures.
During the Employment Period, the Company shall provide Executive with a mobile
phone, facsimile machine and photocopying machine for his home office, and the
Company shall reimburse Executive for expenses incurred in the use thereof by
Executive in pursuance and furtherance of the Company's business, upon
presentation of proper vouchers or receipts therefor and in accordance with the
Company's customary procedures.
2.3 Other Benefits. Executive shall be entitled to participate, at
Executive's option and as eligible, in any Company plans for the benefit of
officers and key employees as from time to time established, including, without
limitation, profit sharing, pension plan, stock option plans, performance bonus
plans, disability, medical and group life insurance. If the Company shall not
provide coverage for comprehensive family major medical, family dental,
disability and life insurance to Executive, he shall be reimbursed for the cost
of such coverage acquired by him elsewhere.
3. Employment Period; Termination.
3.1 Employment Period. Executive's employment term ("Employment Period")
shall terminate on the fifth anniversary of the date of this Agreement unless
earlier terminated pursuant to Section 3.2.
3.2 Termination.
3.2.1 Termination for Cause. The Company may, upon the approval of a
majority of the members of the Board of Directors of the Company, discharge
Executive and terminate the Employment Period for cause. Discharge for
cause shall be effective ten (10) days after Executive's receipt of written
notice of discharge or at such later date as may be specified in that
notice, provided such notice contains the specific reasons and the specific
events upon which discharge is predicated. If Executive is discharged for
cause, Executive shall only be entitled to Base Salary through the
effective date of the discharge or termination. As used in this paragraph,
"cause" shall mean any or all of the following:
(i) Willful and grossly negligent action taken by Executive which
materially harms, or can reasonably be expected to harm, the Company;
(ii) Commission of a fraud, misappropriation, embezzlement, or
criminal misconduct that would constitute a felony or adversely affect
the reputation of the Company or any of its affiliates (for purposes of
this Employment Agreement the term "affiliates" shall be deemed to
include, but not necessarily be limited to the corporation to which the
Company assigns its rights to the name, "Endo Pharmaceuticals" or any
variation thereof); or
(iii) If Executive shall be in breach of, or in default under, any
material provision, term or covenant of Article 4 of this Agreement
(other than a breach or default described in clauses (i) and (ii)) and
shall fail to cure such breach or default within a reasonable time
after written notice describing such breach or default in particular by
the Company; provided, however, that the Company need not give such
notice of, and Executive shall not have such opportunity to cure, any
material breach or default of any provision, term or covenant of
Article 4 of this Agreement if Executive had previously committed such
material breach or default and received notice thereof pursuant to this
clause (iii). The Employment Agreement shall only be terminable by the
Company with cause; provided, however, that "cause" shall in no event
include failure by Executive to perform services under this Agreement
because the Company and Executive have failed to agree on the nature,
amount, scope or timing of his services.
3.2.2 Termination for other than Cause. During the Employment Period, the
Company may terminate Executive's employment at any time for other than cause
on 30 days' written notice to Executive. Such termination shall be deemed
effective 30 days after Executive's receipt of the written notice of
termination or at such later date as may be specified in such notice.
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3.2.3 Involuntary Termination. If, during the Employment Period, Executive
becomes ill, disabled or otherwise incapacitated so as to be unable regularly
to perform his usual duties for a period in excess of 120 consecutive days, or
more than 150 days in any consecutive twelve-month period (such condition being
hereinafter referred to as "Disability"), the Company shall have the right,
with the approval of a majority of the members of the Board of Directors, to
terminate Executive's employment on 30 days' written notice to Executive (such
termination, or Executive's death, being herein referred to as "Involuntary
Termination"). If the Executive dies during the Employment Period, his
employment hereunder shall be deemed to have ceased as of the date of his
death.
3.2.4 Voluntary Termination. Any termination of the employment of the
Executive hereunder effectuated by the Executive shall be deemed to be a
"Voluntary Termination." A Voluntary Termination shall be deemed to be
effective immediately upon such termination.
3.3 Effect of Termination of Employment.
3.3.1 Upon the termination of the Executive's employment hereunder
pursuant to a Voluntary Termination or a Termination for Cause, neither the
Executive nor his beneficiary or estate shall have any further rights or
claims against the Company under this Agreement except to receive:
(i) the unpaid portion of the Base Salary provided for in Section
2.1, computed on a pro rata basis to the date of termination; and
(ii) reimbursement for any expenses for which the Executive shall
not have theretofore been reimbursed as provided in Section 2.2.
3.3.2 Upon the termination of the Executive's employment hereunder
pursuant to an Involuntary Termination or a Termination for other than
Cause, neither the Executive nor his beneficiary or estate shall have any
further rights or claims against the Company under this Agreement except to
receive:
(i) the unpaid portion of the Base Salary provided for in Section
2.1, to the fifth anniversary of the date of this Agreement;
(ii) reimbursement for any expenses for which the Executive shall
not have theretofore been reimbursed as provided in Section 2.2; and
(iii) the continuation of the benefits afforded pursuant to Section
2.3(i) through the fifth anniversary of the date of this Agreement.
4. Executive's Covenants.
4.1 Executive agrees that he will not from and after the date hereof through
the fifth anniversary of the termination of the Employment Period (for whatever
reason), directly or indirectly, through any other person, firm or corporation,
solicit, raid, entice, induce or encourage any employee, sales representative,
agent or consultant of or for the Company or its affiliates, to (i) cease his
or her association with or leave the employ of the Company or its affiliates,
(ii) solicit customers or suppliers of the Company or its affiliates for
Executive's or any other person's or entity's benefit or (iii) otherwise act in
violation of that person's obligations to the Company or its affiliates, and
Executive shall not authorize or knowingly approve the taking of such actions
by any other person.
4.2 Executive acknowledges that, by reason of his employment with the
Company, he will obtain confidential or non-public proprietary knowledge or
information pertaining to the business and policies of the Company and its
affiliates. Executive agrees that during and after the term of this Agreement,
he shall not disclose, without the prior written consent of the Board of
Directors of the Company or the Chairman of the Board, any confidential or non-
public proprietary knowledge or information pertaining to the Company and its
affiliates ("Confidential Information"), including, but not limited to (1)
trade secrets concerning the business and affairs of the Company and its
affiliates, product specifications, data, know-how, formulae, compositions,
processes, designs, sketches, photographs, graphs, drawings, samples,
inventions and ideas, past, current and
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planned research and development, current and planned manufacturing or
distribution methods and processes, customer lists, information regarding
customers of the Company (including such customers' requirements), price lists,
market studies, business plans, computer software and programs (including
object code and source code), computer software and database technologies,
systems, structures, and architectures (and related formulae, compositions,
processes, improvements, devices, know-how, inventions, discoveries, designs,
methods and information); (2) information concerning the business and affairs
of the Company and its affiliates (which includes historical financial
statements, financial projections and budgets, historical and projected sales,
capital spending budgets and plans, the names and backgrounds of key personnel,
personnel training and techniques and material) however documented; and (3)
notes, analyses, compilations, studies, summaries and other materials prepared
by or for the Company and its affiliates containing or based, in whole or in
part, on any information included in the foregoing. Confidential Information
shall not include information that: (a) was known to Executive prior to his
first employment with the Company or its affiliates, or (b) is public
knowledge, or becomes public knowledge other than by action (or omission) of
(i) Executive or persons obtaining access to such information directly or
indirectly from Executive or (ii) other persons disclosing such information in
breach of obligations to the Company.
4.3 Executive acknowledges and agrees that all memoranda, notes, reports,
records and other documents made or compiled by Executive, or made available to
Executive prior to or during the term of this Agreement concerning the
Company's and its affiliates, business, shall be the Company's or its
affiliates' property and shall be delivered to the Company on the termination
of this Agreement or at any other time on request by the Board of Directors or
Chairman of the Board of the Company.
4.4 Executive agrees that he will not, from and after the date hereof
through the fifth anniversary of the termination of the Employment Period (for
whatever reason), (i) directly or indirectly engage in, represent in any way,
or be connected with, any business or activity (such business or activity being
hereinafter called a "Competing Business"), which engages in pain management,
generic pharmaceuticals or such other activities that (during Executive's
Employment Period) the Company engages in or intends to engage in and is set
forth in a detailed written business plan that has been submitted to the
Company's Board of Directors prior to the termination of the Executive's
Employment Period, within any state in which the Company or its affiliates
transact business, whether such engagement shall be as an officer, director,
owner, employee, partner, affiliate or other participant in any Competing
Business; or (ii) assist others in engaging in any Competing Business in the
manner described in the foregoing clause (i); provided, however, that it shall
not be a violation of this Section 4.4 for Executive (a) to be the registered
or beneficial owner of up to twelve percent (12%) of any class of capital stock
of U.S. Dermatalogics, Inc., and the amount and percentage ownership of shares
beneficially owned by Executive, as of the date of this Agreement is set forth
on Schedule 4.4 hereto, (b) to be the registered or beneficial owner of shares
of any class of capital stock of a Competing Business that Executive owns as of
the date of this Agreement, the amounts and percentage ownership of which is
set forth on Schedule 4.4 hereto or (c) to become the registered or beneficial
owner of up to five percent (5%) of any class of the capital stock of a
Competing Business, provided that in the case of each of clauses (a), (b) and
(c) Executive does not actively participate in the business of such Competing
Business until such time as this covenant expires. The Executive acknowledges
and understands that the foregoing restrictions may limit his ability to earn a
livelihood in a business similar to the business of the Company, but he
nevertheless believes that he has received and will receive sufficient
consideration and other benefits in connection with the Company's issuance of
certain stock to the Executive, as an employee of the Company and as otherwise
provided hereunder to clearly justify such restrictions which, in any event
(given his education, skills and ability), the Executive does not believe would
prevent him from earning a living; provided, however, that the Executive may
actively engage in a Competing Business during the term of the covenant set
forth in this Section 4.4 if the Executive provides written notice to the
Company prior to engaging in any such Competing Business and the Executive
thereafter receives the written consent of the Board of Directors of the
Company to engage in such Competing Business. Notwithstanding the foregoing,
during the period from and after the date of this Agreement through the fifth
anniversary of the termination of the Employment Period, the Executive shall
keep the Board of Directors apprised of his business activities.
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<PAGE>
4.5 The Executive shall promptly disclose, grant and assign to the Company
for its sole use and benefit any and all inventions, improvements, technical
information and suggestions relating in any way to the business of the Company,
which he may develop or acquire during the Employment Period (whether or not
during usual working hours), together with all patent applications, letters
patent, copyrights and reissues thereof that may at any time be granted for or
upon any such invention, improvement or technical information. In connection
therewith:
(i) The Executive shall without charge, but at the expense of the
Company, promptly at all times hereafter execute and deliver such
applications, assignments, descriptions and other instruments as may be
reasonably necessary or proper in the reasonable opinion of the Company to
vest title to any such inventions, improvements, technical information,
patent applications, patents, copyrights or reissues thereof in the Company
and to enable it to obtain and maintain the entire right and title thereto
throughout the world; and
(ii) The Executive shall render to the Company at its expense (including
a reasonable payment for the time involved in case he is not then in its
employ) all such assistance as it may reasonably require in the prosecution
of applications for said patents, copyrights or reissues thereof, in the
prosecution or defense of interferences which may be declared involving any
said applications, patents or copyrights and in any litigation in which the
Company may be involved relating to any such patents, inventions,
improvements or technical information.
4.6 The provisions of this paragraph 4 shall survive the termination or
expiration of this Agreement irrespective of the reason therefor.
4.7 Executive acknowledges that the services to be rendered by him are of a
special, unique and extraordinary character and, in connection with such
services, he will have access to Confidential Information vital to the
Company's business. By reason of this, Executive consents and agrees that if he
violates any of the provisions of this Agreement with respect to the diversion
of the Company's or its affiliates' employees or confidentiality, the Company
or its affiliates would sustain irreparable harm and, therefore, in addition to
any other remedies which the Company may have under this Agreement or
otherwise, the Company shall be entitled to apply to any court of competent
jurisdiction for an injunction restraining Executive from committing or
continuing any such violation of this Agreement, and Executive shall not object
to any such application.
5. Indemnification. The Company agrees to indemnify and hold harmless
Executive on the terms set forth in the Company's Bylaws and Certificate of
Incorporation as they exist on the date of this Agreement and in any event to
the same extent that the Company provides indemnification for its other
executive employees.
6. Conflicting Duties. The Company acknowledges that during his tenure
pursuant to this Employment Agreement, Executive shall not be required to work
"full-time" for the Company and shall work on an as-needed basis, the dates and
times of which to be mutually agreed upon by the Company and Executive. In
addition, the Company acknowledges that during the Employment Period Executive
shall retain the right to pursue and/or fulfill other business opportunities,
commitments and obligations so long as such opportunities, commitments and
obligations would not constitute a breach by Executive of his obligations under
Section 4 of this Employment Agreement.
7. Miscellaneous.
7.1 Notices. Any notice or communication given by either party hereto to the
other party shall be in writing and shall be deemed duly given (i) when
personally delivered, or (ii) when five days have elapsed after its
transmittal, by registered or certified mail, return receipt requested, postage
prepaid, or (iii) if transmitted by telecopy, when sent, or (iv) if transmitted
by telex (or equivalent service), when the sender's receiving apparatus has
printed the answerback of the addressee on a copy of the telex message. Notices
shall be addressed as follows:
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<PAGE>
If to the Company:
Endo Pharmaceutical Holdings Inc.
223 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
Telecopier No.: 610-558-9683
Attention: Chief Executive Officer
If to Executive:
Mr. John W. Lyle
28 Inlet Terrace
Belmar, New Jersey 07719
With copies in each case to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Telecopier No.: 212-986-8866
Attention: James R. Ledley, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
Telecopier No.: 212-735-2000
Attention: Eileen T. Nugent Esq.
Any person entitled to receive notice (or a copy thereof) may designate in
writing, by notice to the others, such other address to which notices to such
person shall thereafter be sent.
7.2 Entire Agreement; Amendment; Waiver. This Agreement contains the entire
understanding of the parties covering its subject matter and supersedes all
prior agreements between the parties. This Agreement may be amended or waived
only by a writing signed by both parties. The waiver by either party of a
breach of any provision of this Agreement shall not operate or be construed as
a waiver of any other breach of that provision nor as a waiver of any breach of
another provision.
7.3 Headings. The headings of the paragraphs of this Agreement are inserted
for convenience only and shall not be considered a part of or be referred to in
interpreting this Agreement.
7.4 Governing Law; Interpretation; Service of Process. This Agreement shall
be construed in accordance with and governed for all purposes by the laws and
public policies of the State of New Jersey applicable to contracts executed and
to be wholly performed in that State. Service of process in any dispute shall
be effective: (a) upon the Company, if service is made on any officer of the
Company; and (b) upon Executive, if service is made to Executive's residence
last known to the Company with an information copy to Executive at any other
residence, or care of a subsequent employer, of which the Company may be aware.
7.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original, but all of which
together shall constitute one and the same instrument.
7.6 Assignment. Assignment of the rights and obligations of this Agreement
shall bind and enure to the benefit of any successor of the Company by
reorganization, merger or consolidation, or any assignee of all or
substantially all of the Company's business and properties, provided that the
successor shall assume the obligations of the Company under this Agreement.
Executive's rights or obligations under this Agreement may not be assigned by
Executive.
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<PAGE>
7.7 Further Assurances. Each of the parties agrees to execute, acknowledge,
deliver and perform, and/or cause to be executed, acknowledged, delivered and
performed, at any time and/or from time to time, as the case may be, all such
further acts, deeds, assignments, transfers, conveyances, powers-of-attorney
and/or assurances as may be necessary and/or proper to carry out the provisions
and/or intent of this Agreement.
7.8 Severability. If any one or more of the terms, provisions, covenants or
restrictions of this Agreement shall be determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated,
unless the parties hereto would not have entered into this Agreement without
said invalid, void or unenforceable term, provision, covenant or restriction.
If, moreover, any one or more of the provisions contained in this Agreement
shall for any reason be determined by a court of competent jurisdiction to be
excessively broad as to duration, geographical scope, activity or subject, it
shall be construed by limiting or reducing it, so as to be enforceable to the
extent compatible with then applicable law.
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<PAGE>
Execution
The parties have duly executed this Agreement as of the date first above
written whereupon this Agreement enters into full force and effect in
accordance with its terms.
ATTEST: ENDO PHARMACEUTICALS HOLDINGS INC.,
a Delaware Corporation
By: _________________________________ By: _________________________________
Name: Name:
Title: Title:
-------------------------------------
John W. Lyle
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<PAGE>
Schedule 4.4
<TABLE>
<S> <C> <C>
<CAPTION>
Competing Business Shares Beneficially Owned Percentage Ownership
------------------ -------------------------- -----------------------
<S> <C> <C>
U.S. Dermatalogics, Inc. 970,250 shares of common 7.9%, fully diluted for
stock the exercise of the
options and issuance
23,944 shares of common the issuance of the
issuable under a 23,944 shares issuable
convertible note shares issuable upon
conversion of the note
Options to purchase 25,000
shares of common stock
Warner Lambert Less than 500 shares Less than 1.0%
American Home Products Less than 500 shares Less than 1.0%
</TABLE>
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<PAGE>
Exhibit I
FORM OF WARRANT AGREEMENT
by and between
ENDO PHARMACEUTICALS HOLDINGS INC.
and
UNITED STATES TRUST COMPANY OF NEW YORK,
as
Warrant Agent
----------------
Dated as of , 2000
----------------
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
Section 1. Appointment of Warrant Agent.............................. A-129
Section 2. Warrant Certificates...................................... A-129
Section 3. Execution of Warrant Certificates......................... A-129
Section 4. Registration and Countersignature......................... A-130
Section 5. Transfer and Exchange of Warrants......................... A-130
Section 6. Registration of Transfers and Exchanges................... A-130
Section 7. Terms of Warrants; Exercise of Warrants................... A-132
Section 8. Payment of Taxes.......................................... A-134
Section 9. Mutilated or Missing Warrant Certificates................. A-134
Section 10. Reservation of Warrant Shares............................. A-134
Section 11. Obtaining Stock Exchange Listings......................... A-134
Adjustment of Exercise Price and Number of Warrant Shares
Section 12. Issuable.................................................. A-135
Section 13. Fractional Interests...................................... A-139
Section 14. Notices to Warrant Holders; Reservation of Dividends...... A-139
Section 15. Notices to the Company and Warrant Agent.................. A-140
Section 16. Supplements and Amendments................................ A-141
Section 17. Concerning the Warrant Agent.............................. A-141
Section 18. Change of Warrant Agent................................... A-143
Section 19. Successors................................................ A-143
Section 20. Termination............................................... A-143
Section 21. Governing Law............................................. A-143
Section 22. Benefits of This Agreement................................ A-143
Section 23. Counterparts.............................................. A-143
Section 24. Headings.................................................. A-143
Exhibit A. Form of Warrant Certificate............................... A-145
Exhibit B. Certificate to be Delivered Upon Transfer................. A-151
</TABLE>
A-128
<PAGE>
WARRANT AGREEMENT (the "Agreement"), dated as of , 2000, by and between
Endo Pharmaceuticals Holdings Inc., a Delaware corporation (together with any
successors and assigns, the "Company"), and United States Trust Company of New
York, as Warrant Agent (the "Warrant Agent").
WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated as of
November 26, 1999 (as may be amended and restated from time to time, the
"Merger Agreement"), by and among the Company, Endo Inc., a Delaware
corporation and wholly owned subsidiary of the Company ("Sub"), and Algos
Pharmaceutical Corporation, a Delaware corporation ("Algos"), the Company
proposes to issue warrants (each a "Warrant," and collectively, the "Warrants")
for the purchase of an aggregate of 29,920,177/1/ shares of common stock, par
value $.01 per share, of the Company (the "Common Stock," and the shares of
Common Stock issuable upon exercise of the Warrants being referred to herein as
the "Warrant Shares");
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company and the Warrant Agent is willing to act in connection with the
issuance, transfer, exchange and exercise of Warrants as provided herein; and
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein, the Company and the Warrant Agent hereby agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
Section 2. Warrant Certificates. The Warrants will initially be issued in
global form (the "Global Warrants"), substantially in the form of Exhibit A
hereto. Any certificates evidencing the Global Warrants to be delivered
pursuant to this Agreement (the "Warrant Certificates") shall be substantially
in the form set forth in Exhibit A hereto. Such Global Warrants shall represent
such of the outstanding Warrants as shall be specified therein and each shall
provide that it shall represent the aggregate amount of outstanding Warrants
from time to time endorsed thereon and that the aggregate amount of outstanding
Warrants represented thereby may from time to time be reduced or increased, as
appropriate. Any endorsement of a Global Warrant to reflect the amount of any
increase or decrease in the amount of outstanding Warrants represented thereby
shall be made by the Warrant Agent and the Depositary (as defined below) in
accordance with instructions given by the holder thereof. The Depository Trust
Company shall act as the Depositary with respect to the Global Warrants until a
successor shall be appointed by the Company. Upon written request, a Warrant
holder who holds Warrants may receive from the Depositary and Warrant Agent
Warrants in registered form as definitive Warrant Certificates (the "Definitive
Warrants") as set forth in Section 6 below.
Section 3. Execution of Warrant Certificates. Warrant Certificates shall be
signed on behalf of the Company by its Chairman of the Board, its President,
Chief Executive Officer, Chief Operating Officer, Chief Financial Officer or
Treasurer or a Vice President and by its Secretary or an Assistant Secretary.
Each such signature upon the Warrant Certificates may be in the form of a
facsimile signature of the present or any future Chairman of the Board,
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, Vice President, Secretary or Assistant Secretary and may be
imprinted or otherwise reproduced on the Warrant Certificates and for that
purpose the Company may adopt and use the facsimile signature of any person who
shall have been Chairman of the Board, President, Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, Treasurer, a Vice President,
Secretary or an Assistant Secretary, notwithstanding the fact that at the time
the Warrant Certificates shall be countersigned and delivered or disposed of
such person shall have ceased to hold such office.
In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer before the Warrant Certificates so
signed shall have been countersigned by the Warrant Agent, or disposed of by
the Company, such Warrant Certificates nevertheless may be countersigned and
delivered or
--------
(1) These numbers shall be adjusted in the final Endo Warrant. See footnotes 2-
5 below.
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<PAGE>
disposed of as though such person had not ceased to be such officer of the
Company; and any Warrant Certificate may be signed on behalf of the Company by
any person who, at the actual date of the execution of such Warrant
Certificate, shall be a proper officer of the Company to sign such Warrant
Certificate, although at the date of the execution of this Warrant Agreement
any such person was not such officer.
Warrant Certificates shall be dated the date of countersignature by the
Warrant Agent.
Section 4. Registration and Countersignature. The Warrants shall be numbered
and shall be registered on the books of the Company maintained at the principal
office of the Warrant Agent located at 114 West 47th Street, 25th Floor, New
York, New York, 10036, Attention: Corporate Trust Division (the "Warrant
Register") as they are issued.
Warrant Certificates shall be manually countersigned by the Warrant Agent
and shall not be valid for any purpose unless so countersigned. The Warrant
Agent shall, upon written instructions of the Chairman of the Board, the
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, a Vice President, the Secretary or an Assistant Secretary
of the Company, initially countersign and deliver Warrants entitling the
holders thereof to purchase not more than the number of Warrant Shares referred
to above in the first recital hereof and shall thereafter countersign and
deliver Warrants as otherwise provided in this Agreement.
The Company and the Warrant Agent may deem and treat the registered holders
(the "Holders") of the Warrant Certificates as the absolute owners thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone) for all purposes, and neither the Company nor the Warrant Agent shall
be affected by any notice to the contrary.
