<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant: [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
DRAXIS HEALTH INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-
11.
1) Title of each class of securities to which transaction applies:
- -------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
- -------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
- -------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
- -------------------------------------------------------------------------------
5) Total fee paid:
- -------------------------------------------------------------------------------
[ X ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
- -------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
- -------------------------------------------------------------------------------
3) Filing Party:
- -------------------------------------------------------------------------------
4) Date Filed:
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<PAGE>
NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS OF:
DRAXIS HEALTH INC.
(a Canadian Corporation)
DEPRENYL ANIMAL HEALTH, INC.
(a Missouri Corporation)
DEPRENYL ANIMAL HEALTH, INC.
(a Louisiana Corporation)
to be held on:
NOVEMBER 25, 1996 - DRAXIS HEALTH INC.
NOVEMBER 26, 1996 - DEPRENYL ANIMAL HEALTH, INC.
- and -
JOINT MANAGEMENT PROXY STATEMENT - PROSPECTUS
with respect to a proposed
SHARE EXCHANGE PLAN
OCTOBER 15, 1996
<PAGE>
(DAHI LOGO/HEADER) (DRAXIS LOGO/HEADER)
October 15, 1996
To Our Shareholders:
We are very pleased to present to you for consideration by shareholders of both
Draxis Health Inc. ("Draxis") and Deprenyl Animal Health, Inc. ("DAHI") a
proposal whereby Draxis would acquire the outstanding shares of DAHI it does not
already own, and DAHI would become a wholly-owned subsidiary of Draxis. Draxis
currently owns 44% of DAHI's outstanding equity, and has rights, through
convertible debt, which if exercised would bring its ownership to approximately
52%. On consummation of the proposed transaction (the "Share Exchange"),
holders of DAHI common stock will receive 1.35 common shares of Draxis for each
DAHI share of common stock.
You are cordially invited to attend the upcoming Special Meetings of
Shareholders, at which the overall transaction and the critically important
proposed resolutions will be reviewed and voted upon. The Draxis meeting will
be held in the Dining Room of the Board of Trade, Airport Club, 830 Dixon Road,
Etobicoke, Ontario on November 25, 1996 at 10:00 a.m. and the DAHI meetings will
be held at the Embassy Suites Hotel, 7640 Northwest Tiffany Springs Parkway,
Kansas City, Missouri on November 26, 1996 at 12:00 noon and 1:00 p.m.
At the 12:00 noon DAHI Special Meeting, DAHI shareholders will be asked to
reincorporate DAHI in the state of Louisiana to facilitate the Share Exchange.
The Special Meeting of Shareholders of the reincorporated DAHI will be held at
1:00 p.m. at the same location. The purpose of this last Special Meeting is to
approve the actual Share Exchange.
The purpose of the Draxis Special Meeting is to approve the issuance of Draxis
common shares to shareholders of DAHI and to amend the Draxis stock option plan
to allow the issuance of Draxis common shares upon the due exercise of
outstanding DAHI stock options pursuant to the Share Exchange.
The Boards of Directors of DAHI and Draxis each appointed an independent
committee to review the proposed transaction. The DAHI independent committee
received a written opinion from its financial advisor in connection with the
proposed transaction, Hambrecht & Quist, to the effect that the Share Exchange
is fair to shareholders of DAHI from a financial point of view. KPMG provided a
formal valuation to the DAHI independent committee on the range of fair market
values of the common stock of DAHI and the common shares of Draxis.
DUE TO THE IMPORTANCE OF THE ACTIONS TO BE TAKEN AT THESE UPCOMING SPECIAL
MEETINGS, WE URGE YOU TO CAREFULLY REVIEW THE ATTACHED JOINT MANAGEMENT PROXY
STATEMENT-PROSPECTUS. FOR AN OVERVIEW, PLEASE REVIEW THE FOLLOWING SECTIONS IN
THE SUMMARY: "RECOMMENDATIONS OF DAHI BOARD OF DIRECTORS", "RECOMMENDATIONS OF
DRAXIS BOARD OF DIRECTORS"; "FINANCIAL ADVISOR TO DAHI"; AND "VALUATION".
REGARDLESS OF THE NUMBER OF SHARES YOU OWN, IT IS IMPERATIVE THAT YOU
PARTICIPATE EITHER IN PERSON OR BY PROXY. INSTRUCTIONS ON COMPLETING AND
RETURNING THE ENCLOSED PROXIES ARE ATTACHED TO THIS LETTER.
On behalf of the Boards of Directors,
DEPRENYL ANIMAL HEALTH, INC. DRAXIS HEALTH INC.
/s/ David R. Stevens /s/ Martin Barkin
David R. Stevens, DVM, PhD Martin Barkin, MD, FRCSC
President and Chief Executive Officer President, Chief Executive Officer
<PAGE>
INSTRUCTIONS FOR COMPLETING AND RETURNING PROXIES:
FOR DAHI SHAREHOLDERS: Complete the proxies printed on BOTH GREEN and PINK
paper, sign and date, and return to DAHI in the enclosed postage paid pre-
addressed envelope.
FOR DRAXIS SHAREHOLDERS: Complete the proxy printed on BLUE paper, sign and
date, and return to Draxis in the enclosed postage paid pre-addressed envelope.
EACH OF THE BOARDS OF DIRECTORS OF DAHI AND DRAXIS HAS UNANIMOUSLY DETERMINED
THAT THE SHARE EXCHANGE IS BOTH FAIR AND IN THE BEST INTERESTS OF SHAREHOLDERS.
ACCORDINGLY, EACH OF THE BOARDS OF DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE IN
FAVOUR OF THIS TRANSACTION AS PRESENTED IN THESE RESOLUTIONS.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.,
a Missouri corporation
10955 Lowell, Suite 710
Overland Park, Kansas 66210
(913) 338-2120
--------------
Notice of Special Meeting of Shareholders
To Be Held November 26, 1996
--------------
To the Shareholders of Deprenyl Animal Health, Inc.:
A special meeting (the "Special Meeting") of the holders of Common Stock in
Deprenyl Animal Health, Inc., a Missouri corporation ("DAHI Missouri"), will be
held at 12:00 noon, Central Standard Time, on November 26, 1996, at the Embassy
Suites Hotel, 7640 Northwest Tiffany Springs Parkway, Kansas City, Missouri, to
consider and vote upon a proposal to change the state of incorporation of DAHI
Missouri from the State of Missouri to the State of Louisiana, including the
approval of a Plan of Merger providing for the merger of DAHI Missouri into
Deprenyl Animal Health, Inc., a Louisiana corporation ("DAHI Louisiana"), which
is a wholly-owned subsidiary of DAHI Missouri (the "Reincorporation Merger").
Consummation of the Reincorporation Merger will be subject to shareholder
approval of, and is intended to be immediately followed by implementation of,
the proposed plan of share exchange pursuant to which each outstanding share of
Common Stock of DAHI Louisiana (formerly, DAHI Missouri) will be exchanged for
1.35 shares of Common Stock of Draxis Health Inc. ("Draxis"), as more fully
described in the attached Joint Management Proxy Statement-Prospectus.
The full text of the resolution approving the Reincorporation Merger is
annexed as Appendix A to the Joint Management Proxy Statement-Prospectus of
Draxis, DAHI Missouri and DAHI Louisiana dated October 15, 1996 accompanying
this Notice.
The Board of Directors has fixed 5:00 p.m., Central Standard Time, on
October 15, 1996, as the record date for the determination of those holders of
DAHI Missouri Common Stock entitled to notice of, and to vote at, the Special
Meeting. Only shareholders of record at that time are entitled to notice of,
and to vote at, such Special Meeting. In the event that the Reincorporation
Merger is approved, holders of DAHI Missouri Common Stock who timely file a
written notice, and comply with other procedural requirements within certain
time periods, may have the right to demand a cash payment equal to the fair
value of their DAHI Missouri Common Stock. Such rights, and entitlement
thereto, are further explained in the Joint Management Proxy Statement-
Prospectus accompanying this Notice and are contingent upon compliance by
holders with detailed statutory requirements, the text of which is set forth as
Appendix G to the Joint Management Proxy Statement-Prospectus.
Whether or not you plan to attend the Special Meeting, please complete,
date and sign the enclosed form of proxy colored pink and return it promptly in
the enclosed envelope. Your proxy may be revoked in the manner described in the
accompanying Joint Management Proxy Statement-Prospectus at any time before it
has been voted at the Special Meeting.
A copy of the Joint Management Proxy Statement-Prospectus accompanying this
Notice has been sent to each director, each shareholder entitled to notice of
the Special Meeting and to the auditors of DAHI Missouri.
By Order of the Board of Directors,
/s/ Arthur E. Fillmore
October 15, 1996 Arthur E. Fillmore, II
Overland Park, Kansas Secretary
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.,
a Louisiana corporation
643 Magazine Street
New Orleans, Louisiana 70130
(504) 596-2791
--------------
Notice of Special Meeting of Shareholders
To Be Held November 26, 1996
--------------
To the current and prospective Shareholders of Deprenyl Animal Health, Inc., a
Louisiana corporation:
A special meeting (the "Special Meeting") of the holder of Common Stock in
Deprenyl Animal Health, Inc., a Louisiana corporation ("DAHI Louisiana"), will
be held at 1:00 p.m., Central Standard Time, on November 26, 1996, at the
Embassy Suites Hotel, 7640 Northwest Tiffany Springs Parkway, Kansas City,
Missouri, for the following purposes:
1. In the event the shareholders of Deprenyl Animal Health, Inc., a
Missouri corporation ("DAHI Missouri"), approve a proposal to change the
state of incorporation of DAHI Missouri from the State of Missouri to the
State of Louisiana, including the approval of a Plan of Merger providing
for the merger of DAHI Missouri into DAHI Louisiana (the "Reincorporation
Merger"), to consider and vote upon a proposed plan of share exchange (the
"Share Exchange Plan"), pursuant to which each share of Common Stock of
DAHI Louisiana ("DAHI Louisiana Common Stock") issued and outstanding
following the Reincorporation Merger will be mandatorily exchanged for 1.35
shares of Common Stock of Draxis Health Inc. ("Draxis").
2. To transact such other business as may properly come before the
Special Meeting or at any and all adjournments thereof.
The full text of the resolution approving the Share Exchange Plan is
annexed as Appendix B to the Joint Management Proxy Statement-Prospectus of
Draxis, DAHI Missouri and DAHI Louisiana dated October 15, 1996 accompanying
this Notice.
The Board of Directors has fixed 5:00 p.m., Central Standard Time, on
October 15, 1996, as the record date (the "Record Date") for the determination
of those holders of DAHI Louisiana Common Stock entitled to notice of, and to
vote at, the Special Meeting. The sole shareholder of record at the Record Date
was DAHI Missouri, the parent corporation of DAHI Louisiana, and DAHI Missouri
is the only shareholder entitled to notice of, and to vote at, such Special
Meeting.
Although DAHI Missouri is the sole shareholder of record of DAHI Louisiana
as of the Record Date and is the only shareholder entitled to this Notice of
Special Meeting of Shareholders, this Notice is also being sent to all
shareholders of record of DAHI Missouri as of the Record Date (the "DAHI
Missouri Shareholders"), each of whom will become a shareholder of DAHI
Louisiana if the Reincorporation Merger is approved and consummated, other than
dissenting DAHI Missouri Shareholders.
The Reincorporation Merger will not be implemented unless the Share
Exchange Plan is approved. Since the effect of approving the Share Exchange
Plan will be to cause each share of DAHI Missouri Common Stock (which will be
converted to a share of DAHI Louisiana Common Stock in the Reincorporation
Merger) to be exchanged for 1.35 shares of Draxis Common Stock, DAHI Missouri
wishes the votes on the Share Exchange Plan to be cast by the DAHI Missouri
Shareholders, the real parties in interest. Therefore, DAHI Missouri has agreed
to issue a proxy to each DAHI Missouri Shareholder to cast that number of votes
for or against the Share Exchange Plan equal to the number of shares the DAHI
Missouri Shareholder owns in DAHI Missouri as of the Record Date. As a result,
a DAHI Missouri Shareholder who owns 100 shares of DAHI Missouri Common Stock as
of the Record Date will be granted a proxy to cast 100 votes in favor of or
against the Share Exchange Plan at the Special Meeting. DAHI Missouri will not
cast any votes directly at the Special Meeting. Its shares of DAHI Louisiana
Common Stock will only be voted by the DAHI Missouri Shareholders pursuant to
the proxies granted to them by DAHI Missouri.
The proxies being granted to DAHI Missouri Shareholders to vote shares of
DAHI Louisiana stock are on a form of proxy colored green. Each DAHI Missouri
Shareholder is requested to complete, date, and sign the enclosed blank form of
proxy and return it promptly in the enclosed envelope whether or not such
shareholder plans to attend the Special Meeting. A DAHI Missouri Shareholder's
proxy may be revoked in the manner described in the accompanying Joint
Management Proxy Statement-Prospectus at any time before it has been voted at
the Special Meeting.
<PAGE>
-2-
A copy of the Joint Management Proxy Statement-Prospectus accompanying this
Notice has been sent to each director of DAHI Louisiana, DAHI Missouri, its sole
shareholder, and to each DAHI Missouri Shareholder.
By Order of the Board of Directors,
/s/ Arthur E. Fillmore
October 15, 1996 Arthur E. Fillmore, II
Overland Park, Kansas Secretary
<PAGE>
DRAXIS HEALTH INC.
6870 Goreway Drive
Mississauga, Ontario
L4V 1P1 Canada
(416) 677-5500
--------------
Notice of Special Meeting of Common Shareholders
To Be Held November 25, 1996
--------------
To the Shareholders of Draxis Health Inc.:
A special meeting (the "Special Meeting"), of the common shareholders of
Draxis Health Inc. ("Draxis") will be held at 10:00 a.m., Toronto Time, on
November 25, 1996, in the Dining Room of the Board of Trade, Airport Club, 830
Dixon Road, Etobicoke, Ontario, for the following purposes:
1. To consider and vote upon a proposed issuance (the "Draxis Common
Stock Offering") of up to 5,725,188 common shares by Draxis to holders of
common stock in Deprenyl Animal Health, Inc., a Louisiana corporation
("DAHI Louisiana"), in connection with a plan of share exchange (the "Share
Exchange Plan"), pursuant to which each issued and outstanding share of
common stock of DAHI Louisiana will be mandatorily exchanged for 1.35
common shares of Draxis (the "Exchange Ratio"), so that Draxis, through its
wholly-owned subsidiaries, will thereafter hold all the issued and
outstanding shares of DAHI Louisiana. Outstanding options to acquire
common stock of DAHI Louisiana will similarly be exchanged for options to
acquire common shares of Draxis at the Exchange Ratio.
2. Subject to approval by the shareholders of Deprenyl Animal Health,
Inc., a Missouri corporation (voting pursuant to proxies granted to them by
DAHI Missouri, the sole shareholder of DAHI Louisiana) of the Share
Exchange Plan, to consider and vote upon the proposed change to the Draxis
Stock Option Plan (the "Plan") to provide that, in connection with the
implementation of the Share Exchange Plan, the maximum number of common
shares of Draxis that may be issued under the Plan be increased from
2,500,000 to 4,500,000 (the "Draxis Stock Option Plan Adjustment").
3. To transact such other business as may properly come before the
Special Meeting or at any and all adjournments thereof.
The full text of the resolutions approving the Draxis Common Stock Offering
and the Draxis Stock Option Plan Adjustment are annexed as Appendix C to the
Joint Management Proxy Statement-Prospectus of Draxis, DAHI Missouri and DAHI
Louisiana dated October 15, 1996 accompanying this Notice.
The Board of Directors has fixed 5:00 p.m., Toronto Time, on October 15,
1996, as the record date for the determination of common shareholders entitled
to notice of, and to vote at, the Special Meeting. Only common shareholders of
record at that time are entitled to notice of, and to vote at, such Special
Meeting.
Whether or not you plan to attend the Special Meeting, please complete,
date and sign the enclosed form of proxy colored blue and return it promptly in
the enclosed envelope. Your proxy may be revoked in the manner described in the
accompanying Joint Management Proxy Statement-Prospectus at any time before it
has been voted at the Special Meeting.
A copy of the Joint Management Proxy Statement-Prospectus accompanying this
Notice has been sent to each director, each shareholder entitled to notice of
the Special Meeting and to the auditors of Draxis.
By Order of the Board of Directors,
/s/ Jacqueline H.R. Le Saux
October 15, 1996 Jacqueline H.R. Le Saux
Mississauga, Ontario Vice-President, Corporate Development &
Secretary
<PAGE>
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
DRAXIS AND DAHI REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES . . . . . . . 14
COMPARATIVE HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA . . . . . . 15
COMPARATIVE PER SHARE HISTORICAL AND PRO FORMA CONSOLIDATED PER SHARE DATA . 15
COMPARATIVE PER SHARE MARKET PRICE DATA. . . . . . . . . . . . . . . . . . . 16
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SHARES OUTSTANDING AND VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . 18
SPECIAL CONSIDERATIONS RELATING TO THE REINCORPORATION MERGER. . . . . . . . 20
SPECIAL CONSIDERATIONS RELATING TO THE SHARE EXCHANGE. . . . . . . . . . . . 21
SPECIAL CONSIDERATIONS RELATING TO THE DRAXIS COMMON STOCK OFFERING. . . . . 25
REINCORPORATION MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
The Articles of Incorporation and Bylaws of DAHI Louisiana. . . . . . . . 30
U.S. Federal Income Tax Consequences of the Reincorporation Merger. . . . 30
Canadian Federal Income Tax Consequences of the Reincorporation Merger. . 32
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SHARE EXCHANGE PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Exchange Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Capitalization of DAHI Missouri, DAHI Louisiana and Draxis. . . . . . . . 39
Background to the Share Exchange; Terms and Reasons . . . . . . . . . . . 40
DAHI Reasons for Transaction and Recommendation of DAHI Board . . . . . . 41
Draxis Reasons for Transaction and Recommendation of Draxis Board . . . . 43
Operations Following the Transaction. . . . . . . . . . . . . . . . . . . 44
Opinion of Financial Advisor to the DAHI Independent Committee. . . . . . 44
Valuation of Independent Valuator . . . . . . . . . . . . . . . . . . . . 48
Prior Valuation of Draxis Common Stock. . . . . . . . . . . . . . . . . . 53
Interests of Management . . . . . . . . . . . . . . . . . . . . . . . . . 53
U.S. Federal Income Tax Consequences of the Share Exchange Plan . . . . . 54
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Canadian Federal Income Tax Consequences of the Share Exchange Plan . . . 56
Issue and Resale of Draxis Common Stock to be Received in the Share
Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Quotation of Draxis Common Stock on the TSE and Nasdaq. . . . . . . . . . 58
Delisting and Deregistration of DAHI Common Shares After the Share
Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Significant Differences Between the Corporation Laws of Missouri and
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Votes Required. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
DRAXIS COMMON STOCK OFFERING . . . . . . . . . . . . . . . . . . . . . . . . 63
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
DRAXIS STOCK OPTION PLAN ADJUSTMENT. . . . . . . . . . . . . . . . . . . . . 64
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Exchange Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
BUSINESS OF DAHI MISSOURI. . . . . . . . . . . . . . . . . . . . . . . . . . 65
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Business of DAHI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Price Range and Trading Volume of DAHI Common Stock . . . . . . . . . . . 68
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
<PAGE>
A-ii
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
DAHI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Principal Shareholders of DAHI Missouri . . . . . . . . . . . . . . . . . 72
BUSINESS OF DAHI LOUISIANA . . . . . . . . . . . . . . . . . . . . . . . . . 72
BUSINESS OF DRAXIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Products Being Marketed . . . . . . . . . . . . . . . . . . . . . . . . . 76
Products under Development. . . . . . . . . . . . . . . . . . . . . . . . 81
Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Research and Development. . . . . . . . . . . . . . . . . . . . . . . . . 85
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
DAHI Funding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Principal Holders of Draxis Common Stock. . . . . . . . . . . . . . . . . 87
Description of Share Capital. . . . . . . . . . . . . . . . . . . . . . . 88
Price Range and Trading Volume of Draxis Common Stock . . . . . . . . . . 89
Outstanding Rights, Options and Warrants. . . . . . . . . . . . . . . . . 90
Directors and Officers. . . . . . . . . . . . . . . . . . . . . . . . . . 91
Management Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 92
Dividend Policy and Record. . . . . . . . . . . . . . . . . . . . . . . . 99
Interest of Management and Others in Material Transactions. . . . . . . . 99
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Auditors, Transfer Agent and Registrar. . . . . . . . . . . . . . . . . . 100
DRAXIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Income From Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 101
Cost of Sales, Administration, Marketing and Selling Expenses . . . . . . 102
Research and Development. . . . . . . . . . . . . . . . . . . . . . . . . 103
Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . . 103
Other Income (Expenses) . . . . . . . . . . . . . . . . . . . . . . . . . 104
Income Taxes (Recoverable). . . . . . . . . . . . . . . . . . . . . . . . 104
Equity Share of Net Development Stage Costs of Affiliated Companies . . . 104
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . 106
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
SOURCES OF INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
SHAREHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING OF DRAXIS SHAREHOLDERS . . 107
SHAREHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING OF DAHI SHAREHOLDERS . . . 107
FINANCIAL STATEMENTS AND RELATED INFORMATION . . . . . . . . . . . . . . . . F-1
APPROVALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
<PAGE>
A-iii
APPENDICES
Special Resolution of DAHI Missouri Shareholders. . . . . . . . . Appendix A
Special Resolution of DAHI Louisiana Shareholders . . . . . . . . Appendix B
Resolutions of Draxis Shareholders. . . . . . . . . . . . . . . . Appendix C
Plan of Merger. . . . . . . . . . . . . . . . . . . . . . . . . . Appendix D
Plan of Share Exchange. . . . . . . . . . . . . . . . . . . . . . Appendix E
Fairness Opinion of Hambrecht & Quist LLC . . . . . . . . . . . . Appendix F
Section 351.455 of the Missouri Business Corporation Act. . . . . Appendix G
Articles of Incorporation for DAHI Louisiana. . . . . . . . . . . Appendix H
By-laws of DAHI Louisiana . . . . . . . . . . . . . . . . . . . . Appendix I
DAHI Form 10-K (December 31, 1995). . . . . . . . . . . . . . . . Appendix J
DAHI Form 10-Q (March 31, 1996) . . . . . . . . . . . . . . . . . Appendix K
DAHI Form 10-Q (June 30, 1996). . . . . . . . . . . . . . . . . . Appendix L
<PAGE>
DEPRENYL ANIMAL HEALTH, INC., A MISSOURI CORPORATION --
PROXY STATEMENT
DEPRENYL ANIMAL HEALTH, INC., A LOUISIANA CORPORATION --
PROXY STATEMENT
DRAXIS HEALTH INC., A CANADIAN CORPORATION --
PROXY STATEMENT-PROSPECTUS
------------
Special Meetings of Shareholders of
Deprenyl Animal Health, Inc., a Missouri corporation,
Deprenyl Animal Health, Inc., a Louisiana corporation, and
Draxis Health Inc., a Canadian corporation
To Be Held November 25 and 26, 1996
------------
This Joint Management Proxy Statement-Prospectus is being furnished to the
holders ("DAHI Missouri Shareholders") of the common stock ("DAHI Missouri
Common Stock") of Deprenyl Animal Health, Inc., a Missouri corporation ("DAHI
Missouri"), to the holder ("DAHI Louisiana Shareholder") of the common stock
("DAHI Louisiana Common Stock") of Deprenyl Animal Health, Inc., a Louisiana
corporation ("DAHI Louisiana"), and to the holders ("Draxis Shareholders") of
common shares ("Draxis Common Stock") of Draxis Health Inc., a Canadian
corporation ("Draxis"), in connection with the solicitation of proxies by the
respective Boards of Directors of DAHI Missouri, DAHI Louisiana and Draxis for
use at (i) the special meeting (the "DAHI Missouri Special Meeting") of holders
of DAHI Missouri Common Stock, (ii) the special meeting (the "DAHI Louisiana
Special Meeting") of the holder of DAHI Louisiana Common Stock, and (iii) the
special meeting (the "Draxis Special Meeting") of holders of Draxis Common
Stock. The DAHI Missouri and DAHI Louisiana Special Meetings are each to be
held on November 26, 1996 and the Draxis Special Meeting is to be held on
November 25, 1996, and any postponements or adjournments thereof (together, the
"Special Meetings" and separately, a "Special Meeting"). Each Special Meeting
is being held for the purposes of voting on the proposals identified in the
respective Notice of Special Meeting of DAHI Missouri, DAHI Louisiana and
Draxis, as further described in this Joint Management Proxy Statement-
Prospectus. The Reincorporation Merger (as defined below) is being voted on by
the DAHI Missouri Shareholders. The Share Exchange Plan (as defined below) is
being voted on by the DAHI Missouri Shareholders through proxies granted to them
by DAHI Missouri as the sole shareholder of DAHI Louisiana. The Draxis Common
Stock Offering (as defined below) and the Draxis Stock Option Plan Adjustment
(as defined below) are being voted on by the Draxis Shareholders. None of the
Reincorporation Merger, the Share Exchange Plan, the Draxis Common Stock
Offering or the Draxis Stock Option Plan Adjustment will be carried out unless
such shareholders pass the resolutions set out in Appendices A, B and C annexed
to this Joint Management Proxy Statement-Prospectus and all other conditions are
satisfied. If DAHI Missouri or DAHI Louisiana does not obtain the required
shareholder approval of the Reincorporation Merger or the Share Exchange Plan,
respectively, or if Draxis does not obtain the approval of Draxis Shareholders
to the Draxis Common Stock Offering and the Draxis Stock Option Plan Adjustment,
DAHI Missouri and Draxis each anticipate that they will continue their current
operations and no specific plans or alternatives are being considered, except
that DAHI Missouri will need to make alternate funding arrangements to satisfy
its future capital requirements to complete the regulatory approval process for
ANIPRYL-Registered Trademark- in the United States and the launch of ANIPRYL-
Registered Trademark- in the U.S. if and when United States Food and Drug
Administration approval is obtained. If both the Reincorporation Merger and
Share Exchange Plan are approved, and the Draxis Common Stock Offering and the
Draxis Stock Option Plan Adjustment are approved, the reincorporation of DAHI
Missouri in Louisiana will be effected prior to, and in order to facilitate, the
consummation of the Share Exchange (as defined below).
WHEN USED IN THIS JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS, THE TERM
DAHI, WHEN USED ALONE, SHALL REFER TO DAHI MISSOURI AND/OR TO DAHI LOUISIANA, AS
THE CONTEXT SHALL REQUIRE. SIMILARLY, THE TERM DAHI SHAREHOLDERS SHALL REFER TO
CURRENT SHAREHOLDERS OF DAHI MISSOURI AS WELL AS THOSE SHAREHOLDERS OF DAHI
LOUISIANA WHO WILL BECOME DAHI LOUISIANA SHAREHOLDERS FOLLOWING APPROVAL OF THE
REINCORPORATION MERGER AND THE FILING OF THE PLAN OF MERGER (AS DEFINED BELOW).
FINALLY, THE TERM DAHI COMMON STOCK SHALL REFER TO SHARES IN DAHI MISSOURI
COMMON STOCK AS WELL AS TO SHARES OF DAHI LOUISIANA COMMON STOCK RECEIVED BY
DAHI MISSOURI SHAREHOLDERS PURSUANT TO THE TERMS OF THE PLAN OF MERGER.
<PAGE>
-2-
The proposal to reincorporate DAHI Missouri in the State of Louisiana (the
"Reincorporation Merger") includes the approval of a Plan of Merger providing
for the merger of DAHI Missouri into DAHI Louisiana, a wholly-owned subsidiary
of DAHI Missouri incorporated in the State of Louisiana, in order to change the
state of incorporation of DAHI Missouri from Missouri to Louisiana. A copy of
the Plan of Merger is attached to this Joint Management Proxy Statement-
Prospectus as Appendix D. The Reincorporation Merger is necessary for DAHI
Missouri to have available to it the provisions of the Louisiana Act (as defined
below) which permit mandatory share exchanges.
In the event that the Reincorporation Merger is approved, a meeting of the
sole DAHI Louisiana Shareholder (i.e., DAHI Missouri) will be held. Shares of
DAHI Louisiana Common Stock owned by DAHI Missouri will be voted by the DAHI
Missouri Shareholders pursuant to proxies granted to each of them by DAHI
Missouri entitling them to vote that number of shares of DAHI Louisiana Common
Stock equal to the number of shares of DAHI Missouri Common Stock owned by each
DAHI Missouri Shareholder as of the Record Date (as defined in the Notice of
DAHI Louisiana Special Meeting). Using the proxies, the DAHI Shareholders will
vote on whether to approve a plan of share exchange (the "Share Exchange Plan"),
as permitted by section 116 of the LOUISIANA BUSINESS CORPORATION LAW (the
"Louisiana Act"), pursuant to which each issued and outstanding share of DAHI
Louisiana Common Stock, issued and outstanding following the Reincorporation
Merger, will be immediately exchanged (the "Share Exchange") with Draxis
Pharmaceutica Inc. ("DPI"), a wholly-owned subsidiary of Draxis, for 1.35 shares
of Draxis Common Stock (the "Exchange Ratio"). DPI has entered into an
agreement with Draxis (the "Draxis Share Delivery Agreement") whereby Draxis has
agreed to issue additional shares of Draxis Common Stock to DAHI Shareholders on
behalf of DPI.
If the Reincorporation Merger and the Share Exchange Plan are both
approved, the Reincorporation Merger will occur and all DAHI Missouri
Shareholders, other than dissenting DAHI Missouri Shareholders, automatically
will become shareholders of DAHI Louisiana prior to the implementation of the
Share Exchange Plan. If the Share Exchange Plan is approved and duly filed,
letters of transmittal will be forwarded to holders of DAHI Common Stock
including instructions as to how to exchange their certificate(s) representing
DAHI Common Stock for a certificate or certificates representing Draxis Common
Stock.
For U.S. federal income tax purposes, it is intended that both the
Reincorporation Merger and the Share Exchange will constitute tax-free
reorganizations for DAHI Shareholders holding such shares as capital assets.
For Canadian federal income tax purposes, subject to the qualifications noted
elsewhere herein, the Reincorporation Merger should not result in a taxable gain
or allowable capital loss for Canadian resident holders of DAHI Common Stock as
more particularly described herein holding such shares as capital property.
HOWEVER, the Share Exchange WILL result in a taxable capital gain or loss for
Canadian federal income tax purposes for Canadian resident holders of DAHI
Common Stock.
The Draxis Shareholders will vote on whether to approve the issuance of up
to 5,725,188 shares of Draxis Common Stock to the DAHI Shareholders (the "Draxis
Common Stock Offering") should the Share Exchange Plan be approved and
implemented. The Draxis Shareholders will also vote on whether to approve the
change of the Draxis Stock Option Plan (the "Plan") to provide that the maximum
number of common shares of Draxis that may be issued under the Plan be increased
from 2,500,000 to 4,500,000 (the "Draxis Stock Option Plan Adjustment") should
the Share Exchange Plan be approved and implemented. The Draxis Stock Option
Plan Adjustment is required pursuant to the Exchange Agreement (as defined
below) to provide for the issuance of shares of Draxis Common Stock upon the
exercise by current DAHI option holders of outstanding DAHI options.
<PAGE>
-3-
WHEN TAKEN TOGETHER, THE REINCORPORATION MERGER, THE SHARE EXCHANGE PLAN,
THE DRAXIS COMMON STOCK OFFERING AND THE DRAXIS STOCK OPTION PLAN ADJUSTMENT
WILL HAVE THE FOLLOWING CONSEQUENCES:
(i) HOLDERS OF SHARES OF DAHI COMMON STOCK (OTHER THAN DISSENTING DAHI MISSOURI
SHAREHOLDERS, DPI AND DRAXIS LLC) WILL BECOME HOLDERS OF SHARES OF DRAXIS
COMMON STOCK ON THE BASIS OF 1.35 SHARES OF DRAXIS COMMON STOCK FOR EACH
SHARE OF DAHI COMMON STOCK;
(ii) HOLDERS OF OUTSTANDING OPTIONS TO ACQUIRE SHARES OF DAHI COMMON STOCK WILL
BECOME HOLDERS OF OPTIONS TO ACQUIRE SHARES OF DRAXIS COMMON STOCK ON THE
BASIS OF 1.35 SHARES OF DRAXIS COMMON STOCK FOR EACH SHARE OF DAHI COMMON
STOCK; AND
(iii) ALL OF THE ISSUED AND OUTSTANDING SHARES OF DAHI COMMON STOCK WILL BE
OWNED, DIRECTLY OR INDIRECTLY, BY DRAXIS.
On July 25, 1996, Draxis, DPI and DAHI Missouri entered into an exchange
agreement (the "Exchange Agreement") pursuant to which the parties agreed to
support the acquisition by DPI of DAHI Common Stock pursuant to the
Reincorporation Merger and the Share Exchange Plan. A copy of the Share
Exchange Plan is attached to this Joint Management Proxy Statement-Prospectus as
Appendix E and is incorporated herein by reference.
THE BOARD OF DIRECTORS OF DAHI MISSOURI, ON THE RECOMMENDATION OF
AN INDEPENDENT COMMITTEE OF DIRECTORS, HAS DETERMINED THAT THE REINCORPORATION
MERGER AND THE SHARE EXCHANGE PLAN ARE FAIR AND IN THE BEST INTEREST OF DAHI
MISSOURI AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS TO THE DAHI MISSOURI
SHAREHOLDERS THAT THEY VOTE FOR THE REINCORPORATION MERGER AND THE SHARE
EXCHANGE PLAN.
THE BOARD OF DIRECTORS OF DRAXIS, ON THE RECOMMENDATION OF AN INDEPENDENT
COMMITTEE OF DIRECTORS, HAS DETERMINED THAT THE DRAXIS COMMON STOCK OFFERING AND
THE DRAXIS STOCK OPTION PLAN ADJUSTMENT ARE FAIR AND IN THE BEST INTEREST OF
DRAXIS AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS TO THE DRAXIS
SHAREHOLDERS THAT THEY VOTE IN FAVOUR OF THE DRAXIS COMMON STOCK OFFERING AND
THE DRAXIS STOCK OPTION PLAN ADJUSTMENT.
This Joint Management Proxy Statement-Prospectus is dated, and was first
mailed, to DAHI Missouri Shareholders, the DAHI Louisiana Shareholder, and
Draxis Shareholders, respectively, on or about October 23, 1996.
This Joint Management Proxy Statement-Prospectus also serves as a
prospectus of Draxis under the United States SECURITIES ACT OF 1933, as amended
(the "Securities Act"), the purpose of which is to qualify the shares of Draxis
Common Stock to be issued pursuant to the Share Exchange Plan.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. WHEN USED
IN THIS JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS, THE WORDS "ESTIMATE",
"PROJECT", "INTEND", "EXPECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT AND SECTION 21E OF THE EXCHANGE ACT (AS DEFINED BELOW), AND SUCH STATEMENTS
ARE INTENDED TO BE COVERED BY THE SAFE HARBOR CREATED THEREBY. SUCH STATEMENTS
ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF SUCH RISKS, SEE "SPECIAL CONSIDERATIONS RELATING TO THE
REINCORPORATION MERGER", "SPECIAL CONSIDERATIONS RELATING TO THE SHARE EXCHANGE"
AND "SPECIAL CONSIDERATIONS RELATING TO THE DRAXIS COMMON STOCK OFFERING".
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. NONE OF DRAXIS, DAHI
MISSOURI NOR DAHI LOUISIANA UNDERTAKES ANY OBLIGATION TO PUBLICLY RELEASE ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
<PAGE>
-4-
THE SECURITIES TO WHICH THIS JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS
RELATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AVAILABLE INFORMATION
Draxis and DAHI Missouri are subject to the informational requirements of
the United States SECURITIES EXCHANGE ACT OF 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy statements and other
information with the United States Securities and Exchange Commission (the
"SEC"). Copies of such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the following Regional Offices of the SEC: Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center,
13th Floor, New York, New York 10048. The SEC maintains a Web Site that
contains reports, proxy statements, information statements and other information
regarding registrants that file electronically with the SEC. Such reports,
proxy statements, information statements and other information may be found on
the SEC's web site address HTTP://WWW.SEC.Gov. Copies of such materials can
also be obtained at prescribed rates from the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Draxis Common Stock is
traded on the Nasdaq National Market ("Nasdaq"). DAHI Missouri Common Stock is
traded on the over-the-counter bulletin board of Nasdaq. Reports, proxy
statements and other information concerning Draxis and DAHI Missouri may be
inspected at the offices of the NASD, Reports Section, 1735 K Street, N.W.,
Washington, D.C. 20006. Draxis Common Stock and DAHI Missouri Common Stock are
also listed and traded on The Toronto Stock Exchange ("TSE").
Draxis has filed with the SEC a registration statement on Form F-4
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to Draxis Common
Stock to be issued in connection with the Share Exchange and the Draxis Stock
Option Plan Adjustment. This Joint Management Proxy Statement-Prospectus
constitutes the prospectus of Draxis filed as part of the Registration
Statement. This Joint Management Proxy Statement-Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the SEC. The
Registration Statement is available for inspection and copying as set forth
above. Statements contained herein concerning certain documents are not
necessarily complete and, in each instance, reference is made to the copies of
such documents filed as exhibits to the Registration Statement. Each such
statement is qualified in its entirety by such reference.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THE INFORMATION CONTAINED HEREIN WITH RESPECT TO DRAXIS AND ITS
SUBSIDIARIES HAS BEEN SUPPLIED BY DRAXIS, AND THE INFORMATION CONTAINED HEREIN
WITH RESPECT TO DAHI MISSOURI HAS BEEN SUPPLIED BY DAHI MISSOURI. THIS JOINT
MANAGEMENT PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS JOINT
MANAGEMENT PROXY STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION, TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS
NOR ANY DISTRIBUTION OF SECURITIES PURSUANT TO THIS JOINT MANAGEMENT PROXY
STATEMENT-PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH OR INCORPORATED HEREIN BY
REFERENCE OR IN THE AFFAIRS OF DRAXIS OR DAHI MISSOURI SINCE THE DATE OF THIS
JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS. THE INFORMATION CONTAINED HEREIN
WITH RESPECT TO DRAXIS AND THE SPECIAL MEETING AND THE PRO FORMA FINANCIAL
STATEMENTS AND INFORMATION REGARDING DRAXIS THAT ASSURE THE IMPLEMENTATION OF
THE SHARE EXCHANGE HAS BEEN PROVIDED BY DRAXIS. THE INFORMATION CONTAINED
HEREIN WITH RESPECT TO DAHI MISSOURI AND THE SPECIAL MEETINGS OF DAHI MISSOURI
AND DAHI LOUISIANA HAS BEEN PROVIDED BY DAHI MISSOURI.
<PAGE>
-5-
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS. THIS SUMMARY DOES NOT
PURPORT TO BE A COMPLETE STATEMENT OF ALL THE MATERIAL FEATURES OF THE
REINCORPORATION MERGER, THE SHARE EXCHANGE PLAN, THE DRAXIS COMMON STOCK
OFFERING OR THE DRAXIS STOCK OPTION PLAN ADJUSTMENT OR RELATED MATTERS AND
SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS JOINT
MANAGEMENT PROXY STATEMENT-PROSPECTUS AND IN THE INFORMATION AND DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. CAPITALIZED TERMS USED BUT NOT DEFINED IN
THIS SUMMARY HAVE THE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS JOINT
MANAGEMENT PROXY STATEMENT-PROSPECTUS.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS OF DAHI MISSOURI, DAHI
LOUISIANA AND OF DRAXIS ARE OF GREAT IMPORTANCE TO THE SHAREHOLDERS OF THOSE
CORPORATIONS. IF THE REINCORPORATION MERGER, THE SHARE EXCHANGE PLAN, THE
DRAXIS COMMON STOCK OFFERING AND THE DRAXIS STOCK OPTION PLAN ADJUSTMENT ARE
APPROVED AND THE PROPOSED SHARE EXCHANGE IS CONSUMMATED, DAHI SHAREHOLDERS'
EQUITY INVESTMENT IN DAHI WILL BECOME AN EQUITY INVESTMENT IN DRAXIS AND
EXISTING DAHI SHAREHOLDERS WILL HOLD APPROXIMATELY 20% OF THE ISSUED AND
OUTSTANDING SHARES OF DRAXIS COMMON STOCK. ACCORDINGLY, SHAREHOLDERS ARE URGED
TO READ AND CAREFULLY CONSIDER THE INFORMATION SUMMARIZED BELOW AND PRESENTED
ELSEWHERE IN THIS JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS.
DAHI MISSOURI SHAREHOLDERS HAVE THE RIGHT TO DISSENT FROM THE
REINCORPORATION MERGER AND RECEIVE FAIR VALUE COMPENSATION FOR THEIR SHARES OF
DAHI MISSOURI COMMON STOCK. THEY WILL NOT HAVE THE RIGHT TO DISSENT FROM THE
SHARE EXCHANGE PLAN; HOWEVER, THE SHARE EXCHANGE PLAN WILL NOT BE IMPLEMENTED
UNLESS DAHI MISSOURI SHAREHOLDERS APPROVE THE REINCORPORATION MERGER. SEE
"REINCORPORATION MERGER - DISSENTERS' RIGHTS" AND "SHARE EXCHANGE PLAN -
DISSENTERS' RIGHTS".
DRAXIS HEALTH INC. . . . . . . . . . . Draxis is an emerging Canadian-based
pharmaceutical company. Draxis, which
was incorporated in 1987, has no long-
term or short-term debt and as at June
30, 1996 had cash reserves of
approximately Cdn.$30 million. Draxis'
primary activities are marketing and
selling prescription pharmaceuticals and
consumer health care products, as well
as researching and developing new
products for its own marketing use, or
for licensing to others. Draxis'
marketing operations in Canada currently
focus on neurological, dermatologic and
veterinary products. Its marketing
operations in the United States focus
primarily on podiatric products.
Draxis' Canadian research and
development operations focus on
developing specific topical drugs for
world markets based on patented
multilamellar liposome technology
licensed to Draxis, and on obtaining
regulatory approval for certain in-
licensed products for which Draxis has
exclusive Canadian rights. The mailing
address of the registered and principal
office of Draxis is 6870 Goreway Drive,
Mississauga, Ontario, L4V 1P1 and its
telephone number is (905) 677-5500. See
"Business of Draxis".
DEPRENYL ANIMAL HEALTH, INC.,
A MISSOURI CORPORATION. . . . . . . . DAHI Missouri was formed in 1990 to
continue the development and marketing
research commenced earlier by Deprenyl
Animal Health (Canada) Inc., a wholly-
owned subsidiary of Draxis, relating to
veterinary prescription applications of
1-deprenyl for the United States and
Canadian markets. DAHI Missouri is
currently developing ANIPRYL-Registered
Trademark-, a selegiline product, for
use in veterinary prescriptive
applications, particularly for use in
dogs. The two indications for ANIPRYL-
Registered Trademark- being developed by
DAHI Missouri are canine Cushing's
disease and canine cognitive
dysfunction. The mailing address of
DAHI Missouri's principal executive
offices is 10955 Lowell, Suite 710,
<PAGE>
-6-
Overland Park, Kansas 66210 and its
telephone number is (913) 338-2120. See
"Business of DAHI Missouri".
DEPRENYL ANIMAL HEALTH, INC.,
A LOUISIANA CORPORATION . . . . . . . DAHI Louisiana was formed in 1996 for
the purpose of permitting DAHI Missouri
to change its state of incorporation and
to avail itself of Louisiana statutory
provisions that permit the exchange of
shares as provided in the Share Exchange
Plan. DAHI Louisiana currently has no
assets or liabilities and carries on no
business. If the Reincorporation Merger
is approved by the DAHI Missouri
Shareholders, DAHI Louisiana will
succeed to the assets and assume the
liabilities of DAHI Missouri. The
mailing address of DAHI Louisiana's
registered office is 643 Magazine
Street, New Orleans, Louisiana, 70130
and its telephone number is (504) 596-
2791. See "Business of DAHI Louisiana".
DATE, TIME AND PLACE OF THE
DAHI MISSOURI SPECIAL MEETING . . . . November 26, 1996 at 12:00 noon, Central
Standard Time, at the Embassy Suites,
7640 Northwest Tiffany Springs Parkway,
Kansas City, Missouri. See "General
Information".
DATE, TIME AND PLACE OF THE
DAHI LOUISIANA SPECIAL MEETING. . . . November 26, 1996 at 1:00 p.m., Central
Standard Time, at the Embassy Suites
Hotel, 7640 Northwest Tiffany Springs
Parkway, Kansas City, Missouri. See
"General Information".
DATE, TIME AND PLACE OF
THE DRAXIS SPECIAL MEETING. . . . . . November 25, 1996 at 10:00 a.m., Toronto
Time, in the Dining Room of the Board of
Trade, Airport Club, 830 Dixon Road,
Etobicoke, Ontario. See "General
Information".
PURPOSE OF THE SPECIAL MEETINGS. . . . The Special Meetings are being held for
shareholders of Draxis, DAHI Missouri
and DAHI Louisiana to consider and, if
deemed appropriate, to approve the
Reincorporation Merger, the Share
Exchange Plan, the Draxis Common Stock
Offering and the Draxis Stock Option
Plan Adjustment, all in order to effect
the Share Exchange whereby each DAHI
Shareholder, other than Dissenting
Shareholders, DPI and Draxis LLC, would
receive 1.35 shares of Draxis Common
Stock for each share of DAHI Common
Stock. See "General Information".
REINCORPORATION MERGER . . . . . . . . The DAHI Missouri Shareholders will be
asked to consider and vote on a proposal
to change the state of incorporation of
DAHI Missouri from Missouri to
Louisiana, including the approval of the
Plan of Merger, a copy of which is
attached to this Joint Management Proxy
Statement-Prospectus as Appendix D,
providing for the merger of DAHI
Missouri into DAHI Louisiana, its
wholly-owned subsidiary. Consummation
of the Reincorporation Merger is subject
to approval of the Share Exchange Plan,
as described below. See
"Reincorporation Merger" and "Special
Considerations Relating to the
Reincorporation Merger".
SHARE EXCHANGE PLAN. . . . . . . . . . In the event that the Reincorporation
Merger is approved, DAHI Missouri
Shareholders, who have been granted
proxies by DAHI Missouri (the sole
shareholder of DAHI Louisiana) to cast
the same number of votes at the DAHI
Louisiana Special Meeting that they were
entitled to cast in respect of the
Reincorporation Merger at the DAHI
Missouri Special Meeting, will be
<PAGE>
-7-
asked to consider and vote on a proposal
to approve a plan of share exchange
under the laws of Louisiana. A copy of
the Share Exchange Plan is attached to
this Joint Management Proxy Statement-
Prospectus as Appendix E, providing for
the acquisition by Draxis Pharmaceutica
Inc. ("DPI"), a wholly-owned subsidiary
of Draxis, of all of the DAHI Common
Stock not held by Dissenting
Shareholders (as defined below) or by
DPI or by Draxis LLC (a U.S. limited
liability company owned as to 90% by
Draxis and as to 10% by DPI), in
exchange for Draxis Common Stock. DAHI
Shareholders, other than Dissenting
Shareholders, DPI, and Draxis LLC, will
receive 1.35 shares of Draxis Common
Stock for each share of DAHI Common
Stock exchanged (the "Exchange Ratio").
Outstanding options to acquire DAHI
Common Stock will similarly be exchanged
for options to acquire Draxis Common
Stock at the Exchange Ratio. See "Share
Exchange Plan" and "Special
Considerations Relating to the Share
Exchange Plan".
DRAXIS COMMON STOCK OFFERING . . . . . In the event that both the
Reincorporation Merger and the Share
Exchange Plan are approved by the
required shareholder action, Draxis has
agreed to issue additional shares of
Draxis Common Stock as required under
the Share Exchange Plan, subject to
Draxis Shareholder approval. The number
of shares that will have to be issued
pursuant to the Share Exchange Plan will
be approximately 25% of the current
issued and outstanding shares of Draxis
Common Stock. Approval by the Draxis
Shareholders of such issuance is
required by the rules of the National
Association of Securities Dealers, Inc.
("NASD"). See "Draxis Common Stock
Offering" and "Special Considerations
Relating to the Draxis Common Stock
Offering".
DRAXIS STOCK OPTION
PLAN ADJUSTMENT . . . . . . . . . . . The Exchange Agreement provides that
existing options to acquire shares of
DAHI Common Stock will be exchanged for
options to acquire shares of Draxis
Common Stock at the Exchange Ratio.
Therefore, it will be necessary to
adjust the Draxis Stock Option Plan (the
"Plan") to provide that the maximum
number of shares of Draxis Common Stock
that may be issued under the Plan be
increased from 2,500,000 to 4,500,000.
See "Draxis Stock Option Plan
Adjustment".
SHAREHOLDERS ENTITLED TO VOTE. . . . . Both Draxis and DAHI Missouri have
determined that only DAHI Shareholders
and Draxis Shareholders of record at
5:00 p.m., Central Standard Time and
Toronto Time, respectively, on October
15, 1996 (the "Record Date") are
entitled to notice of and to vote at
their respective Special Meetings. On
the Record Date there were 7,549,698
shares of DAHI Missouri Common Stock
issued and outstanding and 23,463,973
shares of Draxis Common Stock issued and
outstanding. EVERY DAHI MISSOURI
SHAREHOLDER ENTITLED TO VOTE AT THE DAHI
MISSOURI SPECIAL MEETING SHALL BE
ENTITLED TO VOTE AT THE DAHI LOUISIANA
SPECIAL MEETING PURSUANT TO A PROXY
GRANTED TO EACH DAHI MISSOURI
SHAREHOLDER BY DAHI MISSOURI, THE SOLE
SHAREHOLDER OF DAHI LOUISIANA. See
"Shares Outstanding and Voting Rights".
VOTES REQUIRED . . . . . . . . . . . . In order to approve and adopt the
Reincorporation Merger, the affirmative
vote of holders of two-thirds of the
outstanding shares of DAHI Missouri
Common Stock entitled to vote at the
DAHI Missouri Special Meeting is
required under Missouri law. In
addition, the Exchange Agreement
requires that the Reincorporation Merger
be approved by the affirmative vote of
holders of a majority of the outstanding
shares of DAHI Common Stock
<PAGE>
-8-
represented in person or by proxy at the
DAHI Missouri Special Meeting by persons
other than Draxis or its affiliates or
related parties. See "Reincorporation
Merger".
In order to approve and adopt the Share
Exchange Plan, the affirmative vote of
two-thirds of the votes cast in person
or by proxy at the DAHI Louisiana
Special Meeting is required under the
Louisiana Act. In addition, the
Exchange Agreement requires that the
Share Exchange Plan be approved by the
affirmative vote of holders of a
majority of the shares of DAHI Common
Stock represented in person or by proxy
at the DAHI Louisiana Special Meeting
not held by Draxis or its affiliates or
related parties. See "Share Exchange
Plan".
In order to approve and adopt the Draxis
Common Stock Offering and the Draxis
Stock Option Plan Adjustment, the
affirmative vote of the holders of a
majority of the shares of Draxis Common
Stock represented in person or by proxy
at the Draxis Special Meeting is
required. See "Draxis Common Stock
Offering" and "Draxis Stock Option Plan
Adjustment".
All current directors and officers of
both Draxis and DAHI have indicated that
they will vote any shares held by them
directly, or indirectly, to approve the
resolutions put before Draxis
Shareholders and DAHI Shareholders,
respectively; provided, however, that no
such shares held by directors and
officers of Draxis will be counted
towards any "majority of the minority"
votes as contemplated above.
INTERESTS OF MANAGEMENT. . . . . . . . As of October 15, 1996, directors and
officers of DAHI Missouri beneficially
owned an aggregate of 645,963 shares of
DAHI Missouri Common Stock, excluding
options and warrants to purchase shares,
representing approximately 8.56% of the
outstanding shares of DAHI Missouri
Common Stock. To the knowledge of such
directors, no DAHI Missouri Shareholder
beneficially owns more than 10% of the
outstanding shares of DAHI Missouri
Common Stock other than DPI, which holds
approximately 30%, and Draxis LLC, which
holds approximately 14%.
As of October 15, 1996, directors and
officers of Draxis beneficially owned an
aggregate of 1,813,610 shares of Draxis
Common Stock, excluding options and
warrants to purchase shares,
representing approximately 7.7% of the
outstanding shares of Draxis Common
Stock. To the knowledge of such
directors, no Draxis Shareholder
beneficially owns more than 10% of the
issued and outstanding shares of Draxis
Common Stock.
As of October 15, 1996, to the knowledge
of the directors of DAHI Missouri,
directors and officers of Draxis (and
its affiliates) beneficially owned an
aggregate of 499,633 shares of DAHI
Missouri Common Stock, excluding options
and warrants to purchase shares,
representing approximately 6.6% of the
outstanding shares of DAHI Missouri
Common Stock. As of October 15, 1996,
to the knowledge of the directors of
Draxis, directors and officers of DAHI
Missouri beneficially owned an aggregate
of 555,838 shares of Draxis Common
Stock, excluding options and warrants to
purchase shares, representing
approximately 2.4% of the outstanding
shares of Draxis Common Stock.
<PAGE>
-9-
RECOMMENDATIONS OF
DAHI BOARD OF DIRECTORS . . . . . . . The Board of Directors of DAHI Missouri
has duly approved the Plan of Merger as
part of the Exchange Agreement and
unanimously recommends a vote IN FAVOUR
of it on the basis that the
Reincorporation Merger is in the best
interests of DAHI and the DAHI
Shareholders. The Boards of Directors
of DAHI Missouri and DAHI Louisiana have
also recommended that DAHI Shareholders
vote IN FAVOUR of the Share Exchange
Plan pursuant to the proxies granted to
them by DAHI Missouri, the sole
shareholder of DAHI Louisiana, on the
basis that the Share Exchange is in the
best interests of DAHI and the DAHI
Shareholders. The Board of Directors of
DAHI Missouri, including a committee
comprised of two independent directors,
reviewed a number of factors, including,
but not limited to (i) the immediate and
long-term benefits to DAHI Shareholders;
(ii) the relative prospects for
expansion and growth in shareholder
values of DAHI as a stand-alone entity
and as a wholly-owned subsidiary of
Draxis; (iii) DAHI's need for additional
capital and the relative prospects for
raising such capital; (iv) Draxis'
intention, following implementation of
the Share Exchange Plan, to delegate
operational control to DAHI over the
development, marketing and distribution
of ANIPRYL-Registered Trademark- and
other veterinary products which Draxis
may develop in the future; (v) the
premium over the trading prices of DAHI
Common Stock to be received by DAHI
Shareholders; (vi) increased investment
liquidity for DAHI Shareholders through
ownership of Draxis Common Stock;
(vii) the tax-free nature of the
transactions to U.S.-resident DAHI
Shareholders; (viii) the Hambrecht &
Quist LLC fairness opinion; (ix) the
valuation opinion of KPMG; and (x) the
requirement that the transactions be
approved by a "majority of the minority"
vote of DAHI Shareholders. See
"Reincorporation Merger" and "Share
Exchange Plan - DAHI Reasons for
Transaction and Recommendation of DAHI
Board".
RECOMMENDATIONS OF
DRAXIS BOARD OF DIRECTORS . . . . . . The Board of Directors of Draxis has
duly approved the Exchange Agreement and
unanimously recommends that Draxis
Shareholders vote IN FAVOUR of the
Draxis Common Stock Offering
contemplated in the Share Exchange Plan,
on the basis that the Share Exchange is
in the best interests of Draxis and the
Draxis Shareholders. The Board of
Directors of Draxis, including a
committee comprised of an independent
director, reviewed a number of factors,
including, but not limited to (i) the
enhancement of long-term value for
Draxis Shareholders; (ii) the enhanced
platform for growth for the combined
Draxis and DAHI entity in the United
States; (iii) the opportunity to
leverage Draxis' infrastructure and
resources to accelerate the roll-out of
ANIPRYL-Registered Trademark- in the
U.S.; (iv) the increased value of
Draxis' investment in DAHI over the
longer term; (v) the valuation opinion
of KPMG received after the entering into
of the Exchange Agreement; (vi) the
requirement for Draxis Shareholder
approval for the issuance of shares of
Draxis Common Stock; and (vii) DAHI's
significant capital needs and the terms
upon which Draxis can commit to
providing financial and other resources
to DAHI. See "Share Exchange Plan -
Draxis Reasons for Transaction and
Recommendation of Draxis Board".
The Board of Directors of Draxis
unanimously recommends that Draxis
Shareholders vote IN FAVOUR of the
Draxis Stock Option Plan Adjustment to
permit the issuance of shares of Draxis
Common Stock upon the exchange of
options to purchase shares of DAHI
Common Stock into options to purchase
<PAGE>
-10-
shares of Draxis Common Stock at the
Exchange Ratio as contemplated by the
Exchange Agreement.
FINANCIAL ADVISOR TO DAHI. . . . . . . Hambrecht & Quist LLC ("H&Q") is DAHI's
financial advisor in connection with the
Share Exchange Plan. H&Q has delivered
an opinion to the independent committee
of DAHI Missouri's Board of Directors (a
copy of which is attached as Appendix F
to this Joint Management Proxy
Statement-Prospectus) to the effect
that, as of the date of such opinion,
the terms of the Share Exchange Plan are
fair to DAHI Missouri Shareholders from
a financial point of view. See "Share
Exchange Plan - Opinion of Financial
Advisor to DAHI". In particular, see
"Selected Comparable Transaction
Analysis" in that section for a
discussion of premiums paid in selected
comparable transactions.
VALUATION. . . . . . . . . . . . . . . KPMG provided a formal valuation of the
Draxis Common Stock and the DAHI
Missouri Common Stock to the independent
committee of the DAHI Missouri Board of
Directors. See "Share Exchange Plan -
Valuation of Independent Valuator" for a
description of the valuation.
DISSENTERS' RIGHTS . . . . . . . . . . In connection with the Reincorporation
Merger, holders of DAHI Common Stock who
perfect dissenters' rights pursuant to
Sections 351.455 and 351.458 of the
MISSOURI BUSINESS CORPORATIONS ACT (the
"Missouri Act") ("Dissenting
Shareholders") will be entitled to
surrender and receive fair value
compensation for their shares of DAHI
Common Stock. To perfect dissenters'
rights, it is imperative to follow the
procedures set forth in the Missouri
Act. The payment of cash to a holder of
DAHI Common Stock who exercises
dissenters' rights under the Missouri
Act with respect to such stock will
result in a taxable transaction to the
Dissenting Shareholder. See
"Reincorporation Merger - Dissenters'
Rights".
In connection with the Share Exchange
Plan, at the time of the DAHI Louisiana
Special Meeting, the only shareholder of
record of DAHI Louisiana will be DAHI
Missouri, so the only person who could
exercise dissenters' rights under
Louisiana law would be DAHI Missouri.