Section 5. Transfer and Exchange of Warrants. The Warrant Agent shall from
time to time, subject to the limitations of Section 6 hereof, register the
transfer of any outstanding Warrants upon the records to be maintained by it
for that purpose, upon surrender thereof duly endorsed or accompanied (if so
required by it) by a written instrument or instruments of transfer in form
satisfactory to the Warrant Agent, duly executed by the registered Holder or
Holders thereof or by the duly appointed legal representative thereof or by a
duly authorized attorney. Subject to the terms of this Agreement, each Warrant
Certificate may be exchanged for another certificate or certificates entitling
the Holder thereof to purchase a like aggregate number of Warrant Shares as the
certificate or certificates surrendered then entitle each Holder to purchase.
Any Holder desiring to exchange a Warrant Certificate or Certificates shall
make such request in writing delivered to the Warrant Agent, and shall
surrender, duly endorsed or accompanied (if so required by the Warrant Agent)
by a written instrument or instruments of transfer in form satisfactory to the
Warrant Agent, the Warrant Certificate or Certificates to be so exchanged.
Upon registration of transfer, the Warrant Agent shall countersign and
deliver by certified or first class mail a new Warrant Certificate or
Certificates to the persons entitled thereto. The Warrant Certificates may be
exchanged at the option of the Holder thereof, when surrendered at the office
or agency of the Company maintained for such purpose, which initially will be
the corporate trust office of the Warrant Agent located at 770 Broadway, 13th
Floor, New York, New York, 10003, Attention: Corporate Trust Services, for
another Warrant Certificate, or other Warrant Certificates of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Warrant Shares.
No service charge shall be made for any exchange or registration of transfer
of Warrant Certificates, but the Company may require payment of a sum
sufficient to cover any stamp or other tax or other governmental charge that is
imposed in connection with any such exchange or registration of transfer.
Section 6. Registration of Transfers and Exchanges.
(a) Transfer and Exchange of Definitive Warrants. When Definitive Warrants
are presented to the Warrant Agent with a request:
(i) to register the transfer of the Definitive Warrants; or
(ii) to exchange such Definitive Warrants for an equal number of
Definitive Warrants of other authorized denominations, the Warrant Agent
shall register the transfer or make the exchange as requested
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<PAGE>
if its requirements under this Agreement are met; provided, however, that
the Definitive Warrants presented or surrendered for registration of
transfer or exchange shall be duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the Warrant Agent, duly
executed by the Holder thereof or by such Holder's attorney, duly
authorized in writing.
(b) Restrictions on Transfer of a Definitive Warrant for a Beneficial
Interest in a Global Warrant. The Warrant Agent may exchange a Definitive
Warrant for a beneficial interest in a Global Warrant only if the Warrant Agent
has received such Definitive Warrant, duly endorsed or accompanied by
appropriate instruments of transfer, in form satisfactory to the Warrant Agent,
together with written instructions directing the Warrant Agent to make, or to
direct the Depositary to make, an endorsement on the Global Warrant to reflect
an increase in the aggregate amount of the Warrants represented by the Global
Warrant. If such conditions have been satisfied, the Warrant Agent shall cancel
such Definitive Warrant and cause, or direct the Depositary to cause, in
accordance with the standing instructions and procedures existing between the
Depositary and the Warrant Agent, the number of Warrant Shares represented by
the Global Warrant to be increased accordingly. If no Global Warrant is then
outstanding, the Company shall issue and the Warrant Agent shall countersign a
new Global Warrant in the appropriate amount.
(c) Transfer and Exchange of Global Warrants. The transfer and exchange of
Global Warrants or beneficial interests therein shall be effected through the
Depositary, in accordance with this Warrant Agreement (including the
restrictions on transfer set forth herein) and the procedures of the Depositary
therefor.
(d) Transfer of a Beneficial Interest in a Global Warrant for a Definitive
Warrant.
(i) Any person having a beneficial interest in a Global Warrant may upon
his, her or its request exchange such beneficial interest for a Definitive
Warrant. Upon receipt by the Warrant Agent of written instructions (or such
other form of instructions as is customary for the Depositary) from the
Depositary or its nominee on behalf of any person having a beneficial
interest in a Global Warrant and upon receipt by the Warrant Agent of a
written order or such other form of instructions as is customary for the
Depositary or the person designated by the Depositary as having such a
beneficial interest containing registration instructions, then the Warrant
Agent will cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Warrant Agent, the
aggregate amount of the Global Warrant to be reduced and, following such
reduction, the Company will execute and, upon receipt of a
countersignature, the Warrant Agent will countersign and deliver to the
transferee a Definitive Warrant.
(ii) Definitive Warrants issued in exchange for a beneficial interest in
a Global Warrant pursuant to this Section 6(d) shall be registered in such
names and in such authorized denominations as the Depositary, pursuant to
instructions from its direct or indirect participants or otherwise, shall
instruct the Warrant Agent in writing, provided such designation is in
accordance with this Section 6(d). The Warrant Agent shall deliver such
Definitive Warrants to the persons in whose names such Definitive Warrants
are registered.
(e) Restrictions on Transfer and Exchange of Global
Warrants. Notwithstanding any other provisions of this Warrant Agreement (other
than the provisions set forth in subsection (f) of this Section 6), a Global
Warrant may not be transferred as a whole except by the Depositary to a nominee
of the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) Authentication of Definitive Warrants in Absence of Depositary. If at
any time:
(i) the Depositary for the Global Warrants notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the Global
Warrant and a successor Depositary for the Global Warrant is not appointed
by the Company within 90 days after delivery of such notice; or
(ii) the Company, at its sole discretion, notifies the Warrant Agent in
writing that it elects to cause the issuance of Definitive Warrants under
this Warrant Agreement, then the Company will execute, and the
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<PAGE>
Warrant Agent, upon receipt of an officers' certificate, signed by the
President, Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer or a Vice President of the Company, requesting the
countersignature and delivery of Definitive Warrants, will countersign and
deliver Definitive Warrants, in an aggregate number equal to the aggregate
number of Warrants represented by the Global Warrant, in exchange for such
Global Warrant.
(g) Cancellation and/or Adjustment of a Global Warrant. At such time as all
beneficial interests in a Global Warrant have either been exchanged for
Definitive Warrants, redeemed, repurchased or cancelled, such Global Warrant
shall be returned to or retained and cancelled by the Warrant Agent. At any
time prior to such cancellation, if any beneficial interest in a Global Warrant
is exchanged for Definitive Warrants, redeemed, repurchased or cancelled, the
number of Warrants represented by such Global Warrant shall be reduced and an
endorsement shall be made on such Global Warrant, by the Warrant Agent to
reflect such reduction.
(h) Obligations with Respect to Transfers and Exchanges of Definitive
Warrants.
(i) To permit registrations of transfers and exchanges in accordance
with the terms of this Agreement, the Company shall execute, and the
Warrant Agent shall countersign Definitive Warrants and Global Warrants.
(ii) All Definitive Warrants and Global Warrants issued upon any
registration, transfer or exchange of Definitive Warrants or Global
Warrants shall be the valid obligations of the Company, entitled to the
same benefits under this Warrant Agreement as the Definitive Warrants or
Global Warrants surrendered upon the registration of transfer or exchange.
(iii) Prior to due presentment for registration of transfer of any
Warrant, the Warrant Agent and the Company may deem and treat the person in
whose name any Warrant is registered as the absolute owner of such Warrant,
and neither the Warrant Agent nor the Company shall be affected by notice
to the contrary.
Section 7. Terms of Warrants; Exercise of Warrants. Subject to the terms of
this Agreement, the Warrant Holders shall have the right, which may be
exercised commencing on or after the Exercisability Date (as defined below) and
until 5:00 p.m., New York City time, on July 7, 2003 (the six-month anniversary
of the Exercisability Date) (the "Expiration Date"), to receive from the
Company (on exercise of such Warrants and payment of the Exercise Price then in
effect for such Warrant Shares) (together, if applicable, with cash payable as
provided in Section 13 hereof and any dividends or distributions payable as
provided in Section 14 hereof) (a) 29,920,177 Warrant Shares (in the aggregate)
(with each Warrant being exercisable for 0.416667 Warrant Shares)/2/ in the
event the Adjustment Event has not occurred prior to such time or (b)
17,952,106 Warrant Shares (in the aggregate) (with each Warrant being
exercisable for 0.250000 Warrant Shares)/3/ in the event the Adjustment Event
has occurred prior to such time. Each Warrant not exercised prior to the
Expiration Date shall become void and all rights thereunder and all rights in
respect thereof under this Agreement shall cease as of the Expiration Date. If
applicable, dividends and other distributions will be made upon exercise of the
Warrants as set forth in Section 14 hereof.
--------
(2) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock held by Persons who
had been holders of Parent Common Stock immediately prior to the Effective
Time, shall equal 85% of the shares of Parent Common Stock on a fully
diluted basis (excluding the effect of the Algos Warrants as if no
Adjustment Event had occurred).
(3) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock held by Persons who
had been holders of Parent Common Stock immediately prior to the Effective
Time, shall equal 80% of the shares of Parent Common Stock on a fully
diluted basis (excluding the effect of the Algos Warrants and after giving
effect to the Adjustment Event as if it had occurred).
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"Exercisability Date" shall mean the fifth (5th) Business Day (as defined
below) following December 31, 2002 if the Company (or any of its subsidiaries)
has not received approval from the U.S. Food and Drug Administration (the
"FDA") with respect to its New Drug Application for MorphiDex(R) for the
treatment of any pain prior to December 31, 2002.
In addition to the notices required by Section 14 hereof, the Company shall
give prompt written notice to the Warrant Agent that the Exercisability Date
has occurred and shall cause the Warrant Agent, on behalf of and at the expense
of the Company, within 5 Business Days after such notification is received by
the Warrant Agent, to mail by first class mail, postage prepaid, to each Holder
a notice specifying that the Exercisability Date has occurred and that the
Warrant has become exercisable pursuant to its terms and that the Warrant will
expire at 5:00 p.m., New York City time, on the Expiration Date. In addition,
the Company shall post appropriate notices of the Exercisability Date on its
web pages and issue press releases to wire services. A "Business Day" is a day
that is not a Legal Holiday. A "Legal Holiday" is a Saturday, a Sunday, a
federally recognized holiday or a day on which banking institutions are not
required to be open in the State of New York.
The initial price per share at which Warrant Shares shall be purchasable
upon exercise of Warrants (the "Exercise Price") shall equal $0.01. A Warrant
may be exercised upon surrender at the office or agency of the Company
maintained for such purpose, which initially will be the corporate trust office
of the Warrant Agent or its agents located at 114 West 47th Street, 25th Floor,
New York, New York, 10036, Attention: Corporate Trust Division, of the Warrant
Certificate(s) evidencing the Warrants to be exercised with the form of
election to purchase on the reverse thereof duly filled in and signed, which
signature shall be guaranteed by a participant in a recognized Signature
Guarantee Medallion Program, and upon payment to the Warrant Agent for the
account of the Company of the Exercise Price, as adjusted as herein provided,
for the number of Warrant Shares together, if applicable, with cash payable as
provided in Section 13 hereof and any dividends or distributions as provided in
Section 14 hereof in respect of which such Warrants are then exercised. Payment
of the Exercise Price may be made (a) in the form of cash or by certified or
official bank check payable to the order of the Company in New York Clearing
House Funds, (b) by delivering to the Company a written notice accompanying the
surrender of a Warrant to, at the time of exercise, apply to the payment of the
Exercise Price such number of Warrant Shares as shall be specified in such
notice, in which case an amount equal to the excess of the Current Market Value
(as defined in Section 12(d) hereof) of such Warrant Shares on the date of
exercise over the Exercise Price required for such exercise shall be deemed to
have been paid to the Company and the number of Warrant Shares issuable upon
such exercise shall be reduced by such specified number (a "Cashless Exercise")
or (c) any combination of (a) and (b) above.
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause
to be delivered with all reasonable dispatch to or upon the written order of
the Holder and in such name or names as the Warrant Holder may designate a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 13
hereof. Such certificate or certificates shall be deemed to have been issued
and any person so named therein shall be deemed to have become a holder of
record of such Warrant Shares as of the date of the surrender of such Warrants
and payment of the Exercise Price.
On or after the Exercisability Date, the Warrants shall be exercisable, at
the election of the Holders thereof, either in full or from time to time in
part and, in the event that a certificate evidencing Warrants is exercised in
respect of fewer than all of the Warrant Shares issuable on such exercise at
any time prior to the Expiration Date, a new certificate evidencing the
remaining Warrant or Warrants will be issued, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrant
Certificate or Certificates pursuant to the provisions of this Section 7 and of
Section 3 hereof, and the Company, whenever required by the Warrant Agent, will
promptly supply the Warrant Agent with Warrant Certificates duly executed on
behalf of the Company for such purpose.
All Warrant Certificates surrendered upon exercise of Warrants shall be
cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall then
be either delivered to the Company or disposed of by the
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Warrant Agent in a manner consistent with the Warrant Agent's customary
procedure for such disposal and in a manner reasonably satisfactory to the
Company. The Warrant Agent shall account promptly to the Company with respect
to Warrants exercised and concurrently pay to the Company all monies received
by the Warrant Agent for the purchase of the Warrant Shares through the
exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by the Holders during normal business hours at its office. The
Company shall supply the Warrant Agent from time to time with such numbers of
copies of this Agreement as the Warrant Agent may request.
Section 8. Payment of Taxes. The Company will pay all documentary stamp
taxes attributable to the initial issuance of Warrant Shares upon the exercise
of Warrants; provided, however, that the Company shall not be required to pay
any tax or taxes which may be payable in respect of any transfer involved in
the issue of any Warrant Certificates or any certificates for Warrant Shares in
a name other than that of the registered Holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
Section 9. Mutilated or Missing Warrant Certificates. In case any of the
Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company
may in its discretion issue and the Warrant Agent may countersign, in exchange
and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing
an equivalent number of Warrants, but only upon receipt of evidence
satisfactory to the Company and the Warrant Agent of such loss, theft or
destruction of such Warrant Certificate and indemnity, if requested, also
satisfactory to them. Applicants for such substitute Warrant Certificates shall
also comply with such other reasonable regulations and pay such other
reasonable charges as the Company or the Warrant Agent may prescribe.
Section 10. Reservation of Warrant Shares. The Company will at all times
reserve and keep available, free from preemptive rights, out of the aggregate
of its authorized but unissued Common Stock or its authorized and issued Common
Stock held in its treasury, for the purpose of enabling it to satisfy any
obligation to issue Warrant Shares upon exercise of Warrants, the maximum
number of shares of Common Stock which may then be deliverable upon the
exercise of all outstanding Warrants.
The Company will keep a copy of this Agreement on file with the transfer
agent for the Common Stock (the "Transfer Agent") and with every subsequent
transfer agent for any shares of the Company's capital stock issuable upon the
exercise of the rights of purchase represented by the Warrants. The Warrant
Agent is hereby irrevocably authorized to requisition from time to time from
such Transfer Agent the stock certificates required to honor outstanding
warrants upon exercise thereof in accordance with the terms of this Agreement.
The Company will supply such Transfer Agent with duly executed certificates for
such purposes and will provide or otherwise make available any cash which may
be payable as provided in Section 13 hereof. The Company will furnish such
Transfer Agent a copy of all notices of adjustments and certificates related
thereto transmitted to each Holder pursuant to Section 14 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon payment of the Exercise Price therefor and
issue, be validly authorized and issued, fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security
interests with respect to the issuance thereof. The Company will use its
reasonable best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations under this
Agreement.
Section 11. Obtaining Stock Exchange Listings. The Company will from time to
time take all action which may be necessary so that the Warrants and,
immediately upon their issuance upon exercise of the
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Warrants, the Warrant Shares will be listed on the principal securities
exchanges and markets within the United States of America, if any, on which
other shares of Common Stock are then listed.
Section 12. Adjustment of Exercise Price and Number of Warrant Shares
Issuable.
(a) If the Company:
(i) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock or other capital stock of the Company; or
(ii) subdivides, splits, combines or reclassifies its outstanding shares
of Common Stock into a different number of securities of the same class,
then the number of shares of Common Stock issuable upon the exercise of each
Warrant (the "Exercise Rate") in effect immediately prior to such action shall
be proportionately adjusted so that the Holder of any Warrant thereafter
exercised may receive the aggregate number and kind of shares of capital stock
of the Company which such Holder would have owned immediately following such
action if such Warrant had been exercised immediately prior to such action and
the Exercise Price in effect immediately prior to such action shall be adjusted
to a price determined by multiplying the Exercise Price in effect immediately
prior to such action by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding before giving effect to such action and
the denominator of which shall be the number of shares of Common Stock and/or
such other capital stock outstanding referred to in the foregoing clause (a)(1)
after giving effect to such action.
An adjustment pursuant to this Section 12(a) shall become effective
immediately after the record date in the case of a dividend or distribution and
immediately after the effective date in the case of a subdivision, combination
or reclassification.
If, after an adjustment pursuant to this Section 12(a), a Holder of a
Warrant upon exercise of it may receive shares of two or more classes of
capital stock of the Company, the board of directors of the Company shall
determine the allocation of the adjusted Exercise Price between the classes of
capital stock. After such allocation, the exercise privilege and the Exercise
Price of each class of capital stock shall thereafter be subject to adjustment
on terms comparable to those applicable to Common Stock in this Section 12.
Such adjustment shall be made successively whenever any event listed above
shall occur.
(b) Adjustment for Certain Issuances of Common Stock. If the Company issues
or sells to any Affiliate (as defined in Section 12(d) hereof) of the Company
(other than KIA V, L.P. and KEP V, L.P.) shares of its Common Stock or
distributes to any Affiliate of the Company (other than KIA V, L.P. and KEP V,
L.P.) any rights, options or warrants entitling them to purchase shares of
Common Stock, or securities convertible into or exchangeable for Common Stock,
in each case, at a price per share less than the Current Market Value on the
record date for determining entitlements of such Affiliates to participate in
such issuance, sale or distribution (the "Time of Determination") and prior to
such issuance, sale or distribution the Company did not first offer to issue,
sell or distribute such shares of its Common Stock or such rights, options or
warrants or such securities convertible into or exchangeable for Common Stock
to all holders of Common Stock on the same economic terms and on a pro rata
basis with the issuance, sale or distribution to such Affiliates of the
Company, then the Exercise Rate shall be adjusted in accordance with the
formula:
E' = E x O + N
---------
O + N x P
-----
M
and the Exercise Price shall be adjusted in accordance with the following
formula:
EP' = EP x E
---
E'
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<PAGE>
where:
E' = the adjusted Exercise Rate.
E = the Exercise Rate immediately prior to the Time of Determination for
any such issuance, sale or distribution.
EP'= the Adjusted Exercise Price.
EP = the Exercise Price immediately prior to the Time of Determination for
any such issuance, sale or distribution.
O = the number of Fully Diluted Shares (as defined below) outstanding
immediately prior to the Time of Determination for any such issuance,
sale or distribution.
N = the number of additional shares of Common Stock issued, sold or
issuable upon exercise of such rights, options or warrants.
P = the per share price received and receivable by the Company in the case
of any issuance or sale of Common Stock or rights, options or warrants
as to which such adjustment is being made, inclusive of the exercise
price per share of Common Stock payable upon exercise of such rights,
options or warrants.
M = the Current Market Value per share of Common Stock on the Time of
Determination for any such issuance, sale or distribution.
For purposes of this Section 12(b), the term "Fully Diluted Shares" shall
mean (i) the shares of Common Stock outstanding as of a specified date, and
(ii) the shares of Common Stock into or for which rights, options, warrants or
other securities of the Company outstanding as of such date are exercisable or
convertible (other than the Warrants).
Any adjustments shall be made successively whenever any such rights, options
or warrants are issued and shall become effective immediately after the
relevant Time of Determination. Notwithstanding the foregoing, the Exercise
Rate and the Exercise Price shall not be subject to adjustment in connection
with (i) the issuance of any shares of Common Stock upon exercise of any such
rights, options or warrants which have previously been the subject of an
adjustment under this Agreement for which the required adjustment has been made
and (ii) any exercise of the Warrants. If at the end of the period during which
any such rights, options or warrants are exercisable, not all rights, options
or warrants shall have been exercised, the Warrant shall be immediately
readjusted to what it would have been if "N" in each of the above formulas had
been the number of shares actually issued.
(c) When De Minimis Adjustment May Be Deferred. No adjustment in the
Exercise Rate need be made unless the adjustment would require an increase or
decrease of at least 1% in the Exercise Rate. Notwithstanding the foregoing,
any adjustments that are not made shall be carried forward and taken into
account in any subsequent adjustment, provided that no such adjustment shall be
deferred beyond the date on which a Warrant is exercised.
All calculations under this Section 12 shall be made to the nearest cent or
to the nearest 1/100th of a share, as the case may be.
(d) Certain Definitions. "Current Market Value" per share of Common Stock or
of any other security (herein collectively referred to as a "Security") at any
date shall be:
(1) if the Security is not registered under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), (i) the value of the Security
determined in good faith by the board of directors of the Company and
certified in a board resolution, based on the most recently completed
arm's-length transaction between the Company and a person other than an
Affiliate of the Company and the closing of which occurs on such date or
shall have occurred within the six months preceding such date or (ii) if no
such transaction shall have occurred on such date or within such six-month
period, the value of the
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Security determined as of a date within 30 days preceding such date by an
Independent Financial Expert (as defined below), or
(2) if the Security is registered under the Exchange Act, the average of
the daily closing bid prices of such Security for 30 consecutive Business
Days selected by the Company from the period of 45 Business Days preceding
such date, but only if such Security shall have been listed on a national
securities exchange or the Nasdaq National Market or traded through an
automated quotation system during such entire 45-Business Day period.
The "closing bid price" for any Security on each Business Day means the
closing price, regular way, on such day on the principal exchange on which such
Security is traded, or if no sale takes place on such day, the average of the
closing bid and asked prices on such day.
"Independent Financial Expert" shall mean any nationally recognized
investment banking firm that is not an Affiliate of the Company. Any such
person may receive customary compensation and indemnification by the Company
for opinions or services it provides as an Independent Financial Expert.
"Affiliate" of any specified person means any other person which directly or
indirectly through one or more intermediaries controls or is controlled by, or
is under common control with, such specified person. For the purposes of this
definition, "control" (including with correlative meanings, the terms
"controlling," "controlled by" and "under common control with") as used with
respect to any person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
person, whether through the ownership of voting securities, by agreement or
otherwise.
"Ordinary Cash Distribution" means any quarterly cash dividend on the Common
Stock to the extent that the aggregate cash dividend per share of Common Stock
in any calendar quarter does not exceed the greater of (x) the amount per share
of Common Stock of the next preceding quarterly cash dividend on the Common
Stock (as adjusted to reflect subdivisions or combinations of the Common Stock)
and (y) 3.0% of the average of the last reported sales prices of the Common
Stock during the ten trading days immediately prior to the date of declaration
of such dividend.
(e) When No Adjustment Required. If an adjustment is made upon the
establishment of a record date for an issuance, sale or distribution subject to
subsection (a) or (b) hereof and such issuance, sale or distribution is
subsequently cancelled or is not otherwise made, the Exercise Rate and Exercise
Price then in effect shall be readjusted, effective as of the date when the
board of directors of the Company determines to cancel such issuance, sale or
distribution or when it is otherwise evident that such issuance, sale or
distribution will not be so made, to that which would have been in effect if
such record date had not been fixed. If an adjustment would be required under
both subsections (a) and (b) above, such adjustments will be determined without
duplication.
To the extent the Warrants become convertible into cash, no adjustment need
be made thereafter as to the amount of cash into which such Warrants are
exercisable. Interest will not accrue on the cash.
(f) Notice of Adjustment. Whenever the Exercise Rate or Exercise Price is
adjusted, the Company shall provide the notices required by Section 14 hereof.
(g) Voluntary Reduction. The Company from time to time may increase the
Exercise Rate or reduce the Exercise Price by any amount for any period of time
(including, without limitation, permanently) if the period is at least 20
Business Days and the Company has given notice of such increase or reduction in
accordance with Section 14 hereof.
An increase of the Exercise Rate or reduction in the Exercise Price under
this subsection (g) (other than a permanent increase) does not change or adjust
the Exercise Rate otherwise in effect for purposes of subsection (a) and (b) of
this Section 12.
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(h) When Issuance or Payment May Be Deferred. In any case in which this
Section 12 shall require that an adjustment in the Exercise Rate or Exercise
Price be made effective as of a record date for a specified event, the Company
may elect to defer until the occurrence of such event (i) issuing to the Holder
of any Warrant exercised after such record date the Warrant Shares and other
capital stock of the Company, if any, issuable upon such exercise over and
above the Warrant Shares and other capital stock of the Company, if any,
issuable upon such exercise on the basis of the Exercise Rate prior to such
adjustment, and (ii) paying to such Holder any amount in cash in lieu of a
fractional share pursuant to Section 13 hereof; provided, however, that the
Company shall deliver to the Warrant Agent and shall cause the Warrant Agent,
on behalf of and at the expense of the Company, to deliver to such Holder a due
bill or other appropriate instrument evidencing such Holder's right to receive
such additional Warrant Shares, other capital stock and cash upon the
occurrence of the event requiring such adjustment.
(i) Reorganizations. In case of (i) any capital reorganization, other than
in the cases referred to in Section 12(a) and (b) hereof and other than any
capital reorganization that does not result in any reclassification of the
outstanding shares of Common Stock into shares of other stock or other
securities or property, or (ii) the consolidation or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock into shares of other
stock or other securities or property), or (iii) the sale of all or
substantially all of the assets of the Company (collectively such actions being
hereinafter referred to as "Reorganizations"), there shall thereafter be
deliverable upon exercise of any Warrant in accordance with the terms hereof
(in lieu of the number of shares of Common Stock theretofore deliverable) the
number of shares of stock or other securities or property to which a holder of
the number of shares of Common Stock that would otherwise have been deliverable
upon the exercise of such Warrant would have been entitled upon such
Reorganization if the Exercisability Date had occurred and such Warrant had
been exercised in full immediately prior to such Reorganization. In case of any
Reorganization, appropriate adjustment, as determined in good faith by the
board of directors of the Company, whose determination shall be described in a
duly adopted resolution certified by the Company's Secretary or Assistant
Secretary, shall be made in the application of the provisions herein set forth
with respect to the rights and interests of Holders so that the provisions set
forth herein shall thereafter be applicable, as nearly as possible, in relation
to any such shares or other securities or property thereafter deliverable upon
exercise of Warrants.
The Company shall not effect any such Reorganization unless prior to or
simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such Reorganization or the corporation
or other entity purchasing such assets shall expressly assume, by a
supplemental warrant agreement or other acknowledgment executed and delivered
to the Warrant Agent, the obligation to deliver to the Warrant Agent and to
cause the Warrant Agent to deliver to each such Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
Holder may be entitled to purchase in accordance with the terms hereof upon the
occurrence of the Exercisability Date, and the due and punctual performance and
observance of each and every covenant, condition, obligation and liability
under this Agreement to be performed and observed by the Company in the manner
prescribed herein.
The foregoing provisions of this Section 12(i) shall apply to successive
Reorganization transactions.
(j) Form of Warrants. Irrespective of any adjustments in the number or kind
of shares purchasable upon the exercise of the Warrants, Warrants theretofore
or thereafter issued may continue to express the same price and number and kind
of shares as are stated in the Warrants initially issuable pursuant to this
Agreement.
(k) Warrant Agent's Disclaimer. The Warrant Agent has no duty to determine
when an adjustment under this Section 12 should be made, how it should be made
or what it should be. The Warrant Agent has no duty to determine whether any
provisions of a supplemental warrant agreement under subsection (i) of this
Section 12 are correct. The Warrant Agent makes no representation as to the
validity or value of any securities or assets issued upon exercise of Warrants.
The Warrant Agent shall not be responsible for the Company's failure to comply
with this Section 12.
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(l) Miscellaneous. For purpose of this Section 12 the term "shares of Common
Stock" shall mean (i) shares of the class of stock designated as the Common
Stock, par value $.01 per share, of the Company as of the date of this
Agreement, and (ii) shares of any other class of stock resulting from
successive changes or reclassification of such shares consisting solely of
changes in par value, or from par value to no par value, or from no par value
to par value. In the event that at any time, as a result of an adjustment made
pursuant to this Section 12, the Holders of Warrants shall become entitled to
purchase any securities of the Company other than, or in addition to, shares of
Common Stock, thereafter the number or amount of such other securities so
purchasable upon exercise of each Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in subsections (a)
through (l) of this Section 12, inclusive, and the provisions of Sections 7, 8,
10 and 13 with respect to the Warrant Shares or the Common Stock shall apply on
like terms to any such other securities.
Section 13. Fractional Interests. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same Holder,
the number of full Warrant Shares which shall be issuable upon the exercise
thereof shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of the Warrants so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 13, be
issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the excess of the Current Market
Value of a Warrant Share over the Exercise Price on the day immediately
preceding the date the Warrant is presented for exercise, multiplied by such
fraction.
Section 14. Notices to Warrant Holders; Reservation of Dividends. Upon any
adjustment pursuant to Section 12 hereof, the Company shall give prompt written
notice of such adjustment to the Warrant Agent and shall cause the Warrant
Agent, on behalf of and at the expense of the Company, within 10 days after
notification is received by the Warrant Agent of such adjustment, to mail by
first class mail, postage prepaid, to each Holder a notice of such
adjustment(s) and shall deliver to the Warrant Agent a certificate of the Chief
Financial Officer of the Company, setting forth in reasonable detail (i) the
number of Warrant Shares purchasable upon the exercise of each Warrant and the
Exercise Price of such Warrant after such adjustment(s), (ii) a brief statement
of the facts requiring such adjustment(s) and (iii) the computation by which
such adjustment(s) was made. Where appropriate, such notice may be given in
advance and included as a part of the notice required under the other
provisions of this Section 14.
In case the Exercisability Date has occurred and:
(a) the Company shall authorize the issuance to all holders of shares of
Common Stock of rights, options or warrants to subscribe for or purchase
shares of Common Stock or of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets or cash;
or
(c) of any consolidation or merger to which the Company is a party and
for which approval of any stockholders of the Company is required, or of
the conveyance or transfer of the properties and assets of the Company
substantially as an entirety, or of any reclassification or change of
Common Stock issuable upon exercise of the Warrants (other than a change in
par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), or a tender offer
or exchange offer for shares of Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or winding
up of the Company; or
(e) the Company proposes to take any action that would require an
adjustment to the Exercise Rate pursuant to Section 12 hereof;
then the Company shall give prompt written notice to the Warrant Agent and
shall cause the Warrant Agent, on behalf of and at the expense of the Company
to give to each of the registered holders of the Warrant Certificates at his,
her or its address appearing on the Warrant Register, at least 30 days (or 20
days in any case
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specified in clauses (a) or (b) above) prior to the applicable record date
hereinafter specified, or the date of the event in the case of events for which
there is no record date, by first-class mail, postage prepaid, a written notice
stating (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such rights, options, warrants or
distribution are to be determined, or (ii) the initial expiration date set
forth in any tender offer or exchange offer for shares of Common Stock, or
(iii) the date on which any such consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up is expected to become effective or
consummated, and the date as of which it is expected that holders of record of
shares of Common Stock shall be entitled to exchange such shares for securities
or other property, if any, deliverable upon such reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up. The failure by the Company or the Warrant Agent to give such notice
or any defect therein shall not affect the legality or validity of any
distribution, right, option, warrant, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up, or the vote upon any action.
The Company shall give prompt written notice to the Warrant Agent and shall
cause the Warrant Agent, on behalf of and at the expense of the Company to give
to each Holder written notice of any determination to make a distribution or
dividend to the holders of its Common Stock of any assets (including cash
(other than any Ordinary Cash Distribution)), debt securities, preferred stock,
or any rights or warrants to purchase debt securities, preferred stock, assets
or other securities (other than Common Stock, or rights, options, or warrants
to purchase Common Stock) of the Company, which notice shall state the nature
and amount of such planned dividend or distribution and the record date
therefor, and shall be given by the Company at least 20 days prior to such
record date therefor.
At any time prior to the date that is 30 Business Days after the
Exercisability Date, with respect to any distribution or dividend made by the
Company to all of the holders of its Common Stock for which notice to the
Holders of the Warrants under this Section 14 would be required had such
dividend or distribution occurred after the Exercisability Date and except for
such distributions or dividends as are provided for in Section 12 hereof, the
Company shall hold in reserve the amount of any such dividend or distribution
that would have been payable to the Holders in respect of their Warrant Shares
had the Holders exercised their Warrants immediately prior to such dividend or
distribution. The Company shall release to each Holder of Warrants his, her or
its pro rata share of such reserved dividends or distributions upon the
exercise of such Holder's Warrants pursuant to Section 7 hereof. Any notice
delivered to the Holders by the Company pursuant to this Section 14 shall state
the nature and amount of such dividend or distribution that shall be held in
reserve.
Nothing contained in this Agreement or in any Warrant Certificate shall be
construed as conferring upon the Holders the right to vote or to consent or to
receive notice as stockholders in respect of the meetings of stockholders or
the election of directors of the Company or any other matter, or any rights
whatsoever as stockholders of the Company.
Section 15. Notices to the Company and Warrant Agent. Any notice or demand
authorized by this Agreement to be given or made by the Warrant Agent or by any
Holder to or on the Company shall be sufficiently given or made when received
at the office of the Company expressly designated by the Company as its office
for purposes of this Agreement (until the Warrant Agent is otherwise notified
in accordance with this Section 15 by the Company), as follows:
Endo Pharmaceuticals Holdings Inc.
c/o Kelso & Company
320 Park Avenue
24th Floor
New York, New York 10022
Attention: Managing Director
with a copy to General Counsel
A-140
<PAGE>
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
Attention: Eileen T. Nugent, Esq.
Any notice pursuant to this Agreement to be given by the Company or by any
Holder(s) to the Warrant Agent shall be sufficiently given when received by the
Warrant Agent at the address appearing below (until the Company is otherwise
notified in accordance with this Section by the Warrant Agent).
United States Trust Company of New York
114 West 47th Street, 25th Floor
New York, New York 10036
Attention: Corporate Trust Division
Section 16. Supplements and Amendments. The Company and the Warrant Agent
may from time to time supplement or amend this Agreement without the approval
of any holders of Warrants in order to cure any ambiguity or to correct or
supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions
in regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not in any way
adversely affect the rights of any holder of Warrants hereunder. Any amendment
or supplement to this Agreement that has a material adverse effect on the
rights of holders hereunder shall require the written consent of registered
holders of a majority of the then outstanding Warrants, which consent shall
then be effective against all the Holders of Warrants hereunder. The consent of
each holder of a Warrant affected shall be required for any amendment pursuant
to which the Exercise Price would be increased or the number of Warrant Shares
purchasable upon exercise of Warrants would be decreased (not including
adjustments contemplated hereunder). The Warrant Agent shall be entitled to
receive and shall be fully protected in relying upon an officers' certificate
and opinion of counsel as conclusive evidence that any such amendment or
supplement is authorized or permitted hereunder, that it is not inconsistent
herewith, and that it will be valid and binding upon the Company in accordance
with its terms.
Section 17. Concerning the Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the Holders, by their acceptance of
Warrants, shall be bound:
(a) The statements contained herein and in the Warrant Certificate shall
be taken as statements of the Company, and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as
describe the Warrant Agent or any action taken by it. The Warrant Agent
assumes no responsibility with respect to the distribution of the Warrants
except as herein otherwise provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with the covenants contained in this Agreement or in the
Warrants to be complied with by the Company.
(c) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself
(through its employees) or by or through its attorneys or agents (which
shall not include its employees) and shall not be responsible for the
misconduct of any agent appointed with due care.
(d) The Warrant Agent may consult at any time with legal counsel
satisfactory to it (who may be counsel for the Company), and the Warrant
Agent shall incur no liability or responsibility to the Company or to any
Holder in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such
counsel.
(e) Whenever in the performance of its duties under this Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless such evidence in respect
thereof be herein
A-141
<PAGE>
specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the
President, Chief Financial Officer, one of the Vice Presidents, the
Treasurer or the Secretary of the Company and delivered to the Warrant
Agent; and such certificate shall be full authorization to the Warrant
Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(f) The Company agrees to pay the Warrant Agent reasonable compensation
for all services rendered by the Warrant Agent in the performance of its
duties under this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent (including reasonable fees and
expenses of the Warrant Agent's counsel and agents) in the performance of
its duties under this Agreement, and to indemnify the Warrant Agent and
save it harmless against any and all liabilities, including judgments,
costs and counsel fees, for anything done or omitted by the Warrant Agent
in the performance of its duties under this Agreement, except as a result
of the Warrant Agent's negligence or bad faith.
(g) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to
involve expense unless the Company or one or more Holders shall furnish the
Warrant Agent with reasonable security and indemnity satisfactory to the
Warrant Agent for any costs and expenses which may be incurred, but this
provision shall not affect the power of the Warrant Agent to take such
action as the Warrant Agent may consider proper, whether with or without
any such security or indemnity. All rights of action under this Agreement
or under any of the Warrants may be enforced by the Warrant Agent without
the possession of any of the Warrants or the production thereof at any
trial or other proceeding relative thereto, and any such action, suit or
proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable
benefit of the Holders, as their respective rights or interests may appear.
(h) The Warrant Agent and any stockholder, director, officer or employee
of the Warrant Agent may buy, sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily interested in any
transactions in which the Company may be interested, or contract with or
lend money to the Company or otherwise act as fully and freely as though it
were not Warrant Agent under this Agreement or such director, officer or
employee. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity including,
without limitation, acting as Transfer Agent or as a lender to the Company
or an Affiliate thereof.
(i) The Warrant Agent shall act hereunder solely as agent, and its
duties shall be determined solely by the provisions hereof. The Warrant
Agent shall not be liable for anything which it may do or refrain from
doing in connection with this Agreement except for its own negligence or
bad faith.
(j) The Warrant Agent will not incur any liability or responsibility to
the Company or to any Holder for any action taken in reliance on any
notice, resolution, waiver, consent, order, certificate, or other paper,
document or instrument reasonably believed by it to be genuine and to have
been signed, sent or presented by the proper party or parties.
(k) The Warrant Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant (except its countersignature thereof);
nor shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Warrant Shares (or other stock) to be issued pursuant to this Agreement or
any Warrant, or as to whether any Warrant Shares (or other stock) will,
when issued, be validly issued, fully paid and nonassessable, or as to the
Exercise Price or the number or amount of Warrant Shares or other
securities or other property issuable upon exercise of any Warrant.
(l) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from
the Chairman of the Board, the President, any Vice President or the
Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and shall not be liable for any
action taken or suffered to be taken by it in good faith and without
negligence in accordance with instructions of any such officer or officers.
A-142
<PAGE>
Section 18. Change of Warrant Agent. The Warrant Agent may resign at any
time and be discharged from its duties under this Agreement by giving to the
Company 30-days' notice in writing. The Warrant Agent may be removed by like
notice to the Warrant Agent from the Company. If the Warrant Agent shall resign
or be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Warrant Agent. If the Company shall fail to make
such appointment within a period of 30 days after such removal or after it has
been notified in writing of such resignation or incapacity by the resigning or
incapacitated Warrant Agent or by any Holder (who shall with such notice submit
his, her or its Warrant for inspection by the Company), then any Holder may
apply to any court of competent jurisdiction for the appointment of a successor
to the Warrant Agent. Pending appointment of a successor warrant agent, either
by the Company or by such court, the duties of the Warrant Agent shall be
carried out by the Company. Any successor warrant agent, whether appointed by
the Company or such a court, shall be a bank or trust company in good standing,
incorporated under the laws of the United States of America or any State
thereof or the District of Columbia and having at the time of its appointment
as warrant agent a combined capital and surplus of at least $10,000,000. After
appointment, the successor warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Warrant Agent without further act or deed; but the former Warrant Agent shall
deliver and transfer to the successor warrant agent any property at the time
held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for such purpose. Failure to file any notice
provided for in this Section 18, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Warrant
Agent or the appointment of the successor warrant agent, as the case may be. In
the event of such resignation or removal, the Company or the successor warrant
agent shall mail by first class mail, postage prepaid, to each Holder, written
notice of such removal or resignation and the name and address of such
successor warrant agent.
Section 19. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company, the Warrant Agent or any holder of
Warrants shall bind and inure to the benefit of their respective successors and
assigns hereunder.
Section 20. Termination. This Agreement shall terminate at 5:00 p.m., New
York City time, on the Expiration Date. Notwithstanding the foregoing, this
Agreement will terminate on any earlier date if all Warrants have been
exercised pursuant to this Agreement.
Section 21. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT CERTIFICATE
ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE
STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF SAID STATE, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF.
Section 22. Benefits of This Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered Holders of the Warrant Certificates any legal
or equitable right, remedy or claim under this Agreement; but this Agreement
shall be for the sole and exclusive benefit of the Company, the Warrant Agent
and the registered Holders of the Warrant Certificates.
Section 23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 24. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
A-143
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
ENDO PHARMACEUTICALS HOLDINGS INC.
By: _________________________________
Name:
Title:
UNITED STATES TRUST
COMPANY OF NEW YORK,
as Warrant Agent
By: _________________________________
Name:
Title:
A-144
<PAGE>
EXHIBIT A
[Form of Warrant Certificate]
[Face]
THIS SECURITY IS A GLOBAL CERTIFICATE AND IS REGISTERED IN THE NAME OF A
DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS
SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON
OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE WARRANT AGREEMENT, DATED AS OF , 2000, BY AND BETWEEN THE
COMPANY AND THE WARRANT AGENT (THE "WARRANT AGREEMENT"), AND NO TRANSFER OF
THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE
DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO
THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT
IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (A NEW YORK CORPORATION) ("DTC") TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
A-145
<PAGE>
EXERCISABLE ON OR AFTER THE EXERCISABILITY DATE
AND ON OR BEFORE JULY 7, 2003
No. Warrants
Warrant Certificate
ENDO PHARMACEUTICALS HOLDINGS INC.
This Warrant Certificate certifies that , or registered assigns, is the
registered holder of Warrants expiring on or before July 7, 2003 (the
"Warrants") to purchase shares of Common Stock, par value $.01 per share (the
"Common Stock"), of Endo Pharmaceuticals Holdings Inc., a Delaware corporation
(the "Company"). Each Warrant entitles the holder upon exercise to receive from
the Company on or after the Exercisability Date and on or before 5:00 p.m. New
York City Time on July 7, 2003 (the six-month anniversary of the Exercisability
Date), (a) 0.416667/4/ fully paid and nonassessable shares of Common Stock
(each such share, a "Warrant Share") in the event the Adjustment Event (as
defined in that certain Agreement and Plan of Merger, dated as of November 26,
1999, as may be amended and restated from time to time, by and among the
Company, Endo Inc., a Delaware corporation and wholly owned subsidiary of the
Company, and Algos Pharmaceutical Corporation, a Delaware corporation) has not
occurred prior to such time or (b) 0.250000/5/ Warrant Shares in the event the
Adjustment Event has occurred prior to such time, in either case, at the
initial exercise price (the "Exercise Price") equal to $0.01 payable upon
surrender of this Warrant Certificate and payment of the Exercise Price in the
manner set forth in the Warrant Agreement, subject only to the conditions set
forth herein and in the Warrant Agreement referred to on the reverse hereof.
The Exercise Price and number of Warrant Shares issuable upon exercise of the
Warrants are subject to adjustment upon the occurrence of certain events as set
forth in the Warrant Agreement.
No Warrant may be exercised before the Exercisability Date or after 5:00
p.m., New York City Time, on July 7, 2003 and to the extent not exercised by
such time such Warrants shall become void.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent, as such term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
--------
(4) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock held by
Persons who had been holders of Parent Common Stock immediately prior to
the Effective Time, shall equal 85% of the shares of Parent Common Stock on
a fully diluted basis (excluding the effect of the Algos Warrants as if no
Adjustment Event had occurred).
(5) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock held by
Persons who had been holders of Parent Common Stock immediately prior to
the Effective Time, shall equal 80% of the shares of Parent Common Stock on
a fully diluted basis (excluding the effect of the Algos Warrants and after
giving effect to the Adjustment Event as if it had occurred).
A-146
<PAGE>
IN WITNESS WHEREOF, Endo Pharmaceuticals Holdings Inc. has caused this
Warrant Certificate to be signed by an officer and by its Secretary, each by a
facsimile of his or her signature, and has caused a facsimile of its corporate
seal to be affixed hereunto or imprinted hereon.
Dated: ,
ENDO PHARMACEUTICALS HOLDINGS INC.
By: _________________________________
Name:
Title:
By: _________________________________
Name:
Title: Secretary
Countersigned:
UNITED STATES TRUST COMPANY
OF NEW YORK,
as Warrant Agent
By: _________________________________
Name:
Title:
A-147
<PAGE>
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring July 7, 2003, entitling the holder on
exercise to receive shares of Common Stock, par value $.01 per share, of the
Company (the "Common Stock"), and are issued or to be issued pursuant to a
Warrant Agreement dated as of , 2000 (the "Warrant Agreement"), duly
executed and delivered by the Company to United States Trust Company of New
York, as warrant agent (the "Warrant Agent"), which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Warrant Agent, the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants. A copy of the Warrant Agreement may be
obtained by the holder hereof upon written request to the Company.
Warrants may be exercised at any time on or after the "Exercisability Date"
and on or before July 7, 2003. The holder of Warrants evidenced by this Warrant
Certificate may exercise them by surrendering this Warrant Certificate, with
the form of election to purchase set forth hereon properly completed and
executed, together with payment in the manner provided for in the Warrant
Agreement at the office of the Warrant Agent. In the event that upon any
exercise of Warrants evidenced hereby, the number of Warrants exercised shall
be less than the total number of Warrants evidenced hereby, there shall be
issued to the holder hereof or his, her or its assignee a new Warrant
Certificate evidencing the number of Warrants not exercised.
The Warrant Agreement provides that upon the occurrence of certain events
the number of Warrants set forth on the face hereof and the Exercise Price may,
subject to certain conditions, be adjusted. No fractions of a share of Common
Stock will be issued upon the exercise of any Warrant, but the Company will pay
the cash value thereof determined as provided in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Warrant Agent by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided in the Warrant
Agreement, without charge except for any tax or other governmental charge
imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder(s) thereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, of any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
A-148
<PAGE>
[Form of Election to Purchase]
(To Be Executed upon Exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant Certificate, to receive shares of Common Stock and herewith
tenders payment for such shares to the order of Endo Pharmaceuticals Holdings
Inc. in the amount of $ payable in (select one or more: (i) cash and/or (ii)
pursuant to a Cashless Exercise) in accordance with the terms hereof and of the
Warrant Agreement. The undersigned requests that a certificate for such shares
be registered in the name of , whose address is and that such shares
be delivered to whose address is . If said number of shares is less
than all of the shares of Common Stock purchasable hereunder, the undersigned
requests that a new Warrant Certificate representing the remaining balance of
such shares be registered in the name of , whose address is , and that
such Warrant Certificate be delivered to , whose address is .