DAHI Missouri does not intend to
exercise any such rights. If DAHI
Missouri Shareholders wish to exercise
dissenters' rights, they must do so
under the Missouri Act in connection
with the Reincorporation Merger. See
"Share Exchange Plan - Dissenters'
Rights".
The provisions dealing with dissenters'
rights in the Missouri Act are set out
in Appendix G to this Joint Management
Proxy Statement-Prospectus.
U.S. AND CANADIAN FEDERAL
INCOME TAX CONSEQUENCES . . . . . . . For U.S. federal income tax purposes, it
is intended that both the
Reincorporation Merger and the Share
Exchange Plan will constitute tax-free
reorganizations for DAHI Shareholders,
other than Dissenting Shareholders,
holding such shares as capital assets,
so that no gain or loss will be
recognized by them for U.S. tax purposes
as a result of either the
Reincorporation Merger or the Share
Exchange. See "Reincorporation Merger -
U.S. Federal Income Tax Consequences of
the Reincorporation Merger" and "Share
Exchange Plan - U.S. Federal Income Tax
Consequences of the Share Exchange
Plan".
<PAGE>
-11-
For Canadian federal income tax
purposes, subject to the qualifications
noted elsewhere herein, the
Reincorporation Merger should not result
in a taxable capital gain or allowable
capital loss for Canadian resident
holders of DAHI Common Stock holding
such shares as capital property, other
than Dissenting Shareholders. However,
the Share Exchange WILL constitute a
taxable transaction for Canadian holders
of DAHI Common Stock resident in Canada.
No gain or loss will be recognized by
such DAHI Shareholders as a result of
the Reincorporation Merger, however, a
gain or loss WILL be recognized as a
result of the Share Exchange. See
"Reincorporation Merger - Canadian
Federal Income Tax Consequences of the
Reincorporation Merger" and "Share
Exchange Plan - Canadian Federal Income
Tax Consequences of the Share Exchange
Plan".
CONDITIONS TO THE SHARE
EXCHANGE PLAN; TERMINATION. . . . . . Notwithstanding the requisite
shareholder approval of the
Reincorporation Merger, the Share
Exchange Plan, the Draxis Common Stock
Offering and the Draxis Stock Option
Plan Adjustment, consummation of the
Share Exchange is subject to a number of
conditions which, if not fulfilled or
waived, permit termination of the
Exchange Agreement.
The obligation of each of the parties to
the Exchange Agreement to perform its
obligations under the Exchange Agreement
is conditional, among other things, upon
a registration statement becoming
effective under the Securities Act
(which registration statement is not
subject to any stop order or proceeding
by the SEC seeking a stop order) with
respect to the shares of Draxis Common
Stock issuable to the DAHI Shareholders
pursuant to the Share Exchange and the
receipt of all necessary exemptions or
rulings pursuant to the Canadian
securities laws.
The obligation of each party to effect
the Share Exchange is also subject to a
number of conditions which include the
absence of any material inaccuracies in
the representations and warranties made
to them by the other party as set forth
in the Exchange Agreement, the
performance by the other party of all of
its obligations under the Exchange
Agreement and the receipt of a tax
opinion from each party's respective
U.S. counsel that the Share Exchange
will constitute a tax-free
reorganization within the meaning of
Section 368(a)(1)(B) of the U.S.
Internal Revenue Code of 1986, as
amended, for U.S. federal income tax
purposes.
Draxis or DPI may terminate the Exchange
Agreement if the Board of Directors of
DAHI withdraws, amends or modifies, in a
manner adverse to Draxis and DPI, its
recommendation or approval in respect of
the Exchange Agreement, the
Reincorporation Merger, the Share
Exchange or the Share Exchange Plan, or
makes any recommendation with respect to
an Alternative Acquisition (as defined
in the Exchange Agreement) other than a
recommendation to reject such
Alternative Acquisition, or enters into
or continues any discussions with any
third party concerning an Alternative
Acquisition. DAHI may terminate the
Exchange Agreement to allow it to enter
into an agreement with respect to a
Superior Proposal (as defined in the
Exchange Agreement). It may also
terminate the Exchange Agreement if the
Board of Directors of Draxis withdraws,
amends or modifies, in a manner adverse
to DAHI, its recommendation or approval
in respect of the Exchange Agreement,
the Draxis Common Stock Offering or the
Draxis Stock Option Plan Adjustment.
<PAGE>
-12-
All parties may also terminate their
obligations if the Share Exchange shall
not have been consummated before January
31, 1997, subject to certain conditions.
See "Share Exchange Plan - Exchange
Agreement".
EFFECTIVE TIME . . . . . . . . . . . . The Effective Time is defined in the
Exchange Agreement to be 10:00 a.m.
(Toronto time) on the second business
day following the date on which the
conditions precedent to the Share
Exchange are satisfied or waived or on
such other date and time as may be
agreed by the parties or mandated by the
Louisiana Act.
If the Reincorporation Merger is
approved at the DAHI Missouri Special
Meeting, the Share Exchange Plan is
approved at the DAHI Louisiana Special
Meeting, the Draxis Common Stock
Offering and Draxis Stock Option Plan
Adjustment are approved at the Draxis
Special Meeting, and all other
conditions of the Exchange Agreement
have been met or waived, the
Reincorporation Merger will be effected
as soon as practicable following the
DAHI Missouri Special Meeting and prior
to the consummation of the Share
Exchange. The Share Exchange will be
effected as soon as practicable
following the consummation of the
Reincorporation Merger. If all
conditions are not met or waived, there
could be a delay in the Effective Time
or the Exchange Agreement could be
terminated.
FURTHER DAHI FUNDING
AND OPERATIONS . . . . . . . . . . . . Upon consummation of the Share Exchange
and subject to Draxis' good business
judgment, Draxis intends to commit
approximately U.S.$10,000,000 to DAHI to
complete the process of obtaining
approval from the United States Food and
Drug Administration for
ANIPRYL-Registered Trademark-, to launch
ANIPRYL-Registered Trademark- in the
United States and to acquire and develop
new veterinary products, as appropriate.
In addition, Draxis intends to delegate
to DAHI operational control over the
development, marketing and distribution
of ANIPRYL-Registered Trademark- and any
other veterinary product.
EXPENSES . . . . . . . . . . . . . . . Such party incurring costs and expenses
in connection with the Reincorporation
Merger or Share Exchange Plan shall pay
such expenses; however, if the Share
Exchange Plan is consummated, for all
practical purposes all costs will have
been paid for by Draxis as DAHI will
have become an indirect wholly-owned
subsidiary of Draxis.
Under the Exchange Agreement, if Draxis
or DPI terminates the Exchange Agreement
because there has been a breach of any
material representation or warranty of
DAHI or there has been a breach in any
material respect of any of the covenants
or agreements set forth in the Exchange
Agreement on the part of DAHI, then DAHI
is responsible to reimburse Draxis and
DPI for all out-of-pocket expenses, up
to an aggregate amount of U.S.$750,000,
incurred in connection with the
transactions contemplated therein.
Similarly, if DAHI terminates the
Exchange Agreement because there has
been a breach of any material
representation or warranty of Draxis or
DPI or there has been a breach in any
material respect of any of the covenants
or agreements set forth in the Exchange
Agreement on the part of Draxis or DPI,
then Draxis is responsible to reimburse
DAHI for all out-of-pocket expenses, up
to an amount of U.S.$750,000, incurred
in connection with the transactions
contemplated therein.
<PAGE>
-13-
Should DAHI withdraw or modify, in a
manner adverse to Draxis and DPI, its
recommendation to DAHI Shareholders to
approve the Reincorporation Merger or
the Share Exchange Plan, or make any
recommendation with respect to an
Alternative Acquisition other than a
recommendation to reject such
Alternative Acquisition, and the
Exchange Agreement is terminated as a
result or if DAHI terminates the
Exchange Agreement to enter into an
agreement with respect to a Superior
Proposal, then DAHI is obligated to pay
Draxis a termination fee of
U.S.$1,000,000 and reimburse Draxis and
DPI for all out-of-pocket expenses, up
to an aggregate amount of U.S.$750,000,
incurred in connection with the
transactions contemplated therein.
Draxis is responsible for the same
payments to DAHI should the Board of
Directors of Draxis amend or modify, in
any manner adverse to DAHI, its
recommendation in respect of the Draxis
Common Stock Offering. See "Share
Exchange Plan - Exchange Agreement".
MARKET PRICE DATA. . . . . . . . . . . DAHI Missouri Common Stock is listed on
the TSE and is quoted on the over-the-
counter bulletin board of Nasdaq.
On July 25, 1996, the last full trading
day immediately preceding the public
announcement of the Share Exchange, and
on October 15, 1996, the closing prices
were as follows:
July 25, October 15,
1996 1996
----------- ----------
TSE Cdn.$4.25 Cdn.$5.10
Nasdaq Bulletin
Board U.S.$3.75 U.S.$3.75
Draxis Common Stock is listed on the TSE
and is quoted on Nasdaq. On July 25,
1996, the last full trading day
immediately preceding the public
announcement of the Share Exchange, and
on October 15, 1996, the closing prices
were as follows:
July 25, October 15,
1996 1996
----------- ----------
TSE Cdn.$4.50 Cdn.$3.80
Nasdaq U.S.$3.25 U.S.$3.00
See "Comparative Per Share Market Price
Data".
<PAGE>
-14-
DRAXIS AND DAHI REPORTING CURRENCIES
AND ACCOUNTING PRINCIPLES
The historical financial statements and the PRO FORMA financial statements
of, and the summaries of financial information concerning, Draxis contained in
this Joint Management Proxy Statement-Prospectus are reported in Canadian
dollars and have been prepared in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP"), which differ in certain material
respects from United States generally accepted accounting principles ("U.S.
GAAP"). See Note 19 to the historical consolidated financial statements of
Draxis and Note K to the PRO FORMA consolidated financial statements of Draxis,
which presents a reconciliation of such financial statements from Canadian GAAP
to U.S. GAAP.
The historical financial statements of, and the summaries of financial
information concerning, DAHI contained in this Joint Management Proxy Statement-
Prospectus are reported in United States dollars and have been prepared in
accordance with U.S. GAAP. See note 13 to the financial statements of DAHI
contained in DAHI's Form 10-K attached as Appendix J hereto, which presents a
reconciliation of such financial statements from U.S. GAAP to Canadian GAAP.
EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS
In this Joint Management Proxy Statement-Prospectus, dollar amounts are
expressed either in U.S. dollars ("U.S.$") or Canadian dollars ("Cdn.$").
The following table sets forth, for each period indicated, the high and low
exchange rates for one Canadian dollar expressed in U.S. dollars, the average of
such exchange rates on the last day of each month during such period, and the
exchange rate at the end of such period, based upon the noon buying rate in New
York City for cable transfers in Canadian dollars, as certified for customs
purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate"):
Six
months
Year Ended December 31, Ended
---------------------------------------------- June 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------
High . . . . . 0.8926 0.8757 0.8046 0.7632 0.7527 0.7391
Low. . . . . . 0.8587 0.7761 0.7439 0.7103 0.7023 0.7235
Average. . . . 0.8726 0.8235 0.7729 0.7300 0.7305 0.7310
Period End . . 0.8652 0.7865 0.7544 0.7128 0.7323 0.7328
On October 15, 1996, the exchange rate for one Canadian dollar expressed in
U.S. dollars was U.S.$0.7386, based on the Noon Buying Rate.
The following table sets forth, for each period indicated, the high and low
exchange rates for one U.S. dollar expressed in Canadian dollars, the average of
such exchange rates on the last day of each month during such period, and the
exchange rate at the end of such period, based upon the noon spot rate of the
Bank of Canada (the "Noon Spot Rate"):
Six
months
Year Ended December 31, Ended
---------------------------------------------- June 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------
High . . . . . 1.1642 1.2887 1.3449 1.4075 1.4235 1.3865
Low. . . . . . 1.1200 1.1416 1.2423 1.3102 1.3282 1.3515
Average. . . . 1.1457 1.2140 1.2936 1.3698 1.3686 1.3766
Period End . . 1.1556 1.2711 1.3240 1.4028 1.3652 1.3637
On October 15, 1996, the exchange rate for one U.S. dollar expressed in
Canadian dollars was $1.3539, based on the Noon Spot Rate.
<PAGE>
-15-
COMPARATIVE HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
The following tables set forth for the periods indicated (i) certain
historical information with respect to DAHI Missouri and Draxis; and (ii)
certain information on a PRO FORMA consolidated basis after giving effect to the
Share Exchange. Such information is based on the historical consolidated
financial statements of DAHI Missouri and Draxis, the unaudited PRO FORMA
consolidated financial statements of combined Draxis and DAHI and the related
notes thereto included elsewhere herein and should be read in conjunction
therewith. See "Financial Statements and Related Information".
<TABLE>
<CAPTION>
Year Ended Six Months Ended
(or as at) (or as at)
December 31 June 30 June 30
1991 1992 1993 1994 1995 1996 1995
------ ------ ------ ------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
DAHI HISTORICAL (U.S.$) (in thousands of dollars, except per share amounts)
Operations Data:
Revenues. . . . . . . . . . . . . . . . . . . . . . $ 328 $ 304 $ 204 $ 212 $ 281 $ 890 $ 77
Net Loss. . . . . . . . . . . . . . . . . . . . . . (1,047) (1,421) (1,848) (2,561) (2,631) (443) (1,393)
Net Loss per share. . . . . . . . . . . . . . . . . (0.17) (0.22) (0.29) (0.40) (0.41) (.06) (0.21)
Balance Sheet Data:
Total Assets. . . . . . . . . . . . . . . . . . . . $ 5,791 $ 5,981 $ 4,408 $ 4,646 $ 1,560 $ 2,215 $ 2,915
Long-term debt, net of current portion. . . . . . . --- 1,250 1,390 3,690 3,090 2,545 3,290
DRAXIS HISTORICAL (CDN.$)
Operations Data:
Revenues. . . . . . . . . . . . . . . . . . . . . . $15,236 $17,879 $15,396 $17,086 $16,631 $ 7,796 $ 8,096
Net Income (Loss) . . . . . . . . . . . . . . . . . 6,128 6,007 (2,079) 1,099 2,417 1,865 16
Net Income (Loss) per share . . . . . . . . . . . . 0.38 0.35 (0.11) 0.06 0.12 0.09 0.00
Balance Sheet Data:
Total assets. . . . . . . . . . . . . . . . . . . . $38,905 $28,097 $31,986 $33,062 $35,052 $47,348 $31,109
License Obligation, net of current portion. . . . . -- -- -- 500 -- -- -
<CAPTION>
Year Ended Six Months Ended
December 31, 1995 June 30, 1996
----------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
PRO FORMA COMBINED DAHI AND DRAXIS (CDN.$):
Operations Data:
Net Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,405 $ 7,740
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,638) 321
Net Income (Loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.14) 0.01
<CAPTION>
As at
June 30, 1996
-------------
(Unaudited)
<S> <C>
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75,566
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
</TABLE>
COMPARATIVE PER SHARE HISTORICAL AND
PRO FORMA CONSOLIDATED PER SHARE DATA
The following table sets forth (1) historical net income per share from
continuing operations and historical book value per share data of Draxis;
(2) historical net income per share from continuing operations and historical
book value per share of DAHI Missouri; (3) unaudited PRO FORMA consolidated net
income (loss) per share from continuing operations and unaudited PRO FORMA book
value per share data of Draxis after giving
<PAGE>
-16-
effect to the Share Exchange on a purchase basis; and (4) unaudited equivalent
PRO FORMA consolidated net income (loss) per share from continuing operations
and unaudited equivalent PRO FORMA consolidated book value per share data of
DAHI Missouri based on an Exchange Ratio of 1.35 shares of Draxis Common Stock
for each share of DAHI Missouri Common Stock. Draxis and DAHI Missouri have not
paid any cash dividends on the Draxis Common Stock or the DAHI Missouri Common
Stock, respectively.
The unaudited PRO FORMA consolidated financial data are not necessarily
indicative of the net income (loss) per share from continuing operations or book
value per share that would have been achieved had the Share Exchange been
consummated as of the beginning of the periods presented and should not be
construed as representative of such amounts for any future dates or periods.
<TABLE>
<CAPTION>
Historical Draxis DAHI Equivalent
--------------------- Pro Forma Pro Forma
Draxis DAHI Conolidated Consolidated(1)
------ ----- ----------- ---------------
(Cdn.$) (U.S.$) (Unaudited) (Unaudited)
(Cdn.$) (Cdn.$)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE
FROM CONTINUING OPERATIONS:
For the year ended December 31, 1995 . . . . . . . . 0.12 (0.41) (0.14) (0.19)
For the six months ended June 30, 1996 . . . . . . . 0.09 (0.06) 0.01 0.01
BOOK VALUE PER SHARE(2)
June 30, 1996 . . . . . . . . . . . . . . . . . . . 1.88 (0.06) 2.47 3.33
</TABLE>
- -----------------------------
(1) The unaudited DAHI Equivalent PRO FORMA Consolidated per share amounts are
calculated by multiplying the Draxis Pro Forma Consolidated per share
amounts by the Exchange Ratio of 1.35 shares of Draxis Common Stock for
each share of DAHI Common Stock.
(2) Historical book value per share is computed by dividing shareholders'
equity by the number of shares of common stock outstanding at the end of
each period. Draxis PRO FORMA book value per share is computed by dividing
PRO FORMA shareholders' equity by the PRO FORMA consolidated number of
shares of Draxis Common Stock which would have been outstanding had the
Share Exchange been consummated as of the balance sheet date, assuming an
Exchange Ratio of 1.35 shares of Draxis Common Stock for each share of DAHI
Common Stock.
COMPARATIVE PER SHARE MARKET PRICE DATA
Draxis Common Stock is traded on the TSE under the symbol "DAX" and on
Nasdaq under the symbol "DRAXF". DAHI Missouri Common Stock is traded on the
TSE under the symbol "DAH" and on the over-the-counter bulletin board of Nasdaq
under the symbol "DAHI".
The following table sets forth the closing prices per share of Draxis
Common Stock as reported on the TSE and Nasdaq and of DAHI Missouri Common Stock
as reported on the TSE and the Nasdaq bulletin board, respectively, on July 25,
1996, the business day preceding public announcement of the Share Exchange and
on October 15, 1996, and the closing price of a share of Draxis Common Stock on
such dates multiplied by the Exchange Ratio. The dollar equivalent of the price
offered for each share of DAHI Common Stock, as of the dates indicated above,
based on the Exchange Ratio is as shown in the column entitled "Draxis Common
Stock multiplied by the Exchange Ratio".
<PAGE>
-17-
<TABLE>
<CAPTION>
Draxis Common
Stock multiplied
Draxis Common Stock DAHI Missouri Common Stock by the Exchange Ratio
------------------- -------------------------- ---------------------
TSE Nasdaq TSE Nasdaq TSE Nasdaq
--- ------ --- ------ --- ------
<S> <C> <C> <C> <C> <C> <C>
July 25, 1996. . . . . . . . . Cdn.$4.50 U.S.$3.25 Cdn.$4.25 U.S.$3.75 Cdn.$6.08 U.S.$5.06
October 15, 1996 . . . . . . . Cdn.$3.80 U.S.$3.00 Cdn.$5.10 U.S.$3.75 Cdn.$5.13 U.S.$4.05
</TABLE>
Since the market price of Draxis Common Stock that holders of DAHI Common
Stock will receive in the Share Exchange may increase or decrease prior to the
Share Exchange, shareholders are urged to obtain current market quotations.
GENERAL INFORMATION
This Joint Management Proxy Statement-Prospectus and the accompanying
Notices of Special Meeting and Forms of Proxy are being sent to shareholders of
Draxis, DAHI Missouri and DAHI Louisiana on or about October 23, 1996 in
connection with the solicitation by (i) the Board of Directors of DAHI Missouri
of proxies to be used at the DAHI Missouri Special Meeting to be held on
November 26, 1996 at 12:00 noon, Central Standard Time, and at any and all
adjournments thereof; (ii) the Board of Directors of DAHI Louisiana of proxies
to be used at the DAHI Louisiana Special Meeting to be held on November 26, 1996
at 1:00 p.m., Central Standard Time, and at any and all adjournments thereof;
and (iii) the Board of Directors of Draxis of proxies to be used at the Draxis
Special Meeting to be held on November 25, 1996 at 10:00 a.m., Toronto Time, and
at any and all adjournments thereof.
The DAHI Missouri Special Meeting and the DAHI Louisiana Special Meeting
will be held at the Embassy Suites Hotel, 7640 Northwest Tiffany Springs
Parkway, Kansas City, Missouri. The Draxis Special Meeting will be held in the
Dining Room of the Board of Trade, Airport Club, 830 Dixon Road, Etobicoke,
Ontario.
The DAHI Missouri Special Meeting is to be held for the purpose of allowing
the DAHI Shareholders to consider and vote on one proposal, the Reincorporation
Merger. The Reincorporation Merger provides for the reincorporation of DAHI
Missouri in the State of Louisiana, including the approval of a Plan of Merger
providing for the merger of DAHI Missouri into DAHI Louisiana, which is a
wholly-owned subsidiary of DAHI Missouri incorporated in the State of Louisiana.
For U.S. federal income tax purposes, it is intended that the Reincorporation
Merger will constitute a tax-free reorganization for DAHI Shareholders holding
such shares as capital assets, other than Dissenting Shareholders. For Canadian
federal income tax purposes, subject to the qualifications noted elsewhere
herein, the Reincorporation Merger should not result in a taxable capital gain
or allowable capital loss for Canadian resident holders of DAHI Common Stock
holding such shares as capital property, other than Dissenting Shareholders.
The Reincorporation Merger is necessary for DAHI Missouri to have available to
it the provisions of the Louisiana Act which permit mandatory share exchanges.
If the Reincorporation Merger is approved, the DAHI Louisiana Special
Meeting will be called to order and the DAHI Missouri Shareholders, who have
been granted proxies by DAHI Missouri, will direct the DAHI Missouri vote on the
Share Exchange Plan which provides for the acquisition by DPI of all of the
shares of DAHI Missouri Common Stock, as those shares are automatically
converted in the Reincorporation Merger into shares of DAHI Louisiana Common
Stock, in exchange for newly-issued shares of Draxis Common Stock on the basis
of 1.35 shares of Draxis Common Stock for each share of DAHI Common Stock
exchanged. DAHI Missouri and DAHI Louisiana are not aware of any matters to
come before either the DAHI Missouri Special Meeting or the DAHI Louisiana
Special Meeting other than as stated herein. However, if any other matters
properly come before the DAHI Louisiana Special Meeting, the persons named on
the enclosed green-colored form of proxy will vote the proxy in accordance with
their best judgment on such matters.
The Draxis Special Meeting is being held for the purpose of allowing the
Draxis Shareholders to consider and vote upon a proposal to issue additional
shares of Draxis Common Stock to DAHI Shareholders
<PAGE>
-18-
pursuant to the Share Exchange Plan and to increase the number of shares of
Draxis Common Stock that may be issued pursuant to the Draxis Stock Option Plan.
Draxis is not aware of any matters to come before the Draxis Special Meeting
other than these proposals. However, if any other matters properly come before
the Draxis Special Meeting, the persons named on the enclosed blue-colored form
of proxy will vote the proxy in accordance with their best judgment on such
matters.
WHEN TAKEN TOGETHER, THE REINCORPORATION MERGER, THE SHARE EXCHANGE PLAN,
THE DRAXIS COMMON STOCK OFFERING AND THE DRAXIS STOCK OPTION PLAN ADJUSTMENT
WILL HAVE THE FOLLOWING CONSEQUENCES AS OF THE EFFECTIVE TIME:
(i) HOLDERS OF SHARES OF DAHI COMMON STOCK (OTHER THAN DISSENTING
SHAREHOLDERS, DPI AND DRAXIS LLC) WILL BECOME HOLDERS OF SHARES OF
DRAXIS COMMON STOCK ON THE BASIS OF 1.35 SHARES OF DRAXIS COMMON STOCK
FOR EACH SHARE OF DAHI COMMON STOCK;
(ii) HOLDERS OF OUTSTANDING OPTIONS TO ACQUIRE SHARES OF DAHI COMMON STOCK
WILL BECOME HOLDERS OF OPTIONS TO ACQUIRE SHARES OF DRAXIS COMMON
STOCK ON THE BASIS OF 1.35 SHARES OF DRAXIS COMMON STOCK FOR EACH
SHARE OF DAHI COMMON STOCK; AND
(iii) ALL OF THE ISSUED AND OUTSTANDING SHARES OF DAHI COMMON STOCK WILL BE
OWNED, DIRECTLY OR INDIRECTLY, BY DRAXIS.
In addition to solicitation of proxies by mail, proxies may be solicited in
person or by telephone or telegram by directors, officers and employees of DAHI
and Draxis, respectively, who will not receive additional compensation for such
services. Of the expenses incurred in connection with the printing and mailing
of this Joint Management Proxy Statement-Prospectus, 76% will be borne by Draxis
and 24% will be borne by DAHI Missouri. Draxis and DAHI Missouri have retained
Morrow & Co., Inc. at an estimated cost of U.S.$25,000 including reimbursement
of expenses, to assist in the solicitation of proxies by telephone and by mail.
Draxis, DAHI Missouri and Morrow & Co., Inc. will also request banks, brokers,
and other intermediaries holding shares beneficially owned by others to send
this Joint Management Proxy Statement-Prospectus to and obtain proxies from such
beneficial owners and will reimburse such holders for their reasonable expenses
in so doing.
SHARES OUTSTANDING AND VOTING RIGHTS
DAHI MISSOURI
The only authorized class of capital stock of DAHI Missouri outstanding and
entitled to vote at the DAHI Missouri Special Meeting is DAHI Missouri Common
Stock. On October 15, 1996, at 5:00 p.m., Central Standard Time, the Record
Date for determination of DAHI Missouri Shareholders entitled to notice of and
to vote at the DAHI Missouri Special Meeting, there were 7,549,698 shares of
DAHI Missouri Common Stock outstanding. Each outstanding share of DAHI Missouri
Common Stock is entitled to one (1) vote on any matter submitted to the DAHI
Missouri Special Meeting.
Holders of a majority of the outstanding shares of DAHI Common Stock
entitled to vote must be present in person or represented by proxy to constitute
a quorum at the DAHI Missouri Special Meeting. The affirmative vote of the
holders of two-thirds of the outstanding shares of DAHI Common Stock entitled to
vote is required for approval of the Reincorporation Merger. In addition, the
Exchange Agreement requires the affirmative vote of the holders of a majority of
the shares of DAHI Common Stock represented in person or by proxy at the DAHI
Missouri Special Meeting and not held of record or beneficially or controlled
directly or indirectly by Draxis or its affiliates for approval of the
Reincorporation Merger.
The Board of Directors of DAHI Missouri has designated each of David R.
Stevens and Charles L. Wood as proxies to vote shares of DAHI Missouri Common
Stock solicited by management of DAHI Missouri.
<PAGE>
-19-
If the enclosed pink-colored form of proxy is executed and returned, it may
nonetheless be revoked at any time prior to the vote at the DAHI Missouri
Special Meeting, by written notice to David R. Stevens, President and Chief
Executive Officer, 10955 Lowell, Suite 710, Overland Park, Kansas, 66210, by
attending the DAHI Missouri Special Meeting and electing to vote in person, or
by proper delivery of a duly executed proxy bearing a later date. The persons
named in the enclosed proxy will vote as directed with respect to the
Reincorporation Merger, or in the absence of any direction, IN FAVOUR of
approval and adoption of the Reincorporation Merger.
DAHI LOUISIANA
The only authorized class of capital stock of DAHI Louisiana outstanding
and entitled to vote at the DAHI Louisiana Special Meeting is DAHI Louisiana
Common Stock. On October 15, 1996, at 5:00 p.m. Central Standard Time, the
Record Date for determination of DAHI Louisiana Shareholders entitled to notice
of and to vote at the DAHI Louisiana Special Meeting, there were 7,549,698
shares of DAHI Louisiana Common Stock outstanding (which was equal to the number
of shares of DAHI Missouri Common Stock issued and outstanding on the Record
Date), all of which were owned by DAHI Missouri. Each outstanding share of DAHI
Louisiana Common Stock is entitled to one (1) vote on any matter submitted to
the DAHI Louisiana Special Meeting. DAHI Missouri is entitled to cast all of
the votes at the DAHI Louisiana Special Meeting.
DAHI Missouri wishes to permit its shareholders to cast the votes at the
DAHI Louisiana Special Meeting for or against the Share Exchange Plan as such
DAHI Missouri Shareholders desire. Therefore, DAHI Missouri has granted a proxy
to each DAHI Missouri Shareholder to cast the same number of votes at the DAHI
Louisiana Special Meeting as such person is entitled to cast at the DAHI
Missouri Special Meeting. The proxy also gives authority to such Shareholders
to appoint a proxyholder to vote on their behalf. DAHI Missouri Shareholders
may cast those votes by signing, dating, and returning the green-colored form of
proxy included with this Joint Management Proxy Statement-Prospectus.
In the event that the Reincorporation Merger is approved and adopted by the
DAHI Missouri Shareholders at the DAHI Missouri Special Meeting, the DAHI
Louisiana Special Meeting will be called to order. The affirmative vote of two-
thirds of the votes cast in person or by proxy at the DAHI Louisiana Special
Meeting is required under Louisiana law for approval of the Share Exchange Plan.
In addition, the Exchange Agreement requires the affirmative vote of a majority
of the votes cast at the DAHI Louisiana Special Meeting by persons other than
Draxis or its affiliates for approval of the Share Exchange Plan.
The proxies granted by DAHI Missouri Shareholders to cast votes at the DAHI
Louisiana Special Meeting designate each of David R. Stevens and Charles L. Wood
as proxies to vote DAHI Louisiana Common Stock as directed by the DAHI Missouri
Shareholders. If the enclosed green-colored form of proxy is executed and
returned, it may nevertheless be revoked at any time prior to the vote at the
DAHI Louisiana Special Meeting by written notice to David R. Stevens, President
and Chief Executive Officer, 10955 Lowell, Suite 710, Overland Park, Kansas,
66210, by attending the DAHI Louisiana Special Meeting and electing to vote in
person, or by proper delivery of a duly executed proxy bearing a later date.
The persons named in the enclosed green-colored proxy will vote as directed with
respect to the Share Exchange Plan, or in the absence of any direction, IN
FAVOUR of approval and adoption of the Share Exchange Plan.
DRAXIS
The only authorized class of capital stock of Draxis outstanding and
entitled to vote at the Draxis Special Meeting is Draxis Common Stock. On
October 15, 1996, at 5:00 p.m., Toronto Time, the Record Date for determination
of Draxis Shareholders entitled to notice of and to vote at the Draxis Special
Meeting, there were 23,463,973 shares of Draxis Common Stock outstanding. Each
outstanding share of Draxis Common Stock is entitled to one (1) vote on any
matter submitted to the Draxis Special Meeting.
Holders of 25% of the outstanding shares of Draxis Common Stock entitled to
vote must be present in person or represented by proxy to constitute a quorum at
the Draxis Special Meeting. The affirmative vote of the holders of a majority
of the outstanding shares of Draxis Common Stock represented in person or by
proxy
<PAGE>
-20-
at the Draxis Special Meeting is required for approval of the Draxis Common
Stock Offering and the Draxis Stock Option Plan Adjustment.
The Board of Directors of Draxis has designated each of Martin Barkin and
Jacqueline H.R. Le Saux as proxies to vote shares of Draxis Common Stock
solicited by management of Draxis. If the enclosed blue-colored form of proxy
is executed and returned, it may nonetheless be revoked at any time prior to the
vote at the Draxis Special Meeting by written notice to Jacqueline H.R. Le Saux,
Vice-President, Corporate Development & Secretary, 6870 Goreway Drive,
Mississauga, Ontario, Canada, L4V 1P1, by attending the Draxis Special Meeting
and electing to vote in person, or by proper delivery of a duly executed proxy
bearing a later date. The persons named in the enclosed blue-colored proxy will
vote as directed with respect to the Draxis Common Stock Offering and the Draxis
Stock Option Plan Adjustment, or in the absence of any direction, IN FAVOUR of
approval and adoption of the Draxis Common Stock Offering and the Draxis Stock
Option Plan Adjustment.
SPECIAL CONSIDERATIONS
RELATING TO THE REINCORPORATION MERGER
PRIOR TO VOTING ON THE REINCORPORATION MERGER, DAHI SHAREHOLDERS SHOULD
CAREFULLY EXAMINE THIS ENTIRE JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS AND
THE APPENDICES HERETO. IF THE REINCORPORATION MERGER AND THE SHARE EXCHANGE
PLAN ARE APPROVED BY THE DAHI SHAREHOLDERS, A CHANGE IN THE LEGAL DOMICILE OF
DAHI WILL BE EFFECTED TOGETHER WITH CERTAIN OTHER CHANGES OF A LEGAL NATURE.
PARTICULAR CONSIDERATION SHOULD BE GIVEN TO CERTAIN OF THE RISKS INHERENT IN THE
REINCORPORATION MERGER SUMMARIZED BELOW.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF MISSOURI AND LOUISIANA
If the Reincorporation Merger and the Share Exchange Plan are approved and
consummated, the DAHI Shareholders who do not exercise dissenters' rights under
the Missouri Act will become shareholders of DAHI Louisiana for a brief period
of time until their shares are exchanged for shares of Draxis Common Stock.
Since neither the Reincorporation Merger nor the Share Exchange Plan will be
consummated unless both of those transactions are consummated, a DAHI Missouri
Shareholder will either remain as a shareholder of DAHI Missouri or will become
a shareholder of a Louisiana corporation for only an instant of time before
becoming the holder of shares of Draxis Common Stock. Draxis is a corporation
governed by the laws of Canada. Therefore, not all differences between the
corporation laws of Missouri and Louisiana are material to the DAHI Missouri
Shareholders. The following discussion is a summary of certain material
differences between the rights of shareholders under the Missouri Act and the
rights of shareholders under the Louisiana Act. It does not purport to be a
complete statement of the rights of DAHI Missouri Shareholders under the
Missouri Act as compared to the rights of shareholders under the Louisiana Act.
The identification of specific material differences is not meant to indicate
that other material differences relevant to a party or shareholder may not
exist. The summary is qualified in its entirety by reference to the Missouri
Act and the Louisiana Act.
Share Exchange Statute. The primary difference between the Missouri Act
and the Louisiana Act for purposes of the Reincorporation Merger and the Share
Exchange Plan is that the Louisiana Act allows a mandatory exchange of shares
under Section 116 of the Louisiana Act and the Missouri Act does not. The
purpose of the Reincorporation Merger is to permit DAHI Louisiana to avail
itself of the Louisiana Act, which permits a non-Louisiana corporation, such as
DPI, to acquire the outstanding shares of a Louisiana corporation in exchange
for shares of the non-Louisiana corporation or another corporation (i.e.,
Draxis) on a mandatory basis. A mandatory share exchange allows Draxis to
acquire the shares of DAHI Missouri not already beneficially owned by it in a
manner that Draxis and DAHI believe is tax effective to as many shareholders of
DAHI as possible, allows DAHI Shareholders the opportunity to make the decision
of whether to allow Draxis to acquire DAHI and minimizes the uncertainty and
cost associated with other acquisition methods considered. To effect a share
exchange under the Louisiana Act, the board of directors of each party to the
exchange must adopt a plan of exchange (see the "Plan of Share Exchange"
attached as Exhibit A1 to the Exchange Agreement) and the shareholders of the
party whose shares will be acquired must approve that plan of exchange by a vote
of
<PAGE>
-21-
at least two-thirds of the voting power present at a properly called meeting of
the shareholders. After the plan of exchange is approved by the shareholders,
the acquiring corporation must deliver articles of share exchange (see the
"Articles of Share Exchange" attached as Exhibit A2 to the Exchange Agreement)
to the Louisiana Secretary of State. When the share exchange is consummated,
the shares of stock of the acquired corporation shall be exchanged for the
shares of the acquiring corporation or another corporation as provided in the
plan of exchange.
Dissenters' Rights. Dissenters' rights under the Missouri Act are
described below under "Reincorporation Merger - Dissenters' Rights".
Dissenters' rights under the Louisiana Act are similar to dissenters' rights
under the Missouri Act except that such rights are eliminated under the
Louisiana Act if the relevant transaction is approved by eighty percent (80%) or
more of the total voting power of the Louisiana corporation. Thus, any
shareholder of a Missouri corporation who complies with the relevant provisions
of the Missouri Act can exercise dissenters' rights, but a shareholder of a
Louisiana corporation who complies with the relevant provisions of the Louisiana
Act will be prevented from exercising his or her dissenters' rights if eighty
percent (80%) or more of the total voting power of the corporation is voted in
favour of the transaction. DAHI Shareholders will have dissenters' rights in
connection with the Reincorporation Merger only under the Missouri Act, and they
will not have any dissenters' rights in connection with the Share Exchange Plan.
Approval of Certain Corporate Transactions. The Missouri Act provides that
certain significant corporate transactions, such as mergers, consolidations, or
a sale of all or substantially all of a corporation's assets, must be approved
by the affirmative vote of the holders of two-thirds of the outstanding shares
of the corporation entitled to vote. Under the Louisiana Act, such
transactions, including a share exchange transaction, require the vote of two-
thirds of the voting power present, in person or by proxy, at a duly called
meeting of the shareholders which can be convened upon the attendance, in person
or by proxy, of a majority of the shareholders entitled to vote. Thus, the
number of votes needed to approve a significant transaction under the Louisiana
Act requirements could theoretically be substantially less than the number of
votes required if the Missouri Act were to apply.
The Exchange Agreement provides that in addition to any other required
approval requirement, the DAHI Shareholders, other than Draxis and its
affiliates, must approve the Share Exchange Plan by a simple majority of those
present in person or by proxy at the DAHI Louisiana Special Meeting.
For the Reincorporation Merger, the Missouri Act requirements will apply
and for the Share Exchange Plan, the Louisiana Act requirements will apply.
SPECIAL CONSIDERATIONS RELATING
TO THE SHARE EXCHANGE
PRIOR TO VOTING ON THE SHARE EXCHANGE PLAN, DAHI SHAREHOLDERS SHOULD
CAREFULLY EXAMINE THIS ENTIRE JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS AND
THE APPENDICES HERETO. IF THE SHARE EXCHANGE PLAN IS APPROVED AND ADOPTED AND
THE SHARE EXCHANGE IS CONSUMMATED, THE DAHI SHAREHOLDERS' EQUITY INVESTMENT IN
DAHI WILL BECOME AN EQUITY INVESTMENT IN DRAXIS. ACCORDINGLY, DAHI SHAREHOLDERS
ARE URGED TO READ AND CAREFULLY CONSIDER THE FOLLOWING INVESTMENT CONSIDERATIONS
WITH RESPECT TO DRAXIS. DAHI SHAREHOLDERS SHOULD READ "BUSINESS OF DRAXIS"
PRIOR TO REVIEWING THESE SPECIAL CONSIDERATIONS, AS WELL AS THE "SPECIAL
CONSIDERATIONS RELATING TO THE DRAXIS COMMON STOCK OFFERING" WHICH REFLECT ON-
GOING RISKS OF DAHI, PARTICULARLY THOSE RISK FACTORS RELATING TO THE CONTINUING
DEVELOPMENT, FDA APPROVAL AND COMMENCEMENT OF MARKETING OF ANIPRYL-Registered
Trademark- IN THE UNITED STATES.
GENERIC DRUG COMPETITION. Draxis anticipates a new generic competitor to
ELDEPRYL-Registered Trademark- will be introduced to the Canadian market in the
near future. Management of Draxis believes that the entry of another generic
competitor for ELDEPRYL-Registered Trademark- could have an adverse effect on
the sales and profitability of Draxis. The impact of generic competition will
be mitigated to the extent that Draxis has diversified its product lines and by
Draxis' profit sharing agreement with Novopharm Limited with respect to sales of
NOVO-SELEGILINE, the first and currently the only generic version of ELDEPRYL-
Registered Trademark- approved in Canada. The most important aspect of Draxis'
<PAGE>
-22-
multi-dimensional generic selegiline defense is its active program of product
diversification. In fiscal 1995, ELDEPRYL-Registered Trademark- and NOVO-
SELEGILINE comprised 78.6% of Draxis' sales, down from 86.7% in 1994. In the
first six months of 1996, this trend continued and ELDEPRYL-Registered
Trademark- and NOVO-SELEGILINE sales declined to 65.5% of Draxis' total sales.
See "- Market Acceptance of Products".
NO ASSURANCE OF REGULATORY APPROVAL; GOVERNMENT REGULATION. Draxis'
preclinical studies and clinical trials, as well as the manufacturing and
marketing of its existing and potential products, are subject to extensive
regulation by the Canadian Health Protection Branch ("HPB") and other
authorities in Canada and by numerous federal, state and local government
authorities in the United States, including the United States Food and Drug
Administration ("FDA"). Similar regulatory requirements exist in Europe and
other countries. To the extent it chooses to explore foreign markets, Draxis
may rely on foreign licensees to obtain regulatory approval for marketing its
products in foreign countries. The commercialization of LIPOTECA-TM-, in
particular, will be subject to rigorous preclinical and clinical testing and
other premarket approval requirements by the FDA and similar authorities in
other foreign countries. Draxis is seeking collaborators or licensees for
LIPOTECA-TM- outside Canada. Any failure or delay by Draxis, its collaborators
or licensees to comply with applicable requirements or obtain regulatory
approvals could adversely affect the marketing of products developed by Draxis,
including LIPOTECA-TM-, and its ability to receive product or royalty revenue.
The regulatory process, which includes preclinical studies and clinical
trials of each compound to establish its safety and efficacy, takes many years
and requires the expenditure of substantial resources. Moreover, if regulatory
approval of the drug is granted, such approval may entail limitations on the
indicated uses for which it may be marketed. Failure to comply with applicable
regulatory requirements can, among other things, result in suspension of
regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. Further, government policy may change
and additional government regulations may be established that could prevent or
delay regulatory approvals of Draxis' products. In addition, a marketed drug
and its manufacturer are subjected to a continual review. Later discovery of
previously unknown problems with the product or manufacturer may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS. Draxis' success will
depend in part on its ability to obtain and enforce patent protection for its
technology in Canada, the United States and other countries. No assurance can
be given that patents will issue from any pending applications or that claims
now or in the future, if any, allowed under issued patents will be sufficiently
broad to protect Draxis' technology. In addition, no assurance can be given
that any patents issued or licensed by Draxis will not be challenged,
invalidated, infringed or circumvented, or that the rights granted thereunder
will provide competitive advantages to Draxis. The commercial success of Draxis
will also depend in part on Draxis not infringing patents or proprietary rights
of others and not breaching the licenses granted to Draxis. The degree of
patent protection afforded to pharmaceutical or biotechnological inventions
around the world is uncertain and varies significantly between different
countries. There can be no assurance that Draxis will be able to obtain a
license to any third-party technology or patents that it may require to conduct
its business or that such technology or patents can be licensed at a reasonable
cost. Failure by Draxis or its collaborators to obtain a license to any
technology or patents that it may need to commercialize its technologies or
products may result in delays in marketing Draxis' proposed products or the
inability to proceed with the development, manufacture or sale of products
requiring such licenses and may have a material adverse effect on Draxis.
Litigation, which could result in substantial cost to Draxis, may also be
necessary to enforce any patents issued to Draxis or to determine the scope and
validity of other parties' proprietary rights, which may affect Draxis' products
and technology. If the outcome of any such litigation is adverse to Draxis,
Draxis' business could be materially adversely affected. To determine the
priority of invention, Draxis may also have to participate in interference
proceedings declared by the United States Patent and Trademark Office, which
could result in substantial cost to Draxis.
In particular, Draxis may be required to enforce its patent rights in
respect of ELDEPRYL-Registered Trademark- for human use and ANIPRYL-Registered
Trademark- in the event of the introduction in Canada of a new generic version
of these drugs, other than
<PAGE>
-23-
NOVO-SELEGILINE. In addition, the successful commercialization of LIPOTECA-TM-
will depend in part on the enforceability of Draxis' patented liposome
technology.
Draxis also relies on unpatented trade secrets, improvements, know-how and
continuing technological innovation to develop and maintain its competitive
position, which it seeks to protect, in part, by confidentiality agreements with
its corporate partners, collaborators, employees and consultants. There can be
no assurance that these agreements will not be breached, that Draxis will have
adequate remedies for any breach, or that Draxis' trade secrets will not
otherwise become known or be independently discovered by competitors.
RELIANCE ON COLLABORATIVE RELATIONSHIPS. Draxis has entered into a number
of agreements for Canadian rights to products under development where the other
party to the agreement is responsible for developing a body of data upon which
Draxis can base a submission to the HPB. These include an agreement with DUSA
Pharmaceuticals, Inc. ("DUSA") with respect to ALA Photodynamic Therapy, an
agreement with Bone Care International, Inc. ("Bone Care") with respect with
ONE-ALPHA D(2), and an agreement with Somerset Pharmaceuticals, Inc.
("Somerset") with respect to IPRIFLAVONE.
There can be no assurance that the interests of the other party to each of
these agreements (the "Collaborators") are or will remain consistent with those
of Draxis or that they will succeed in developing a body of data which can form
the basis of an HPB approval. Should the Collaborators fail to develop such
body of data to enable Draxis to obtain the requisite regulatory approvals,
Draxis' business, financial condition and results of operations may be
materially and adversely affected. In addition, Draxis cannot control the
amount and availability of resources which the Collaborators devote to the
products to which Draxis has Canadian rights. The agreements may be terminated
by the Collaborators in certain circumstances. See "Business of Draxis -
Products Under Development".
In addition, Draxis owns 30% of Stef International Corp. ("Stef"), a
network marketing company which develops and distributes nutritional and
personal care products in the United States. Stef's success will depend on the
ability of its management to add distributors and increase revenues and profit.
TECHNOLOGICAL UNCERTAINTY. The development of new products is subject to a
number of significant risks. Potential products that appear to be promising in
various stages of development may not reach the market for a number of reasons.
Such reasons include the possibilities that the potential product will be found
ineffective or unduly toxic during preclinical or clinical trials, fail to
receive necessary regulatory approvals, be difficult to manufacture on a large
scale, be uneconomical to market or not achieve market acceptance, or be
precluded from commercialization by proprietary rights of third parties. Many
of Draxis' potential products, in particular new products based on Draxis'
patented liposome technology, will require significant additional research and
development efforts and significant additional preclinical and clinical testing,
prior to any commercial use. There can be no assurance that Draxis will
successfully meet any of these technological challenges, or others that may
arise in the course of development.
LIMITED MANUFACTURING CAPABILITY. Draxis lacks commercial-scale facilities
to manufacture any of its products in accordance with current good manufacturing
practices prescribed by the FDA. Draxis is relying on the manufacturing
capabilities and resources of certain of its Collaborators and other third
parties for the manufacture of products to which it has Canadian rights. Draxis
believes that those Collaborators either have the facilities available to
manufacture commercial quantities of the product in question or will develop
them. At present, Draxis relies exclusively on third parties for the
manufacture of its products. Certain products that Draxis is attempting to
develop have never been manufactured on a commercial scale and there can be no
assurance that such products can be manufactured by Draxis or any other party at
a cost or in a quantity to render such products commercially viable. Production
of such products may require the development of new manufacturing technologies
and expertise which could delay the manufacturing process and which could prove
not to be cost-effective.
PRODUCT LIABILITY EXPOSURE AND INSURANCE. The use of any of Draxis'
potential products in clinical trials, and the sale of any approved products,
may expose Draxis to liability claims resulting from the use of its
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products. These claims might be made directly by consumers, healthcare
providers or by pharmaceutical companies or others selling such products.
Draxis currently has liability insurance. No assurance can be given that Draxis
will be able to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect Draxis against losses due to liability. There can
also be no assurance that Draxis will be able to maintain or obtain additional
commercially reasonable product liability insurance for any products approved
for marketing. A successful product liability claim or a series of claims
brought against Draxis could have a material adverse effect on its business,
financial condition or results of operations.
MARKET ACCEPTANCE OF PRODUCTS. There can be no assurance that any of
Draxis' products in development or recently launched products will achieve
market acceptance. The degree of market acceptance will depend upon a number of
factors, including the receipt of regulatory approvals, the establishment and
demonstration in the medical community of the clinical efficacy and safety of
Draxis' products, the establishment and demonstration of the potential
advantages over existing and new treatment methods and the reimbursement
policies of government and third-party payors. There can be no assurance that
physicians, patients, payors or the medical community in general will accept and
utilize any existing or new products that may be developed by Draxis. ANIPRYL-
Registered Trademark- is the first HPB-approved product for canine Cushing's
disease. The market acceptance of the product is not yet known. Similarly,
KERASAL-Registered Trademark- is a new product in the United States podiatric
market. Market acceptance of the product, particularly by third party payors is
not yet known. Delays in the introduction of both these new products due to
product availability, sales force recruitment and training and other factors
could affect revenues for 1996.
Draxis anticipates that it will face increased competition in the future as
new products enter the market and advanced technologies become available. There
can be no assurance that existing products or new products developed by Draxis'
competitors will not be more effective, or be more effectively marketed and
sold, than any that may be developed or sold by Draxis. Competitive products
may render Draxis' products obsolete and non-competitive prior to Draxis'
recovering research, development or commercialization expenses incurred with
respect to any such products.
Many of Draxis' existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than Draxis. In addition, many of these competitors have
significantly greater experience than Draxis in undertaking research,
preclinical studies and human clinical trials of new pharmaceutical products,
obtaining regulatory approvals, and manufacturing and marketing such products.
Accordingly, Draxis' competitors may succeed in commercializing products more
rapidly or effectively than Draxis, which could have a material adverse effect
on Draxis' business, financial condition or results of operations. See
"Business of Draxis - Competition".
UNCERTAINTIES RELATED TO CLINICAL TRIALS. Before obtaining regulatory
approval for the commercial sale of any products under development, Draxis must
demonstrate through preclinical studies and clinical trials that the product is
safe and efficacious. The results from preclinical studies and clinical trials
may not be totally predictive of results obtained in larger clinical trials, and
there can be no assurance that Draxis' or its Collaborators' clinical trials
will demonstrate safety and efficacy, achieve regulatory approvals or result in
marketable products. A number of companies in the biotechnology and
pharmaceutical industry have suffered significant setbacks in advanced clinical
trials, even after achieving promising results in earlier trials.
Draxis has announced the results of Phase III clinical trials for each of
MODAFINIL and LIPOTECA-TM-. See "Business of Draxis - Products Under
Development - Dermatological Products - LIPOTECA-TM-" and "MODAFINIL". There
can be no assurance that the Phase III clinical trials underway, or any
additional Phase III clinical trials, will demonstrate any efficacy or
superiority over existing therapies or will be completed successfully in a
timely manner. Failure to complete successfully the Phase III clinical trials
on a timely basis could have an adverse effect on Draxis' future business,
financial condition and results of operations.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT. The business and
financial condition of pharmaceutical companies will continue to be affected by
the efforts of governments and third-party payors to contain or reduce the costs
of healthcare through various means. For example, in certain markets, including
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Canada, pricing or profitability of prescription pharmaceuticals is subject to
government control. For a description of Canadian controls, see "Government
Regulation". In the United States there have been, and Draxis expects that
there will continue to be, a number of federal and state proposals to implement
similar government controls. In addition, an increasing emphasis on managed
care in the United States has and will continue to increase the pressure on
pharmaceutical pricing. While Draxis cannot predict whether such legislative or
regulatory proposals will be adopted or the effects such proposals or managed
care efforts may have on its business, the announcement of such proposals and
the adoption of such proposals or efforts could have a material adverse effect
on Draxis' business and financial condition. Further, to the extent such
proposals or efforts have a material adverse effect on other pharmaceutical
companies that are prospective corporate partners for Draxis, Draxis' ability to
establish strategic alliances may be adversely affected. In addition, in
Canada, the United States and elsewhere, sales of prescription pharmaceutical
products are dependent, in part, on the availability of reimbursement to the
consumer from third-party payors, such as government and private insurance
plans. Third-party payors are increasingly challenging the prices charged for
medical products and services. To the extent Draxis succeeds in bringing
products to market, there can be no assurance that these products will be
considered cost-effective and reimbursement to consumers will be available or
will be sufficient to allow Draxis to sell its products on a competitive basis.
Draxis is taking steps to ensure that KERASAL-Registered Trademark- will be
included on the reimbursement schedules of various managed care organizations in
the United States. No assurances can be made that Draxis will be successful.
UNCERTAINTIES OF FINANCIAL RESULTS. Draxis' ability to achieve and
maintain profitability in the foreseeable future depends on the commercial
success of its products. Because Draxis has recently launched new products in
new markets, revenues are difficult to predict and may fluctuate substantially
from period to period. In addition, product development programs will require
substantial additional investment, including the cost of clinical trials,
obtaining additional regulatory approvals, if necessary, and marketing and sales
expenses associated with potential new product introductions. There can be no
assurance that, or if so, when Draxis will successfully develop, receive
regulatory approvals for or manufacture or market any new products. The
research, development, production and marketing of new products will require the
application of considerable technical and financial resources by Draxis and its
Collaborators, while revenues that are generated by such products, if
successfully developed and marketed, may not be realized for several years.
Involvement in any patent litigation may materially adversely affect Draxis'
future business, financial condition and results of operations. No assurance
can be given that Draxis will be able to sustain profitability. See "Draxis
Management's Discussion and Analysis".
VOLATILITY OF COMMON SHARE PRICE. The market prices for the securities of
pharmaceutical and biotechnology companies, including those of Draxis, have
historically been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Factors such as fluctuations in
Draxis' operating results, announcements of competing technological innovations
or new therapeutic products by Draxis' competitors, clinical trial results,
governmental regulation, developments in patent or other proprietary rights,
public concern as to the safety of drugs developed by Draxis or others and
general market conditions can have an adverse effect on the market price of
Draxis Common Stock. In particular, the realization of any of the risks
described herein could have a material adverse impact on such market price. See
"Business of Draxis - Price Range and Trading Volume".
SPECIAL CONSIDERATIONS
RELATING TO THE DRAXIS COMMON STOCK OFFERING
PRIOR TO VOTING ON THE DRAXIS COMMON STOCK OFFERING, DRAXIS SHAREHOLDERS
SHOULD CAREFULLY EXAMINE THIS ENTIRE JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS
AND THE APPENDICES HERETO. IF THE SHARE EXCHANGE PLAN IS APPROVED BY THE DAHI
SHAREHOLDERS AND IMPLEMENTED, DPI WILL EFFECT THE EXCHANGE OF SHARES OF DRAXIS
COMMON STOCK FOR ALL THE SHARES OF DAHI COMMON STOCK. SUCH ISSUANCE WILL RESULT
IN APPROXIMATELY 5.8 MILLION SHARES OF DRAXIS COMMON STOCK BEING ISSUED OR
APPROXIMATELY 25% OF THE CURRENTLY ISSUED AND OUTSTANDING DRAXIS COMMON STOCK.
ACCORDINGLY, DRAXIS SHAREHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE
FOLLOWING INVESTMENT CONSIDERATIONS WITH RESPECT TO DAHI. DRAXIS SHAREHOLDERS
SHOULD READ "BUSINESS OF
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DAHI" PRIOR TO REVIEWING THESE SPECIAL CONSIDERATIONS, AS WELL AS "SPECIAL
CONSIDERATIONS RELATING TO THE SHARE EXCHANGE" RELATING TO DRAXIS.
RELIANCE ON ANIPRYL-Registered Trademark-. DAHI is a single product
company. Since its inception, DAHI has focused its efforts and resources to
researching, developing and seeking regulatory approval for ANIPRYL-Registered
Trademark-. DAHI's ability to achieve and maintain profitability will depend
entirely on DAHI's ability to obtain all required approvals from the FDA, the
Bureau of Veterinary Drugs ("BVD") in Canada and other regulatory agencies, and
to successfully commercialize ANIPRYL-Registered Trademark-. DAHI is developing
ANIPRYL-Registered Trademark- for two indications, canine Cushing's disease and
canine cognitive dysfunction. The market for either indication is limited in
proportion to the incidences of such disorders in the jurisdictions for which
DAHI is able to obtain regulatory approvals. Approximately 15,000 cases of
canine Cushing's disease are diagnosed each year in Canada and 150,000 in the
United States. Each year, approximately 150,000 dogs in Canada and 1.5 million
dogs in the United States are afflicted with canine cognitive dysfunction.
There can be no assurance that DAHI will be able to successfully commercialize
ANIPRYL-Registered Trademark- in the United States or elsewhere. While DAHI's
long-range plan is to become a multi-product companion animal health company,
such a commitment would require additional financial and other resources and
there can be no assurance DAHI will be able to diversify its product range
successfully to limit its dependence on ANIPRYL-Registered Trademark-.
LIMITED REVENUES AND HISTORY OF LOSSES. DAHI has generated limited
revenues and has incurred operating losses, including net losses of
Cdn.$2,631,147, Cdn.$2,561,292, Cdn.$1,848,218 and Cdn.$1,421,046 for the years
ended December 31, 1995, 1994, 1993 and 1992, respectively, and Cdn.$443,318 for
the six months ended June 30, 1996. DAHI's revenues were Cdn.$280,777 for the
year ended December 31, 1995 and Cdn.$890,326 for the six months ended June 30,
1996. There can be no assurance that DAHI's revenues will increase in the
future or that DAHI's operations will become profitable. The future growth and
profitability of DAHI will be entirely dependent upon DAHI's ability to
successfully complete the development of, obtain regulatory approvals for, and
market or license ANIPRYL-Registered Trademark-. DAHI's management anticipates
that DAHI will incur substantial operating expenses in connection with the
continued development, testing, approvals and marketing of ANIPRYL-Registered
Trademark- and these expenses will result in continuing operating losses until
DAHI is able to achieve adequate revenue levels. There can be no assurance that
DAHI will be able to increase its revenues or achieve profitability.
NEED FOR ADDITIONAL FINANCING. DAHI believes it has sufficient cash to
meet its current needs through December 1996. After that time, DAHI will
require additional funding to complete the regulatory approval process in the
United States for canine Cushing's disease, in the United States and Canada for
canine cognitive dysfunction and in other countries for both applications. DAHI
also will require additional funding to commercialize ANIPRYL-Registered
Trademark- and, eventually, to research, develop, obtain regulatory approval for
and commercialize other companion animal health products. DAHI has considered
several options for obtaining such additional funding but, apart from DAHI's
initial public offering and funding received from Draxis, DAHI has been unable
to attract significant new capital on acceptable terms. Consequently, there can
be no assurance that additional funding will be available to DAHI on acceptable
terms, or at all.