Signature:
Date:
Signature Guaranteed:
A-149
<PAGE>
SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS
The following exchanges of a part of this Global Warrant for certificated
Warrants have been made:
<TABLE>
<CAPTION>
Number of
Warrants of
Amount of Amount of this Global
decrease in increase in Warrant Signature of
Number of Number of following authorized
Date of Warrants of this Warrants of this such decrease officer of
Exchange Global Warrant Global Warrant (or increase) Warrant Agent
-------- ---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
</TABLE>
A-150
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF WARRANTS
Re: Warrants to Purchase Common Stock (the "Warrants") of Endo Pharmaceuticals
Holdings Inc.
This Certificate relates to Warrants held in * book-entry or *
certificated form by (the "Transferor").
The Transferor:*
[_]has requested the Warrant Agent by written order to deliver in exchange for
its beneficial interest in the Global Warrant held by the depository a
Warrant or Warrants in definitive, registered form equal to its beneficial
interest in Warrants represented by such Global Warrant (or the portion
thereof indicated above); or
[_]has requested the Warrant Agent by written order to exchange or register the
transfer of a Warrant or Warrants.
_____________________________________
[INSERT NAME OF TRANSFEROR]
By: _________________________________
Date: _______________________
*Check applicable box.
A-151
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Affiliate................................................................. A-137
Agreement................................................................. A-129
Algos..................................................................... A-129
Business Day.............................................................. A-133
Cashless Exercise......................................................... A-133
closing bid price......................................................... A-137
Common Stock.............................................................. A-129
Company................................................................... A-129
Current Market Value...................................................... A-136
Definitive Warrants....................................................... A-129
Exchange Act.............................................................. A-136
Exercisability Date....................................................... A-133
Exercise Price............................................................ A-133
Exercise Rate............................................................. A-135
Expiration Date........................................................... A-132
FDA....................................................................... A-133
Fully Diluted Shares...................................................... A-136
Global Warrants........................................................... A-129
Holders................................................................... A-130
Independent Financial Expert.............................................. A-137
Legal Holiday............................................................. A-133
Merger Agreement.......................................................... A-129
Ordinary Cash Distribution................................................ A-137
Reorganizations........................................................... A-138
Security.................................................................. A-136
shares of Common Stock.................................................... A-129
Sub....................................................................... A-129
Time of Determination..................................................... A-135
Transfer Agent............................................................ A-134
Warrant................................................................... A-129
Warrant Agent............................................................. A-129
Warrant Certificates...................................................... A-129
Warrant Register.......................................................... A-130
Warrant Shares............................................................ A-129
Warrants.................................................................. A-129
</TABLE>
A-152
<PAGE>
APPENDIX B
AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER
AMENDMENT, dated as of April 17, 2000 (this "Amendment"), by and among ENDO
PHARMACEUTICALS HOLDINGS INC., a Delaware corporation ("Parent"), ENDO INC., a
Delaware corporation and a newly-formed wholly-owned subsidiary of Parent
("Sub"), and ALGOS PHARMACEUTICAL CORPORATION, a Delaware corporation (the
"Company"). Capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in the Merger Agreement (as
hereinafter defined).
W I T N E S S E T H:
WHEREAS, Parent, Sub and the Company entered into an agreement and plan of
merger, dated as of November 26, 1999 (as amended and restated as of March 3,
2000, the "Merger Agreement"), whereby the Company will merge with and into
Sub;
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have each determined that amending the Merger Agreement is advisable and in the
best interest of their respective stockholders;
NOW THEREFORE, in consideration of the premises and agreements contained
herein, the parties hereto agree as follows:
FIRST, Section 7.1(d)(iii) of the Merger Agreement is hereby amended to
replace "June 30, 2000" with "July 31, 2000."
SECOND, the Merger Agreement is hereby further amended to extend for three
months each of the time periods related to the exercise of the Algos Warrants
to purchase shares of Parent Common Stock, as contemplated by Section 7 of the
Form of Algos Warrant Agreement, by and between Parent and the Warrant Agent
(as defined therein) and attached as Exhibit C to the Merger Agreement (the
"Algos Warrant Agreement"). To achieve the intentions of the parties set forth
in the previous sentence, Section 7 of the Algos Warrant Agreement is hereby
amended as follows:
a. "December 31, 2001" in the second and third sentences thereof shall be
replaced with "March 31, 2002;"
b. "June 30, 2002" in the third and fourth sentences thereof shall be
replaced with "September 30, 2002;" and
c. "December 31, 2002" in the fourth sentence thereof shall be replaced
with "March 31, 2003."
THIRD, the Merger Agreement is hereby further amended to revise the numbers
of shares of Parent Common Stock (the "Number(s) of Parent Shares") into which
the Algos Warrants shall be exercisable, as contemplated by Section 7 of the
Algos Warrant Agreement. To achieve the intentions of the parties set forth in
the previous sentence, Section 7 of the Algos Warrant Agreement is hereby
amended to provide that:
a. If the Exercisability Date (as defined in the Algos Warrant Agreement)
is on or prior to March 31, 2002 (such date having been updated to
reflect the amendment in Article SECOND hereof), the holders of the
Algos Warrants shall continue to be entitled to receive, upon exercise
of the Algos Warrants and payment of the Exercise Price (as defined in
the Algos Warrant Agreement), the Number of Parent Shares that, together
with the shares of Parent Common Stock issued to the Algos stockholders
in the Merger, represent 35% of the Parent Common Stock outstanding
immediately upon consummation of the Merger (assuming all of the Algos
Warrants were exercised upon such consummation);
B-1
<PAGE>
b. If the Exercisability Date is after March 31, 2002 and on or prior to
September 30, 2002 (such dates having been updated to reflect the
amendments in Article SECOND hereof), the holders of the Algos Warrants
shall be entitled to receive, upon exercise of the Algos Warrants and
payment of the Exercise Price, the Number of Parent Shares that,
together with the shares of Parent Common Stock issued to the Algos
stockholders in the Merger, represent 29% of the Parent Common Stock
outstanding immediately upon consummation of the Merger (assuming all of
the Algos Warrants were exercised upon such consummation); and
c. If the Exercisability Date is after September 30, 2002 and on or prior
to March 31, 2003 (such dates having been updated to reflect the
amendments in Article SECOND hereof), the holders of the Algos Warrants
shall be entitled to receive, upon exercise of the Algos Warrants and
payment of the Exercise Price (as defined in the Algos Warrant
Agreement), the Number of Parent Shares that, together with the shares
of Parent Common Stock issued to the Algos stockholders in the Merger,
represent 24% of the Parent Common Stock outstanding immediately upon
consummation of the Merger (assuming all of the Algos Warrants were
exercised upon such consummation).
FOURTH, in order to achieve the agreements set forth in this Amendment, the
parties hereto further agree to revise in the Algos Warrant Agreement and the
Algos Warrants the Numbers of Parent Shares into which the Algos Warrants are
exercisable to reflect the provisions of Article THIRD hereof and to make such
other changes to the Algos Warrant Agreement and the Algos Warrants as they
deem necessary or appropriate to carry out their intentions in entering into
this Amendment.
FIFTH, this Amendment may be executed in counterparts, all of which shall be
considered one and the same amendment, and shall become effective when one or
more counterparts have been signed by each of the parties and delivered to the
other parties.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
signed by their respective officers thereunto duly authorized all as of the
date first written above.
ENDO PHARMACEUTICALS HOLDINGS
INC.
By: /s/ Carol A. Ammon
-------------------------------
Name: Carol A. Ammon
Title: President & Chief
Executive Officer
ENDO INC.
By: /s/ Carol A. Ammon
-------------------------------
Name: Carol A. Ammon
Title: President & Chief
Executive Officer
ALGOS PHARMACEUTICAL
CORPORATION
By: /s/ John W. Lyle
-------------------------------
Name: John W. Lyle
Title: President
B-2
<PAGE>
APPENDIX C
November 26, 1999
Board of Directors
Algos Pharmaceutical Corporation
13333 Campus Parkway
Neptune, NJ 07753
Ladies and Gentlemen:
You have asked us to advise you with respect to the fairness to the
stockholders of Algos Pharmaceutical Corporation (the "Company") from a
financial point of view of the consideration to be received by such
stockholders pursuant to the terms of the Agreement and Plan of Merger, dated
as of November 26, 1999 (the "Merger Agreement"), among the Company, Endo
Pharmaceuticals Holdings Inc. (the "Acquiror") and Endo Inc. (the "Sub"). The
Merger Agreement provides for the merger (the "Merger") of the Company with and
into the Sub and each outstanding share of common stock, par value $0.01 per
share, of the Company will be converted into (i) one share of common stock, par
value $0.01 per share, of the Acquiror and (ii) 1.00 warrant (together, the
"Merger Consideration"). Each warrant will be exercisable for $0.01 to purchase
a number of shares of common stock of the Acquiror which will vary from zero to
1.15 depending on whether the Company receives approval from the U.S. Food and
Drug Administration with respect to its New Drug Application for MorphiDex(TM)
(the "Approval") and if so, the timing of such Approval, all according to the
terms set forth in the Warrant Agreement by and between the Acquiror and the
party thereto.
In arriving at our opinion, we have reviewed certain publicly available
business information relating to the Acquiror and certain publicly available
business and financial information relating to the Company, as well as the
Merger Agreement and the Warrant Agreement. We understand and have assumed that
the Acquiror common stock to be received by the stockholders of the Company
will be issued pursuant to an effective Registration Statement on Form S-4, and
that such shares will be authorized for quotation on the Nasdaq National
Market. We have also reviewed certain other information, including financial
forecasts, provided to us by the Company and the Acquiror, and have met with
the Company's and the Acquiror's management to discuss the business and
prospects of the Company and the Acquiror.
We have also considered certain financial and stock market data of the Company
and certain financial data of the Acquiror, and we have compared those data
with similar data for other publicly held companies in businesses similar to
the Company and the Acquiror, and we have considered the financial terms of
certain other business combinations and other transactions which have recently
been effected. We also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria which
we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's and the Acquiror's management as to the future financial performance
of the Company and the Acquiror. You also have informed us, and we have
assumed, that the Merger will be treated as a tax-free reorganization for
federal income tax purposes. In addition, we have not been requested to make,
and have not made, an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Company or the Acquiror, nor have
we been furnished with any such evaluations or appraisals. Our opinion is
necessarily based upon financial, economic, market and other conditions as they
exist and can be evaluated on the date hereof. We are not expressing any
opinion as to the actual value of the common stock and/or warrants when issued
to the Company's stockholders pursuant to the Merger, whether any active
trading market will develop for such common stock or warrants, or the prices at
which such common stock and warrants will trade subsequent to the Merger. We
have not been requested to opine as to, and our opinion does not in any manner
address, the Company's underlying business decision to
C-1
<PAGE>
effect the Merger. We were not requested to, and did not, solicit third party
indications of interest in acquiring all or any part of the Company.
We have acted as financial advisor to the Company in connection with the Merger
and will receive a fee for our services, a portion of which is contingent upon
the consummation of the Merger. We will also receive a fee for rendering this
opinion.
In the ordinary course of our business, we and our affiliates may actively
trade the equity securities of the Company for our and such affiliates' own
accounts and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
It is understood that this letter is for the information of Board of Directors
in connection with its consideration of the Merger, does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger and is not to be quoted or referred to, in whole or in part, in
any registration statement, prospectus or proxy statement, or in any other
document used in connection with the offering or sale of securities, nor shall
this letter be used for any other purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Merger Consideration is fair to the stockholders of the Company
from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON
CORPORATION
/s/ Steven L. Fisch, M.D.
By: _________________________________
Steven L. Fisch, M.D.
Director
C-2
<PAGE>
Appendix D
FORM OF WARRANT AGREEMENT
by and between
ENDO PHARMACEUTICALS HOLDINGS INC.
and
UNITED STATES TRUST COMPANY OF NEW YORK,
as
Warrant Agent
----------------
Dated as of , 2000
----------------
D-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 1. Appointment of Warrant Agent............................... D-3
Section 2. Warrant Certificates....................................... D-3
Section 3. Execution of Warrant Certificates.......................... D-3
Section 4. Registration and Countersignature.......................... D-4
Section 5. Transfer and Exchange of Warrants.......................... D-4
Section 6. Registration of Transfers and Exchanges.................... D-5
Section 7. Terms of Warrants; Exercise of Warrants.................... D-7
Section 8. Payment of Taxes........................................... D-9
Section 9. Mutilated or Missing Warrant Certificates.................. D-9
Section 10. Reservation of Warrant Shares.............................. D-10
Section 11. Obtaining Stock Exchange Listings.......................... D-10
Adjustment of Exercise Price and Number of Warrant Shares
Section 12. Issuable................................................... D-10
Section 13. Fractional Interests....................................... D-14
Section 14. Notices to Warrant Holders; Reservation of Dividends....... D-15
Section 15. Notices to the Company and Warrant Agent................... D-16
Section 16. Supplements and Amendments; Actions........................ D-17
Section 17. Concerning the Warrant Agent............................... D-17
Section 18. Change of Warrant Agent.................................... D-18
Section 19. Successors................................................. D-19
Section 20. Termination................................................ D-19
Section 21. Governing Law.............................................. D-19
Section 22. Benefits of This Agreement................................. D-19
Section 23. Counterparts............................................... D-19
Section 24. Headings................................................... D-19
Exhibit A. Form of Warrant Certificate................................ D-21
Exhibit B. Certificate to be Delivered Upon Transfer.................. D-28
</TABLE>
D-2
<PAGE>
WARRANT AGREEMENT (the "Agreement"), dated as of , 2000, by and
between Endo Pharmaceuticals Holdings Inc., a Delaware corporation (together
with any successors and assigns, the "Company"), and United States Trust
Company of New York, as Warrant Agent (the "Warrant Agent").
WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated as of
November 26, 1999 (as may be amended and restated from time to time, the
"Merger Agreement"), by and among the Company, Endo Inc., a Delaware
corporation and wholly owned subsidiary of the Company ("Sub"), and Algos
Pharmaceutical Corporation, a Delaware corporation ("Algos"), the Company
proposes to issue warrants (each a "Warrant," and collectively, the "Warrants")
for the purchase of an aggregate of up to 20,713,968/1/ shares of common stock,
par value $.01 per share, of the Company (the "Common Stock," and the shares of
Common Stock issuable upon exercise of the Warrants being referred to herein as
the "Warrant Shares");
WHEREAS, there shall be two classes of Warrants, Class A which shall be
transferable ("Class A Transferable Warrants") and Class B which shall not be
transferable ("Class B Non-Transferable Warrants") and each holder of shares of
common stock of Algos at the time of the stockholder vote relating to the
Merger Agreement may elect to receive all or a portion of such holder's
Warrants to be Class A Transferable Warrants or all or a portion of such
holder's Warrants to be Class B Non-Transferable Warrants and in the event any
such holder of shares of common stock of Algos does not make such an election,
then such holder shall be issued Class A Transferable Warrants. Such election,
once made, will be irrevocable;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company and the Warrant Agent is willing to act in connection with the
issuance, transfer, exchange and exercise of Warrants as provided herein; and
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein, the Company and the Warrant Agent hereby agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent for the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
Section 2. Warrant Certificates. The Class A Transferable Warrants will
initially be issued in global form (the "Global Warrants"), substantially in
the form of Exhibit A hereto. Any certificates evidencing the Global Warrants
to be delivered pursuant to this Agreement (the "Class A Warrant Certificates")
shall be substantially in the form set forth in Exhibit A hereto. Such Global
Warrants shall represent such of the outstanding Class A Transferable Warrants
as shall be specified therein and each shall provide that it shall represent
the aggregate amount of outstanding Class A Transferable Warrants from time to
time endorsed thereon and that the aggregate amount of outstanding Class A
Transferable Warrants represented thereby may from time to time be reduced or
increased, as appropriate. Any endorsement of a Global Warrant to reflect the
amount of any increase or decrease in the amount of outstanding Class A
Transferable Warrants represented thereby shall be made by the Warrant Agent
and the Depositary (as defined below) in accordance with instructions given by
the holder thereof. The Depository Trust Company shall act as the Depositary
with respect to the Global Warrants until a successor shall be appointed by the
Company. Upon written request, a Warrant holder who holds Class A Transferable
Warrants may receive from the Depositary and Warrant Agent Class A Transferable
Warrants in registered form as definitive Warrant Certificates (the "Definitive
Warrants") as set forth in Section 6 below. Class B Non-Transferable Warrants
will be issued in certificated form in the form of Exhibit B hereto, in the
name of and in the denomination as set forth in the applicable letter of
transmittal accompanying the shares of common stock of Algos surrendered by the
holder thereof in connection with the merger of Algos with and into Sub
pursuant to the Merger Agreement.
Section 3. Execution of Warrant Certificates. Warrant Certificates shall be
signed on behalf of the Company by its Chairman of the Board, its President,
Chief Executive Officer, Chief Operating Officer, Chief
--------
(1) These numbers may be adjusted in the final Endo Warrant. See footnotes 2-5
below.
D-3
<PAGE>
Financial Officer or Treasurer or a Vice President and by its Secretary or an
Assistant Secretary. Each such signature upon the Warrant Certificates may be
in the form of a facsimile signature of the present or any future Chairman of
the Board, President, Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer, Treasurer, Vice President, Secretary or Assistant Secretary
and may be imprinted or otherwise reproduced on the Warrant Certificates and
for that purpose the Company may adopt and use the facsimile signature of any
person who shall have been Chairman of the Board, President, Chief Executive
Officer, Chief Operating Officer, Chief Financial Officer, Treasurer, a Vice
President, Secretary or an Assistant Secretary, notwithstanding the fact that
at the time the Warrant Certificates shall be countersigned and delivered or
disposed of such person shall have ceased to hold such office.
In case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer before the Warrant Certificates so
signed shall have been countersigned by the Warrant Agent, or disposed of by
the Company, such Warrant Certificates nevertheless may be countersigned and
delivered or disposed of as though such person had not ceased to be such
officer of the Company; and any Warrant Certificate may be signed on behalf of
the Company by any person who, at the actual date of the execution of such
Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Warrant
Agreement any such person was not such officer.
Warrant Certificates shall be dated the date of countersignature by the
Warrant Agent.
Section 4. Registration and Countersignature. The Warrants shall be numbered
and shall be registered on the books of the Company maintained at the principal
office of the Warrant Agent located at 114 West 47th Street, 25th Floor, New
York, New York 10036, Attention: Corporate Trust Division (the "Warrant
Register") as they are issued.
Warrant Certificates shall be manually countersigned by the Warrant Agent
and shall not be valid for any purpose unless so countersigned. The Warrant
Agent shall, upon written instructions of the Chairman of the Board, the
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, a Vice President, the Secretary or an Assistant Secretary
of the Company, initially countersign and deliver Warrants entitling the
holders thereof to purchase not more than the number of Warrant Shares referred
to above in the first recital hereof and shall thereafter countersign and
deliver Warrants as otherwise provided in this Agreement.
The Company and the Warrant Agent may deem and treat the registered holders
(the "Holders") of the Warrant Certificates as the absolute owners thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone) for all purposes, and neither the Company nor the Warrant Agent shall
be affected by any notice to the contrary.
Section 5. Transfer and Exchange of Warrants. The Warrant Agent shall from
time to time, subject to the limitations of Section 6 hereof, register the
transfer of any outstanding Warrants upon the records to be maintained by it
for that purpose, upon surrender thereof duly endorsed or accompanied (if so
required by it) by a written instrument or instruments of transfer in form
satisfactory to the Warrant Agent, duly executed by the registered Holder or
Holders thereof or by the duly appointed legal representative thereof or by a
duly authorized attorney; provided that Class B Non-Transferable Warrants may
only be transferred (i) as the result or assignment by operation of law (such
as death or merger or otherwise) or (ii) as required by law or any court of
competent jurisdiction (such as in connection with divorce, bankruptcy or
liquidation). A request for a transfer of a Class B Non-Transferable Warrant
shall be accompanied by such documentation establishing satisfaction of the
conditions set forth in clause (i) or (ii) above, as applicable, as may be
reasonably requested by the Company (including opinions of counsel, if
appropriate). Upon receipt of documentation reasonably satisfactory to the
Company, the Company shall authorize the Warrant Agent to permit the transfer
of a Class B Non-Transferable Warrant. The Warrant Agent shall not permit the
transfer of a Class B Non-Transferable Warrant until it is so authorized by the
Company. Unless otherwise authorized by the Company, Class B Non-Transferable
Warrant Certificate may only be transferred for another Class B Non-
Transferable Warrant Certificate. Subject to the terms of this Agreement, each
Warrant Certificate may be exchanged for another
D-4
<PAGE>
certificate or certificates entitling the Holder thereof to purchase a like
aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitle each Holder to purchase. Any Holder desiring to
exchange a Warrant Certificate or Certificates shall make such request in
writing delivered to the Warrant Agent, and shall surrender, duly endorsed or
accompanied (if so required by the Warrant Agent) by a written instrument or
instruments of transfer in form satisfactory to the Warrant Agent, the Warrant
Certificate or Certificates to be so exchanged.
Upon registration of transfer, the Warrant Agent shall countersign and
deliver by certified or first class mail a new Warrant Certificate or
Certificates to the persons entitled thereto. The Warrant Certificates may be
exchanged at the option of the Holder thereof, when surrendered at the office
or agency of the Company maintained for such purpose, which initially will be
the corporate trust office of the Warrant Agent located at 770 broadway, 13th
Floor, New York, New York 10003, Attention: Corporate Trust Services for
another Warrant Certificate, or other Warrant Certificates of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Warrant Shares.
No service charge shall be made for any exchange or registration of transfer
of Warrant Certificates, but the Company may require payment of a sum
sufficient to cover any stamp or other tax or other governmental charge that is
imposed in connection with any such exchange or registration of transfer.
Section 6. Registration of Transfers and Exchanges.
(a) Transfer and Exchange of Definitive Warrants. When Definitive Warrants
are presented to the Warrant Agent with a request:
(i) to register the transfer of the Definitive Warrants; or
(ii) to exchange such Definitive Warrants for an equal number of
Definitive Warrants of other authorized denominations,
the Warrant Agent shall register the transfer or make the exchange as requested
if its requirements under this Agreement are met; provided, however, that the
Definitive Warrants presented or surrendered for registration of transfer or
exchange shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Warrant Agent, duly executed by the Holder
thereof or by such Holder's attorney, duly authorized in writing; provided that
a transfer of Definitive Warrants that are Class B Non-Transferable Warrants
shall be subject to the requirements of Section 5 hereof.
(b) Restrictions on Transfer of a Definitive Warrant for a Beneficial
Interest in a Global Warrant. The Warrant Agent may exchange a Definitive
Warrant for a beneficial interest in a Global Warrant only if the Warrant Agent
has received such Definitive Warrant, duly endorsed or accompanied by
appropriate instruments of transfer, in form satisfactory to the Warrant Agent,
together with written instructions directing the Warrant Agent to make, or to
direct the Depositary to make, an endorsement on the Global Warrant to reflect
an increase in the aggregate amount of the Warrants represented by the Global
Warrant. If such conditions have been satisfied, the Warrant Agent shall cancel
such Definitive Warrant and cause, or direct the Depositary to cause, in
accordance with the standing instructions and procedures existing between the
Depositary and the Warrant Agent, the number of Warrant Shares represented by
the Global Warrant to be increased accordingly. If no Global Warrant is then
outstanding, the Company shall issue and the Warrant Agent shall countersign a
new Global Warrant in the appropriate amount.
(c) Transfer and Exchange of Global Warrants. The transfer and exchange of
Global Warrants or beneficial interests therein shall be effected through the
Depositary, in accordance with this Warrant Agreement (including the
restrictions on transfer set forth herein) and the procedures of the Depositary
therefor.
(d) Transfer of a Beneficial Interest in a Global Warrant for a Definitive
Warrant.