NO ASSURANCE OF REGULATORY APPROVAL. DAHI's clinical trials, as well as
the manufacturing and marketing of ANIPRYL-Registered Trademark-, are subject to
extensive regulation by governmental authorities in the United States and
Canada, including the FDA and the BVD, respectively. Similar regulatory
requirements exist in Europe and in other countries. The process of obtaining
regulatory approvals for any new veterinary drug generally takes a number of
years and requires the expenditure of substantial resources. Once a new drug or
product license application is submitted, there can be no assurance that the
FDA, the BVD or similar regulatory authorities in other jurisdictions will
review or approve the application in a timely manner. In September 1995, the
BVD approved the use of ANIPRYL-Registered Trademark- in treating canine
Cushing's disease in Canada. In May 1996, an application was filed with the BVD
in Canada for the treatment of canine cognitive dysfunction. In October 1995,
DAHI filed its first complete New Animal Drug Application with the FDA for
treating canine Cushing's disease and is currently conducting Phase III
equivalent clinical trials to obtain FDA approval for the use of ANIPRYL-
Registered Trademark- in treating canine cognitive dysfunction.
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Even after an initial approval has been granted, the FDA and BVD may
require DAHI to undertake further studies, including post-marketing studies, to
provide additional data on safety and efficacy. Similarly, the FDA and BVD may
require post-marketing surveillance programs to monitor ANIPRYL-Registered
Trademark-'s side effects. The results of any post-marketing programs may limit
any further marketing of ANIPRYL-Registered Trademark-. Any serious safety or
effectiveness problem involving an approved ANIPRYL-Registered Trademark- may
result in the HPB or BVD requiring DAHI to withdraw ANIPRYL-Registered
Trademark- from the market and could even result in civil proceedings against
DAHI. Failure to comply with applicable regulatory requirements can, among
other things, result in suspension of regulatory approvals, product recalls,
seizure of products, operating restrictions and criminal prosecutions. While
the process of obtaining required regulatory approvals is costly and time
consuming, there can be no assurance that DAHI will be able, for financial
reasons or otherwise, to comply with applicable laws and regulations required to
enable DAHI to manufacture or sell ANIPRYL-Registered Trademark-.
LIMITED PROTECTION AGAINST COMPETITION. Existing law may not afford any
meaningful protection against competition with ANIPRYL-Registered Trademark-.
DAHI's success will depend in part on its ability to obtain and enforce patent
protection for its proprietary technology in Canada, the United States and other
countries. DAHI has obtained several patents in the United States which claim
specific veterinary uses of 1-deprenyl. DAHI has obtained similar patents in
Australia and New Zealand and from the European Patent Office. However, Chinoin
Pharmaceutical and Chemical Works, Co. Ltd.'s ("Chinoin") composition matter
patent on 1-selegiline and Chinoin's product by-process patent in Canada have
expired. The expiration of Chinoin's patents permits generic drug manufacturers
to compete with DAHI, subject to such competitors' compliance with required
regulatory approvals and DAHI's rights in respect of its issued use patents.
Other manufacturers will be free to develop processes to manufacture generic
versions of ANIPRYL-Registered Trademark-, so long as their processes do not
infringe the process patents held by Chinoin.
Additionally, Sanofi, S.A. ("Sanofi") has filed veterinary use patent
applications in Europe disclosing uses of 1-deprenyl. DAHI believes that the
subject matter of Sanofi's patent applications may contain claims that, if
practised, could infringe DAHI's issued European patents. However, there can be
no assurance that Sanofi's patent applications will not issue or whether, if
they issue, they will be dominated by DAHI's patents. Furthermore, DAHI may not
be able to afford the expense of enforcing its proprietary rights or defending
itself against infringement charges asserted by third parties.
In the event that DAHI's intellectual property infringes patents or
proprietary rights of others, DAHI may be required to modify the design of its
intellectual property, change the name of its product or obtain a license to
continue using such product. There can be no assurance that DAHI will be able
to do so in a timely manner. The failure to do any of the foregoing could have
a material adverse effect upon DAHI. DAHI also relies on unpatented trade
secrets, improvements, know how and continuing technological innovation to
develop and maintain its competitive position, which DAHI seeks to protect in
part by confidentiality agreements with third parties. There can be no
assurance that these agreements will not be breached, that DAHI will have
adequate remedies for any breach or that DAHI's trade secrets will not otherwise
become known or be discovered independently by competitors.
UNCERTAINTY OF ANIPRYL-Registered Trademark- DEVELOPMENT. The development
of ANIPRYL-Registered Trademark- for additional indications, if any, has not
been completed and DAHI will be required to invest considerable additional
resources to finalizing such development and obtaining all necessary regulatory
approvals. Satisfactory completion of development, testing, regulatory approval
and attainment of sufficient production levels of ANIPRYL-Registered Trademark-
will be required prior to ANIPRYL-Registered Trademark- being available for
commercial sale. There can be no assurance that ANIPRYL-Registered Trademark-
will be approved by the FDA or other regulatory authorities. Failure to
complete clinical trials, the inability to successfully complete development, or
a determination by DAHI, for financial or other reasons, not to undertake to
complete development of ANIPRYL-Registered Trademark-, could have a material
adverse effect on DAHI.
LIMITED MARKETING CAPABILITY. To date, DAHI has not commenced marketing
any product and has only limited marketing capability. DAHI has not marketed or
distributed ANIPRYL-Registered Trademark- or any other product, except through
its marketing agreement with Draxis in Canada. Moreover, DAHI does not
currently have the financial resources to undertake its own extensive marketing
or advertising activities. In January 1996, DAHI signed an
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agreement with Draxis under which Draxis obtained exclusive Canadian
distribution rights for a 10 year term to market ANIPRYL-Registered Trademark-
for canine Cushing's disease. In May 1994, DAHI entered into an agreement with
Hoechst Veterinae GMBH ("HVG") under which HVG obtained distribution rights for
ANIPRYL-Registered Trademark- in certain European countries. Currently, DAHI
and HVG are renegotiating the return of DAHI's European rights to ANIPRYL-
Registered Trademark- under the 1994 distribution agreement and DAHI is
evaluating other options for registering and distributing ANIPRYL-Registered
Trademark- throughout Europe. DAHI intends to rely on distribution arrangements
with third parties in the U.S. There can be no assurance that DAHI will be able
to enter into marketing and distribution arrangements on terms acceptable to it
or that such arrangements will be successful. There can be no assurance that
DAHI or DAHI's distribution partners will be able to market ANIPRYL-Registered
Trademark- successfully.
NO COMMERCIAL SCALE MANUFACTURING CAPABILITY. DAHI does not own commercial
scale facilities to manufacture ANIPRYL-Registered Trademark- and currently does
not have the financial or other resources required to establish its own
manufacturing facilities. In September 1994, DAHI entered into a manufacturing
agreement with Fermenta Animal Health Company ("FAH"). The manufacturing
agreement provides that FAH will manufacture ANIPRYL-Registered Trademark- for
sale in the United States and Canada. DAHI will be obligated to purchase
annually certain minimum quantities of ANIPRYL-Registered Trademark- from FAH
upon obtaining FDA approval to market ANIPRYL-Registered Trademark- in the
United States and Canada. The agreement permits DAHI to seek additional
manufacturers for ANIPRYL-Registered Trademark- in the United States and Canada,
subject to certain conditions. During 1995, DAHI established a second
manufacturing site to manufacture ANIPRYL-Registered Trademark- for the Canadian
market. To the extent that DAHI arranges with third parties to manufacture
ANIPRYL-Registered Trademark-, the commercial success of ANIPRYL-Registered
Trademark- will depend upon the efforts of those third parties. There can be no
assurance that DAHI or such third parties will be able to manufacture ANIPRYL-
Registered Trademark- profitably on a commercial scale. Applicable government
regulations impose strict "good manufacturing practices" on manufacturers of
veterinary pharmaceutical products. There can be no assurance that DAHI or any
entity manufacturing ANIPRYL-Registered Trademark- on behalf of DAHI will be
able to comply with good manufacturing practices or satisfy other applicable
regulating requirements. Any failure or delay by a manufacturer to comply with
such requirements could have a material adverse effect on DAHI. FAH was sold in
late 1995, and DAHI and FAH have mutually agreed to terminate the manufacturing
agreement, and thereafter DAHI will seek an alternate manufacturing partner.
PRODUCT LIABILITY EXPOSURE. The use and sale of ANIPRYL-Registered
Trademark- may expose DAHI to liability claims resulting from the use of
ANIPRYL-Registered Trademark-. These claims might be made directly by owners of
companion animals, veterinarians or other persons. While DAHI currently has
product liability insurance, no assurance can be given that DAHI will be able to
maintain insurance coverage at a reasonable cost or in sufficient amounts to
protect DAHI against losses to product liability. A successful product
liability claim or a series of successful claims brought against DAHI could have
a material adverse effect on its business, financial condition or results of
operations.
UNCERTAINTY OF MARKET ACCEPTANCE. There can be no assurance that ANIPRYL-
Registered Trademark- will achieve market acceptance in the United States,
Canada or elsewhere. The degree of market acceptance will depend upon a number
of factors, including the receipt of regulatory approvals, the establishment and
demonstration in the animal health community of the clinical efficacy and safety
of ANIPRYL-Registered Trademark- in treating targeted indications and the
success of marketing activities made by or on behalf of DAHI. There can be no
assurance that veterinarians or other participants in the animal health
community will accept, use or recommend the use of ANIPRYL-Registered
Trademark-. Draxis launched ANIPRYL-Registered Trademark- in Canada in April
1996.
COMPETITION. The animal health marketplace is served by veterinary,
agricultural or animal health divisions of several large international
pharmaceutical and chemical companies. Those companies have available
financial and other resources which far exceed those of DAHI. In addition,
many of these competitors have significantly greater experience than DAHI in
undertaking research, pre-clinical studies, obtaining regulatory approvals
and manufacturing and marketing veterinary pharmaceutical products. While
DAHI is not aware of any FDA or BVD approved product which competes with
ANIPRYL-Registered Trademark-, there can be no assurance that existing
products or new products developed by DAHI's competitors will not be more
effective or be more effectively marketed and sold than ANIPRYL-Registered
Trademark-. Competitive products may render ANIPRYL-Registered Trademark-
obsolete and non-competitive prior
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to the recovery of research, development, marketing and commercialization
expenses incurred by DAHI with respect to ANIPRYL-Registered Trademark-.
SUPPLY OF 1-DEPRENYL. DAHI's primary supplier of 1-deprenyl is Chinoin.
DAHI purchases its supply of 1-deprenyl from Chinoin under a supply agreement
dated October 1, 1990. The agreement expires in November 2003, or earlier upon
the occurrence of a force majeure or certain other stated events. DAHI has
submitted data to the FDA and BVD to qualify an alternative source of supply of
1-deprenyl, and has received regulatory approval in both Canada and the U.S. for
this second source of active ingredient. Failure to maintain an adequate supply
of 1-deprenyl would have a material adverse effect on DAHI.
DILUTION OF DRAXIS COMMON STOCK. If the Draxis Shareholders approve the
Draxis Common Stock Offering and the DAHI Shareholders approve the Share
Exchange, Draxis will issue and DPI will deliver approximately 5.8 million
shares of Draxis Common Stock to the DAHI Shareholders, other than Dissenting
Shareholders, DPI or Draxis LLC. Such issue of Draxis Common Stock, will
represent approximately 25% of the number of shares of Draxis Common Stock
currently outstanding. To the extent that the business of DAHI does not perform
as expected or to the extent that the Exchange Ratio overvalued the value of
DAHI Common Stock or undervalued the value of Draxis Common Stock, dilution to
the Draxis Shareholders will occur.
REINCORPORATION MERGER
The independent members of the Board of Directors of DAHI Missouri have
unanimously approved, subject to shareholder approval, a change in DAHI
Missouri's state of incorporation from Missouri to Louisiana (the
"Reincorporation Merger") which will be effected by merging DAHI Missouri into
DAHI Louisiana, a wholly-owned subsidiary of DAHI Missouri which is a Louisiana
corporation (the "Reincorporation Merger"). The Reincorporation Merger is
necessary for DAHI Missouri to have available to it the provisions of the
Louisiana Act which permit mandatory shares exchanges. For U.S. federal income
tax purposes, it is intended that the Reincorporation Merger will constitute a
tax free reorganization for DAHI Shareholders holding such shares as capital
assets, other than Dissenting Shareholders. For Canadian federal income tax
purposes, subject to the qualifications noted elsewhere herein, the
Reincorporation Merger should not result in a taxable capital gain or allowable
capital loss for Canadian resident holders of DAHI Common Stock holding such
shares as capital property, other than Dissenting Shareholders. However, if
approval of the Reincorporation Merger is followed by approval of the Share
Exchange Plan, such Canadian resident holders WILL recognize a taxable capital
gain or an allowable capital loss. See "Share Exchange Plan - Canadian Federal
Income Tax Consequences of the Share Exchange Plan".
The Reincorporation Merger is conditional on the Share Exchange Plan, the
Draxis Common Stock Offering and the Draxis Stock Option Plan Adjustment being
approved and all other conditions of the Exchange Agreement being satisfied or
waived.
If the Reincorporation Merger, the Share Exchange Plan, the Draxis Common
Stock Offering and the Draxis Stock Option Plan Adjustment are approved, DAHI
Missouri will first merge into DAHI Louisiana and will then consummate the Share
Exchange. However, a vote for the Reincorporation Merger is not a vote for the
Share Exchange Plan and the Share Exchange will not be completed unless the
Share Exchange Plan is approved by the required shareholder vote at the DAHI
Louisiana Special Meeting and the Draxis Common Stock Offering and the Draxis
Stock Option Plan Adjustment are approved by the Draxis Shareholders at the
Draxis Special Meeting.
GENERAL
The Reincorporation Merger will be effected by a merger of DAHI Missouri
with and into its wholly-owned subsidiary, DAHI Louisiana, pursuant to the Plan
of Merger in substantially the form attached to this Joint Management Proxy
Statement-Prospectus as Appendix D. Upon the effectiveness of the
Reincorporation Merger, (i) the legal existence of DAHI Missouri as a separate
corporation will cease, (ii) DAHI Louisiana, as the surviving corporation, will
succeed to the assets and assume the liabilities of DAHI Missouri, and (iii)
each
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outstanding share of DAHI Missouri Common Stock will be converted by operation
of law into one share of common stock, no par value, of DAHI Louisiana and all
DAHI Missouri Shareholders shall become shareholders of DAHI Louisiana (subject
to the exercise of dissenters' rights, if any, by a DAHI Missouri Shareholder
pursuant to the applicable provisions of the Missouri Act). Each outstanding
certificate representing a share or shares of DAHI Missouri Common Stock will
continue to represent the same number of shares of DAHI Louisiana Common Stock.
Similarly, options to purchase shares of DAHI Missouri Common Stock will
continue to represent options to purchase the same number of shares of DAHI
Louisiana Common Stock. IT WILL NOT BE NECESSARY FOR SHAREHOLDERS OF DAHI
MISSOURI TO EXCHANGE THEIR EXISTING STOCK CERTIFICATES FOR STOCK CERTIFICATES OF
DAHI LOUISIANA. The delivery of existing DAHI Missouri Common Stock will
constitute "good delivery" of shares of DAHI Louisiana Common Stock in
transactions subsequent to the Reincorporation Merger, including in connection
with the Share Exchange.
Implementation of the Reincorporation Merger will effect a change in the
legal domicile of DAHI Missouri and certain other changes of a legal nature, but
will NOT result in a change in the business, management, location of the
principal executive office, capitalization, or assets, liabilities or net worth
of DAHI Missouri (other than those changes due to the costs of the transaction).
It is anticipated that the Reincorporation Merger will become effective as soon
as practicable following DAHI Missouri Shareholder approval, subject to the
approval but prior to the consummation of the Share Exchange Plan.
The discussion contained herein is qualified in its entirety by, and should
be read in conjunction with, the Plan of Merger, the Articles of Incorporation
of DAHI Louisiana and the By-laws of DAHI Louisiana, copies of which are
attached to this Joint Management Proxy Statement-Prospectus as Appendices D, H
and I, respectively.
THE ARTICLES OF INCORPORATION AND BYLAWS OF DAHI LOUISIANA
The Articles of Incorporation and By-laws of DAHI Louisiana are identical
to the Articles of Incorporation and By-laws of DAHI Missouri in all material
respects. Although the Reincorporation Merger will not occur unless the Share
Exchange is also consummated and, therefore, DAHI Missouri Shareholders will
only hold shares in DAHI Louisiana for a short period of time (until they are
exchanged for shares of Draxis Common Stock), such holders may hold up to 20% of
the common shares of Draxis, whose largest subsidiary will be DAHI Louisiana.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION MERGER
The following summary, based upon current law, is a general discussion of
certain federal income tax consequences of the Reincorporation Merger to DAHI
Louisiana, DAHI Missouri and holders of DAHI Common Stock assuming the
Reincorporation Merger is consummated as contemplated herein. This summary is
based upon the Internal Revenue Code of 1986, as amended (the "Code"),
applicable U.S. Treasury regulations thereunder and administrative rulings and
judicial authority as of the date hereof, all of which are subject to change,
possibly with retroactive effect. Any such change could affect the continuing
validity of this summary. This summary applies to holders of DAHI Common Stock
who hold their DAHI Common Stock as capital assets. This summary does not
discuss all aspects of income taxation that may be relevant to a particular
holder of DAHI Common Stock in light of such holder's specific circumstances or
to certain types of holders subject to special treatment under the federal
income tax laws (for example, foreign persons, dealers in securities, banks and
other financial institutions, insurance companies, tax-exempt organizations, and
holders who acquire DAHI Common Stock pursuant to the exercise of options or
otherwise as compensation or through a tax-qualified retirement plan), and it
does not discuss any aspect of state, local, foreign or other tax laws (but see
"Canadian Federal Income Tax Consequences of the Reincorporation Merger").
No ruling has been (or will be) sought from the Internal Revenue Service as
to the anticipated tax consequences of the Reincorporation Merger. HOLDERS OF
DAHI COMMON STOCK SHOULD CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE
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REINCORPORATION MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL,
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS IN THEIR PARTICULAR
CIRCUMSTANCES.
The Reincorporation Merger. The discussion set forth below regarding the
Reincorporation Merger, pursuant to which DAHI Missouri will merge into DAHI
Louisiana and the DAHI Missouri Common Stock of non-dissenting DAHI Missouri
Shareholders will be converted to shares of DAHI Louisiana Common Stock, is
based upon the assumption that there will be a significant continuing equity
interest in DAHI Louisiana (and in Draxis following the Share Exchange - See
"Share Exchange Plan") by the historic shareholders of DAHI Missouri and DAHI
Missouri believes that the Reincorporation Merger will constitute a
reorganization for federal income tax purposes within the meaning of Section
368(a) of the Code. As a reorganization, the Reincorporation Merger will result
in the following general federal income tax consequences:
1. Neither DAHI Missouri nor DAHI Louisiana will recognize any gain or
loss as a result of the Reincorporation Merger.
2. No gain or loss will be recognized by DAHI Missouri Shareholders whose
DAHI Missouri Common Stock is converted into DAHI Louisiana Common Stock.
3. Each holder's aggregate tax basis in the DAHI Louisiana Common Stock
received in the Reincorporation Merger will equal his aggregate tax basis in the
DAHI Missouri Common Stock exchanged therefor.
4. Provided that the DAHI Missouri Common Stock is held as a capital
asset at the Effective Time, the holding period of DAHI Louisiana Common Stock
received in the Reincorporation Merger in exchange therefor will include the
prior holding period of such DAHI Missouri Common Stock.
Federal Income Tax Consequences Regarding Dissenters. The payment of cash
to a holder of DAHI Common Stock who exercises dissenters' rights under the
Missouri Act with respect to such stock will result in a taxable transaction to
the Dissenting Shareholder. See "Reincorporation Merger - Dissenters' Rights".
Such payment will be treated as a distribution in redemption of the DAHI
Missouri Common Stock with respect to which dissenters' rights were exercised
and perfected, the consequence of which will be determined in accordance with
Section 302 of the Code.
In the event any DAHI Missouri Shareholders dissent to the Reincorporation
Merger, it will be a condition to the tax opinions of Wilson, Sonsini, Goodrich
& Rosati and Gardner, Carton & Douglas (including the opinions described in
"Share Exchange Plan - U.S. Federal Income Tax Consequences of the Share
Exchange Plan) that all payments made to Dissenting Shareholders be made by DAHI
out of its assets, and not directly or indirectly by Draxis or DPI. If any
payments are made by Draxis or DPI, directly or indirectly, to any Dissenting
Shareholders, the Reincorporation Merger could be treated, if viewed together
with the Share Exchange as an integrated transaction, as a fully taxable
transaction to all shareholders, and the tax effects described above may not
apply.
To prevent "backup withholding" of federal income tax on any payments of
cash to a Dissenting Shareholder, such Dissenting Shareholder must, unless an
exception applies under the applicable law and regulations, provide the payor of
such cash with such Dissenting Shareholder's correct taxpayer identification
number ("TIN") on a Substitute Form W-9 and certify under penalties of perjury
that such number is correct and that such holder is not subject to backup
withholding. A Substitute Form W-9 will be provided to each holder of DAHI
Common Stock in the letter of transmittal to be mailed to each holder after the
Effective Time. If the correct TIN and certifications are not provided, a
U.S.$50 penalty may be imposed on a holder of DAHI Common Stock by the Internal
Revenue Service, and any cash received by such holder may be subject to backup
withholding at a rate of 31%.
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND IS BASED ON EXISTING LAW AS OF THE DATE OF THIS
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JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS. SHAREHOLDERS OF DAHI MISSOURI ARE
URGED TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES
TO THEM OF THE REINCORPORATION MERGER (INCLUDING THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS).
CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION MERGER
General
The following summary describes generally the principal Canadian federal
income tax consequences of the Reincorporation Merger for Canadian holders (as
defined below) of DAHI Missouri Common Stock assuming that the Reincorporation
Merger is consummated as contemplated herein.
This summary is of a general nature only and is not intended to be, and
should not be construed to be, legal or tax advice to any holder of DAHI
Missouri Common Stock and no representation is made with respect to Canadian
federal income tax consequences to any such holder. This summary assumes that
the DAHI Missouri Common Stock held by each Canadian holder thereof is held as a
capital asset and does not take account of rules that may apply to Canadian
holders of DAHI Missouri Common Stock that are subject to special treatment
under the INCOME TAX ACT (Canada) (the "Act") (including, without limitation,
insurance companies, dealers in securities, certain retirement plans, financial
institutions, tax exempt organizations and holders who are not Canadian holders
(as defined below). No ruling has been or will be sought from Revenue Canada
Taxation, as to the tax consequences of the Reincorporation Merger.
ACCORDINGLY, HOLDERS OF DAHI MISSOURI COMMON STOCK SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THEIR INDIVIDUAL CIRCUMSTANCES.
This discussion is based upon the current provisions of the Act, the
regulations adopted thereunder in force on August 31, 1996, all specific
proposals to amend the Act and regulations publicly announced by the Minister of
Finance (Canada) prior to August 31, 1996 and on the understanding of counsel of
the current administrative and assessing practices of and published by Revenue
Canada, Customs, Excise and Taxation as they exist as of August 31, 1996. This
summary is not exhaustive of all possible Canadian federal income tax
considerations and except as mentioned above does not take into account or
anticipate any prospective changes in tax law, whether by legislative,
governmental or judicial action, and does not take into account provincial,
territorial or foreign tax consequences which may differ significantly from
those described herein.
AS USED IN THIS SECTION, A CANADIAN HOLDER OF DAHI MISSOURI COMMON STOCK
MEANS A SHAREHOLDER THAT IS A RESIDENT OF CANADA FOR THE PURPOSES OF THE ACT AND
THE CURRENT PROVISIONS OF THE CANADA-UNITED STATES INCOME TAX CONVENTION (1980)
AS AMENDED BY THE PROTOCOLS SIGNED ON JUNE 14, 1983, MARCH 28, 1994 AND
MARCH 17, 1995 (THE "TREATY") AND HAS ALWAYS BEEN SO RESIDENT.
Taxation Consequences
The Reincorporation Merger. The discussion set forth below regarding the
Reincorporation Merger is based upon the assumption that the Reincorporation
Merger takes place in accordance with the terms of the Plan of Merger (see
Appendix D) and that substantially all of DAHI Missouri Shareholders will have
their shares converted to shares of DAHI Louisiana Common Stock.
No capital gain or loss should be recognized under the Act by a NON-
DISSENTING Canadian holder of DAHI Missouri Common Stock as a result of the
Reincorporation Merger unless the Canadian holder otherwise elects in its return
of income for the taxation year in which the Reincorporation Merger takes place.
A NON-DISSENTING Canadian holder will be deemed under the Act to have
disposed of its DAHI Missouri Common Stock for proceeds equal to their adjusted
cost base (as defined by the Act) immediately before the Reincorporation Merger.
Similarly, the shares of DAHI Louisiana Common Stock acquired by such
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holder on the Reincorporation Merger will generally be deemed under the Act to
have been acquired at a cost equal to the adjusted cost base of such holder's
DAHI Missouri Common Stock.
Canadian Federal Tax Consequences Regarding Dissenters. The payment of
cash to a Canadian holder of DAHI Common Stock who exercises dissenters' rights
under the Missouri Act with respect to such stock will result in a taxable
transaction to such a Canadian holder of DAHI Common Stock. Such a Canadian
holder will recognize either a taxable capital gain or an allowable capital loss
(as defined by the Act) equal to seventy-five percent of the difference between
the cash received by the Canadian holder for such holder's DAHI Common Stock and
the holder's adjusted cost base (as defined by the Act) of the DAHI Common Stock
sold for cash. Any taxable capital gain realized will be subject to Canadian
personal or corporate income tax rates. In the event an allowable capital loss
is realized such a loss may be deducted by a Canadian holder in computing income
for the year of disposition or the three preceding or any subsequent taxation
years (subject to and in accordance with and subject to the rules contained in
the Act) but only to the extent of taxable capital gains realized in those
years. A holder that is a Canadian-controlled private corporation may be liable
to pay an additional refundable tax of 6-2/3% in respect of taxable capital
gains. The full amount of capital gains must be included in an individual
holder's adjusted taxable income for the purpose of computing such holder's
liability under the Act for alternative minimum tax.
Article XIII of the Treaty will normally apply to exempt a Canadian holder
from U.S. capital gains tax provided the value of the DAHI Missouri Common Stock
is not at the time of the Reincorporation Merger derived principally from real
property or interests therein situated in the United States and provided the
holder does not have and has not had within 12 months preceding the
Reincorporation Merger a permanent establishment or fixed base available to such
holder in the United States of which such stock was part or to which such stock
pertains.
DISSENTERS' RIGHTS
If the Reincorporation Merger is approved by the vote of two-thirds of the
DAHI Missouri Shareholders entitled to vote at the meeting and is not abandoned
or terminated, any holder of DAHI Common Stock may, by complying with the
provisions of Section 351.455 of the Missouri Act and subject to the limitations
specified below, require DAHI to purchase, at their fair value, the shares of
DAHI Common Stock owned by such DAHI Shareholder. The fair value shall be
determined as of the day before the vote on the Reincorporation Merger is taken.
A dissenting shareholder (a "Dissenting Shareholder") wishing to require
DAHI to purchase his or her shares of DAHI Common Stock ("Dissenting Shares")
must:
1. Prior to or at the meeting at which the vote on the Reincorporation Merger
will be taken, file a written objection to the Reincorporation Merger; and
2. Not vote in favour of the Reincorporation Merger at the shareholder's
meeting; and
3. Make demand on DAHI, within twenty (20) days after the Reincorporation
Merger is effected, for payment of the "fair value" of said shares as of
the day prior to the date on which the vote on the Reincorporation Merger
was taken.
Compliance with clauses 1, 2 and 3 above will "perfect" a shareholder's
rights as a Dissenting Shareholder. Neither a vote against approval of the
Reincorporation Merger nor the giving of a proxy directing a negative vote will
be sufficient to constitute the written notice of intent described in clause 1
above or the demand described in clause 3 above. A proxy which fails to include
instructions with respect to approval of the Reincorporation Merger will be
voted in favour of the Reincorporation Merger. Accordingly, shares covered by
such Proxy would not be Dissenting Shares.
After "perfecting" a shareholder's right as a Dissenting Shareholder, a
shareholder must:
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1. Within thirty (30) days after the date on which Reincorporation Merger was
effected agree upon the "fair value" of Dissenting Shares with DAHI, in
which case DAHI must pay the fair value for the Dissenting Shares to the
Dissenting Shareholder within ninety (90) days after the date on which the
Reincorporation Merger is effected; or
2. If within such thirty (30) day period following the Reincorporation Merger
being effected, the Dissenting Shareholder and DAHI do not agree as to the
"fair value" of the Dissenting Shareholder's shares, the Dissenting
Shareholder must, within sixty (60) days after the expiration of such
thirty (30) day period, file a Petition in the Circuit Court of Jackson
County, Missouri, asking for a finding and determination of the "fair
value" of the Dissenting Shareholder's Dissenting Shares. If the
Dissenting Shareholder elects this process, the Dissenting Shareholder
shall be entitled to judgment against DAHI for the amount of the "fair
value" of such shares, as of the day prior to the date on which the
Reincorporation Merger was approved, together with interest thereon to the
date of judgment, as determined by the Court. If the Dissenting
Shareholder fails to file the Petition in the Circuit Court of Jackson
County, Missouri, within such time limit, the Dissenting Shareholder shall
be deemed to have voted in favour of the Reincorporation Merger and shall
be bound to the terms thereof.
If the Dissenting Shareholder complies with the provisions of either clause
1 or 2 above, then upon payment by DAHI of the agreed "fair value" or the
"fair value" as determined by the Court, such Dissenting Shareholder shall
surrender his certificates in exchange for such payment, in which case, the
Dissenting Shareholder shall have no further interest in the shares of
DAHI.
The foregoing summary does not purport to be a complete statement of
dissenter's rights or provisions of the Missouri Act, and is qualified in
its entirety by reference to Sections 351.455 and 351.458 of the Missouri
Act regarding mergers and dissenter's rights, a copy of which is attached
to this Joint Management Proxy Statement-Prospectus as Appendix G.
VOTE REQUIRED
The affirmative vote of the holders of two-thirds of the outstanding shares
of DAHI Missouri Common Stock entitled to vote at the DAHI Missouri Special
Meeting is required for approval of the Reincorporation Merger, including
approval of the Plan of Merger. In addition, Draxis and DAHI have agreed not to
proceed unless holders of DAHI Common Stock, other than Draxis or its
affiliates, who are present in person or by proxy at the DAHI Missouri Special
Meeting, also approve the Reincorporation Merger by simple majority vote. The
officers and directors of DAHI Missouri and Draxis, owning beneficially an
aggregate of approximately 8.56% of the outstanding DAHI Missouri Common Stock,
have indicated that they intend to vote in favour of the Reincorporation Merger.
Abstentions and broker non-votes will be included in the total number of shares
of DAHI Common Stock outstanding, of which an affirmative vote of two-thirds is
required for approval of the Reincorporation Merger.
THE BOARD OF DIRECTORS OF DAHI MISSOURI HAS APPROVED THE REINCORPORATION
MERGER BY UNANIMOUS VOTE OF ALL INDEPENDENT DIRECTORS INCLUDING AN INDEPENDENT
COMMITTEE THEREOF AND SUCH DIRECTORS UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS
VOTE "FOR" THE APPROVAL OF THE REINCORPORATION MERGER. PROXIES SOLICITED BY
DAHI WILL BE VOTED TO APPROVE THE REINCORPORATION MERGER UNLESS SHAREHOLDERS
SPECIFY IN THEIR PROXIES A CONTRARY CHOICE.
SHARE EXCHANGE PLAN
GENERAL
On July 25, 1996, DAHI Missouri, Draxis and DPI entered into the Exchange
Agreement, which sets forth the terms and conditions upon which the
Reincorporation Merger, the Share Exchange, the Draxis
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Common Stock Offering and the Draxis Stock Option Plan Adjustment are to be
effected and certain representations, warranties and covenants relating to the
Share Exchange.
The Boards of Directors of Draxis, DPI and DAHI Missouri have each duly
approved the Exchange Agreement. All references to the Share Exchange and the
terms and conditions thereof in this Joint Management Proxy Statement-Prospectus
are qualified by reference to the full text of the Exchange Agreement.
EXCHANGE AGREEMENT
The Exchange Agreement provides that DAHI will seek approval of its
shareholders in accordance with the Missouri Act and the Louisiana Act to merge
DAHI Missouri into DAHI Louisiana, a newly formed Louisiana corporation, and,
subject to approval by the DAHI Missouri Shareholders of the Reincorporation
Merger, to approve and adopt the Plan of Share Exchange attached as Exhibit E to
this Joint Management Proxy Statement-Prospectus. The Share Exchange Plan
provides for the mandatory exchange of each share of DAHI Common Stock, other
than shares as to which dissenters' rights shall have been properly demanded and
shares held by Draxis or its affiliates, for 1.35 shares of Draxis Common Stock
(the "Exchange Ratio"). No fractional shares of Draxis Common Stock shall be
issued in the Share Exchange. The Exchange Agreement provides that, in lieu of
any fractional shares, each DAHI Shareholder who would otherwise be entitled to
receive a fraction of a share will be entitled to receive a cash payment
(without interest) determined by multiplying (i) the fractional interest to
which such holder would otherwise be entitled and (ii) the average of the per
share closing prices for Draxis Common Stock quoted on Nasdaq for the five
trading days immediately preceding the Effective Time. The Exchange Agreement
also provides that existing options to acquire shares of DAHI Common Stock will
be exchanged for options to acquire shares of Draxis Common Stock ("New
Options") at the Exchange Ratio. The exercise price per share of Draxis Common
Stock under the New Options shall be equal to the exercise price per share of
DAHI Common Stock under the original option divided by the Exchange Ratio,
rounded up to the nearest cent. On and after the Effective Time, each New
Option shall be exercisable and shall vest upon the same terms and conditions as
were applicable to the related option to acquire shares of DAHI Common Stock;
provided, however, that such DAHI options held by those directors of DAHI who
will cease to be directors of DAHI and who are neither directors of Draxis nor
employees of DAHI or Draxis after the consummation of the Share Exchange shall
be accelerated so that they vest immediately upon the mailing of this Joint
Management Proxy Statement-Prospectus. In order to give effect to the New
Options, it will be necessary to adjust the Draxis Stock Option Plan to provide
that the maximum number of shares of Draxis Common Stock that may be issued
under the Plan be increased from 2,500,000 to 4,500,000. The Exchange Agreement
also provides for dissenters' rights in connection with the Reincorporation
Merger in favour of the DAHI Missouri Shareholders pursuant to the applicable
provisions of the Missouri Act. See "Reincorporation Merger - Dissenters'
Rights" and "Share Exchange Plan - Dissenters' Rights".
The Exchange Agreement also provides that Draxis will seek approval of the
Draxis Shareholders in respect of the Draxis Common Stock Offering and the
Draxis Stock Option Plan Adjustment and in that regard will enter into an
agreement (the "Share Delivery Agreement") with DPI, whereby Draxis will agree
to deliver to Draxis' duly appointed transfer agent shares of Draxis Common
Stock sufficient to enable DPI to consummate the Share Exchange.
Representations, Warranties and Covenants
The Exchange Agreement contains a number of customary representations,
warranties and covenants of the parties thereto with respect to, among other
things, corporate organization, capitalization, authority, consents and
approvals, reports and financial statements, litigation, taxes, intellectual
property, and employee benefit plans.
Both DAHI Missouri and Draxis have covenanted to conduct their respective
businesses only in the ordinary and usual course consistent with their
respective past practices pending the consummation of the Share Exchange and to
use reasonable best efforts to preserve intact their respective business
organizations as of the date of the Exchange Agreement, keep available services
of their respective officers and key employees as of the date of the Exchange
Agreement, and preserve the goodwill of those having business relationships with
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them. DAHI Missouri has further covenanted, except with the consent of Draxis,
not to hire any person to any position within DAHI or as a consultant to DAHI
whose total annual compensation would exceed U.S.$100,000, amend its
organizational documents, effect any split, combination or reclassification of
any shares of DAHI Missouri Common Stock, declare, set aside or pay any dividend
or other distribution in respect of DAHI Missouri Common Stock or indirectly
redeem or otherwise acquire any shares of DAHI Missouri Common Stock. DAHI
Missouri has also covenanted, among other things, not to (a) authorize for
issuance, issue or sell, among other things, any shares of or rights or
securities convertible into any shares of DAHI Missouri Common Stock except
certain options allowable by the Exchange Agreement, and except for the issuance
of shares of DAHI Common Stock upon exercise of DAHI options or warrants
outstanding as of the date of the Exchange Agreement, (b) merge or consolidate
with another entity (other than certain transactions pending as of the date of
the Exchange Agreement), (c) acquire or purchase an equity interest in or a
substantial portion of the assets of another entity or otherwise acquire any
assets or enter into any material contract, commitment or transaction outside
the ordinary and usual course of business consistent with past practice; (d)
sell, lease, license, waive, transfer, encumber or otherwise dispose of any of
its assets outside the ordinary and usual course of business and consistent with
past practice; (e) incur, assume or prepay any material indebtedness or any
other material liabilities other than in the ordinary course of business and
consistent with past practices; (f) become liable or responsible for the
obligations of any other person except in the ordinary course of business and
consistent with past practice; (g) make any loans, advances or capital
contributions to, or investments in, any other person; (h) authorize or make
capital expenditures materially in excess of amounts budgeted therefor; (i)
permit any insurance policy to be cancelled or terminated other than in the
ordinary course of business; (j) settle or compromise any litigation; (k) enter
into any contract, agreement, commitment or arrangement with respect to (a)
through (j). Subject to certain conditions, DAHI has also covenanted not to
allow its assets to diminish or its liabilities to increase if such diminution
or increase would result in DAHI not being able to make the required dissenters'
rights payments out of DAHI's own resources. Draxis has similarly covenanted,
among other things, not to declare, set aside or pay any dividend or make any
other distribution, and not to split, combine or reclassify any shares of Draxis
Common Stock. All of Draxis, DPI and DAHI Missouri have covenanted not to
knowingly take any action which would jeopardize qualification of the Share
Exchange as a "reorganization" within the meaning of Section 368(a) of the Code
or which would result in the transfer of the DAHI Common Stock in the Share
Exchange being treated as a disposition by Draxis under the INCOME TAX ACT
(Canada).
Limitation on Solicitation and Negotiation
As a result of executing the Exchange Agreement, DAHI Missouri is required
not to engage in or to immediately terminate any discussions with any third
parties concerning an Alternative Acquisition (as defined below). From and
after the date of the Exchange Agreement until the earlier of the Effective Time
or the termination of the Exchange Agreement, DAHI may not, directly or
indirectly, (a) solicit, engage in discussions or negotiate with any person or
take any other action intended or designed to facilitate the efforts of any
person, other than Draxis, relating to an Alternative Acquisition or (b) provide
information with respect to DAHI to, or enter into an agreement with, any person
with respect to, or make or authorize any statement, recommendation or
solicitation in support of, any possible Alternative Acquisition by any person,
other than Draxis.
Notwithstanding the foregoing, the Board of Directors of DAHI may furnish
information concerning DAHI and its business, properties and assets to any third
party or negotiate with such third party concerning an Alternative Acquisition
provided that all of the following events shall have occurred: (a) such a third
party has made a written proposal to the DAHI Missouri Board of Directors to
consummate an Alternative Acquisition, which proposal identifies a price or
range of values to be paid for outstanding securities or substantially all of
the assets of DAHI Missouri, and if consummated, based on the advice of DAHI
Missouri's investment bankers, the DAHI Missouri Board of Directors has
determined is financially more favourable to the DAHI Missouri Shareholders than
the terms of the Share Exchange (a "Superior Proposal"); (b) the DAHI Board of
Directors has determined, based on the advice of its investment bankers, that
such third party is financially capable of consummating such Superior Proposal;
(c) the DAHI Board of Directors shall have determined, after consultation with
its outside legal counsel, that the fiduciary duties of the DAHI Board of
Directors require DAHI to furnish information to and negotiate with such third
party; and (d) Draxis shall have been notified in
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writing of such Superior Proposal, including all of its terms and conditions,
and shall have been given copies of such proposal. Notwithstanding the
foregoing, DAHI may not provide any non-public information to such third party
unless (a) DAHI has prior to the date hereof provided such information to
Draxis' representative; (b) DAHI has notified Draxis in advance of any such
proposed disclosure of non-public information to any such third party, with a
description of the information proposed to be disclosed; and (c) DAHI provides
such non-public information pursuant to a non-disclosure agreement with terms
which are at least as restrictive as the non-disclosure agreement between DAHI
and Draxis. An Alternative Acquisition is defined in the Exchange Agreement as
any acquisition, or proposed acquisition, of DAHI Missouri (whether by way of
merger, purchase of capital stock, purchase of assets or otherwise) or any
material portion of its stock or assets including by way of a distribution or
marketing agreement. Furthermore, DAHI Missouri shall not accept or enter into
any agreement concerning an Alternative Acquisition for a period of not less
than 48 hours after Draxis' receipt of a copy of such proposal of an Alternative
Acquisition. Thereafter, DAHI shall be entitled (a) not to recommend or change
its recommendation concerning the Mandatory Share Exchange; and (b) to enter
into an agreement with such third party concerning an Alternative Acquisition,
provided that DAHI shall immediately make payment in full to Draxis of the
termination fee. See "Termination and Fees".
Conditions to Consummation of the Share Exchange
The respective obligations of each party to the Exchange Agreement to
implement the Share Exchange by filing Articles of Share Exchange shall be
subject to the satisfaction at or prior to the Effective Time of a number of
conditions precedent including, without limitation, the approval by the DAHI
Shareholders of the Reincorporation Merger and the Share Exchange Plan and the
Exchange Agreement and the transactions contemplated thereby and by the Draxis
Shareholders of the Draxis Common Stock Offering and the Draxis Stock Option
Plan Adjustment and the consummation of the Reincorporation Merger; a
Registration Statement shall have become effective under the Securities Act and
shall not be the subject of any stop order or proceeding by the SEC seeking a
stop order and the necessary exemptions obtained in Canada to permit the
distribution to DAHI Shareholders of shares of Draxis Common Stock without the
need for Draxis to file a prospectus in Canada and to permit such issued shares
to be freely trading shares within Canada; no governmental entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
order which is in effect and which materially restricts, prevents or prohibits
consummation of the Share Exchange or any transaction contemplated by the
Exchange Agreement; all material authorizations, consents, waivers, orders or
approvals of, or declarations or filings with, or expirations of waiting periods
imposed by, any governmental entity shall have been obtained, been filed or have
occurred; DPI will, as of the Effective Time, have acquired, pursuant to the
Share Exchange and/or its share subscription right as described below, at least
80% of the DAHI Common Stock issued and outstanding immediately following the
Share Exchange.
Each party's obligations under the Exchange Agreement are also conditioned
upon (a) the accuracy in all material respects of the representations and
warranties made by the other party as of the date of execution of the Exchange
Agreement and as of the Effective Time and the aggregate effect of all
inaccuracies would not have a material adverse affect; (b) the performance in
all material respects by the other party of its covenants; and (c) the receipt
by each party of opinions from their respective U.S. tax counsel with respect to
the characterization of the Share Exchange as a "reorganization" within the
meaning of Section 368(a)(1)(B) of the Code for U.S. federal income tax
purposes. Draxis and DPI's obligations under the Exchange Agreement are further
conditioned on the receipt by Draxis of the Affiliate Letters (as described
below) from each of the affiliates of DAHI, as such term is used in paragraphs
(c) and (d) of Rule 145 under the Securities Act. See "Affiliate Letters".
Termination and Fees
The Exchange Agreement may be terminated in any of the following
circumstances: at any time prior to the Effective Time by mutual consent of the
parties thereto; by any of Draxis, DPI or DAHI Missouri if the Share Exchange
shall not have been consummated before January 31, 1997 (subject to certain
conditions); if a permanent injunction or action by any governmental entity
preventing the consummation of the Share Exchange shall have become final and
non-appealable; if there has been a breach of any representations or warranties
of any party thereto, which would have a material adverse effect on such party
by any party; if there has been a
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breach in any material respect in any of the covenants or agreements set forth
therein, which breach is not curable or is not cured within 30 days after
written notice of such breach; by Draxis or DPI if DAHI Missouri withdraws or
modifies, in a manner adverse to Draxis and DPI, its recommendation or approval
of the Exchange Agreement, the Reincorporation Merger, the Share Exchange or the
Share Exchange Plan or makes any recommendation with respect to an Alternative
Acquisition other than a recommendation to reject such Alternative Acquisition;
by DAHI if Draxis withdraws or modifies, in a manner adverse to DAHI, its
recommendation or approval of the Exchange Agreement, the Share Exchange or the
Share Exchange Plan; or by DAHI if termination is necessary to allow DAHI to
enter into an agreement with respect to a Superior Proposal.
If Draxis or DPI terminates the Exchange Agreement because there has been a
breach of any material representation or warranty of DAHI Missouri or there has
been a breach in any material respect of any of the covenants or agreements set
forth in the Exchange Agreement on the part of DAHI Missouri, then DAHI Missouri
is responsible to reimburse Draxis and DPI for all out-of-pocket expenses, up to
an aggregate amount of U.S.$750,000, incurred in connection with the
transactions contemplated therein. Similarly, if DAHI Missouri terminates the
Exchange Agreement because there has been a breach of any material
representation or warranty of Draxis or DPI or there has been a breach in any
material respect of any of the covenants or agreements set forth in the Exchange
Agreement on the part of Draxis or DPI, then Draxis is responsible to reimburse
DAHI Missouri for all out-of-pocket expenses, up to an amount of U.S.$750,000,
incurred in connection with the transactions contemplated therein.
Should DAHI Missouri withdraw or modify, in a manner adverse to Draxis and
DPI, its recommendation to DAHI Shareholders to approve the Reincorporation
Merger or the Share Exchange Plan, or makes any recommendation with respect to
an Alternative Acquisition other than a recommendation to reject such
Alternative Acquisition and the Exchange Agreement has been terminated as a
result or DAHI terminates the Exchange Agreement to enter into an agreement with
respect to a Superior Proposal, then DAHI Missouri is responsible to pay Draxis
a termination fee of U.S.$1,000,000 and reimburse Draxis and DPI for all out-of-
pocket expenses, up to an aggregate amount of U.S.$750,000, incurred in
connection with the transactions contemplated therein. Draxis is responsible
for the same payments to DAHI Missouri should the Draxis Board of Directors
amend or modify, in a manner adverse to DAHI Missouri, its recommendation in
respect of the Draxis Common Stock Offering and the Draxis Stock Option Plan
Adjustment.
DAHI Directors' and Officers' Indemnification
Pursuant to the Exchange Agreement, Draxis has agreed to assume all of
DAHI's obligations relating to indemnification, advancement of litigation
expenses and limitation of personal liability rights of the directors and
officers of DAHI as of the date of the Exchange Agreement (the "DAHI Directors
and Officers") existing under the provisions of DAHI's Articles of Incorporation
or By-Laws. Draxis' assumption of such obligations shall relate to any matter
existing or occurring at or prior to the Effective Time and with respect to any
claim or claims relating to any such matter asserted prior to or within a six
year period immediately after the Effective Time. In addition, for six years
following the consummation of the Share Exchange, Draxis has agreed to indemnify
the DAHI directors and officers for all claims brought against them or expenses
incurred by them in defense of such claims where such claims relate to actions
or omissions on their part as officers or directors of DAHI and such
indemnification would have been available to them from DAHI. In addition,
subject to certain conditions, with respect to any litigation commenced prior to
the Effective Time by stockholders of DAHI in connection with the performance of
the duties as an officer or director under federal or state law and Draxis'
offer or proposal to acquire DAHI, directors and officers of DAHI that are
defendants to such litigation shall be entitled to be represented at the
reasonable expense of Draxis by one counsel (and one local counsel). DAHI has
purchased directors' and officers' liability insurance regarding such potential
claims or litigation, and Draxis has agreed to provide similar or more
comprehensive insurance if the Share Exchange is consummated.
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Non-solicitation of Employees
Should the Share Exchange not be consummated, each of Draxis and DAHI have
agreed, for a period of one year from the date of the Exchange Agreement, not to
solicit, directly or indirectly, any employee of the other or induce or
encourage any employee of the other to terminate employment.
Subscription of DAHI Shares
Pursuant to the Exchange Agreement, DAHI has agreed to issue, and DPI has
the right at its election to subscribe for, a sufficient number of authorized
but unissued shares of DAHI Common Stock to ensure that upon the consummation of
the Share Exchange, DPI will hold 80% of the issued and outstanding DAHI Common
Stock immediately following the Share Exchange.
Board Representation
Prior to the Effective Time, the Draxis Board shall have taken appropriate
action to appoint a designee of DAHI who is acceptable to Draxis, acting
reasonably, to the Draxis Board effective as of the Effective Time. That
director shall serve until the next annual meeting of Draxis. At that meeting,
the Draxis Shareholders will be asked to elect a designee of DAHI who is
acceptable to Draxis, acting reasonably, to the Draxis Board and such director,
if elected, will serve until the next annual meeting of Draxis Shareholders.
Future DAHI Funding and Operations
The Exchange Agreement provides that subject to the consummation of the
Share Exchange, and subject to good business judgment, Draxis intends (a) to
commit approximately U.S.$10,000,000 to assist DAHI in completing the process of
obtaining approval from the FDA for ANIPRYL-Registered Trademark-, to launch
ANIPRYL-Registered Trademark- in the United States and to acquire and develop
new veterinary products, as appropriate, and (b) to delegate to DAHI operational
control over the development, marketing and distribution of ANIPRYL-Registered
Trademark- and any other veterinary product.
Affiliate Letters
The shares of Draxis Common Stock to be issued in the Share Exchange,
including those to be issued upon exercise of options to be granted or issued by
Draxis to current DAHI optionholders will have been registered under the
Securities Act by a Registration Statement on Form F-4, thereby allowing those
shares to be traded in the United States without restriction by all former
holders of DAHI Common Stock who neither (a) are deemed to be affiliates of DAHI
at the time of the DAHI Special Meeting nor (b) become affiliates of Draxis
after the Share Exchange. DAHI has agreed to use its reasonable best efforts to
cause each person who is an "affiliate" (as such term is defined in Rule 145) of
DAHI to deliver to Draxis at or prior to the Effective Time, a written agreement
to the effect that such person will not sell, transfer or otherwise dispose of
any shares of Draxis Common Stock such person acquired in connection with the
Share Exchange unless (a) such sale, transfer or other disposition is made in
conformity with the volume and other limitations of Rule 145 promulgated by the
SEC under the Securities Act, (b) such resale, transfer or other disposition has
been registered under the Securities Act or (c) in the opinion of counsel
reasonably acceptable to Draxis, such sale, transfer or other disposition is
otherwise exempt from registration under the Securities Act. This Joint
Management Proxy Statement-Prospectus does not cover any resales of Draxis
Common Stock received by persons who are deemed to be Affiliates of DAHI.
CAPITALIZATION OF DAHI MISSOURI, DAHI LOUISIANA AND DRAXIS
The authorized capital stock of each of DAHI Missouri and DAHI Louisiana
consists of 20,000,000 shares of Common Stock. As of October 15, 1996,
7,549,698 shares of DAHI Missouri Common Stock and an equal number of shares of
DAHI Louisiana Common Stock were issued and outstanding. The authorized voting
capital stock of Draxis is described under "Business of Draxis - Description of
Share Capital". It is
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contemplated that the Share Exchange will be effected as soon as practicable
following approval by the DAHI Shareholders. If the Share Exchange Plan is
approved and duly filed, letters of transmittal will be forwarded to holders of
DAHI Common Stock including instructions as to how to exchange their
certificate(s) representing DAHI Common Stock for a certificate or certificates
representing Draxis Common Stock.
The Exchange Agreement provides that existing options to acquire shares of
DAHI Common Stock pursuant to DAHI's stock option plans will be exchanged for
options to acquire shares of Draxis Common Stock at the Exchange Ratio;
provided, however, that such DAHI options held by those directors of DAHI who
will cease to be directors of DAHI and who are neither directors of Draxis nor
employees of DAHI or Draxis after the consummation of the Share Exchange shall
be accelerated so that they vest immediately upon the mailing of this Joint
Management Proxy Statement-Prospectus. Therefore, it will be necessary to
expand the Draxis Stock Option Plan to provide that the maximum number of shares
of Draxis Common Stock that may be issued under the Plan be increased from
2,500,000 to 4,500,000.
BACKGROUND TO THE SHARE EXCHANGE; TERMS AND REASONS
In 1990, Draxis determined that the development of selegiline (1-deprenyl)
for use in animals, then being conducted by its subsidiary, Deprenyl Animal
Health (Canada) Inc. ("DAHI Canada") would be better accomplished in a company
incorporated in the United States. Accordingly, DAHI was formed by Draxis to
assume the rights held by DAHI (Canada) and to continue the development and
marketing research relating to veterinary prescription applications of
1-deprenyl for the United States and Canadian markets. In March 1991, DAHI
completed an initial public offering, generating U.S.$4,658,436 net of offering
expenses to fund the development of ANIPRYL-Registered Trademark-. Following
the offering, Draxis held approximately 32% of DAHI.
Over the years, Draxis provided funding support for DAHI. In 1992, DAHI
(Canada), a wholly-owned subsidiary of Draxis, advanced U.S.$140,000 to DAHI and
Draxis advanced U.S.$450,000 (collectively, the "Notes") to DAHI in connection
with the purchase by DAHI of an interest in Phoenix Scientific, Inc.. In March
1994, DAHI and Draxis entered into an agreement under which Draxis agreed to
extend the maturity of the Notes and provided a loan, the ("1994 Loan") of
U.S.$2,500,000 to DAHI so that DAHI could continue to pursue the development of
ANIPRYL-Registered Trademark-.
In May 1995, the Board of Directors of Draxis first considered, on a
preliminary basis, a possible combination of Draxis with DAHI, along with a
number of other scenarios related to the funding of DAHI.
In September 1995, the Board of Directors of DAHI first appointed an
independent committee (the "DAHI Independent Committee") to consider funding
alternatives to continue the development of ANIPRYL-Registered Trademark-. Such
funding alternatives included potential licensing agreements, distribution
agreements, joint ventures, public or private placements of DAHI's Common Stock
and mergers, including a merger with Draxis.
In September 1995, DAHI received from the Canadian Bureau of Veterinary
Drugs ("BVD") its first regulatory approval of the use of ANIPRYL-Registered
Trademark- in treating canine Cushing's disease.
In October 1995, Draxis and DAHI commenced formal negotiations with respect
to the distribution of ANIPRYL-Registered Trademark- by Draxis in Canada. In
January 1996, Draxis and DAHI entered into a distribution agreement granting
Draxis the exclusive rights to distribute ANIPRYL-Registered Trademark- in
Canada for an initial term of 10 years. See "Business of DAHI".
In connection with the 1996 distribution agreement with Draxis, Draxis
converted, at the request of DAHI, approximately one-half of the U.S.$3,000,000
then outstanding in respect of the Notes and the 1994 Loan into shares of DAHI
Common Stock and loaned an additional U.S.$1,000,000 to DAHI ("1996 Loan"). As
a result of the conversion, Draxis now holds approximately 44% of the
outstanding shares of DAHI and its ownership could increase to approximately 52%
of DAHI, on a non-diluted basis, through the conversion of the balance of the
amounts outstanding under the 1994 Loan and the 1996 Loan.
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In March 1996, Draxis retained Montgomery Securities to act as financial
advisor to Draxis in connection with a possible combination with DAHI.
In April 1996, Draxis submitted to DAHI in writing an offer to acquire all
of the outstanding shares of DAHI not already owned by Draxis by way of a share
exchange. On April 12, 1996, Messrs. Brian King and Samuel Sarick were
appointed to an Independent Committee of the Draxis Board ("Draxis Independent
Committee") to review and consider the DAHI transaction. Messrs. Charles Wood
and George Darnell, as members of the DAHI Independent Committee, were asked to
review and consider the transaction with Draxis. Following the DAHI Independent
Committee's determination to consider on a preliminary basis a possible
combination of Draxis with DAHI, the DAHI Independent Committee, upon approval
of DAHI's Board of Directors, retained Hambrecht & Quist, LLC, to act as
financial advisor to DAHI in connection with a possible combination of DAHI and
Draxis as well as other funding alternatives.
During the period from April 1996 to July 25, 1996, executives and advisors
of Draxis negotiated with representatives of DAHI. In June 1996, DAHI held its
annual meeting and the DAHI Shareholders, excluding Draxis or any associate or
insider of Draxis, approved the conversion feature of the 1996 Loan. In
addition, Mr. Samuel Sarick was elected a director of DAHI. Mr. Samuel Sarick
resigned as a member of the Draxis Independent Committee as of that date.
Negotiations continued on the terms of a proposed share exchange during the
months of May, June and July and the Draxis Independent Committee met and
conferred frequently. The Draxis Board considered the proposed terms of the
share exchange at five meetings held from April 12, 1996 to July 25, 1996,
inclusively. The DAHI Independent Committee met six times to consider the terms
of the proposed share exchange prior to July 25, 1996. They had previously met
several times to consider other joint-venture or funding proposals. On July 25,
1996, the Draxis Board received the recommendation of the Draxis Independent
Committee and approved the terms of the Exchange Agreement. Following the
meeting of the Draxis directors on July 25, 1996, the DAHI Board met and also
approved the terms of the Exchange Agreement, based on the recommendation of the
DAHI Independent Committee.
Throughout the negotiations, members of the Draxis Board who were also
directors of DAHI excused themselves from the meetings of the Draxis Board or
DAHI Board, as the case may be, during deliberations on the transaction. They
also declared their conflict of interest and abstained from voting on the
respective proposals. Members of both Independent Committees, were, during
their tenure, independent of both Draxis and DAHI.
DAHI REASONS FOR TRANSACTION AND RECOMMENDATION OF DAHI BOARD
On July 25, 1996, the independent members of DAHI Board unanimously
approved the Exchange Agreement and determined that the transaction was fair and
in the best interests of DAHI, the DAHI Shareholders and the DAHI optionholders.