(i) Any person having a beneficial interest in a Global Warrant may
upon his, her or its request exchange such beneficial interest for a
Definitive Warrant. Upon receipt by the Warrant Agent of written
D-5
<PAGE>
instructions (or such other form of instructions as is customary for the
Depositary) from the Depositary or its nominee on behalf of any person
having a beneficial interest in a Global Warrant and upon receipt by the
Warrant Agent of a written order or such other form of instructions as is
customary for the Depositary or the person designated by the Depositary as
having such a beneficial interest containing registration instructions,
then the Warrant Agent will cause, in accordance with the standing
instructions and procedures existing between the Depositary and the Warrant
Agent, the aggregate amount of the Global Warrant to be reduced and,
following such reduction, the Company will execute and, upon receipt of a
countersignature, the Warrant Agent will countersign and deliver to the
transferee a Definitive Warrant. All such Warrants shall be Class A
Transferable Warrants.
(ii) Definitive Warrants issued in exchange for a beneficial interest
in a Global Warrant pursuant to this Section 6(d) shall be registered in
such names and in such authorized denominations as the Depositary, pursuant
to instructions from its direct or indirect participants or otherwise,
shall instruct the Warrant Agent in writing, provided such designation is
in accordance with this Section 6(d). The Warrant Agent shall deliver such
Definitive Warrants to the persons in whose names such Definitive Warrants
are registered.
(e) Restrictions on Transfer and Exchange of Global
Warrants. Notwithstanding any other provisions of this Warrant Agreement (other
than the provisions set forth in subsection (f) of this Section 6), a Global
Warrant may not be transferred as a whole except by the Depositary to a nominee
of the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) Authentication of Definitive Warrants in Absence of Depositary. If at
any time:
(i) the Depositary for the Global Warrants notifies the Company that
the Depositary is unwilling or unable to continue as Depositary for the
Global Warrant and a successor Depositary for the Global Warrant is not
appointed by the Company within 90 days after delivery of such notice; or
(ii) the Company, at its sole discretion, notifies the Warrant Agent
in writing that it elects to cause the issuance of Definitive Warrants
under this Warrant Agreement,
then the Company will execute, and the Warrant Agent, upon receipt of an
officers' certificate, signed by the President, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer or a Vice President of the Company,
requesting the countersignature and delivery of Definitive Warrants, will
countersign and deliver Definitive Warrants, in an aggregate number equal to
the aggregate number of Warrants represented by the Global Warrant, in exchange
for such Global Warrant.
(g) Cancellation and/or Adjustment of a Global Warrant. At such time as all
beneficial interests in a Global Warrant have either been exchanged for
Definitive Warrants, redeemed, repurchased or cancelled, such Global Warrant
shall be returned to or retained and cancelled by the Warrant Agent. At any
time prior to such cancellation, if any beneficial interest in a Global Warrant
is exchanged for Definitive Warrants, redeemed, repurchased or cancelled, the
number of Warrants represented by such Global Warrant shall be reduced and an
endorsement shall be made on such Global Warrant, by the Warrant Agent to
reflect such reduction.
(h) Obligations with Respect to Transfers and Exchanges of Definitive
Warrants.
(i) To permit registrations of transfers and exchanges in accordance
with the terms of this Agreement, the Company shall execute, and the
Warrant Agent shall countersign Definitive Warrants and Global Warrants.
(ii) All Definitive Warrants and Global Warrants issued upon any
registration, transfer or exchange of Definitive Warrants or Global
Warrants shall be the valid obligations of the Company, entitled to the
same benefits under this Warrant Agreement as the Definitive Warrants or
Global Warrants surrendered upon the registration of transfer or exchange.
D-6
<PAGE>
(iii) Prior to due presentment for registration of transfer of any
Warrant, the Warrant Agent and the Company may deem and treat the person in
whose name any Warrant is registered as the absolute owner of such Warrant,
and neither the Warrant Agent nor the Company shall be affected by notice
to the contrary.
Section 7. Terms of Warrants; Exercise of Warrants. Subject to the terms of
this Agreement, each Warrant Holder shall have the right, which may be
exercised commencing on or after the Exercisability Date (as defined below) and
until 5:00 p.m., New York City time, on the six-month anniversary of the
Exercisability Date (the "Expiration Date"), to receive from the Company the
number of fully paid and nonassessable Warrant Shares which the Holder may at
the time be entitled to receive on exercise of such Warrants and payment of the
Exercise Price (as defined below) then in effect for such Warrant Shares
together, if applicable, with cash payable as provided in Section 13 hereof and
any dividends or distributions payable as provided in Section 14 hereof. If the
Exercisability Date is on or prior to March 31, 2002, the Holders shall then be
entitled to receive from the Company (on exercise of such Warrants and payment
of the Exercise Price then in effect for such Warrant Shares) (together, if
applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
20,713,968 Warrant Shares (in the aggregate) (with each Warrant being
exercisable for 1.153846 Warrant Shares)/2/ in the event the Adjustment Event
(as defined in the Merger Agreement) has not occurred prior to the
Exercisability Date or (b) 17,952,106 Warrant Shares (in the aggregate) (with
each Warrant being exercisable for 1.000000 Warrant Shares)/3/ in the event the
Adjustment Event has occurred prior to the Exercisability Date. If the
Exercisability Date is after March 31, 2002 and on or prior to September 30,
2002, the Holder shall then be entitled to receive from the Company (on
exercise of such Warrants and payment of the Exercise Price then in effect for
such Warrant Shares) (together, if applicable, with cash payable as provided in
Section 13 hereof and any dividends or distributions payable as provided in
Section 14 hereof) (a) 11,378,095 Warrant Shares (in the aggregate) (with each
Warrant being exercisable for 0.633803 Warrant Shares)/4/ in the event the
Adjustment Event has not occurred prior to the Exercisability Date or (b)
9,792,058 Warrant Shares (in the aggregate) (with each Warrant being
exercisable for 0.545455 Warrant Shares)/5/ in the event the Adjustment Event
has occurred prior to the Exercisability Date. If the Exercisability Date is
after September 30, 2002 and on or prior to March 31, 2003 (the "Ultimate
Expiration Date"), the Holders shall then be entitled to receive from the
Company (on exercise of such Warrants and payment of the Exercise Price then in
effect for such Warrant Shares) (together, if applicable, with cash payable as
provided in Section 13 hereof and any dividends or distributions payable as
provided in Section 14 hereof) (a) 4,724,238 Warrant Shares (in the aggregate)
(with each Warrant being exercisable for 0.263158 Warrant Shares)/6/ in the
event the Adjustment Event has not occurred prior to the Exercisability Date or
(b) 4,045,545 Warrant Shares (in the aggregate) (with each Warrant being
exercisable for 0.225352 Warrant Shares)/7/ in the event the Adjustment Event
has occurred prior to the Exercisability Date. Each Warrant not exercised prior
to the Expiration Date shall become void and all rights thereunder and all
rights in respect thereof under this Agreement shall cease as of the Expiration
Date. Without limiting the foregoing, in the event the Ultimate Expiration Date
occurs before the Exercisability Date, each Warrant shall become void and all
rights thereunder and all rights in respect thereof under this Agreement shall
cease as of the Ultimate Expiration Date. If applicable, dividends and other
distributions will be made upon exercise of the Warrants as set forth in
Section 14 hereof.
--------
(2) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 35% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants as if no Adjustment Event had occurred).
(3) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 40% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants and after giving effect to the Adjustment Event as if it had
occurred).
D-7
<PAGE>
"Exercisability Date" shall mean the fifth (5th) Business Day (as defined
below) following the date on which the Company (or any of its subsidiaries)
receives approval from the U.S. Food and Drug Administration (the "FDA") with
respect to its New Drug Application for MorphiDex(R) for the treatment of one
or more pain indications. In addition to the notices required by Section 14
hereof, the Company shall give prompt written notice to the Warrant Agent that
the Exercisability Date has occurred and shall cause the Warrant Agent, on
behalf of and at the expense of the Company, within 5 Business Days after such
notification is received by the Warrant Agent, to mail by first class mail,
postage prepaid, to each Holder a notice specifying that the Exercisability
Date has occurred and that the Warrant has become exercisable pursuant to its
terms and that the Warrant will expire at 5:00 p.m., New York City time, on the
Expiration Date. In addition, the Company shall post appropriate notices of the
Exercisability Date on its web pages and issue press releases to wire services.
A "Business Day" is a day that is not a Legal Holiday. A "Legal Holiday" is a
Saturday, a Sunday, a federally recognized holiday or a day on which banking
institutions are not required to be open in the State of New York.
From and after the Effective Time, Parent agrees to use its reasonable
efforts to continue to process the FDA application for MorphiDex(R) in a timely
fashion. The parties acknowledge that there are many variables in the process
of obtaining FDA approval in such a situation and many different approaches
which may be used by an applicant in order to obtain such approval; as a
result, the parties hereto agree that all determinations relating to such
process and all actions taken in connection with seeking such approval shall be
in the sole discretion of Parent and shall be binding upon the parties for all
purposes. The parties further acknowledge that (i) on August 2, 1999, the
Company received notification from the FDA that such application was not
approvable, (ii) the failure to obtain such approval, either at all or on or
before a certain date, shall not be deemed a breach by Parent of the provisions
hereof and (iii) in any event Parent shall have no responsibility in connection
with the provisions of this paragraph, except for its willful breach hereof.
The initial price per share at which Warrant Shares shall be purchasable
upon exercise of Warrants (the "Exercise Price") shall equal $0.01. A Warrant
may be exercised upon surrender at the office or agency of the Company
maintained for such purpose, which initially will be the corporate trust office
of the Warrant Agent or its agents in located at 114 West 47th Street, 25th
Floor, New York, New York, 10036, Attention: Corporate Trust Division, of the
Warrant Certificate(s) evidencing the Warrants to be exercised with the form of
election to purchase on the reverse thereof duly filled in and signed, which
signature shall be guaranteed by a participant in a recognized Signature
Guarantee Medallion Program, and upon payment to the Warrant Agent
--------
(4) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 29% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants as if no Adjustment Event had occurred).
(5) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 34% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants and after giving effect to the Adjustment Event as if it had
occurred).
(6) These numbers shall be adjusted in the final Agreement and Warrant in order
to reflect that at the Effective Time such aggregate number, when taken
together with the shares of Parent Common Stock issuable to holders of
Company Common Stock in the Merger, shall equal 24% of the shares of Parent
Common Stock on a fully diluted basis (excluding the effect of the Algos
Warrants as if no Adjustment Event had occurred).
(7) These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 29% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants and after giving effect to the Adjustment Event as if it had
occurred).
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for the account of the Company of the Exercise Price, as adjusted as herein
provided, for the number of Warrant Shares together, if applicable, with cash
payable as provided in Section 13 hereof and any dividends or distributions as
provided in Section 14 hereof in respect of which such Warrants are then
exercised. Payment of the Exercise Price may be made (a) in the form of cash or
by certified or official bank check payable to the order of the Company in New
York Clearing House Funds, (b) by delivering to the Company a written notice
accompanying the surrender of a Warrant to, at the time of exercise, apply to
the payment of the Exercise Price such number of Warrant Shares as shall be
specified in such notice, in which case an amount equal to the excess of the
Current Market Value (as defined in Section 12(d) hereof) of such Warrant
Shares on the date of exercise over the Exercise Price required for such
exercise shall be deemed to have been paid to the Company and the number of
Warrant Shares issuable upon such exercise shall be reduced by such specified
number (a "Cashless Exercise") or (c) any combination of (a) and (b) above.
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause
to be delivered with all reasonable dispatch to or upon the written order of
the Holder and in such name or names as the Warrant Holder may designate a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 13
hereof. Such certificate or certificates shall be deemed to have been issued
and any person so named therein shall be deemed to have become a holder of
record of such Warrant Shares as of the date of the surrender of such Warrants
and payment of the Exercise Price.
On or after the Exercisability Date, the Warrants shall be exercisable, at
the election of the Holders thereof, either in full or from time to time in
part and, in the event that a certificate evidencing Warrants is exercised in
respect of fewer than all of the Warrant Shares issuable on such exercise at
any time prior to the Expiration Date, a new certificate evidencing the
remaining Warrant or Warrants will be issued, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrant
Certificate or Certificates pursuant to the provisions of this Section 7 and of
Section 3 hereof, and the Company, whenever required by the Warrant Agent, will
promptly supply the Warrant Agent with Warrant Certificates duly executed on
behalf of the Company for such purpose.
All Warrant Certificates surrendered upon exercise of Warrants shall be
cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall then
be either delivered to the Company or disposed of by the Warrant Agent in a
manner consistent with the Warrant Agent's customary procedure for such
disposal and in a manner reasonably satisfactory to the Company. The Warrant
Agent shall account promptly to the Company with respect to Warrants exercised
and concurrently pay to the Company all monies received by the Warrant Agent
for the purchase of the Warrant Shares through the exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by the Holders during normal business hours at its office. The
Company shall supply the Warrant Agent from time to time with such numbers of
copies of this Agreement as the Warrant Agent may request.
Section 8. Payment of Taxes. The Company will pay all documentary stamp
taxes attributable to the initial issuance of Warrant Shares upon the exercise
of Warrants; provided, however, that the Company shall not be required to pay
any tax or taxes which may be payable in respect of any transfer involved in
the issue of any Warrant Certificates or any certificates for Warrant Shares in
a name other than that of the registered Holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
Section 9. Mutilated or Missing Warrant Certificates. In case any of the
Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company
may in its discretion issue and the Warrant Agent may countersign, in exchange
and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like
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<PAGE>
tenor and representing an equivalent number of Warrants, but only upon receipt
of evidence satisfactory to the Company and the Warrant Agent of such loss,
theft or destruction of such Warrant Certificate and indemnity, if requested,
also satisfactory to them. Applicants for such substitute Warrant Certificates
shall also comply with such other reasonable regulations and pay such other
reasonable charges as the Company or the Warrant Agent may prescribe.
Section 10. Reservation of Warrant Shares. The Company will at all times
reserve and keep available, free from preemptive rights, out of the aggregate
of its authorized but unissued Common Stock or its authorized and issued Common
Stock held in its treasury, for the purpose of enabling it to satisfy any
obligation to issue Warrant Shares upon exercise of Warrants, the maximum
number of shares of Common Stock which may then be deliverable upon the
exercise of all outstanding Warrants.
The Company will keep a copy of this Agreement on file with the transfer
agent for the Common Stock (the "Transfer Agent") and with every subsequent
transfer agent for any shares of the Company's capital stock issuable upon the
exercise of the rights of purchase represented by the Warrants. The Warrant
Agent is hereby irrevocably authorized to requisition from time to time from
such Transfer Agent the stock certificates required to honor outstanding
warrants upon exercise thereof in accordance with the terms of this Agreement.
The Company will supply such Transfer Agent with duly executed certificates for
such purposes and will provide or otherwise make available any cash which may
be payable as provided in Section 13 hereof. The Company will furnish such
Transfer Agent a copy of all notices of adjustments and certificates related
thereto transmitted to each Holder pursuant to Section 14 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon payment of the Exercise Price therefor and
issue, be validly authorized and issued, fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security
interests with respect to the issuance thereof. The Company will use its
reasonable best efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations under this
Agreement.
Section 11. Obtaining Stock Exchange Listings. The Company will from time to
time take all action which may be necessary so that the Warrants and,
immediately upon their issuance upon exercise of the Warrants, the Warrant
Shares will be listed on the principal securities exchanges and markets within
the United States of America, if any, on which other shares of Common Stock are
then listed.
Section 12. Adjustment of Exercise Price and Number of Warrant Shares
Issuable.
(a) If the Company:
(i) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock or other capital stock of the Company; or
(ii) subdivides, splits, combines or reclassifies its outstanding
shares of Common Stock into a different number of securities of the same
class,
then the number of shares of Common Stock issuable upon the exercise of each
Warrant (the "Exercise Rate") in effect immediately prior to such action shall
be proportionately adjusted so that the Holder of any Warrant thereafter
exercised may receive the aggregate number and kind of shares of capital stock
of the Company which such Holder would have owned immediately following such
action if such Warrant had been exercised immediately prior to such action and
the Exercise Price in effect immediately prior to such action shall be adjusted
to a price determined by multiplying the Exercise Price in effect immediately
prior to such action by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding before giving effect to such action and
the denominator of which shall be the number of shares of Common Stock and/or
such other capital stock outstanding referred to in the foregoing clause (a)(1)
after giving effect to such action.
D-10
<PAGE>
An adjustment pursuant to this Section 12(a) shall become effective
immediately after the record date in the case of a dividend or distribution and
immediately after the effective date in the case of a subdivision, combination
or reclassification.
If, after an adjustment pursuant to this Section 12(a), a Holder of a
Warrant upon exercise of it may receive shares of two or more classes of
capital stock of the Company, the board of directors of the Company shall
determine the allocation of the adjusted Exercise Price between the classes of
capital stock. After such allocation, the exercise privilege and the Exercise
Price of each class of capital stock shall thereafter be subject to adjustment
on terms comparable to those applicable to Common Stock in this Section 12.
Such adjustment shall be made successively whenever any event listed above
shall occur.
(b) Adjustment for Certain Issuances of Common Stock. If the Company issues
or sells to any Affiliate (as defined in Section 12(d) hereof) of the Company
shares of its Common Stock or distributes to any Affiliate of the Company any
rights, options or warrants entitling them to purchase shares of Common Stock,
or securities convertible into or exchangeable for Common Stock, in each case,
at a price per share less than the Current Market Value on the record date for
determining entitlements of such Affiliates to participate in such issuance,
sale or distribution (the "Time of Determination") and prior to such issuance,
sale or distribution the Company did not first offer to issue, sell or
distribute such shares of its Common Stock or such rights, options or warrants
or such securities convertible into or exchangeable for Common Stock to all
holders of Common Stock on the same economic terms and on a pro rata basis with
the issuance, sale or distribution to the Affiliates of the Company, then the
Exercise Rate shall be adjusted in accordance with the formula:
E' = E x O + N
--------
O + N x P
-----
M
and the Exercise Price shall be adjusted in accordance with the following
formula:
EP' = EP x E
---
E'
where:
E' = the adjusted Exercise Rate.
E = the Exercise Rate immediately prior to the Time of Determination for
any such issuance, sale or distribution.
EP' = the Adjusted Exercise Price.
EP = the Exercise Price immediately prior to the Time of Determination for
any such issuance, sale or distribution.
O = the number of Fully Diluted Shares (as defined below) outstanding
immediately prior to the Time of Determination for any such issuance,
sale or distribution.
N = the number of additional shares of Common Stock issued, sold or
issuable upon exercise of such rights, options or warrants.
P = the per share price received and receivable by the Company in the case
of any issuance or sale of Common Stock or rights, options or warrants
as to which such adjustment is being made, inclusive of the exercise
price per share of Common Stock payable upon exercise of such rights,
options or warrants.
M = the Current Market Value per share of Common Stock on the Time of
Determination for any such issuance, sale or distribution.
D-11
<PAGE>
For purposes of this Section 12(b), the term "Fully Diluted Shares" shall
mean (i) the shares of Common Stock outstanding as of a specified date, and
(ii) the shares of Common Stock into or for which rights, options, warrants or
other securities of the Company outstanding as of such date are exercisable or
convertible (other than the Warrants).
Any adjustments shall be made successively whenever any such rights, options
or warrants are issued and shall become effective immediately after the
relevant Time of Determination. Notwithstanding the foregoing, the Exercise
Rate and the Exercise Price shall not be subject to adjustment in connection
with (i) the issuance of any shares of Common Stock upon exercise of any such
rights, options or warrants which have previously been the subject of an
adjustment under this Agreement for which the required adjustment has been made
and (ii) any exercise of the Warrants. If at the end of the period during which
any such rights, options or warrants are exercisable, not all rights, options
or warrants shall have been exercised, the Warrant shall be immediately
readjusted to what it would have been if "N" in each of the above formulas had
been the number of shares actually issued.
(c) When De Minimis Adjustment May Be Deferred. No adjustment in the
Exercise Rate need be made unless the adjustment would require an increase or
decrease of at least 1% in the Exercise Rate. Notwithstanding the foregoing,
any adjustments that are not made shall be carried forward and taken into
account in any subsequent adjustment, provided that no such adjustment shall be
deferred beyond the date on which a Warrant is exercised.
All calculations under this Section 12 shall be made to the nearest cent or
to the nearest 1/100th of a share, as the case may be.
(d) Certain Definitions. "Current Market Value" per share of Common Stock or
of any other security (herein collectively referred to as a "Security") at any
date shall be:
(1) if the Security is not registered under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), (i) the value of the Security
determined in good faith by the board of directors of the Company and
certified in a board resolution, based on the most recently completed
arm's-length transaction between the Company and a person other than an
Affiliate of the Company and the closing of which occurs on such date or
shall have occurred within the six months preceding such date or (ii) if no
such transaction shall have occurred on such date or within such six-month
period, the value of the Security determined as of a date within 30 days
preceding such date by an Independent Financial Expert (as defined below),
or
(2) if the Security is registered under the Exchange Act, the average
of the daily closing bid prices of such Security for 30 consecutive
Business Days selected by the Company from the period of 45 Business Days
preceding such date, but only if such Security shall have been listed on a
national securities exchange or the Nasdaq National Market or traded
through an automated quotation system during such entire 45-Business Day
period.
The "closing bid price" for any Security on each Business Day means the
closing price, regular way, on such day on the principal exchange on which such
Security is traded, or if no sale takes place on such day, the average of the
closing bid and asked prices on such day.
"Independent Financial Expert" shall mean any nationally recognized
investment banking firm that is not an Affiliate of the Company. Any such
person may receive customary compensation and indemnification by the Company
for opinions or services it provides as an Independent Financial Expert.
"Affiliate" of any specified person means any other person which directly or
indirectly through one or more intermediaries controls or is controlled by, or
is under common control with, such specified person. For the purposes of this
definition, "control" (including with correlative meanings, the terms
"controlling," "controlled by" and "under common control with") as used with
respect to any person, means the possession,
D-12
<PAGE>
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such person, whether through the ownership of voting
securities, by agreement or otherwise.
"Ordinary Cash Distribution" means any quarterly cash dividend on the Common
Stock to the extent that the aggregate cash dividend per share of Common Stock
in any calendar quarter does not exceed the greater of (x) the amount per share
of Common Stock of the next preceding quarterly cash dividend on the Common
Stock (as adjusted to reflect subdivisions or combinations of the Common Stock)
and (y) 3.0% of the average of the last reported sales prices of the Common
Stock during the ten trading days immediately prior to the date of declaration
of such dividend.
(e) When No Adjustment Required. If an adjustment is made upon the
establishment of a record date for an issuance, sale or distribution subject to
subsection (a) or (b) hereof and such issuance, sale or distribution is
subsequently cancelled or is not otherwise made, the Exercise Rate and Exercise
Price then in effect shall be readjusted, effective as of the date when the
board of directors of the Company determines to cancel such issuance, sale or
distribution or when it is otherwise evident that such issuance, sale or
distribution will not be so made, to that which would have been in effect if
such record date had not been fixed. If an adjustment would be required under
both subsections (a) and (b) above, such adjustments will be determined without
duplication.
To the extent the Warrants become convertible into cash, no adjustment need
be made thereafter as to the amount of cash into which such Warrants are
exercisable. Interest will not accrue on the cash.
(f) Notice of Adjustment. Whenever the Exercise Rate or Exercise Price is
adjusted, the Company shall provide the notices required by Section 14 hereof.
(g) Voluntary Reduction. The Company from time to time may increase the
Exercise Rate or reduce the Exercise Price by any amount for any period of time
(including, without limitation, permanently) if the period is at least 20
Business Days after the Company has given notice of such increase or reduction
in accordance with Section 14 hereof.