The independent members of the DAHI Board unanimously recommend to DAHI
Shareholders that they vote "FOR" the Reincorporation Merger and the Share
Exchange. The DAHI Board has based its approval of the transaction on its
determination that the Exchange Ratio is fair to DAHI, DAHI Shareholders and
DAHI optionholders and upon a number of other factors, none of which
individually was determinative, including without limitation the following:
1. The immediate and long-term benefits to DAHI Shareholders inherent in
the terms of the Share Exchange Plan and the long-term prospects of the combined
entities. In this regard, in light of DAHI's limited financial resources and
the significant required investment to complete the regulatory approval process
for ANIPRYL-Registered Trademark- in the United States for canine cognitive
dysfunction, to develop a marketing and distribution infrastructure and to
exploit future opportunities in animal health, the DAHI Board concluded that the
Share Exchange Plan represented the best opportunity to maximize DAHI
Shareholder value;
2. DAHI's need for additional capital in the form of debt or equity and
the relative prospects for raising capital as a stand-alone entity and as a part
of a larger organization. The DAHI Board determined that DAHI would need
substantial amounts of additional capital and that the cost of such capital
would adversely affect earnings and/or further dilute ownership of existing
shareholders and, therefore, negatively impact the
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price of DAHI Common Stock in the marketplace. Subject to the Share Exchange
and subject to good business judgment, Draxis intends to commit approximately
U.S.$10,000,000 to DAHI to complete the process of obtaining regulatory approval
in the U.S., to launch ANIPRYL-Registered Trademark- in the United States and to
acquire and develop future veterinary products, as appropriate;
3. The Exchange Agreement provides that subject to the Share Exchange
becoming effective and to Draxis' good business judgment, Draxis intends to
delegate to DAHI operational control over the development, marketing and
distribution of ANIPRYL-Registered Trademark- and any other veterinary product
which Draxis may develop in the future. In addition, upon approval of the Share
Exchange, a designee of DAHI who is acceptable to Draxis will be appointed to
the Draxis Board, to serve until the next annual meeting. At that meeting, the
Draxis Shareholders will be asked to elect a designee of DAHI, who is acceptable
to Draxis, to the Draxis Board and such director, if elected, will serve until
the next annual meeting of Draxis Shareholders;
4. The relative prospects for expansion and growth in shareholder values,
as a stand-alone entity and as part of a substantially larger operation with a
more diversified product portfolio. The DAHI Board considered the dilution to
DAHI Shareholders which would have resulted from an equity financing by DAHI as
a stand-alone entity to finance the completion of the development and the launch
of ANIPRYL-Registered Trademark- compared to the dilution to DAHI Shareholders
as a result of the transactions proposed herein. The DAHI Board concluded,
taking into account dilution to DAHI Shareholders under both scenarios, that the
combination with Draxis will allow DAHI Shareholders to participate in upside
potential similar to that associated with ANIPRYL-Registered Trademark- while
limiting single product risk through greater diversification associated with the
Draxis line of existing products and future product pipeline;
5. The increased investment liquidity that will accrue to DAHI
Shareholders through their ownership of Draxis Common Stock, its larger common
stock base and public float, and its longer trading volume history;
6. The premium over the trading prices of DAHI Common Stock to be
received by DAHI Shareholders, other than Dissenting Shareholders, Draxis and
its affiliates. On July 24, 1996, the day prior to the announcement of the
transaction, the closing price of the DAHI Common Stock on the Nasdaq bulletin
board was U.S.$3.375. In the month preceding the date of announcement of the
transaction, the closing prices on the Nasdaq bulletin board for DAHI Common
Stock ranged from U.S.$2.75 to U.S.$4.00, with the average closing price being
U.S.$3.49. Based on the closing price of Draxis Common Stock the day prior to
the announcement of the transaction of U.S.$3.19 and an average of U.S.$3.21 for
the month prior to the announcement, the Share Exchange represents a premium to
DAHI Shareholders of 27.5% and 24.2%, respectively;
7. The tax-free nature of the transaction to DAHI Shareholders who are
subject to U.S. federal income tax. In this regard, the DAHI Board carefully
considered the tax consequences of the transaction to all DAHI Shareholders. Of
the many transaction structures considered, the DAHI Board concluded that the
transaction described herein was the most favourable, from a tax perspective, to
the maximum number of DAHI Shareholders. However, the DAHI Board noted that the
transaction will constitute a taxable transaction for Canadian shareholders of
DAHI Common Stock resident in Canada. Based on a list of shareholders provided
by DAHI's transfer agent, approximately 88% of the registered shareholders of
DAHI have U.S. addresses.
8. The written opinion of Hambrecht & Quist, LLC rendered to the DAHI
Independent Committee on July 25, 1996 to the effect that, as of such date, the
consideration to be received by the DAHI Shareholders was fair to such
shareholders, from a financial point of view, as of such date (see "Opinion of
Financial Advisor to the DAHI Independent Committee");
9. The conclusion of KPMG in its valuation opinion that the fair market
value of the DAHI Common Stock as at June 30, 1996 was in the range of U.S.$3.01
(Cdn.$4.10) to U.S.$3.77 (Cdn.$5.14) per share and that the fair market of the
Draxis Common Stock as at June 30, 1996, after giving effect to the successful
completion of the Share Exchange in accordance with the terms contemplated
thereby, was in the
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range of U.S.$2.78 (Cdn.$3.79) to U.S.$3.28 (Cdn.$4.47) per share (see
"Valuation of Independent Valuator"); and
10. The transactions will not proceed unless approved by a "majority of
the minority", being a favourable vote of not less than a majority of the votes
cast or directed by proxy to be cast in person or by proxy at the DAHI Missouri
Special Meeting and the DAHI Louisiana Special Meeting by persons other than
Draxis or its affiliates or related parties and the Reincorporation Merger
requires the vote of two-thirds of all of the outstanding shares of DAHI Common
Stock.
The DAHI Board also considered a variety of potential negative factors in
its deliberations concerning the Reincorporation Merger and the Share Exchange
Plan, including the following: (1) the potential dilutive effect of the issuance
of Draxis Common Stock to the DAHI Shareholders in the Share Exchange in the
event of the commercial success of ANIPRYL-Registered Trademark-; (2) the fact
that the Share Exchange would be taxable to DAHI Shareholders resident in
Canada; (3) the risk of stock price fluctuations prior to and following the
completion of the proposed transactions, particularly given the fact that the
Exchange Ratio is fixed (and hence the number of shares to be received by DAHI
Shareholders upon consummation of the proposed transactions remains the same,
regardless of fluctuations in the stock price of DAHI or Draxis prior to
consummation of the proposed transactions); and (4) the other risks described
above under "Special Considerations Regarding the Share Exchange".
The foregoing discussion of the information and factors considered by the
DAHI Board is not intended to be exhaustive but is believed to include all
material factors considered by the DAHI Board. In view of the variety of
factors considered in connection with its evaluation of the proposed
transactions, the DAHI Board did not find it practicable to and did not quantify
or otherwise assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the DAHI Board
may have given different weights to different factors.
DRAXIS REASONS FOR TRANSACTION AND RECOMMENDATION OF DRAXIS BOARD
On July 25, 1996, the Draxis Board unanimously approved the terms of the
Exchange Agreement and determined that the transaction was fair and in the best
interests of Draxis and Draxis Shareholders. The Draxis Board unanimously
recommends to Draxis Shareholders that they vote "FOR" the Draxis Common Stock
Offering and the Draxis Stock Option Plan Adjustment. The Draxis Board based
its approval of the transaction on its determination that the Exchange Ratio is
fair to Draxis and Draxis Shareholders and upon a number of other factors, none
of which individually was determinative, including without limitation the
following:
1. The respective strengths of DAHI and Draxis and the opportunity for
enhancement of long-term value for Draxis Shareholders. The combination of
Draxis' expertise in marketing human pharmaceuticals and veterinary
pharmaceuticals, namely ANIPRYL-Registered Trademark-, in Canada, together with
the potential global ANIPRYL-Registered Trademark- product opportunity and the
veterinary product development capability of DAHI will result in expanded
opportunities for the Draxis core business and, in the longer term, strengthen
overall combined operations;
2. The enhanced platform for growth for the combined entity in the United
States. The Draxis Board concluded that the expanded product portfolio and
increased market presence in the U.S. of the combined entity could enhance the
value of Draxis Common Stock over the long-term;
3. The opportunity to leverage the existing infrastructure of Draxis.
The Draxis Board concluded that the capital infrastructure and personnel of
Draxis will allow the combined company to achieve operating efficiencies and to
accelerate the "roll-out" of ANIPRYL-Registered Trademark- in the U.S.;
4. The increased value of Draxis' investment in DAHI over the longer
term. As discussed above and below, the Draxis Board concluded that the
strategic benefits of the transaction will result in stronger growth and value
for DAHI's animal health business relative to that currently expected over the
longer term;
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5. The review by the Draxis Board of the valuation opinion of KPMG
received after the entering into of the Exchange Agreement, including the fair
market values attributed to DAHI Common Stock and Draxis Common Stock;
6. The issuance of Draxis Common Stock in connection with the Share
Exchange will be subject to the approval of Draxis Shareholders; and
7. DAHI's significant capital needs to complete the regulatory approval
process in the United States for canine Cushing's disease, to develop a
marketing and distribution infrastructure and to exploit future opportunities in
animal health and DAHI's inability to attract significant new capital on
acceptable terms, other than funding from Draxis. In this regard, Draxis can
commit to providing financial and other resources to DAHI as a wholly-owned
subsidiary on a more flexible basis. As independent publicly held corporations,
Draxis and DAHI must deal at arm's length and no assurance can be given that
arrangements satisfactory to both Draxis and DAHI, and to their respective
shareholders, could be negotiated in the future.
The Draxis Board also considered a variety of potential negative factors in
its deliberations concerning the Share Exchange Plan, including the following:
(1) the dilutive effect of the issuance of the Draxis Common Stock to the DAHI
Shareholders and, upon due exercise of DAHI options, to DAHI optionholders
pursuant to the Share Exchange; (2) the fact that there can be no assurance that
the FDA, the BVD or similar regulatory authorities in other jurisdictions will
review or approve ANIPRYL-Registered Trademark- for veterinary indications,
other than the approval for the use of ANIPRYL-Registered Trademark- in Canada
in treating canine Cushing's disease; (3) the limited protection against
competition with ANIPRYL-Registered Trademark-; and (4) other risks described
above under "Special Considerations Relating to the Draxis Common Stock
Offering".
The foregoing discussion of the information and factors considered by the
Draxis Board is not intended to be exhaustive, but it is believed to include all
material factors considered by the Draxis Board. In view of the variety of
factors considered in connection with its evaluation of the proposed
transactions, the Draxis Board did not find it practicable to and did not
quantify or otherwise assign relative weights to the special factors considered
in reaching its determination. In addition, individual members of the Draxis
Board may have given different weights to different factors.
OPERATIONS FOLLOWING THE TRANSACTION
Following the transaction, Draxis expects that DAHI will continue to
operate as an indirectly wholly-owned subsidiary of Draxis, substantially in the
same manner it has operated prior to the transaction. The Exchange Agreement
provides that subject to the Share Exchange becoming effective and to Draxis'
good business judgment, Draxis intends to delegate to DAHI operational control
over the development, marketing and distribution of ANIPRYL-Registered
Trademark- and any other veterinary product which Draxis may develop in the
future.
OPINION OF FINANCIAL ADVISOR TO THE DAHI INDEPENDENT COMMITTEE
The DAHI Independent Committee engaged Hambrecht & Quist, LLC ("H&Q") to
act as its financial advisor in connection with the Share Exchange and to render
an opinion as to the fairness from a financial point of view to the holders of
the outstanding shares of DAHI Common Stock of the consideration to be received
by such holders in the Share Exchange. H&Q rendered its oral opinion
(subsequently confirmed in writing) on July 25, 1996 to the DAHI Independent
Committee that, as of such date, the consideration to be received by the holders
of DAHI Common Stock in the Share Exchange is fair to such holders from a
financial point of view. A COPY OF H&Q'S FAIRNESS OPINION DATED JULY 25, 1996,
WHICH SETS FORTH THE ASSUMPTION MADE, MATTERS CONSIDERED, THE SCOPE AND
LIMITATIONS OF THE REVIEW UNDERTAKEN AND THE PROCEDURES FOLLOWED BY H&Q IS
ATTACHED AS APPENDIX F TO THIS JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS.
DAHI SHAREHOLDERS ARE ADVISED TO READ THE OPINION IN ITS ENTIRETY. DAHI
Shareholders should note that the opinion expressed by H&Q was provided for the
information of the DAHI Independent Committee of the Board of Directors of DAHI
in its evaluation of the Share Exchange and does not constitute a recommendation
to any shareholder as to how such shareholder should vote with respect to the
Share Exchange. No limitations were placed on H&Q by the
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DAHI Independent Committee with respect to the investigation made or the
procedures followed in preparing and rendering its opinion.
In connection with its review of the Share Exchange, and in arriving at its
opinion, H&Q, among other things: (i) reviewed the publicly available
consolidated financial statements of Draxis for recent years and interim periods
to date and certain other relevant financial and operating data of Draxis
(including its capital structure) made available to H&Q from published sources
and from the internal records of Draxis; (ii) reviewed certain internal
financial and operating information, including certain projections, relating to
Draxis prepared by the management of Draxis; (iii) discussed the business,
financial condition and prospects of Draxis with certain of its officers; (iv)
reviewed the publicly available financial statements of DAHI for recent years
and interim periods to date and certain other relevant financial and operating
data of DAHI made available to H&Q from published sources and from the internal
records of DAHI; (v) reviewed certain internal financial and operating
information, including certain projections, relating to DAHI prepared by the
management of DAHI; (vi) discussed the business, financial condition and
prospects of DAHI with certain of its officers; (vii) reviewed the recent
reported price and trading activity for the Draxis Common Stock and the DAHI
Common Stock and compared such information and certain financial information for
Draxis and DAHI with similar information for certain other companies engaged in
businesses H&Q considered comparable; (viii) reviewed the financial terms, to
the extent publicly available, of certain comparable merger and acquisition
transactions; (ix) reviewed the Exchange Agreement; (x) discussed the tax and
accounting treatment of the Reincorporation Merger with Draxis and Draxis' legal
counsel and auditors; and (xi) performed such other analyses and examinations
and considered such other information, financial studies, analyses and
investigations and financial, economic and market data as H&Q deemed relevant.
H&Q did not assume any responsibility for independent verification of any
of the information concerning DAHI or Draxis considered in connection with their
review of the Reincorporation Merger and, for purposes of their opinion, H&Q
assumed and relied upon the accuracy and completeness of all such information.
H&Q did not prepare or obtain any independent evaluation or appraisal of any of
the assets or liabilities of DAHI or Draxis, nor did they conduct a physical
inspection of the properties and facilities of DAHI or Draxis. With respect to
the financial forecasts and projections made available to H&Q and used in their
analyses, H&Q assumed that they reflect the best currently available estimates
and judgments of the expected future financial performance of DAHI and Draxis,
respectively. H&Q assumed that neither DAHI nor Draxis was a party to any
pending transactions, including external financings, recapitalizations or merger
discussions, other than the Reincorporation Merger and those in the ordinary
course of conducting their respective businesses. H&Q's opinion was necessarily
based upon market, economic, financial and other conditions as they existed and
could be evaluated as of the date of their opinion, and any change in such
conditions would require a reevaluation of that opinion. H&Q expressed no
opinion as to the price at which Draxis Common Stock would trade subsequent to
the Effective Time.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the H&Q analyses set forth below does not purport to be a complete
description of the presentation by H&Q to the DAHI Independent Committee. In
arriving at its opinion, H&Q did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly, H&Q
believes that its analyses and the summary set forth below must be considered as
a whole and that selecting portions of its analyses, without considering all
analyses, or of the summary set forth below, without considering all factors and
analyses, could create an incomplete view of the processes underlying the
analyses set forth in the H&Q presentation to the DAHI Independent Committee and
its opinion. In performing its analyses, H&Q made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of DAHI and Draxis. The
analyses performed by H&Q (and summarized below) are not necessarily indicative
of actual values or actual future results, which may be significantly more or
less favourable than suggested by such analyses. Additionally, analyses
relating to the values of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold.
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COMPARABLE COMPANY ANALYSIS. H&Q reviewed and compared selected historical
and projected financials, operating and stock market performance data of certain
publicly traded biotechnology and pharmaceuticals companies. This comparison
provided the Price-Earnings ("P/E") multiples and net income margin information
to be used in further analysis, particularly the termination value calculations
in connection with the discounted cash flow. The companies included the
following: Johnson & Johnson, Merck & Co, Pfizer Inc., SmithKline Beecham,
Glaxo-Wellcome, Chiron Corp, Amgen Inc. and Genentech Inc. H&Q did not attempt
to prepare any further quantitative valuation analyses based on this comparable
company analysis because H&Q believed that any comparative multiples that might
be derived based upon earnings or other financial data of such companies would
not be meaningful when applied to DAHI's operating losses.
DISCOUNTED CASH FLOW ANALYSIS. H&Q analyzed the theoretical valuation of
DAHI based on the discounted cash flow of its projected financial performance
under three scenarios: (i) DAHI as a stand-alone business (assuming no
combination with a third party) (the "DAHI Stand-Alone Projections"); (ii) DAHI
in a marketing collaboration with a large pharmaceutical company (the "Marketing
Collaboration Projections"); and (iii) DAHI merged with Draxis pursuant to the
Reincorporation Merger and the Share Exchange (the "Combined Projections"). For
the purposes of this analysis, H&Q relied on the DAHI management's estimate of
projected revenues with respect to (i) and (ii) and the Draxis and DAHI
management projections with respect to (iii), but assumed that the maximum net
income margin (i.e. net income as a percentage of total revenues) under all
three scenarios was 20%. This assumption was based on the analysis of
comparable biotechnology and pharmaceutical companies which, on a trailing
twelve-month basis, have sustained an average net income margin of approximately
17%. This assumption was more conservative (i.e. reflected a higher net income
margin) than that contained in the DAHI and Draxis management estimates. H&Q
makes no representation as to the validity of this assumption under any
scenario. To estimate the total present value of DAHI's business, before giving
effect to its capital structure, H&Q discounted to present value the projected
stream of after-tax cash flows and the hypothetical value of selling the entire
business at the end of a five year period (the "Terminal Value") for all three
scenarios.
In the DAHI Stand-Alone Projections, H&Q used discount rates ranging from
30% to 45%. In the Marketing Collaboration Projections, H&Q used discount
rates ranging from 25% to 40%. The lower discount rates applied in the
Marketing Collaboration Projections reflected the lower risk of achieving future
revenue streams when such revenues are generated in collaboration with an
established pharmaceutical company. The Terminal Value under all scenarios was
based upon multiples of sixteen to twenty-two times projected net income for the
year 2000. The range of sixteen to twenty-two times projected net income
reflects the range of P/E multiples derived from the Comparable Companies
Analysis.
Using the DAHI Stand-Alone Projections, H&Q calculated an aggregate average
equity value for DAHI of U.S.$92.6 million. Because DAHI would be required to
raise additional capital in order to finance its operations under the DAHI
Stand-Alone Projections, H&Q assumed that DAHI would issue U.S.$5 million of new
equity in the future at the current market price for DAHI shares (less an
underwriting or private placement discount). After adjusting for this assumed
issuance of new equity, H&Q calculated a hypothetical value of U.S.$8.42 per
share of DAHI stock under the DAHI Stand-Alone Projections. H&Q then conducted
a sensitivity analysis that adjusted the revenue and net income margin
assumptions contained in the DAHI Stand-Alone Projections. Under the
sensitivity analysis, H&Q assumed that revenues would be 30% lower than in the
DAHI Stand-Alone Projections and that the net income margin would be 14% rather
than 20%. This analysis showed an average aggregate enterprise value of U.S.$45
million, and after adjusting for additional equity capital, a hypothetical value
of U.S.$4.09 per share.
Using the DAHI Marketing Collaboration Projections, H&Q calculated an
aggregate average equity value for DAHI of U.S.$52.3 million. From this value,
H&Q calculated a hypothetical value of U.S.$5.66 per share of DAHI stock under
the DAHI Marketing Collaboration Projections. H&Q then conducted a sensitivity
analysis that adjusted the revenue and net income margin assumptions contained
in the DAHI Stand-Alone Projections. Under the sensitivity analysis, H&Q
assumed that revenues would be 30% lower than in the DAHI Marketing
Collaboration Projections and that the net income margin would be 14% rather
than 20%. This
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analysis showed an average aggregate enterprise value of U.S.$25.4 million, and
after adjusting for additional equity capital, a hypothetical value of U.S.$2.75
per share.
These figures were compared with a valuation of the Combined Projections.
For this analysis H&Q also used discount rates from 20% to 35%. H&Q analyzed
the hypothetical valuation of the combined entity and calculated an average
enterprise value of U.S.$193.3 million. From this value H&Q calculated a
hypothetical value of U.S.$6.01 per share of post-transaction Draxis stock.
After applying the 1.35 exchange ratio to this price, a hypothetical value of
U.S.$8.12 per share of DAHI was calculated. This value of U.S.$8.12 per share
was compared to U.S.$8.42 per share for DAHI using the DAHI Stand-Alone
Projections and U.S.$5.66 using the Marketing Collaboration Projections.
STOCK TRADING HISTORY ANALYSIS. H&Q examined the trading history in terms
of both price and volume for DAHI Common Stock from January 3, 1994 to July 24,
1996 and Draxis Common Stock from January 3, 1994 to July 14, 1996. The data
indicated that, over the period, DAHI had traded at an average price of
U.S.$2.02.
SELECTED COMPARABLE TRANSACTION ANALYSIS. H&Q compared the Reincorporation
Merger with selected comparable merger and acquisition transactions in which the
acquiror had a majority stake in the target prior to a transaction. H&Q
analyzed the Reincorporation Merger in comparison with the premiums in the
following comparable transactions for publicly traded companies: Societe
Commerciale de Reassurance/SCOR US Corp., Berkshire Hathaway Inc./GEICO Corp.,
BIC SA/Bic Corp., Genzyme Corp./IG Laboratories Inc., WMX Technologies Inc./Rust
International Inc., PacifiCorp/Pacific Telecom Inc., Dole Food Co. Inc./Castle &
Cooke Holmes Inc., Parkway Co./EB Inc., Ogden Corp./Ogden Projects Inc., Wassall
PLC/General Cable Corp., Burlington Resources Inc./Diamond Shamrock LP., Adia
SA/Adia Services Inc., National Intergroup Inc./FoxMeyer Corp., Holderbank
Financierer Glarus AG/Holnam Inc. H&Q reviewed the premiums paid in such
transactions, and it noted that the average premium paid over the trading price
one day prior to the announcement of the transaction in the foregoing
transactions was 23.5%; the average premium paid over the trading price one week
prior to the announcement of the transaction in the foregoing transactions was
27.5%; the average premium paid over the trading price four weeks prior to the
announcement of the transaction in the foregoing transactions was 30.1%; and the
average premium paid over the trading price six months prior to the announcement
of the transaction in the foregoing transactions was 41.7%. H&Q determined that
the Reincorporation Merger consideration of approximately U.S.$4.35 (based on
the Draxis closing price of U.S.$3.22 on July 24, 1996) represented a premium
paid over the trading price one day prior to the announcement of the transaction
was 28.6%; the premium paid over the trading price one week prior to the
announcement of the transaction was 28.6%; the premium paid over the trading
price four weeks prior to the announcement of the transaction was 25.3%; and the
premium paid over the trading price six months prior to the announcement of the
transaction was 131.0%.
H&Q did not attempt to prepare any further quantitative valuation analyses
based on this comparable transaction analysis because H&Q believed that any
comparative multiples that might be derived based upon earnings or other
financial data of such companies would not be meaningful. This view is based
upon the same reasons that H&Q did not believe a quantitative comparison between
DAHI and Draxis and the companies comprising the biotechnology/pharmaceutical
group of comparable companies would be meaningful; namely that because the
biotechnology companies in the Comparable Companies Analysis generally were not
experiencing operating losses, a comparison of transaction multiples of
operating earnings and net income would not be meaningful because of DAHI's
operating losses.
No company or transaction used in the above analyses is identical to DAHI,
Draxis or the proposed Reincorporation Merger. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading values of the companies or company to which they are compared. The
foregoing description of H&Q's opinion is qualified in its entirety by reference
to the full text of such opinion, which is attached at Appendix F to this Joint
Management Proxy Statement-Prospectus.
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CERTAIN RELATIONSHIP; TERMS OF ENGAGEMENT. H&Q, as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, corporate
restructurings, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
Pursuant to an engagement letter dated May 30, 1996, DAHI has agreed to pay
H&Q a fee in connection with its services as financial advisor to the DAHI
Independent Committee and the rendering of a fairness opinion. DAHI will be
obligated to pay a fee of U.S.$125,000 upon the delivery of the fairness
opinion, and one-half of such fee shall be credited against any other fees owing
to H&Q. Upon consummation by DAHI of the Reincorporation Merger, DAHI shall pay
H&Q a fee, payable in cash on closing, of approximately 2.5% of the value of the
consideration to be received by DAHI stockholders in the Reincorporation Merger.
DAHI has agreed to reimburse H&Q for its reasonable out of pocket expenses, and
to indemnify H&Q against certain liabilities, including liabilities under the
federal securities laws or relating to or arising out of H&Q's engagement as
financial advisor.
VALUATION OF INDEPENDENT VALUATOR
KPMG was engaged as of July 9, 1996 by DAHI, Draxis and DPI to provide a
valuation to the DAHI Independent Committee to assess the range of fair market
values of the DAHI Common Stock and the Draxis Common Stock. KPMG was
considered qualified to make such assessment based on prior experience in such
area. KPMG was considered independent of both Draxis and DAHI by the DAHI
Independent Committee, based upon the fact that KPMG had not performed financial
advisory services for Draxis, DPI or DAHI during the 24 months preceding the
date of its engagement and the fact that there were, and are, no understandings,
commitments or agreements between KPMG and Draxis, DPI or DAHI with respect to
future business dealings. In 1995, KPMG provided two opinions to Draxis on the
value of two series of Draxis Employee Participation Shares. Subject to vesting
provisions, these shares are convertible into Draxis Common Stock based on the
market price at the time of conversion provided this market price exceeds, by
25%, the fair market value of the Draxis Common Stock at the date of issue of
Draxis Employee Participation Shares. Accordingly, the assignment was similar
to an option valuation and KPMG did not value the overall operation of Draxis
for such purposes. Total fees in respect of these opinions amounted to less
than Cdn.$40,000. KPMG provided a formal valuation (the "Formal Valuation") to
the DAHI Independent Committee. A copy of the Formal Valuation was provided by
the DAHI Independent Committee to the Draxis Independent Committee after the
Exchange Agreement was entered into. A copy of the Formal Valuation is
available for inspection by any shareholder of DAHI during regular business
hours at the offices of DAHI prior to the Special Meetings. The Formal
Valuation was prepared by KPMG for the purpose of assisting the DAHI Independent
Committee in connection with the Share Exchange and is not to be, and KPMG has
not consented to it being, relied upon, circulated, quoted from or referred to
by any other person or for any other purpose except for reference to the Formal
Valuation herein.
In connection with the preparation and delivery of the Formal Valuation,
KPMG received a fee of Cdn.$95,000 plus additional fees related to Joint
Management Proxy Statement-Prospectus disclosure and certain expense
reimbursement payable by Draxis. If KPMG's engagement extends beyond September
30, 1996, additional professional fees may be charged. The fee is not
contingent on any valuation outcome or on the success of the proposed Share
Exchange. In addition, Draxis, DPI and DAHI have agreed to indemnify KPMG
against certain liabilities, including any liabilities arising under applicable
securities laws.
In arriving at its opinion as to value with respect to the DAHI Common
Stock and the Draxis Common Stock, KPMG relied upon information provided to it
by management of DAHI and Draxis in addition to publicly-available information
of which it was aware. Information relied upon included (i) financial
statements, annual reports, and corporate tax returns; (ii) projections and
business plans for the future operations of the companies; (iii) principal
agreements affecting the operations of the companies; (iv) press releases,
analyst reports and other publicly available information about the companies and
the industries within which they operate; (v) reported price and trading
activity for the DAHI Common Stock and the Draxis Common Stock; and (vi)
discussions with senior management of both companies. KPMG has assumed and
relied, without
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independent verification, upon the accuracy, completeness and fair presentation
of all information provided to it by DAHI, Draxis and their affiliates, agents
and representatives that was obtained by KPMG from publicly available filings of
DAHI or Draxis, or that was otherwise publicly available. KPMG also assumed
that all forecasts and projections provided to it or adjusted and revised by it
in consultation with DAHI and the DAHI Independent Committee, Draxis or their
agents or representatives were reasonably prepared on bases that reflect the
best currently available estimates and judgements of future performance of DAHI
and Draxis, respectively. KPMG's opinion was necessarily based upon the market,
economic and general business and financial conditions prevailing at the
valuation date (June 30, 1996) and the conditions and prospects of DAHI and
Draxis as they are reflected in the public documents of DAHI and Draxis or in
information provided to KPMG in respect of such companies, and any material
changes therein would require a re-evaluation of that opinion. KPMG was not
denied access to any information of which it was aware and which it considered
necessary in arriving at its opinion of value.
For the purposes of the Formal Valuation, fair market value was defined as
the highest price available in an open and unrestricted market between informed,
prudent parties acting at arms' length and under no compulsion to act, expressed
in terms of money or money's worth. The Formal Valuation was based on an
assessment of the operations of businesses and on rates of return considered
reasonable, having regard to certain factors, including external industry and
economic conditions which influence risks associated with such businesses and
internal corporate factors which affect the future profitability of such
businesses.
KPMG believes that their valuation analyses should be considered as a whole
and that selecting portions of the analyses could create a misleading view of
the methodologies and approaches underlying their opinion. The preparation of
their opinion is a complex process and is not necessarily susceptible to a
partial analysis or summary description. Any attempt to do so could lead to
undue emphasis on any particular factor or analysis.
DAHI Valuation
KPMG valued the issued and outstanding DAHI Common Stock as at June 30,
1996 after giving consideration to the impact of the dilutive effects from
existing stock options, warrants and convertible debt rights that were
exercisable at U.S. $4.00 or less, as well as from an assumed new equity
financing at U.S. $3.00 per DAHI common share to provide DAHI with U.S. $6.7
million, the necessary capital to carry on its business (as if the Share
Exchange were not consummated). Based on the scope of KPMG's review and subject
to the assumptions and restrictions included in their report, it was their
opinion that the proportionate EN BLOC fair market value per share of DAHI
Common Stock, which are the subject of the Share Exchange, at June 30, 1996
ranges from Cdn.$4.10 to Cdn.$5.14, or Cdn.$4.62 at the midpoint (U.S.$3.01 to
U.S.$3.77, or U.S.$3.39 at the midpoint), but before consideration of any
minority discount.