An increase of the Exercise Rate or reduction in the Exercise Price under
this subsection (g) (other than a permanent increase) does not change or adjust
the Exercise Rate otherwise in effect for purposes of subsection (a) and (b) of
this Section 12.
(h) When Issuance or Payment May Be Deferred. In any case in which this
Section 12 shall require that an adjustment in the Exercise Rate or Exercise
Price be made effective as of a record date for a specified event, the Company
may elect to defer until the occurrence of such event (i) issuing to the Holder
of any Warrant exercised after such record date the Warrant Shares and other
capital stock of the Company, if any, issuable upon such exercise over and
above the Warrant Shares and other capital stock of the Company, if any,
issuable upon such exercise on the basis of the Exercise Rate prior to such
adjustment, and (ii) paying to such Holder any amount in cash in lieu of a
fractional share pursuant to Section 13 hereof; provided, however, that the
Company shall deliver to the Warrant Agent and shall cause the Warrant Agent,
on behalf of and at the expense of the Company, to deliver to such Holder a due
bill or other appropriate instrument evidencing such Holder's right to receive
such additional Warrant Shares, other capital stock and cash upon the
occurrence of the event requiring such adjustment.
(i) Reorganizations. In case of (i) any capital reorganization, other than
in the cases referred to in Section 12(a) and (b) hereof and other than any
capital reorganization that does not result in any reclassification of the
outstanding shares of Common Stock into shares of other stock or other
securities or property, or (ii) the consolidation or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock into shares of other
stock or other securities or property), or (iii) the sale of all or
substantially all of the assets of the Company (collectively such actions being
hereinafter referred to as
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<PAGE>
"Reorganizations"), there shall thereafter be deliverable upon exercise of any
Warrant in accordance with the terms hereof (in lieu of the number of shares of
Common Stock theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the number of shares of Common
Stock that would otherwise have been deliverable upon the exercise of such
Warrant would have been entitled upon such Reorganization if the Exercisability
Date had occurred and such Warrant had been exercised in full immediately prior
to such Reorganization. In case of any Reorganization, appropriate adjustment,
as determined in good faith by the board of directors of the Company, whose
determination shall be described in a duly adopted resolution certified by the
Company's Secretary or Assistant Secretary, shall be made in the application of
the provisions herein set forth with respect to the rights and interests of
Holders so that the provisions set forth herein shall thereafter be applicable,
as nearly as possible, in relation to any such shares or other securities or
property thereafter deliverable upon exercise of Warrants.
The Company shall not effect any such Reorganization unless prior to or
simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such Reorganization or the corporation
or other entity purchasing such assets shall expressly assume, by a
supplemental warrant agreement or other acknowledgment executed and delivered
to the Warrant Agent, the obligation to deliver to the Warrant Agent and to
cause the Warrant Agent to deliver to each such Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
Holder may be entitled to purchase in accordance with the terms hereof upon the
occurrence of the Exercisability Date, and the due and punctual performance and
observance of each and every covenant, condition, obligation and liability
under this Agreement to be performed and observed by the Company in the manner
prescribed herein.
The foregoing provisions of this Section 12(i) shall apply to successive
Reorganization transactions.
(j) Form of Warrants. Irrespective of any adjustments in the number or kind
of shares purchasable upon the exercise of the Warrants, Warrants theretofore
or thereafter issued may continue to express the same price and number and kind
of shares as are stated in the Warrants initially issuable pursuant to this
Agreement.
(k) Warrant Agent's Disclaimer. The Warrant Agent has no duty to determine
when an adjustment under this Section 12 should be made, how it should be made
or what it should be. The Warrant Agent has no duty to determine whether any
provisions of a supplemental warrant agreement under subsection (i) of this
Section 12 are correct. The Warrant Agent makes no representation as to the
validity or value of any securities or assets issued upon exercise of Warrants.
The Warrant Agent shall not be responsible for the Company's failure to comply
with this Section 12.
(l) Miscellaneous. For purpose of this Section 12 the term "shares of Common
Stock" shall mean (i) shares of the class of stock designated as the Common
Stock, par value $.01 per share, of the Company as of the date of this
Agreement, and (ii) shares of any other class of stock resulting from
successive changes or reclassification of such shares consisting solely of
changes in par value, or from par value to no par value, or from no par value
to par value. In the event that at any time, as a result of an adjustment made
pursuant to this Section 12, the Holders of Warrants shall become entitled to
purchase any securities of the Company other than, or in addition to, shares of
Common Stock, thereafter the number or amount of such other securities so
purchasable upon exercise of each Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to
the provisions with respect to the Warrant Shares contained in subsections (a)
through (l) of this Section 12, inclusive, and the provisions of Sections 7, 8,
10 and 13 with respect to the Warrant Shares or the Common Stock shall apply on
like terms to any such other securities.
Section 13. Fractional Interests. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be presented for exercise in full at the same time by the same Holder,
the number of full Warrant Shares which shall be issuable upon the exercise
thereof shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of the Warrants so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 13, be
issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal
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<PAGE>
to the excess of the Current Market Value of a Warrant Share over the Exercise
Price on the day immediately preceding the date the Warrant is presented for
exercise, multiplied by such fraction.
Section 14. Notices to Warrant Holders; Reservation of Dividends. No later
than April 6, 2001, the Company shall give written notice of the occurrence or
non-occurrence of the Adjustment Event to the Warrant Agent and shall cause the
Warrant Agent, on behalf of and at the expense of the Company, within 10 days
after such notification is received by the Warrant Agent, to mail by first
class mail, postage prepaid, to each Holder a notice of such occurrence or non-
occurrence of the Adjustment Event. Upon any adjustment pursuant to Section 12
hereof, the Company shall give prompt written notice of such adjustment to the
Warrant Agent and shall cause the Warrant Agent, on behalf of and at the
expense of the Company, within 10 days after notification is received by the
Warrant Agent of such adjustment, to mail by first class mail, postage prepaid,
to each Holder a notice of such adjustment(s) and shall deliver to the Warrant
Agent a certificate of the Chief Financial Officer of the Company, setting
forth in reasonable detail (i) the number of Warrant Shares purchasable upon
the exercise of each Warrant and the Exercise Price of such Warrant after such
adjustment(s), (ii) a brief statement of the facts requiring such adjustment(s)
and (iii) the computation by which such adjustment(s) was made. Where
appropriate, such notice may be given in advance and included as a part of the
notice required under the other provisions of this Section 14.
In case the Exercisability Date has occurred and:
(a) the Company shall authorize the issuance to all holders of shares of
Common Stock of rights, options or warrants to subscribe for or purchase
shares of Common Stock or of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets or cash;
or
(c) of any consolidation or merger to which the Company is a party and
for which approval of any stockholders of the Company is required, or of
the conveyance or transfer of the properties and assets of the Company
substantially as an entirety, or of any reclassification or change of
Common Stock issuable upon exercise of the Warrants (other than a change in
par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), or a tender offer
or exchange offer for shares of Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or winding
up of the Company; or
(e) the Company proposes to take any action that would require an
adjustment to the Exercise Rate pursuant to Section 12 hereof;
then the Company shall give prompt written notice to the Warrant Agent and
shall cause the Warrant Agent, on behalf of and at the expense of the Company
to give to each of the registered holders of the Warrant Certificates at his,
her or its address appearing on the Warrant Register, at least 30 days (or 20
days in any case specified in clauses (a) or (b) above) prior to the applicable
record date hereinafter specified, or the date of the event in the case of
events for which there is no record date, by first-class mail, postage prepaid,
a written notice stating (i) the date as of which the holders of record of
shares of Common Stock to be entitled to receive any such rights, options,
warrants or distribution are to be determined, or (ii) the initial expiration
date set forth in any tender offer or exchange offer for shares of Common
Stock, or (iii) the date on which any such consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up is expected to become
effective or consummated, and the date as of which it is expected that holders
of record of shares of Common Stock shall be entitled to exchange such shares
for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up. The failure by the Company or the Warrant Agent to
give such notice or any defect therein shall not affect the legality or
validity of any distribution, right, option, warrant, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or the vote upon
any action.
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<PAGE>
The Company shall give prompt written notice to the Warrant Agent and shall
cause the Warrant Agent, on behalf of and at the expense of the Company to give
to each Holder written notice of any determination to make a distribution or
dividend to the holders of its Common Stock of any assets (including cash
(other than any Ordinary Cash Distribution)), debt securities, preferred stock,
or any rights or warrants to purchase debt securities, preferred stock, assets
or other securities (other than Common Stock, or rights, options, or warrants
to purchase Common Stock) of the Company, which notice shall state the nature
and amount of such planned dividend or distribution and the record date
therefor, and shall be given by the Company at least 20 days prior to such
record date therefor.
At any time prior to the date that is 30 Business Days after the
Exercisability Date, with respect to any distribution or dividend made by the
Company to all of the holders of its Common Stock for which notice to the
Holders of the Warrants under this Section 14 would be required had such
dividend or distribution occurred after the Exercisability Date and except for
such distributions or dividends as are provided for in Section 12 hereof, the
Company shall hold in reserve the amount of any such dividend or distribution
that would have been payable to the Holders in respect of their Warrant Shares
had the Holders exercised their Warrants immediately prior to such dividend or
distribution. The Company shall release to each Holder of Warrants his, her or
its pro rata share of such reserved dividends or distributions upon the
exercise of such Holder's Warrants pursuant to Section 7 hereof. Any notice
delivered to the Holders by the Company pursuant to this Section 14 shall state
the nature and amount of such dividend or distribution that shall be held in
reserve.
Nothing contained in this Agreement or in any Warrant Certificate shall be
construed as conferring upon the Holders the right to vote or to consent or to
receive notice as stockholders in respect of the meetings of stockholders or
the election of directors of the Company or any other matter, or any rights
whatsoever as stockholders of the Company.
Section 15. Notices to the Company and Warrant Agent. Any notice or demand
authorized by this Agreement to be given or made by the Warrant Agent or by any
Holder to or on the Company shall be sufficiently given or made when received
at the office of the Company expressly designated by the Company as its office
for purposes of this Agreement (until the Warrant Agent is otherwise notified
in accordance with this Section 15 by the Company), as follows:
Endo Pharmaceuticals Holdings Inc.
c/o Kelso & Company
320 Park Avenue
24th Floor
New York, New York 10022
Attention: Managing Director
with a copy to General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036-6522
Attention: Eileen T. Nugent, Esq.
Any notice pursuant to this Agreement to be given by the Company or by any
Holder(s) to the Warrant Agent shall be sufficiently given when received by the
Warrant Agent at the address appearing below (until the Company is otherwise
notified in accordance with this Section by the Warrant Agent).
United States Trust Company of New York
114 West 47th Street, 25th Floor
New York, NY 10036
Attention: Corporate Trust Division
D-16
<PAGE>
Section 16. Supplements and Amendments; Actions. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Warrants in order to cure any ambiguity or to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions
in regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not in any way
adversely affect the rights of any holder of Warrants hereunder. Any amendment
or supplement to this Agreement that has a material adverse effect on the
rights of holders hereunder shall require the written consent of registered
holders of a majority of the then outstanding Warrants, which consent shall
then be effective against all the Holders of Warrants hereunder. The consent of
each holder of a Warrant affected shall be required for any amendment pursuant
to which the Exercise Price would be increased or the number of Warrant Shares
purchasable upon exercise of Warrants would be decreased (not including
adjustments contemplated hereunder). The Warrant Agent shall be entitled to
receive and shall be fully protected in relying upon an officers' certificate
and opinion of counsel as conclusive evidence that any such amendment or
supplement is authorized or permitted hereunder, that it is not inconsistent
herewith, and that it will be valid and binding upon the Company in accordance
with its terms.
Any actions seeking enforcement of the rights of Holders hereunder
(including paragraph 3 of Section 7 hereof) may be brought either by the
Warrant Agent or the Holders of more than 50% of the Warrants issued hereunder
and then outstanding.
Section 17. Concerning the Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the Holders, by their acceptance of
Warrants, shall be bound:
(a) The statements contained herein and in the Warrant Certificate shall
be taken as statements of the Company, and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as
describe the Warrant Agent or any action taken by it. The Warrant Agent
assumes no responsibility with respect to the distribution of the Warrants
except as herein otherwise provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with the covenants contained in this Agreement or in the
Warrants to be complied with by the Company.
(c) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself
(through its employees) or by or through its attorneys or agents (which
shall not include its employees) and shall not be responsible for the
misconduct of any agent appointed with due care.
(d) The Warrant Agent may consult at any time with legal counsel
satisfactory to it (who may be counsel for the Company), and the Warrant
Agent shall incur no liability or responsibility to the Company or to any
Holder in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such
counsel.
(e) Whenever in the performance of its duties under this Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless such evidence in respect
thereof be herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed by the Chairman of the
Board, the President, Chief Financial Officer, one of the Vice Presidents,
the Treasurer or the Secretary of the Company and delivered to the Warrant
Agent; and such certificate shall be full authorization to the Warrant
Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(f) The Company agrees to pay the Warrant Agent reasonable compensation
for all services rendered by the Warrant Agent in the performance of its
duties under this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent (including reasonable fees and
expenses of the Warrant Agent's counsel and agents)
D-17
<PAGE>
in the performance of its duties under this Agreement, and to indemnify the
Warrant Agent and save it harmless against any and all liabilities,
including judgments, costs and counsel fees, for anything done or omitted
by the Warrant Agent in the performance of its duties under this Agreement,
except as a result of the Warrant Agent's negligence or bad faith.
(g) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to
involve expense unless the Company or one or more Holders shall furnish the
Warrant Agent with reasonable security and indemnity satisfactory to the
Warrant Agent for any costs and expenses which may be incurred, but this
provision shall not affect the power of the Warrant Agent to take such
action as the Warrant Agent may consider proper, whether with or without
any such security or indemnity. All rights of action under this Agreement
or under any of the Warrants may be enforced by the Warrant Agent without
the possession of any of the Warrants or the production thereof at any
trial or other proceeding relative thereto, and any such action, suit or
proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable
benefit of the Holders, as their respective rights or interests may appear.
(h) The Warrant Agent and any stockholder, director, officer or employee
of the Warrant Agent may buy, sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily interested in any
transactions in which the Company may be interested, or contract with or
lend money to the Company or otherwise act as fully and freely as though it
were not Warrant Agent under this Agreement or such director, officer or
employee. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity including,
without limitation, acting as Transfer Agent or as a lender to the Company
or an Affiliate thereof.
(i) The Warrant Agent shall act hereunder solely as agent, and its
duties shall be determined solely by the provisions hereof. The Warrant
Agent shall not be liable for anything which it may do or refrain from
doing in connection with this Agreement except for its own negligence or
bad faith.
(j) The Warrant Agent will not incur any liability or responsibility to
the Company or to any Holder for any action taken in reliance on any
notice, resolution, waiver, consent, order, certificate, or other paper,
document or instrument reasonably believed by it to be genuine and to have
been signed, sent or presented by the proper party or parties.
(k) The Warrant Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant (except its countersignature thereof);
nor shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any
Warrant Shares (or other stock) to be issued pursuant to this Agreement or
any Warrant, or as to whether any Warrant Shares (or other stock) will,
when issued, be validly issued, fully paid and nonassessable, or as to the
Exercise Price or the number or amount of Warrant Shares or other
securities or other property issuable upon exercise of any Warrant.
(l) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from
the Chairman of the Board, the President, any Vice President or the
Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and shall not be liable for any
action taken or suffered to be taken by it in good faith and without
negligence in accordance with instructions of any such officer or officers.
Section 18. Change of Warrant Agent. The Warrant Agent may resign at any
time and be discharged from its duties under this Agreement by giving to the
Company 30-days' notice in writing. The Warrant Agent may be removed by like
notice to the Warrant Agent from the Company. If the Warrant Agent shall resign
or be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Warrant Agent. If the Company shall fail to make
such appointment within a period of 30 days after such removal or after it has
been notified in writing of such resignation or incapacity by the resigning or
incapacitated Warrant Agent or by any Holder (who shall with such notice submit
his, her or its Warrant for
D-18
<PAGE>
inspection by the Company), then any Holder may apply to any court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Pending
appointment of a successor warrant agent, either by the Company or by such
court, the duties of the Warrant Agent shall be carried out by the Company. Any
successor warrant agent, whether appointed by the Company or such a court,
shall be a bank or trust company in good standing, incorporated under the laws
of the United States of America or any State thereof or the District of
Columbia and having at the time of its appointment as warrant agent a combined
capital and surplus of at least $10,000,000. After appointment, the successor
warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Warrant Agent without
further act or deed; but the former Warrant Agent shall deliver and transfer to
the successor warrant agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary
for such purpose. Failure to file any notice provided for in this Section 18,
however, or any defect therein, shall not affect the legality or validity of
the resignation or removal of the Warrant Agent or the appointment of the
successor warrant agent, as the case may be. In the event of such resignation
or removal, the Company or the successor warrant agent shall mail by first
class mail, postage prepaid, to each Holder, written notice of such removal or
resignation and the name and address of such successor warrant agent.
Section 19. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company, the Warrant Agent or any holder of
Warrants shall bind and inure to the benefit of their respective successors and
assigns hereunder.
Section 20. Termination. This Agreement shall terminate at 5:00 p.m., New
York City time, on the Expiration Date. Notwithstanding the foregoing, this
Agreement will terminate on any earlier date if all Warrants have been
exercised pursuant to this Agreement.
Section 21. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT CERTIFICATE
ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE
STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF SAID STATE, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF.
Section 22. Benefits of This Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered Holders of the Warrant Certificates any legal
or equitable right, remedy or claim under this Agreement; but this Agreement
shall be for the sole and exclusive benefit of the Company, the Warrant Agent
and the registered Holders of the Warrant Certificates.
Section 23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 24. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
D-19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
ENDO PHARMACEUTICALS HOLDINGS INC.
By: _________________________________
Name:
Title
UNITED STATES TRUST COMPANY OF
NEW YORK, AS WARRANT AGENT
By: _________________________________
Name:
Title:
D-20
<PAGE>
EXHIBIT A
[Form of Warrant Certificate]
[Face]
THIS SECURITY IS A GLOBAL CERTIFICATE AND IS REGISTERED IN THE NAME OF A
DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS
SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON
OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE WARRANT AGREEMENT, DATED AS OF , 2000, BY AND BETWEEN
THE COMPANY AND THE WARRANT AGENT (THE "WARRANT AGREEMENT"), AND NO TRANSFER OF
THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE
DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO
THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT
IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (A NEW YORK CORPORATION) ("DTC") TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
D-21
<PAGE>
EXERCISABLE ON OR AFTER THE EXERCISABILITY DATE
AND ON OR BEFORE THE EXPIRATION DATE
No. Class A Transferable Warrants
Class A Transferable Warrant Certificate
ENDO PHARMACEUTICALS HOLDINGS INC.
This Warrant Certificate certifies that , or registered assigns, is the
registered holder of Class A Transferable Warrants expiring on or before the
Expiration Date (the "Warrants") to purchase shares of Common Stock, par value
$.01 per share (the "Common Stock"), of Endo Pharmaceuticals Holdings Inc., a
Delaware corporation (the "Company"). Each Warrant entitles the holder upon
exercise to receive from the Company on or after the Exercisability Date and on
or before 5:00 p.m. New York City Time on the six-month anniversary of the
Exercisability Date (the "Expiration Date") a number of fully paid and
nonassessable shares of Common Stock (each such share, a "Warrant Share") as
determined in the following paragraph at the initial exercise price (the
"Exercise Price") equal to $0.01 payable upon surrender of this Warrant
Certificate and payment of the Exercise Price in the manner set forth in the
Warrant Agreement, subject only to the conditions set forth herein and in the
Warrant Agreement referred to on the reverse hereof.
If the Exercisability Date is on or prior to March 31, 2002, the Holder
shall then be entitled to receive from the Company (on exercise of such
Warrants and payment of the Exercise Price then in effect for such Warrant
Shares) (together, if applicable, with cash payable as provided in Section 13
hereof and any dividends or distributions payable as provided in Section 14
hereof) (a) 1.153846/8/ Warrant Shares in the event the Adjustment Event (as
defined in that certain Agreement and Plan of Merger, dated as of November ,
1999, as may be amended and restated from time to time, by and among the
Company, Endo Inc., a Delaware corporation and wholly owned subsidiary of the
Company, and Algos Pharmaceutical Corporation, a Delaware corporation) has not
occurred prior to the Exercisability Date or (b) 1.000000/9/ Warrant Shares in
the event the Adjustment Event has occurred prior to the Exercisability Date.
If the Exercisability Date is after March 31, 2002 and on or prior to September
30, 2002, the Holder shall then be entitled to receive from the Company (on
exercise of such Warrants and payment of the Exercise Price then in effect for
such Warrant Shares) (together, if applicable, with cash payable as provided in
Section 13 hereof and any dividends or distributions payable as provided in
Section 14 hereof) (a) 0.633803/10/ Warrant Shares in the event the Adjustment
Event has not occurred prior to the Exercisability
--------
(8) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 35% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
(9) This number shall be adjusted in the final Agreements and Warrant in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 40% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
(10) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 29% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
D-22
<PAGE>
Date or (b) 0.545455/11/ Warrant Shares in the event the Adjustment Event has
occurred prior to the Exercisability Date. If the Exercisability Date is after
September 30, 2002 and on or prior to March 31, 2003, the Holders shall then be
entitled to receive from the Company (on exercise of such Warrants and payment
of the Exercise Price then in effect for such Warrant Shares) (together, if
applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
0.263158/12/ Warrant Shares in the event the Adjustment Event has not occurred
prior to the Exercisability Date or (b) 0.225352/13/ Warrant Shares in the
event the Adjustment Event has occurred prior to the Exercisability Date.
The Exercise Price and number of Warrant Shares issuable upon exercise of
the Warrants are subject to adjustment upon the occurrence of certain events as
set forth in the Warrant Agreement.
No Warrant may be exercised before the Exercisability Date or after 5:00
p.m., New York City Time, on the Expiration Date and to the extent not
exercised by such time such Warrants shall become void.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent, as such term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
--------
(11) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 34% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
(12) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 24% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
(13) This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 29% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
D-23
<PAGE>
IN WITNESS WHEREOF, Endo Pharmaceuticals Holdings Inc. has caused this
Warrant Certificate to be signed by an officer and by its Secretary, each by a
facsimile of his or her signature, and has caused a facsimile of its corporate
seal to be affixed hereunto or imprinted hereon.
Dated: ,
Endo Pharmaceuticals Holdings Inc.
By: _________________________________
Name:
Title:
By: _________________________________
Name:
Title: Secretary
Countersigned:
UNITED STATES TRUST COMPANY OF
NEW YORK, as Warrant Agent
By: _________________________________
Name:
Title:
D-24
<PAGE>
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring on the "Expiration Date," entitling the
holder on exercise to receive shares of Common Stock, par value $.01 per share,
of the Company (the "Common Stock"), and are issued or to be issued pursuant to
a Warrant Agreement dated as of , 2000 (the "Warrant Agreement"), duly
executed and delivered by the Company to United States Trust Company of New
York, as warrant agent (the "Warrant Agent"), which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Warrant Agent, the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants. A copy of the Warrant Agreement may be
obtained by the holder hereof upon written request to the Company.
Warrants may be exercised at any time on or after the "Exercisability Date"
and on or before the "Expiration Date." The holder of Warrants evidenced by
this Warrant Certificate may exercise them by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon properly
completed and executed, together with payment in the manner provided for in the
Warrant Agreement at the office of the Warrant Agent. In the event that upon
any exercise of Warrants evidenced hereby, the number of Warrants exercised
shall be less than the total number of Warrants evidenced hereby, there shall
be issued to the holder hereof or his, her or its assignee a new Warrant
Certificate evidencing the number of Warrants not exercised.
The Warrant Agreement provides that upon the occurrence of certain events
the number of Warrants set forth on the face hereof and the Exercise Price may,
subject to certain conditions, be adjusted. No fractions of a share of Common
Stock will be issued upon the exercise of any Warrant, but the Company will pay
the cash value thereof determined as provided in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Warrant Agent by
the registered holder thereof in person or by legal representative or attorney
duly authorized in writing, may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like
number of Warrants shall be issued to the transferee(s) in exchange for this
Warrant Certificate, subject to the limitations provided in the Warrant
Agreement, without charge except for any tax or other governmental charge
imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder(s) thereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, of any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
D-25
<PAGE>
[Form of Election to Purchase]
(To Be Executed upon Exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right, represented
by this Warrant Certificate, to receive shares of Common Stock and herewith
tenders payment for such shares to the order of Endo Pharmaceuticals Holdings
Inc. in the amount of $ payable in (select one or more: (i) cash and/or (ii)
pursuant to a Cashless Exercise) in accordance with the terms hereof and of the
Warrant Agreement. The undersigned requests that a certificate for such shares
be registered in the name of , whose address is and that such
shares be delivered to whose address is . If said number of shares
is less than all of the shares of Common Stock purchasable hereunder, the
undersigned requests that a new Warrant Certificate representing the remaining
balance of such shares be registered in the name of , whose address is
, and that such Warrant Certificate be delivered to , whose address is
.
Signature:
Date:
Signature Guaranteed:
D-26
<PAGE>
SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS
The following exchanges of a part of this Global Warrant for certificated
Warrants have been made:
<TABLE>
<CAPTION>
Number of
Warrants of
Amount of Amount of this Global
decrease in increase in Warrant Signature of
Number of Number of following authorized
Date of Warrants of this Warrants of this such decrease officer of
Exchange Global Warrant Global Warrant (or increase) Warrant Agent
-------- ---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
</TABLE>
D-27
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF
CLASS A TRANSFERABLE WARRANTS
Re: Class A Transferable Warrants to Purchase Common Stock (the "Warrants") of
Endo Pharmaceuticals Holdings Inc.
This Certificate relates to Warrants held in* book-entry or *
certificated form by (the "Transferor").
The Transferor:*
. has requested the Warrant Agent by written order to deliver in exchange
for its beneficial interest in the Global Warrant held by the depository
a Warrant or Warrants in definitive, registered form equal to its
beneficial interest in Warrants represented by such Global Warrant (or
the portion thereof indicated above); or
. has requested the Warrant Agent by written order to exchange or register
the transfer of a Warrant or Warrants.
_____________________________________
[INSERT NAME OF TRANSFEROR]
By: _________________________________
Date: _______________________________
* Check applicable box.
D-28
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Affiliate.................................................................. D-12
Agreement.................................................................. D-3
Algos...................................................................... D-3
Business Day............................................................... D-8
Cashless Exercise.......................................................... D-9
closing bid price.......................................................... D-12
Common Stock............................................................... D-3
Company.................................................................... D-3
Current Market Value....................................................... D-12
Definitive Warrants........................................................ D-3
Exchange Act............................................................... D-12
Exercisability Date........................................................ D-8
Exercise Price............................................................. D-8
Exercise Rate.............................................................. D-10
Expiration Date............................................................ D-7
FDA........................................................................ D-8
Fully Diluted Shares....................................................... D-12
Global Warrants............................................................ D-3
Holders.................................................................... D-4
Independent Financial Expert............................................... D-12
Legal Holiday.............................................................. D-8
Merger Agreement........................................................... D-3
Ordinary Cash Distribution................................................. D-13
Reorganizations............................................................ D-13
Security................................................................... D-12
shares of Common Stock..................................................... D-14
Sub........................................................................ D-3
Time of Determination...................................................... D-11
Transfer Agent............................................................. D-10
Ultimate Expiration Date................................................... D-7
Warrant.................................................................... D-3
Warrant Agent.............................................................. D-3
Warrant Certificates....................................................... D-3
Warrant Register........................................................... D-4
Warrant Shares............................................................. D-3
Warrants................................................................... D-3
</TABLE>
D-29
<PAGE>
APPENDIX E
FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ENDO PHARMACEUTICALS HOLDINGS INC.
FIRST: The name of the Corporation is Endo Pharmaceuticals Holdings Inc.
(hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at that address is the Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the
"GCL").
FOURTH: The total number of shares of capital stock which the Corporation
shall have authority to issue is 215,000,000 shares, consisting of (i)
175,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock") and (ii) 40,000,000 shares of Preferred Stock, par value $.01 per share
(the "Preferred Stock").
A. Common Stock. Except as otherwise provided in this Article FOURTH or as
otherwise required by law, shares of Common Stock shall be identical and shall
entitle the holders thereof to the same rights and privileges, subject to the
same qualifications, limitations and restrictions.
1. Voting Rights. Except as otherwise required by applicable law, the
holders of Common Stock will be entitled to one vote per share on all
matters to be voted on by the Corporation's Common Stockholders.
2. Dividends. When and as dividends are declared thereon, whether
payable in cash, property or securities of the Corporation, the holders of
Common Stock will be entitled to share equally, share for share, in such
dividends.
B. Preferred Stock. The Board of Directors is expressly authorized to
provide for the issuance of all or any shares of the Preferred Stock in one or
more classes or series, and to fix for each such class or series such voting
powers, full or limited, or no voting powers, and such distinctive
designations, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions thereof, as
shall be stated and expressed in the resolution or resolutions adopted by the
Board of Directors providing for the issuance of such class or series and as
may be permitted by the GCL, including, without limitation, the authority to
provide that any such class or series may be (i) subject to such mandatory or
optional redemption at such time or times and at such price or prices, or, if
appropriate, not subject to such mandatory or optional redemption, (ii)
entitled to receive dividends (which may be cumulative or non-cumulative) at
such rates, on such conditions, and at such times, and payable in preference
to, or in such relation to, the dividends payable on any other class or classes
or any other series, (iii) entitled to such rights upon the dissolution of, or
upon any distribution of the assets of, the Corporation, or (iv) convertible
into, or exchangeable for, shares of any other class or classes of stock, or of
any other series of the same or any other class or classes of stock, of the
Corporation at such price or prices or at such rates of exchange and with such
adjustments, all as may be stated in such resolution or resolutions.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(1) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors.
E-1
<PAGE>
(2) The directors shall have concurrent power with the stockholders to
make, alter, amend, change, add to or repeal the By-Laws of the
Corporation, as amended and restated from time to time (the "By-Laws").
(3) The number of directors of the Corporation shall not be less than
seven (7) nor more than eleven (11), the exact number of directors to be
fixed from time to time by, or in the manner provided in, the By-Laws of
the Corporation. The number of directors constituting the Board of
Directors shall be fixed at nine (9) as of the date hereof. Election of
directors need not be by written ballot unless the By-Laws so provide.
(4) No director shall be personally liable to the Corporation or any
of its stockholders for monetary damages for breach of 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) pursuant to Section 174 of the GCL or (iv) for any
transaction from which the director derived an improper personal benefit.
Any repeal or modification of this Article FIFTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such
repeal or modification.
(5) In addition to the powers and authority hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Certificate of Incorporation, and any By-Laws
adopted by the stockholders; provided, however, that no By-Laws hereafter
adopted by the stockholders shall invalidate any prior act of the directors
which would have been valid if such By-Laws had not been adopted.
SIXTH: The name and mailing address of the Sole Incorporator is as follows:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Deborah M. Reusch................................... P.O. Box 636
Wilmington, DE 19899
</TABLE>
SEVENTH: The Corporation shall indemnify its directors and officers to the
fullest extent authorized or permitted by law, as now or hereafter in effect,
and such right to indemnification shall continue as to a person who has ceased
to be a director or officer of the Corporation and shall inure to the benefit
of his or her heirs, executors and personal and legal representatives;
provided, however, that, except for proceedings to enforce rights to
indemnification, the Corporation shall not be obligated to indemnify any
director or officer (or his or her heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated by
such person unless such proceeding (or part thereof) was authorized or
consented to by the Board of Directors. The right to indemnification conferred
by this Article SEVENTH shall include the right to be paid by the Corporation
the expenses incurred in defending or otherwise participating in any proceeding
in advance of its final disposition.
The Corporation may, to the extent authorized from time to time by the Board
of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article SEVENTH to directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses conferred in
this Article SEVENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under this Certificate of Incorporation, the By-
Laws, any statute, agreement, vote of stockholders or disinterested directors
or otherwise.
Any repeal or modification of this Article SEVENTH by the stockholders of
the Corporation shall not adversely affect any rights to indemnification and to
the advancement of expenses of a director or officer of the Corporation
existing at the time of such repeal or modification with respect to any acts or
omissions occurring prior to such repeal or modification.
E-2
<PAGE>
EIGHTH: Meetings of stockholders may be held within or without the State of
Delaware, as the By-Laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the GCL) outside the State of Delaware
at such place or places as may be designated from time to time by the Board of
Directors or in the By-Laws.
NINTH: The Corporation hereby elects not to be governed by Section 203 of
the GCL pursuant to Section 203(b)(3) therein.
TENTH: The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the GCL, do make this Certificate,
hereby declaring and certifying that this is my act and deed and the facts
herein stated are true, and accordingly have hereunto set my hand this day of
, .
_____________________________________
Deborah M. Reusch
Sole Incorporator
E-3
<PAGE>
APPENDIX F
FORM OF AMENDED AND RESTATED BY-LAWS
OF
ENDO PHARMACEUTICALS HOLDINGS INC.
(hereinafter called the "Corporation")
As adopted ,
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation shall
be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for the election
of directors or for any other purpose shall be held at such time and place,
either within or without the State of Delaware as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting or in
a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of Stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Written notice of the Annual Meeting stating the place, date and hour of the
meeting shall be given to each stockholder entitled to vote at such meeting not
less than ten nor more than sixty days before the date of the meeting.
Section 3. Nature of Business at Meetings of Stockholders. No business may
be transacted at an annual meeting of stockholders, other than business that is
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the annual meeting by
or at the direction of the Board of Directors (or any duly authorized committee
thereof) or (c) otherwise properly brought before the annual meeting by any
stockholder of the Corporation (i) who is a stockholder of record on the date
of the giving of the notice provided for in this Section 3 and on the record
date for the determination of stockholders entitled to vote at such annual
meeting and (ii) who complies with the notice procedures set forth in this
Section 3.
In addition to any other applicable require ments, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary
of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation
not less than sixty (60) days nor more than ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting of stockholders;
provided, however, that in the event that the annual meeting is called for a
date that is not within thirty (30) days before or after such
APPF-1
<PAGE>
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such stockholder, (iii) the
class or series and number of shares of capital stock of the Corporation which
are owned beneficially or of record by such stockholder, (iv) a description of
all arrangements or understandings between such stockholder and any other
person or persons (including their names) in connection with the proposal of
such business by such stockholder and any material interest of such stockholder
in such business and (v) a representation that such stockholder intends to
appear in person or by proxy at the annual meeting to bring such business
before the meeting.
No business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures
set forth in this Section 3; provided, however, that, once business has been
properly brought before the annual meeting in accordance with such procedures,
nothing in this Section 3 shall be deemed to preclude discussion by any
stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
Section 4. Special Meetings. Unless otherwise prescribed by law or by the
certificate of incorporation of the Corporation, as amended and restated from
time to time (the "Certificate of Incorporation"), Special Meetings of
Stockholders, for any purpose or purposes, may be called by any officer of the
Corporation at the request in writing of a majority of the Board of Directors
or at the request in writing of stockholders owning a majority of the capital
stock of the Corporation issued and outstanding and entitled to vote. Such
request shall state the purpose or purposes of the proposed meeting. Written
notice of a Special Meeting stating the place, date and hour of the meeting and
the purpose or purposes for which the meeting is called shall be given not less
than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote at such meeting.
Section 5. Quorum. Except as otherwise provided by law or by the Certificate
of Incorporation, the holders of a majority of the capital stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present or represented. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder entitled to
vote at the meeting.
Section 6. Voting. Unless otherwise required by law, the Certificate of
Incorporation or these By-Laws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. Unless otherwise provided in
the Certificate of Incorporation and subject to Section 5 of Article V hereof,
each stockholder represented at a meeting of stockholders shall be entitled to
cast one vote for each share of the capital stock entitled to vote thereat held
by such stockholder. Such votes may be cast in person or by proxy but no proxy
shall be voted on or after three years from its date, unless such proxy
provides for a longer period. The Board of Directors, in its discretion, or the
officer of the Corporation presiding at a meeting of stockholders, in his or
her discretion, may require that any votes cast at such meeting shall be cast
by written ballot.
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Section 7. Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided in the Certificate of Incorporation, any action required or permitted
to be taken at any Annual or Special Meeting of Stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
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 action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have
not consented in writing.
Section 8. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 9. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 8 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
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<PAGE>
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The Board of Directors shall
consist of not less than seven (7) nor more than eleven (11) members, the exact
number of which shall initially be fixed upon the adoption of these By-Laws at
nine (9) and, thereafter, shall be fixed from time to time by resolution of the
Board of Directors adopted in accordance with Section 6 of this Article III
(the "Board Resolution"), or by resolution adopted by the vote of a majority of
the stockholders of the Common Stock or by consent executed on behalf of such
stockholders (the "Stockholder Resolution"); provided, that in the event of a
conflict between the Board Resolution and the Stockholder Resolution, the
Stockholder Resolution shall govern. Except as provided in Section 2 of this
Article, directors shall be elected by a plurality of the votes cast at Annual
Meetings of Stockholders, and each director so elected shall hold office until
the next Annual Meeting and until his or her successor is duly elected and
qualified, or until his or her earlier resignation or removal. Any director may
resign at any time upon notice to the Corporation. Directors need not be
stockholders.
Section 2. Vacancies. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until
the next Annual Meeting and until their successors are duly elected and
qualified, or until their earlier death, resignation or removal.
Section 3. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as
are not by statute or by the Certificate of Incorporation or by these By-Laws
directed or required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, if there be one, the President, or any director. Notice thereof
stating the place, date and hour of the meeting shall be given to each director
either by personal delivery, facsimile, telephone or telegram on twenty-four
(24) hours' notice, or on such shorter notice as the person or persons calling
such meeting may deem necessary or appropriate in the circumstances.
Section 5. Quorum. Except as may be otherwise specifically provided by law,
the Certificate of Incorporation or these By-Laws, at all meetings of the Board
of Directors, a majority of the entire Board of Directors shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors; provided, however, that so long as (i) Kelso & Company
("Kelso") and its affiliates shall own at least 25% of the outstanding shares
of Common Stock and (ii) the Corporation's Common Stock is not publicly traded,
any act by the Board of Directors shall require the consent of at least one
member of the Board of Directors who is an officer, director or employee of
Kelso or its affiliates (other than the Corporation), if there exists such
officer, director or employee of Kelso serving as a member of the Board of
Directors at such time. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
Section 6. Actions of Board by Written Consent. Unless otherwise provided by
the Certificate of Incorporation or these By-Laws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all the members of the
Board of Directors or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board of Directors or committee.
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<PAGE>
Section 7. Meetings by Means of Conference Telephone. Unless otherwise
provided by the Certificate of Incorporation or these By-Laws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 7 shall
constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may, by resolution passed by a
majority of the entire Board of Directors, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of any such committee. In the absence or disqualification of a member
of a committee, and in the absence of a designation by the Board of Directors
of an alternate member to replace the absent or disqualified member, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or she or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any absent or disqualified member. Notwithstanding the preceding sentences, no
absent or disqualified member of any committee who is an Algos Designee (as
defined in Section 11 of this Article III) shall be replaced at any meeting
except by another Algos Designee or a nominee thereof. Any committee, to the
extent allowed by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation. Each committee shall keep regular minutes and report to the Board
of Directors when required.
Section 9. Compensation. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors or a stated salary
as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation there-for. Members
of special or standing committees may be allowed like compensation for
attending committee meetings.
Section 10. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or her or
their votes are counted for such purpose if (i) the material facts as to his or
her or their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his or her or their relationship or interest and
as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board of Directors, a committee
thereof or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
Section 11. Continuing Directors. Three (3) designees of Algos
Pharmaceutical Corporation (each of whom shall be satisfactory to the
Corporation) shall be appointed to the Board of Directors (such person and any
subsequent designees thereof, the "Algos Designees"), and shall serve until
their terms expire or until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the terms hereof or the Certificate of Incorporation. During
the three-year period, from and including [the Effective Date], (a) at any
meeting of stockholders for the purpose of electing the members of the Board of
Directors, the Corporation shall use its reasonable best efforts to cause to be
nominated for
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election the Algos Designees, (b) any vacancies created by any Algos Designee
upon such Algos Designee's death, resignation or removal that are not filled
pursuant to a stockholder vote shall be filled by a nominee of the remaining
Algos Designees and (c) one Algos Designee shall be appointed as a member of
any compensation committee of the Board of Directors or any other committee of
such Board of Directors having the responsibility or power with respect to the
granting of employee stock options.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be chosen by the
Board of Directors and shall be a President, a Secretary and a Treasurer. The
Board of Directors, in its discretion, may also choose a Chairman of the Board
of Directors (who must be a director) and one or more Vice Presidents,
Assistant Secretaries, Assistant Treasurers and other officers. Any number of
offices may be held by the same person, unless otherwise prohibited by law, the
Certificate of Incorporation or these By-Laws. The officers of the Corporation
need not be stockholders of the Corporation nor, except in the case of the
Chairman of the Board of Directors, need such officers be directors of the
Corporation.
Section 2. Election. The Board of Directors at its first meeting held after
each Annual Meeting of Stockholders shall elect the officers of the Corporation
who shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors; and all officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of attorney,
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name of and on
behalf of the Corporation by the President or any Vice President and any such
officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and power incident to the ownership of such securities and which, as
the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may, by resolution, from time to time confer
like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the Board of
Directors, if there be one, shall preside at all meetings of the stockholders
and of the Board of Directors. Except where by law the signature of the
President is required, the Chairman of the Board of Directors shall possess the
same power as the President to sign all contracts, certificates and other
instruments of the Corporation which may be authorized by the Board of
Directors. During the absence or disability of the President, the Chairman of
the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform such other duties and may exercise such other powers as from time to
time may be assigned to him or her by these By-Laws or by the Board of
Directors.
Section 5. President. The President shall be the Chief Executive Officer of
the Corporation, and shall, subject to the control of the Board of Directors
and, if there be one, the Chairman of the Board of Directors, have general
supervision of the business of the Corporation and shall see that all orders
and resolutions of the Board of Directors are carried into effect. He or she
shall execute all bonds, mortgages, contracts and other instruments of the
Corporation requiring a seal, under the seal of the Corporation, except where
required or
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permitted by law to be otherwise signed and executed and except that the other
officers of the Corporation may sign and execute documents when so authorized
by these By-Laws, the Board of Directors or the President. In the absence or
disability of the Chairman of the Board of Directors, or if there be none, the
President shall preside at all meetings of the stockholders and the Board of
Directors. The President shall also perform such other duties and may exercise
such other powers as from time to time may be assigned to him by these By-Laws
or by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or in his or her
absence or in the event of his or her inability or refusal to act (and if there
be no Chairman of the Board of Directors), the Vice President or the Vice
Presidents if there is more than one (in the order designated by the Board of
Directors) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. Each Vice President shall perform such other duties and have such
other powers as the Board of Directors from time to time may prescribe. If
there be no Chairman of the Board of Directors and no Vice President, the Board
of Directors shall designate the officer of the Corporation who, in the absence
of the President or in the event of the inability or refusal of the President
to act, shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President.
Section 7. Secretary. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books to be kept for that purpose; the Secretary shall
also perform like duties for the standing committees when required. The
Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or President,
under whose supervision he or she shall be. If the Secretary shall be unable or
shall refuse to cause to be given notice of all meetings of the stockholders
and special meetings of the Board of Directors, and if there be no Assistant
Secretary, then either the Board of Directors or the President may choose
another officer to cause such notice to be given. The Secretary shall have
custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the
signature of the Secretary or by the signature of any such Assistant Secretary.
The Board of Directors may give general authority to any other officer to affix
the seal of the Corporation and to attest the affixing by his or her signature.
The Secretary shall see that all books, reports, statements, certificates and
other documents and records required by law to be kept or filed are properly
kept or filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his or her transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give
the Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his or her office and for the restoration to the Corporation, in case
of his or her death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in his or
her possession or under his or her control belonging to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise provided in
these By-Laws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by the
Board of Directors, the President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of his or her
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
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Section 10. Assistant Treasurers. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in
the event of his or her disability or refusal to act, shall perform the duties
of the Treasurer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his or her office and
for the restoration to the Corporation, in case of his or her death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his or her possession or under his
or her control belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the Chairman of the Board of Directors, the President or a Vice
President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Corporation, certifying the number of shares
owned by him in the Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate may be
a facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his or her legal representative, to advertise the same in such
manner as the Board of Directors shall require and/or to give the Corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable in the
manner prescribed by law and in these By-Laws. Transfers of stock shall be made
on the books of the Corporation only by the person named in the certificate or
by his or her attorney law fully constituted in writing and upon the surrender
of the certificate therefor, which shall be cancelled before a new certificate
shall be issued.
Section 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty days nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
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Section 6. Beneficial Owners. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and to hold liable for calls
and assessments a person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his or her
address as it appears on the records of the Corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the same
shall be deposited in the United States mail. Written notice may also be given
by personal delivery, facsimile, telephone or telegram.
Section 2. Waivers of Notice. Whenever any notice is required by law, the
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, and may
be paid in cash, in property, or in shares of the capital stock. Before payment
of any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion, deems proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for any proper purpose, and the Board of
Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
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ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings other than
Those by or in the Right of the Corporation. Subject to Section 3 of this
Article VIII, the Corporation shall 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) by
reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which such person reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that such person's conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the
Right of the Corporation. Subject to Section 3 of this Article VIII, the
Corporation shall 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 by reason of
the fact that such person is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under this
Article VIII (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director or officer is proper in the circumstances because such person has
met the applicable standard of conduct set forth in Section 1 or Section 2 of
this Article VIII, as the case may be. Such determination shall be made (i) by
a majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (ii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion or (iii) by the stockholders. To the extent, however, that a
director or officer of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding described above, or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection therewith, without the necessity of authorization
in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the Corporation, or, with respect to any criminal
action or proceeding, to have had no reasonable cause to believe such person's
conduct was unlawful, if such person's action is based
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on the records or books of account of the Corporation or another enterprise, or
on information supplied to such person by the officers of the Corporation or
another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records
given or reports made to the Corporation or another enterprise by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Corporation or another enterprise. The
term "another enterprise" as used in this Section 4 shall mean any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, employee or agent. The provisions of this
Section 4 shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standard of conduct set forth in Section 1 or 2 of this Article VIII, as the
case may be.
Section 5. Indemnification by a Court. Not withstanding any contrary
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to the Court of Chancery in the State of Delaware for
indemnification to the extent otherwise permissible under Sections 1 and 2 of
this Article VIII. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director or officer is
proper in the circumstances because such person has met the applicable
standards of conduct set forth in Section 1 or 2 of this Article VIII, as the
case may be. Neither a contrary determination in the specific case under
Section 3 of this Article VIII nor the absence of any determination thereunder
shall be a defense to such application or create a presumption that the
director or officer seeking indemnification has not met any applicable standard
of conduct. Notice of any application for indemnification pursuant to this
Section 5 shall be given to the Corporation promptly upon the filing of such
application. If successful, in whole or in part, the director or officer
seeking indemnification shall also be entitled to be paid the expense of
prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a director or
officer in defending any civil, criminal, administrative or investigative
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under the Certificate of Incorporation, any By-Law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in such person's official capacity and as to action in another capacity while
holding such office, it being the policy of the Corporation that
indemnification of the persons specified in Sections 1 and 2 of this Article
VIII shall be made to the fullest extent permitted by law. The provisions of
this Article VIII shall not be deemed to preclude the indemnification of any
person who is not specified in Section 1 or 2 of this Article VIII but whom the
Corporation has the power or obligation to indemnify under the provisions of
the General Corporation Law of the State of Delaware, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director or officer of the Corporation, or
is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan 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 or the obligation to
indemnify such person against such liability under the provisions of this
Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have
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had power and authority to indemnify its directors or officers, so that any
person who is or was a director or officer of such constituent corporation, or
is or was a director or officer of such constituent corporation serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, shall stand in the same position under the
provisions of this Article VIII with respect to the resulting or surviving
corporation as such person would have with respect to such constituent
corporation if its separate existence had continued. For purposes of this
Article VIII, references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving
at the request of the Corporation" shall include any service as a director,
officer, employee or agent of the Corporation which imposes duties on, or
involves services by, such director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner such person reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VIII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer
and shall inure to the benefit of the heirs, executors and administrators of
such a person.
Section 11. Limitation on Indemnification. Notwithstanding anything
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5
hereof), the Corporation shall not be obligated to indemnify any director or
officer in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The Corporation may, to
the extent authorized from time to time by the Board of Directors, provide
rights to indemnification and to the advancement of expenses to employees and
agents of the Corporation similar to those conferred in this Article VIII to
directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. These By-Laws may be altered, amended or repealed, in whole or in
part, or new By-Laws may be adopted by the stockholders or by the Board of
Directors, provided, however, that notice of such alteration, amendment, repeal
or adoption of new By-Laws be contained in the notice of such meeting of
stockholders or Board of Directors as the case may be. All such amendments must
be approved by either the holders of a majority of the outstanding capital
stock entitled to vote thereon or by a majority of the entire Board of
Directors then in office.
Section 2. Entire Board of Directors. As used in this Article IX and in
these By-Laws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no
vacancies.
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APPENDIX G
DELAWARE CODE ANNOTATED
SECTION 262. APPRAISAL RIGHTS
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
SECTION 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 section
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 section 251 (other than a merger effected pursuant to
section 251(g) of this title), section 252, section 254, section 257, section
258, section 263 or section 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 section 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
sections 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;
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c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
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 section 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 subsection (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 section 228
or section 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
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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 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
G-3
<PAGE>
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 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 is 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.
G-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
As authorized by section 145 of the Delaware General Corporation Law, each
director and officer of a corporation may be indemnified by the corporation
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement, actually and reasonably incurred regarding the defense or
settlement of threatened, pending or completed legal proceedings. Each director
or officer will have the right of indemnification if he or she:
. is involved in the legal proceeding because he or she is or was a
director or officer of the corporation;
. acted in good faith and in a manner that he or she reasonably believed
was in the best interests of the corporation; and
. in a criminal action or proceeding, had no reasonable cause to believe
that his or her conduct was unlawful.
However, if the legal proceeding is by or in the right of the corporation, the
director or officer may not be indemnified for claims, issues or matters as to
which the director or officer is adjudged to be liable for negligence or
misconduct in the performance of his or her duty to the corporation unless a
court determines otherwise.
Article SEVENTH of the amended and restated certificate of incorporation of
Endo contains provisions that authorize the indemnification of directors and
officers. Under article SEVENTH, Endo will indemnify its directors and officers
to the fullest extent authorized or permitted by law against expenses,
judgments, fines and amounts paid in settlement. In addition, this right of
indemnification continues to persons who have ceased to be directors or
officers of Endo and to his or her heirs, executors and personal and legal
representatives. However, unless the legal proceeding was authorized or
consented to by Endo's board of directors, Endo is not obligated to indemnify a
director or officer, or his or her heirs, executors or personal or legal
representatives, regarding the proceeding initiated by the same director or
officer, or his or her heirs, executors or personal or legal representatives.
Finally, article SEVENTH provides that a repeal or modification of article
SEVENTH by the stockholders must not adversely affect the rights to
indemnification of directors and officers regarding any acts or omissions that
occurred before the repeal or modification.
Set forth below are material provisions of article EIGHTH of Endo's amended
and restated by-laws that authorize the indemnification of directors and
officers:
. Section 2 of article EIGHTH states that if the director or officer is
adjudged to be liable to the company by a court of law there would be no
right of indemnification unless the court determines upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, the director or officer is fairly and
reasonably entitled to indemnity.
. Under section 3 of article EIGHTH, authorization as to whether a
director or officer should be indemnified is made (a) by a majority vote
of the directors who are not parties to the action, suit or proceeding,
even though less than a quorum, (b) by independent legal counsel in a
written opinion if there are no directors who are not parties to the
action, suit or proceeding, or (c) by the stockholders. However, if a
director or officer has been successful on the merits or defense of the
action, suit or proceeding, then that person will be indemnified without
authorization.
. According to section 5 of article EIGHTH, directors or officers may
apply to the Court of Chancery in the State of Delaware for
indemnification.
II-1
<PAGE>
. Section 6 of article EIGHTH provides that the directors and officers
have the right to be reimbursed for the expenses incurred in defending
or participating in a legal proceeding in advance of the proceeding's
final disposition.
. Pursuant to section 8 of article EIGHTH, Endo may purchase and maintain
insurance on behalf of persons who are or were directors or officers
whether or not Endo would have the power or the obligation to indemnify
those persons.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Set forth below is a list of the exhibits included as part of this
Registration Statement. The exhibits listed below are listed according to the
number assigned in the table in Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
Number Description of the Exhibit
------- --------------------------
<C> <S>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of March
3, 2000 (the "Merger Agreement"), by and among Endo Pharmaceuticals
Holdings Inc. ("Endo"), Endo Inc. and Algos Pharmaceutical Corporation
("Algos")++
2.2 Amendment, dated as of April 17, 2000, to the Merger Agreement, by and
between Endo, Endo Inc. and Algos++
2.3 Asset Purchase Agreement, dated as of August 27, 1997, by and between
Endo Pharmaceuticals Inc. ("Endo Pharmaceuticals") and The DuPont
Merck Pharmaceutical Company ("DuPont Merck Pharmaceutical")++
3.1 Form of Amended and Restated Certificate of Incorporation of Endo++
3.2 Form of Amended and Restated By-laws of Endo++
4.1 Form of Amended and Restated Executive Stockholders Agreement++
4.2 Form of Amended and Restated Employee Stockholders Agreement++
4.3 Form of Stock Certificate of Endo Common Stock++
4.4 Form of Registration Rights Agreement, by and between Endo and Endo
Pharma LLC ("Endo Pharma")++
5 Opinion Regarding Legality of Securities Being Registered by Skadden,
Arps, Slate, Meagher & Flom LLP ("Skadden, Arps"), dated as of June
14, 2000*
8.1 Opinion Regarding Tax Matters by Skadden, Arps, dated as of June 13,
2000*
8.2 Opinion Regarding Tax Matters by Latham & Watkins, dated as of June
13, 2000*
9 Form of Voting Agreement, by and among Endo, Endo Inc. and each of
Karen B. Lyle, John W. Lyle, Michael Hyatt, Roger H. Kimmel, Hyatt
Family Trust, Trust Under the Will of Inez L. Kimmel, Todd Kimmel
Trust, Melissa Kimmel Trust, Anita Hyatt Family Trust, Donald Drapkin,
Donald G. Drapkin, James R. Ledley, Frank S. Caruso, Frank S. Caruso
Irrevocable Trust and Patricia Caruso++
10.1 Form of Endo Warrant Agreement, by and between Endo and United States
Trust Company of New York++
10.2 Form of Algos Warrant Agreement, by and between Endo and United States
Trust Company of New York++
10.3 Form of Series A Warrant to Purchase Shares of Common Stock and
Warrants of Endo++
10.4 Letter Agreement, dated as of November 26, 1999, by and among Algos,
Endo, Kelso Investment Associates V, L.P. and Kelso Equity Partners V,
L.P.++
10.5 Form of Tax Sharing Agreement, by and among Endo, Endo Inc. and Endo
Pharma++
10.6 Form of Agreement, by and between Endo and Endo Pharma++
10.7 Credit Agreement, dated as of August 26, 1997, by and between Endo
Pharmaceuticals and The Chase Manhattan Bank++
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of the Exhibit
------- --------------------------
<C> <S>
10.8+ Co-Promotion Agreement, dated as of March 1, 2000, by and between
Endo Pharmaceuticals and Elan Pharmaceuticals, Inc.++
10.9 Collaboration Agreement, dated as of November 26, 1999, by and
between Endo Pharmaceuticals and Algos++
10.10+ Sole and Exclusive License Agreement, dated as of November 23, 1998,
by and between Endo Pharmaceuticals and Hind Health Care, Inc.++
10.11 Analgesic License Agreement, dated as of October 27, 1997, by and
among Endo Pharmaceuticals, Endo Laboratories, LLC and DuPont Merck
Pharmaceutical++
10.12 Anti-Epileptic License Agreement, dated as of October 27, 1997, by
and among Endo Pharmaceuticals, Endo Laboratories, LLC and DuPont
Merck Pharmaceutical++
10.13+ Product Development, Manufacturing and Supply Agreement, dated as of
October 29, 1999, by and between Endo Pharmaceuticals and Lavipharm
Laboratories Inc.++
10.14+ Supply and Manufacturing Agreement, dated as of November 23, 1998,
by and between Endo Pharmaceuticals and Teikoku Seiyaku Co., Ltd++
10.15+ Supply Agreement, dated as of July 1, 1998, by and between Endo
Pharmaceuticals and Mallinckrodt Inc. ("Mallinckrodt")++
10.16+ Supply Agreement for Bulk Narcotics Raw Materials, dated as of July
1, 1998, by and between Endo Pharmaceuticals and Mallinckrodt++
10.17+ Manufacture and Supply Agreement, dated as of August 26, 1997, by
and among Endo Pharmaceuticals, DuPont Merck Pharmaceutical and
DuPont Merck Pharma++
10.18+ Strategic Alliance Agreement, dated as of September 17, 1997, by and
between Endo Pharmaceuticals and Penwest Pharmaceuticals Group++
10.19+ Agreement, dated as of February 1, 2000, by and between Endo
Pharmaceuticals and Livingston Healthcare Services Inc.++
10.20+ Medical Affairs Support Services Agreement, dated as of June 1,
1999, by and between Endo Pharmaceuticals and Kunitz and Associates,
Inc.++
10.21 Endo 1997 Employee Stock Option Plan++
10.22 Form of Endo Pharma Amended and Restated 1997 Employee Stock Option
Plan++
10.23 Form of Endo Pharma Amended and Restated 1997 Executive Stock Option
Plan++
10.24 Form of Endo Pharma 2000 Supplemental Employee Stock Option Plan++
10.25 Form of Endo Pharma 2000 Supplemental Executive Stock Option Plan++
10.26 Form of Employment Agreement, by and between Endo and John W. Lyle++
10.27 Amended and Restated Employment Agreement, dated as of April 26,
2000, by and between Endo Pharmaceuticals and Carol A. Ammon++
10.28 Amended and Restated Employment Agreement, dated as of April 26,
2000, by and between Endo Pharmaceuticals and Jeffrey R. Black++
10.29 Amended and Restated Employment Agreement, dated as of April 26,
2000, by and between Endo Pharmaceuticals and David Allen Harvey
Lee, MD, Ph.D.++
10.30 Amended and Restated Employment Agreement, dated as April 26, 2000,
by and between Endo Pharmaceuticals and Mariann T. MacDonald++
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of the Exhibit
------- --------------------------
<C> <S>
10.31 Separation and Release Agreement, dated as of March 22, 2000, by and
between Endo Pharmaceuticals, Endo and Osagie O. Imasogie++
10.32 Separation and Release Agreement, dated as of April 20, 2000, by and
between Endo Pharmaceuticals, Endo and Louis J. Vollmer++
10.33 Office Lease, dated as of August 26, 1997, by and between Endo
Pharmaceuticals and Northstar Development Company++
10.34 Lease Agreement, dated as of May 5, 2000, by and between Endo
Pharmaceuticals and Painters' Crossing One Associates, L.P. and Endo
Pharmaceuticals++
11 Statement Regarding Computation of per Share Earnings++
21 Subsidiaries of Endo++
23.1 Consent of Deloitte & Touche LLP++
23.2 Consent of PricewaterhouseCoopers LLP Regarding Algos++
23.3 Consent of PricewaterhouseCoopers LLP Regarding DuPont Pharmaceuticals
Company++
23.4 Consent of Credit Suisse First Boston Corporation++
24 Power of Attorney++
99 Form of Proxy Card*
</TABLE>
--------
* Filed herewith.
+ Confidential portions of this exhibit have been redacted and filed
separately with the Commission pursuant to a confidential treatment request
in accordance with Rule 406 of the Securities Act of 1933.
++ Filed previously as an exhibit to this Registration Statement.
(b) Financial Statement Schedules
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION>
Balance at Balance at
beginning end
Allowance For Doubtful of period Additions Deductions(1) Other of period
Accounts: ---------- --------- ------------- ----- ----------
<S> <C> <C> <C> <C> <C>
Period from August 26,
1997 to December 31,
1997..................... -- $ 181 -- -- $ 181
===== ===== ===== ===== ======
Year Ended December 31,
1998..................... $ 181 $ 141 $ (7) -- $ 315
===== ===== ===== ===== ======
Year Ended December 31,
1999..................... $ 315 $ 150 $ (21) -- $ 444
===== ===== ===== ===== ======
Three Months Ended March
31, 2000................. $ 444 $ 862 $ -- -- $1,306
===== ===== ===== ===== ======
</TABLE>
--------
(1) Accounts written-off
Item 22. Undertakings
Endo, the undersigned registrant, hereby undertakes:
(1) That prior to 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.
II-4
<PAGE>
(2) That every prospectus (i) that is filed pursuant to the immediately
preceding paragraph, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act of 1933 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.
(3) The undersigned registrant undertakes to respond to requests for
information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this form. Within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to
the request.
(4) 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 arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by a 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 of 1933 and will be governed by the final adjudication of such
issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (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
Chadds Ford, state of Pennsylvania, on June 14, 2000.
ENDO PHARMACEUTICALS
HOLDINGS INC.
/s/ Carol A. Ammon
By: ______________________________
Name: Carol A. Ammon
Title: President & Chief
Executive Officer
POWER OF ATTORNEY
Each of the undersigned, hereby (i) consents to being named a director of
Endo Pharmaceuticals Holdings Inc., a Delaware corporation (the "Company"),
following the offering contemplated by a Registration Statement on Form S-4
(the "Registration Statement") filed herewith with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act, and any pre-or
post-effective amendment thereto and (ii) constitutes and appoints each of
Carol A. Ammon, James J. Connors, II, Frank J. Loverro and Stanley de J.
Osborne to be his or her true and lawful attorneys-in-fact and agents, with
full power of each to act alone, and to sign for the undersigned and in each of
their respective names in any and all capacities stated below, the Registration
Statement and any pre- or post-effective amendment thereto, or other applicable
forms, in each case filed by the Company with the Commission, and to do all
such things in the names and on behalf of the undersigned to comply with any
and all of the requirements of the Securities Act and the Commission.
Pursuant to the requirements of the Securities Act, this Registration
Statement and Power of Attorney have been signed by the following persons in
the capacities and on the dates indicated.
II-6
<PAGE>
<TABLE>
<S> <C> <C>
Signature Title Date
--------- ----- ----
/s/ Carol A. Ammon Chief Executive Officer, June 14, 2000
___________________________________________ President and Director
Carol A. Ammon
/s/ * Director June 14, 2000
___________________________________________
Michael B. Goldberg
/s/ * Director June 14, 2000
___________________________________________
David I. Wahrhaftig
/s/ * Director June 14, 2000
___________________________________________
John W. Lyle
/s/ * Director June 14, 2000
___________________________________________
Michael Hyatt
/s/ * Director June 14, 2000
___________________________________________
Roger H. Kimmel
*By: /s/ Stanley de J. Osborne Attorney-in-fact June 14, 2000
___________________________________________
Stanley de J. Osborne
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of the Exhibit
------- --------------------------
<C> <S>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of March
3, 2000 (the "Merger Agreement"), by and among Endo Pharmaceuticals
Holdings Inc. ("Endo"), Endo Inc. and Algos Pharmaceutical Corporation
("Algos")++
2.2 Amendment, dated as of April 17, 2000, to the Merger Agreement, by and
between Endo, Endo Inc. and Algos++
2.3 Asset Purchase Agreement, dated as of August 27, 1997, by and between
Endo Pharmaceuticals Inc. ("Endo Pharmaceuticals") and The DuPont
Merck Pharmaceutical Company ("DuPont Merck Pharmaceutical")++
3.1 Form of Amended and Restated Certificate of Incorporation of Endo++
3.2 Form of Amended and Restated By-laws of Endo++
4.1 Form of Amended and Restated Executive Stockholders Agreement++
4.2 Form of Amended and Restated Employee Stockholders Agreement++
4.3 Form of Stock Certificate of Endo Common Stock++
4.4 Form of Registration Rights Agreement, by and between Endo and Endo
Pharma LLC ("Endo Pharma")++
5 Opinion Regarding Legality of Securities Being Registered by Skadden,
Arps, Slate, Meagher & Flom LLP ("Skadden, Arps"), dated as of June
14, 2000*
8.1 Opinion Regarding Tax Matters by Skadden, Arps, dated as of June 13,
2000*
8.2 Opinion Regarding Tax Matters by Latham & Watkins, dated as of June
13, 2000*
9 Form of Voting Agreement, by and among Endo, Endo Inc. and each of
Karen B. Lyle, John W. Lyle, Michael Hyatt, Roger H. Kimmel, Hyatt
Family Trust, Trust Under the Will of Inez L. Kimmel, Todd Kimmel
Trust, Melissa Kimmel Trust, Anita Hyatt Family Trust, Donald Drapkin,
Donald G. Drapkin, James R. Ledley, Frank S. Caruso, Frank S. Caruso
Irrevocable Trust and Patricia Caruso++
10.1 Form of Endo Warrant Agreement, by and between Endo and United States
Trust Company of New York++
10.2 Form of Algos Warrant Agreement, by and between Endo and United States
Trust Company of New York++
10.3 Form of Series A Warrant to Purchase Shares of Common Stock and
Warrants of Endo++
10.4 Letter Agreement, dated as of November 26, 1999, by and among Algos,
Endo, Kelso Investment Associates V, L.P. and Kelso Equity Partners V,
L.P.++
10.5 Form of Tax Sharing Agreement, by and among Endo, Endo Inc. and Endo
Pharma++
10.6 Form of Agreement, by and between Endo and Endo Pharma++
10.7 Credit Agreement, dated as of August 26, 1997, by and between Endo
Pharmaceuticals and The Chase Manhattan Bank++
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of the Exhibit
------- --------------------------
<C> <S>
10.8+ Co-Promotion Agreement, dated as of March 1, 2000, by and between
Endo Pharmaceuticals and Elan Pharmaceuticals, Inc.++
10.9 Collaboration Agreement, dated as of November 26, 1999, by and
between Endo Pharmaceuticals and Algos++
10.10+ Sole and Exclusive License Agreement, dated as of November 23, 1998,
by and between Endo Pharmaceuticals and Hind Health Care, Inc.++
10.11 Analgesic License Agreement, dated as of October 27, 1997, by and
among Endo Pharmaceuticals, Endo Laboratories, LLC and DuPont Merck
Pharmaceutical++
10.12 Anti-Epileptic License Agreement, dated as of October 27, 1997, by
and among Endo Pharmaceuticals, Endo Laboratories, LLC and DuPont
Merck Pharmaceutical++
10.13+ Product Development, Manufacturing and Supply Agreement, dated as of
October 29, 1999, by and between Endo Pharmaceuticals and Lavipharm
Laboratories Inc.++
10.14+ Supply and Manufacturing Agreement, dated as of November 23, 1998,
by and between Endo Pharmaceuticals and Teikoku Seiyaku Co., Ltd++
10.15+ Supply Agreement, dated as of July 1, 1998, by and between Endo
Pharmaceuticals and Mallinckrodt Inc. ("Mallinckrodt")++
10.16+ Supply Agreement for Bulk Narcotics Raw Materials, dated as of July
1, 1998, by and between Endo Pharmaceuticals and Mallinckrodt++
10.17+ Manufacture and Supply Agreement, dated as of August 26, 1997, by
and among Endo Pharmaceuticals, DuPont Merck Pharmaceutical and
DuPont Merck Pharma++
10.18+ Strategic Alliance Agreement, dated as of September 17, 1997, by and
between Endo Pharmaceuticals and Penwest Pharmaceuticals Group++
10.19+ Agreement, dated as of February 1, 2000, by and between Endo
Pharmaceuticals and Livingston Healthcare Services Inc.++
10.20+ Medical Affairs Support Services Agreement, dated as of June 1,
1999, by and between Endo Pharmaceuticals and Kunitz and Associates,
Inc.++
10.21 Endo 1997 Employee Stock Option Plan++
10.22 Form of Endo Pharma Amended and Restated 1997 Employee Stock Option
Plan++
10.23 Form of Endo Pharma Amended and Restated 1997 Executive Stock Option
Plan++
10.24 Form of Endo Pharma 2000 Supplemental Employee Stock Option Plan++
10.25 Form of Endo Pharma 2000 Supplemental Executive Stock Option Plan++
10.26 Form of Employment Agreement, by and between Endo and John W. Lyle++
10.27 Amended and Restated Employment Agreement, dated as of April 26,
2000, by and between Endo Pharmaceuticals and Carol A. Ammon++
10.28 Amended and Restated Employment Agreement, dated as of April 26,
2000, by and between Endo Pharmaceuticals and Jeffrey R. Black++
10.29 Amended and Restated Employment Agreement, dated as of April 26,
2000, by and between Endo Pharmaceuticals and David Allen Harvey
Lee, MD, Ph.D.++
10.30 Amended and Restated Employment Agreement, dated as April 26, 2000,
by and between Endo Pharmaceuticals and Mariann T. MacDonald++
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of the Exhibit
------- --------------------------
<C> <S>
10.31 Separation and Release Agreement, dated as of March 22, 2000, by and
between Endo Pharmaceuticals, Endo and Osagie O. Imasogie++
10.32 Separation and Release Agreement, dated as of April 20, 2000, by and
between Endo Pharmaceuticals, Endo and Louis J. Vollmer++
10.33 Office Lease, dated as of August 26, 1997, by and between Endo
Pharmaceuticals and Northstar Development Company++
10.34 Lease Agreement, dated as of May 5, 2000, by and between Endo
Pharmaceuticals and Painters' Crossing One Associates, L.P. and Endo
Pharmaceuticals++
11 Statement Regarding Computation of per Share Earnings++
21 Subsidiaries of Endo++
23.1 Consent of Deloitte & Touche LLP++
23.2 Consent of PricewaterhouseCoopers LLP Regarding Algos++
23.3 Consent of PricewaterhouseCoopers LLP Regarding DuPont Pharmaceuticals
Company++
23.4 Consent of Credit Suisse First Boston Corporation++
24 Power of Attorney++
99 Form of Proxy Card*
</TABLE>
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* Filed herewith.
+ Confidential portions of this exhibit have been redacted and filed
separately with the Commission pursuant to a confidential treatment request
in accordance with Rule 406 of the Securities Act of 1933.
++ Filed previously as an exhibit to this Registration Statement.
II-10