KPMG considered two basic approaches to determine the fair market value of
DAHI; the going concern approach and the liquidation approach. Based upon
discussions with management and its review of DAHI's reported financial position
and the projected operating results of DAHI revised and adjusted by KPMG in
consultation with DAHI and the DAHI Independent Committee, KPMG concluded that
DAHI should be valued using a going concern approach. In valuing the DAHI
Common Stock on a going concern basis, KPMG selected the discounted cash flow
approach, rather than other methods of valuation such as those utilizing
capitalized earnings, capitalized cash flow, net tangible assets and market
comparables. Under the discounted cash flow approach, fair market value is
based on the present value of expected net after-tax cash flow and the residual
value of the business at the end of the projection period, discounted at an
appropriate rate. KPMG selected the discounted cash flow approach primarily
because of its focus on future, as opposed to historical results. As DAHI has
been in the development stage since its inception and revenues have consisted
primarily of gains on the disposal of non-operating investments, KPMG did not
believe that DAHI's historical results were indicative of anticipated future
results for DAHI given DAHI's anticipated transition to an operating company
with sales and expenses related to the release of ANIPRYL-Registered Trademark-
in the U.S. and Canada. The capitalized earnings approach was rejected due to
the fact that DAHI has no history of revenue or earnings from which to assess
the level of maintainable earnings. Similarly, the capitalization of
maintainable cash flow approach was
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rejected because DAHI had no history of operating cash flows from which to
assess a level of maintainable cash flows and because of the significant growth
projected in the next five years. In rejecting the net tangible asset approach,
KPMG believed that DAHI's nominal deficit position does not reflect the goodwill
value inherent in the potential for future profits from the anticipated sale of
ANIPRYL-Registered Trademark-. Lastly, the market comparable approach was
rejected as a primary method for determining the value of DAHI given the
difficulty of comparing DAHI to other companies in the animal health
pharmaceutical industry and the fact that DAHI had no history of revenues or
earnings from which to make such a comparison. KPMG used the market comparable
approach, however, as a secondary approach to confirm the reasonableness of the
values determined by them through the discounted cash flow approach.
Using the discounted cash flow approach, KPMG determined that the EN BLOC
fair market value of DAHI as at June 30, 1996 was in the range of Cdn.$34.5
million to Cdn.$47.1 million. Net-after tax cash flow was based on DAHI
management's January 1996 five-year projection updated to the Formal Valuation
date and extended to ten years for valuation purposes by KPMG in consultation
with DAHI and the DAHI Independent Committee. KPMG used a discount rate in the
range of 30-35% for the first five years of the projection for the purposes of
discounting cash flows. The discount rate took into account several factors
reflecting risks or opportunities specific to DAHI. KPMG increased its discount
rate to a range of 35-40% for the last five years of the projection given the
uncertainty over time with respect to future cash flows and the risk that as
ANIPRYL-Registered Trademark- becomes more profitable, the chance of competition
from alternative or generic drugs is increased. At the end of ten years, KPMG
assumed that DAHI would have a residual value equal to 2.5 to 3.0 times expected
cash flow in year 11. This residual value was discounted using a range of 35-
40% and added to the present value of the cash flows from the ten year
projection. In accordance with securities requirements in Canada, no downward
adjustment was made to reflect the liquidity of the DAHI Common Stock, the
effect of the Share Exchange or the fact that the DAHI Common Stock subject to
the Share Exchange does not form part of a controlling interest.
KPMG believes that the following additional factors, among others, are
significant to an understanding of their valuation opinion for DAHI:
- KPMG has made numerous assumptions and relied upon numerous
assumptions made by DAHI management in the course of calculating
values for DAHI, as detailed in the Formal Valuation report, and any
deviation from these assumptions will have a significant impact on the
calculations
- KPMG believes that some of the significant assumptions made in
calculating values for DAHI include (i) the projections used in the
discounted cash flows approach reflect DAHI management and the DAHI
Independent Committee's best estimate as to expected future operating
results, but are subject to uncertainty with respect to competitive
products entering the market, regulatory approval for ANIPRYL-
Registered Trademark- in the U.S., the strength of DAHI's patent
rights, DAHI's reliance on third parties for manufacturing and
distribution, and the level of market acceptance for ANIPRYL-
Registered Trademark-; (ii) DAHI will be able to retain the services
of senior management, in particular Dr. Stevens and Dr. Ruehl; and
(iii) DAHI will be able to obtain sufficient financing to develop,
market and distribute ANIPRYL-Registered Trademark-
- DAHI is a single product company and its value could fluctuate
significantly based on material events as they occur
- KPMG has revised the Company's projections in consultation with DAHI
Management and the DAHI Independent Committee
- KPMG advises that DAHI or the relevant court may determine that the
fair value to be paid to Dissenting Shareholders is different than the
fair market values calculated by KPMG
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- DAHI may not have access to sufficient cash to pay fair value to all
Dissenting Shareholders, although it is arranging for an irrevocable
standby letter of credit in its favour to provide up to U.S.$2 million
for this purpose, subject to its terms.
Draxis Valuation
KPMG valued the issued and outstanding common stock of Draxis, to be issued
to shareholders of DAHI in the Share Exchange, at June 30, 1996 after giving
consideration to the impact of (i) Draxis owning 100% of the DAHI Common Stock
after issuing approximately 5.8 million shares of Draxis Common Stock in
exchange for the issued and outstanding DAHI Common Stock not already owned by
Draxis through its subsidiaries or affiliates; (ii) the dilutive effects from
existing Draxis stock options, warrants and Employee Participation Shares that
were exercisable at Cdn.$4.75 or less; and (iii) the dilutive effects from
existing DAHI stock options and warrants that were exercisable at Cdn.$5.46
(U.S.$4.00) or less, as exchanged for Draxis stock options and warranties as
provided for in the Exchange Agreement. Based on the scope of KPMG's review and
subject to the assumptions and restrictions included in their report, it is
their opinion that the proportionate EN BLOC fair market value per share of the
common shares of Draxis, to be issued to shareholders of DAHI in the Share
Exchange, at June 30, 1996 ranges from Cdn.$3.79 to Cdn.$4.47, or Cdn.$4.13 at
the midpoint (U.S.$2.78 to U.S.$3.28, or U.S.$3.03 at the midpoint), before
consideration of any minority discount but after giving effect to the successful
completion of the Share Exchange in accordance with the terms contemplated
thereby.
KPMG considered two basic approaches to determine the fair market value of
Draxis; the going concern approach and the liquidation approach. Based upon
discussions with management and its review of Draxis' reported financial
position and the projected operating results of Draxis, KPMG concluded that
Draxis should be valued using a going concern approach. In valuing the Draxis
Common Stock on a going concern basis, KPMG selected the discounted cash flow
approach to determine the fair market value of the pharmaceutical/health care
business of Draxis and the net tangible asset approach to determine the fair
market value of the net corporate assets of Draxis. The net tangible asset
approach determines fair market value by adjusting the recorded book values of
all assets and liabilities, other than those used in the pharmaceutical/health
care business, to their fair market values as at the valuation date.
KPMG selected the discounted cash flow approach to determine the fair
market value of the pharmaceutical/health care business of Draxis, primarily
because of its focus on future, as opposed to historical, results, noting that
Draxis' historical results were unlikely to be indicative of future expected
results. Because of Draxis' earnings fluctuating widely during the past five
years, it was not felt that past earnings or cash flows were indicative of
future potential of Draxis and, as a result, the capitalized earnings approach
and the capitalization of maintainable cash flow approach were considered by
KPMG and rejected. The net tangible asset approach, whereby tangible and
identifiable intangible assets and liabilities are adjusted to their respective
fair market values at the valuation date in order to determine the adjusted
value of net equity, was used by KPMG to determine the fair market value of the
net corporate assets of Draxis, but was rejected for purposes of valuating the
pharmaceutical/health care business since KPMG believed there is goodwill
inherent in the business operations of Draxis relating to expected future
profitability on existing products and new products under development. Lastly,
the market comparable approach was considered by KPMG and rejected as a primary
method for determining the value of Draxis due to the difficulties in
identifying comparable companies in the pharmaceutical industry. KPMG used the
market comparable approach, however, as a secondary approach to confirm the
reasonableness of the values determined by them through the discounted cash flow
and net tangible asset approaches.
The calculation of the fair market value of the shares of Draxis Common
Stock in the Formal Valuation consisted of two components: the value of Draxis'
pharmaceutical/health care business comprised the sale of existing products and
development of new products to be brought to the market, and the value of Draxis
net corporate assets comprised of cash on hand, investments in subsidiaries,
including 100% of DAHI, and other assets and liabilities not required in the
pharmaceutical/health care business operations. The value of the
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pharmaceutical/health care business was determined using a discounted cash flow
approach and the value of investments in other assets and liabilities was
determined using a net tangible asset approach.
Using a discounted cash flow approach, KPMG determined that the fair market
value of the pharmaceutical/health care business of Draxis, as at June 30, 1996,
was in the range of Cdn.$48.8 million to Cdn.$57.9 million. Net after-tax cash
flows were based on the projections prepared by Draxis management in April 1996
and updated as at the Formal Valuation date. KPMG selected discount rates of
23-28% for purposes of discounting the cash flows. The discount rate took into
account several factors reflecting risks or opportunities specific to Draxis.
At the end of five years, KPMG assumed that Draxis would have a residual value
equal to fifteen times expected cash flow. This residual value was discounted
using a range of 23-28% and added to the present value of the cash flows from
the five year projection.
In determining the fair market value of Draxis' net corporate assets, KPMG
adjusted their recorded book values to fair market value in order to calculate
net tangible asset value. In adjusting the recorded book value of Draxis' 44%
interest in DAHI to fair market value of Draxis' 100% interest in DAHI, KPMG
determined the EN BLOC fair market value of DAHI using the discounted cash flow
approach, adjusted to reflect a reduction in inherent risk associated with
DAHI's projected financial results and that DAHI would have greater certainty of
obtaining necessary financing. The value of these net corporate assets, based
on a net tangible asset approach, was determined to be, as at June 30, 1996, in
the range of Cdn.$71.2 million to Cdn.$85.8 million, which is comprised
primarily of cash on hand and 100% of the DAHI shares. Adding the fair market
value of the pharmaceutical/health care business to the fair market value of the
net corporate assets results in an EN BLOC fair market value of Draxis in the
range of Cdn.$120.0 million to Cdn.$143.7 million.
KPMG believes that the following additional factors, among others, are
significant to an understanding of their valuation opinion for Draxis:
- KPMG has made numerous assumptions and relied upon numerous
assumptions made by Draxis management in the course of calculating
values for Draxis, as detailed in the Formal Valuation report, and any
deviations from these assumptions will have a significant impact on
the calculations.
- KPMG believes that some of the significant assumptions made in
calculating values for Draxis include (i) the projections used in the
discounted cash flow approach reflect Draxis managements' best
estimate as to expected future operating results, but are subject to
uncertainty with respect to competitive products entering the market
including generics, regulatory approvals for products in the
development stages, the strength of patent rights held by Draxis, and
Draxis' dependency on collaborative relationships; and (ii) the
results of current negotiations with arm's length third parties for
Draxis to acquire new products or distribution systems will not
materially affect the valuation conclusions expressed herein.
- KPMG's range of values for Draxis is comparable to the Cdn.$4.25
warrant issue price at which Draxis recently sold 3 million shares to
the public.
Conclusion
Based on the scope of KPMG's review and subject to the assumptions and
restrictions included in the Formal Valuation, KPMG is of the opinion that the
fair market values of all the issued and outstanding DAHI Common Stock, which
are the subject of the Share Exchange, and Draxis Common Stock, to be issued to
shareholders of DAHI in the Share Exchange, at June 30, 1996, before
consideration of any minority discount and after dilution for issuance of common
shares upon exercise of outstanding rights and, in respect of Draxis Common
Stock only, after giving effect to the successful completion of the Share
Exchange in accordance with the terms contemplated thereby, as described in
their report, were as follows:
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DAHI DRAXIS
---- ------
Range Midpoint Range Midpoint
----- -------- ----- --------
Cdn.$4.10 to Cdn.$5.14 Cdn.$4.62 Cdn.$3.79 to Cdn.$4.47 Cdn.$4.13
U.S.$3.01 to U.S.$3.77 U.S.$3.39 U.S.$2.78 to U.S.$3.28 U.S.$3.03
PRIOR VALUATION OF DRAXIS COMMON STOCK
Draxis and its directors and senior officers know of only one appraisal or
valuation made in the 24 months preceding the date of this Joint Management
Proxy Statement-Prospectus that would constitute a "prior valuation" for Draxis
for Canadian securities law purposes.
In July 1995, a Canadian securities dealer delivered a report to a
committee formed by Draxis and by an unrelated corporation to investigate a
proposed combination of the businesses of Draxis and that third party, or of
portions thereof. The report provided, among other things, an appropriate range
of consideration payable in connection with the proposed transaction expressed
as an exchange ratio of Draxis common shares for shares of the third party. As
at the date of the report, the securities dealer was independent of Draxis and
the third party.
The report summarized several different approaches to assessing a fair
exchange ratio of common shares of Draxis for shares in the third party. These
approaches consisted of market value analysis, discounted cash flow analysis,
and comparable company analysis, with particular reliance on the first two
methods.
The report concluded that on a market valuation basis Draxis common shares
had a value of Cdn.$2.25 each, and, on a discounted cash flow basis, Cdn.$3.53
per common share. The report stated that a comparative analysis was somewhat
tenuous because there were no directly comparable companies and there was a lack
of meaningful price earnings ratios among those companies that were compared,
but concluded that an implied comparable share value was Cdn.$5.50 per share.
The proposed combination was never effected.
The report was based on information available at the date of report and was
subject to a number of important assumptions and qualifications and the values
placed on the Draxis common shares in the report depend upon the analysis
contained therein. Since the date of the report, the circumstances of Draxis
have changed in a number of material respects. See "Business of Draxis". A
copy of this prior valuation is available for inspection during regular business
hours at the registered office of Draxis prior to the Special Meetings and a
copy will be sent to any DAHI Shareholders upon payment of the expenses incurred
by Draxis in printing and delivering such valuation.
INTERESTS OF MANAGEMENT
Certain officers and directors of DAHI Missouri and their associates may be
deemed to have an interest in the consummation of the Share Exchange. As of
October 15, 1996, the directors and executive officers of DAHI Missouri
beneficially owned 645,963 shares of DAHI Missouri Common Stock and 555,838
shares of Draxis Common Stock (excluding 700,000 shares issuable upon the
exercise of DAHI Missouri stock options and warrants).
As of October 15, 1996, the directors and executive officers of Draxis
beneficially owned 499,633 shares of DAHI Missouri Common Stock and 1,813,610
shares of Draxis Common Stock (excluding 2,065,900 shares issuable upon the
exercise of Draxis stock options and warrants).
As part of the Share Exchange, the vesting of DAHI options held by those
directors of DAHI who will cease to be directors of DAHI at the Effective Time,
and who will be neither directors of nor employees of
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DAHI or Draxis after the consummation of the Share Exchange, will be accelerated
so that they vest immediately upon the mailing of this Joint Management Proxy
Statement-Prospectus. Otherwise, the options would have vested incrementally
over a period of years.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SHARE EXCHANGE PLAN
The following summary, based upon current law, is a general discussion of
certain federal income tax consequences of the Share Exchange to Draxis, DAHI
and holders of DAHI Common Stock assuming the Share Exchange is consummated as
contemplated herein. This summary is based upon the Internal Revenue Code of
1986, as amended (the "Code"), applicable U.S. Treasury regulations thereunder
and administrative rulings and judicial authority as of the date hereof, all of
which are subject to change, possibly with retroactive effect. Any such change
could affect the continuing validity of this summary. This summary applies to
holders of DAHI Common Stock who hold their DAHI Common Stock as capital assets.
This summary does not discuss all aspects of income taxation that may be
relevant to a particular holder of DAHI Common Stock in light of such holder's
specific circumstances or to certain types of holders subject to special
treatment under the federal income tax laws (for example, foreign persons,
dealers in securities, banks and other financial institutions, insurance
companies, tax-exempt organizations, and holders who acquired DAHI Common Stock
pursuant to the exercise of options or otherwise as compensation or through a
tax-qualified retirement plan), and it does not discuss any aspect of state,
local, foreign or other tax laws (but see "Canadian Federal Income Tax
Consequences of the Share Exchange").
No ruling has been (or will be) sought from the Internal Revenue Service as
to the anticipated tax consequences of the Share Exchange. Gardner, Carton &
Douglas, counsel to Draxis, has advised Draxis, and Wilson, Sonsini, Goodrich &
Rosati, counsel to DAHI, has advised DAHI, that set forth below are in their
respective opinions the material U.S. federal income tax consequences of the
Share Exchange to Draxis, DAHI and holders of DAHI Common Stock assuming the
Share Exchange is consummated as contemplated herein. HOLDERS OF DAHI COMMON
STOCK SHOULD CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO
THEM OF THE SHARE EXCHANGE, INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL,
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS IN THEIR PARTICULAR
CIRCUMSTANCES.
THE SHARE EXCHANGE. It is a condition to the consummation of the Share
Exchange that Draxis receive an opinion of its U.S. counsel, Gardner, Carton
& Douglas, and that DAHI receive an opinion of its counsel, Wilson, Sonsini,
Goodrich & Rosati, that the Share Exchange, pursuant to which DAHI
Shareholders, other than Dissenting Shareholders, DPI and Draxis LLC, will
transfer all of their shares of DAHI Common Stock to DPI in exchange for
shares of Draxis Common Stock, will constitute a reorganization for federal
income tax purposes within the meaning of Section 368(a) of the Code. These
opinions do not bind the Internal Revenue Service or the courts and there can
be no assurance that the Internal Revenue Service or the courts will not take
a contrary position. The opinions of Gardner, Carton & Douglas and Wilson,
Sonsini, Goodrich & Rosati, will be expressly based and conditioned upon
certain opinions of other counsel, the accuracy of certain assumptions and
the truth and accuracy of certain representations made to such counsel by
Draxis and DAHI and certain holders of DAHI Common Stock and others as
appropriate. Of particular importance will be certain opinions of other
counsel, assumptions and or representations regarding: (a) the retention of a
significant continuing equity interest in Draxis by the historic shareholders
of DAHI, (b) the retention by DAHI of substantially all of its assets, (c)
the ownership of certain shares of DAHI Common Stock, and (d) because Draxis
and its affiliates did acquire shares of DAHI Common Stock and debt
convertible into shares of DAHI Common Stock prior to the Share Exchange,
that any and all acquisitions and transfers of shares of DAHI Common Stock
and debt convertible into shares of DAHI Common Stock by or among Draxis and
its affiliates prior to the Share Exchange were not in contemplation of and
were separate and apart from and unrelated to the Share Exchange and at the
time of any such acquisitions or transfers none of Draxis or any of its
affiliates had any plans or had undertaken any negotiations to acquire 80% or
more of the outstanding shares of DAHI Common Stock.
In the event of a successful Internal Revenue Service challenge to the
"reorganization" status of the Share Exchange, DAHI Shareholders would
recognize gain or loss with respect to each share of DAHI Common Stock
surrendered equal to the difference between the DAHI Shareholder's basis in
such share and the fair market value, as of the Effective Time of the Share
Exchange, of the Draxis Common Stock received in exchange therefor. In such
event, a DAHI Shareholder's aggregate basis in the Draxis Common Stock so
received would equal its fair market value, and his or her holding period for
such stock would begin the day after the Share Exchange is implemented. As a
reorganization for federal income tax purposes within the meaning of Section
368(a) of the Code, the Share Exchange will result in the following general
federal income tax consequences:
1. Draxis, DAHI and DPI will not recognize any gain or loss as a result
of the Share Exchange.
2. No gain or loss will be recognized by holders of DAHI Common Stock who
exchange their DAHI Common Stock for Draxis Common Stock, except with respect to
any cash received by DAHI shareholders in lieu of fractional shares of Draxis
Common Stock.
3. A holder of DAHI Common Stock who receives cash in lieu of a
fractional share of Draxis Common Stock in the Share Exchange generally will be
treated as if the fractional share had been distributed to such holder as part
of the Share Exchange and then redeemed by Draxis in exchange for the cash
distributed in lieu of the fractional share in a transaction qualifying as an
exchange under Section 302 of the Code. As a
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result, a holder of DAHI Common Stock generally will recognize a capital gain or
loss with respect to the cash payment received in lieu of a fractional share.
4. Each holder's aggregate tax basis in the Draxis Common Stock received
in the Share Exchange will equal his aggregate tax basis in the DAHI Common
Stock exchanged therefor, decreased by the amount of any tax basis allocable to
any fractional share interest for which cash is received.
5. Provided that the DAHI Common Stock is held as a capital asset at the
Effective Time, the holding period of Draxis Common Stock received in the Share
Exchange in exchange therefor will include the holding period of such DAHI
Common Stock.
CROSS BORDER REORGANIZATION RULES. Since the Share Exchange consists of a
transfer of shares of a U.S. corporation to a Canadian corporation in exchange
for shares of a Canadian corporation, the rules contained in Section 367 of the
Code relating to reorganizations involving foreign corporations will apply to
the Share Exchange. Section 367 of the Code provides that under certain
circumstances the rules described above relating to tax-free reorganizations
will not apply where one or more of the corporations involved is a non-U.S.
corporation. Under current rules, the Share Exchange will be governed under
Section 1.367(a)-3T of the U.S. Treasury Regulations, which provides that the
transaction will not be recast as a taxable transaction as long as each of the
following five conditions is met:
1. The shares of Draxis Common Stock received in the transaction by DAHI
Shareholders who are U.S. citizens or residents must represent 50% or less of
both the total voting power and the total value of all Draxis Common Stock
outstanding after the transaction;
2. No more than 50% of each of the total voting power and the total value
of the Draxis Common Stock is owned, in the aggregate, immediately after the
transaction by U.S. persons who are either officers or directors of DAHI or who
are 5% DAHI Shareholders (for purposes of this test, Draxis Common Stock owned
by such DAHI officers, directors or Shareholders prior to the transaction also
counts toward ascertaining whether the 50% threshold has been met);
3. DPI or Draxis (or any other affiliate) must have been engaged in the
active conduct of a trade or business that is substantial in comparison to the
trade or business of DAHI for the entire 36-month period preceding the date of
the transaction;
4. Every U.S. DAHI Shareholder who, immediately following the Share
Exchange, will own at least 5% of either the total voting power or the total
value of the Draxis Common Stock (or DPI) must have entered into a "gain
recognition agreement" pursuant to which he, she or it agrees to recognize for
U.S. tax purposes all gain resulting from the transaction if, within the five-
year period following the transaction, DPI disposes of its DAHI Common Stock or
certain other events occur; and
5. DAHI complies with certain reporting requirements following the
transaction.
DAHI and Draxis believe that these criteria will be met without any DAHI
Shareholder being required to enter into a "gain recognition agreement", as
described above. Nevertheless, if one or more of these conditions were not met,
the transaction may be fully taxable for U.S. tax purposes. The opinions of
Gardner, Carton & Douglas and Wilson, Sonsini, Goodrich & Rosati will rely
specifically upon representations of Draxis and DAHI and their respective
managements that each of these conditions is or will be met.
BACKUP WITHHOLDING. To prevent "backup withholding" of federal income tax
on any payments of cash to a holder of DAHI Common Stock in the Share Exchange,
a holder of DAHI Common Stock must, unless an exception applies under the
applicable law and regulations, provide the payor of such cash with such
holder's correct taxpayer identification number ("TIN") on a Substitute Form W-9
and certify under penalties of perjury that such number is correct and that such
holder is not subject to backup withholding. A Substitute Form W-9 will be
provided to each holder of DAHI Common Stock in the letter of transmittal to be
mailed to each holder
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after the Effective Time. If the correct TIN and certifications are not
provided, a Cdn.$50 penalty may be imposed on a holder of DAHI Common Stock by
the Internal Revenue Service, and any cash received by such holder may be
subject to backup withholding at a rate of 31%.
FEDERAL INCOME TAX CONSEQUENCES REGARDING DISSENTERS. There are no
dissenters' rights under the Louisiana Act; rather, all DAHI Missouri
Shareholders who wish to dissent must do so under the Missouri Act with respect
to the Reincorporation Merger. See "Reincorporation Merger - U.S. Federal
Income Tax Consequences of the Reincorporation Merger".
FEDERAL INCOME TAX CONSEQUENCES RESULTING FROM DISSENT TO REINCORPORATION
MERGER. In the event any DAHI Shareholders dissent to the Reincorporation
Merger, it will be a condition to the tax opinions of Wilson, Sonsini, Goodrich
& Rosati and Gardner, Carton & Douglas regarding the Share Exchange that all
payments made to such dissenters be made by DAHI out of its assets, and not
directly or indirectly by Draxis or DPI. If any payments are made by Draxis or
DPI, directly or indirectly, to any DAHI Shareholder who exercises dissenters'
rights under the Missouri Act with respect to the Reincorporation Merger, the
Share Exchange could be treated as a fully taxable transaction to all
shareholders, and the tax effects described above may not apply.
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND IS BASED ON EXISTING LAW AS OF THE DATE OF THIS
JOINT MANAGEMENT PROXY STATEMENT-PROSPECTUS. SHAREHOLDERS OF DAHI ARE URGED TO
CONSULT THEIR TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM
OF THE SHARE EXCHANGE (INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS).
ACCOUNTING TREATMENT
Draxis intends to treat the Share Exchange as a "purchase" for accounting
and financial reporting purposes. Purchase accounting requires the acquiror to
determine the purchase price based on the consideration paid in the acquisition.
The fair value of the acquired net tangible assets is recorded by the acquiror
as of the date on which the acquisition is consummated. The excess of purchase
price over net tangible assets acquired is required to be allocated among
identifiable intangible assets. These identifiable intangible assets may
include, among other things, incomplete technology, complete technology, brands
and trade-marks, customer lists, employment contracts and copyrights. Any
excess purchase price over the acquired net tangible assets that is not allotted
to identifiable assets is classified as goodwill. The amounts recorded for
intangible assets and goodwill are required to be amortized by systematic
charges to income over the estimated periods of benefit and estimated useful
life.
CANADIAN FEDERAL INCOME TAX CONSEQUENCES OF THE SHARE EXCHANGE PLAN
General
The following summary describes generally the principal Canadian federal
income tax consequences of the Share Exchange for Canadian holders (as defined
below) of DAHI Common Stock assuming that the Share Exchange is consummated as
contemplated herein.
This summary is of a general nature only and is not intended to be, and
should not be construed to be, legal or tax advice to any holder of DAHI Common
Stock and no representation is made with respect to Canadian federal income tax
consequences to any such holder. This summary assumes that the DAHI Common
Stock held by each Canadian holder thereof is held as a capital asset and does
not take account of rules that may apply to Canadian holders of DAHI Common
Stock that are subject to special treatment under the INCOME TAX ACT (Canada)
(the "Act") (including, without limitation, insurance companies, dealers in
securities, certain retirement plans, financial institutions, tax exempt
organizations and holders who are not Canadian holders (as defined below).
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Accordingly, holders of DAHI Common Stock should consult their own tax
advisors with respect to their individual circumstances.
This discussion is based upon the current provisions of the Act, the
regulations adopted thereunder in force on October 15, 1996, all specific
proposals to amend the Act and regulations publicly announced by the Minister of
Finance (Canada) prior to October 15, 1996 and on the understanding of counsel
of the current published administrative and assessing practices of and published
by Revenue Canada, Customs, Excise and Taxation as they exist as of October 15,
1996. This summary is not exhaustive of all possible Canadian federal income
tax considerations and except as mentioned above does not take into account or
anticipate any prospective changes in tax law, whether by legislative,
governmental or judicial action, and does not take into account provincial,
territorial or foreign tax consequences which may differ significantly from
those described herein.
As used in this section, a Canadian holder of DAHI Common Stock means a
shareholder that is a resident of Canada for the purposes of the Act and the
current provisions of the CANADA-UNITED STATES INCOME TAX CONVENTION (1980) as
amended by the Protocols signed on June 14, 1983, March 28, 1994 and March 17,
1995 (the "Treaty") and has always been so resident.
Taxation Consequences
A Canadian holder of DAHI Common Stock will recognize a taxable capital
gain or an allowable capital loss (as defined by the Act) on the exchange of
DAHI Common Stock for Draxis Common Stock in an amount equal to seventy-five
percent of the difference between the fair market value of the Draxis Common
Stock received by the Canadian holder in exchange for DAHI Common Stock and the
Canadian holder's adjusted cost base (as defined by the Act) of the DAHI Common
Stock so exchanged. Any taxable capital gain realized will be subject to
Canadian personal or corporate income tax rates. In the event an allowable
capital loss is realized such a loss may be deducted by a Canadian holder in
computing income for the year of disposition or the three preceding or any
subsequent years (subject and in accordance with the rules contained in the Act)
but only to the extent of taxable capital gains realized in those years.
A holder that is a Canadian-controlled private corporation may be liable to
pay an additional refundable tax of 6 2/3% in respect of taxable capital gains.
The full amount of capital gains must be included in an individual holder's
adjusted taxable income for the purpose of computing such holder's liability
under the Act for alternative minimum tax.
Dissenters. There will not be any dissenters under the Louisiana Act;
rather, all DAHI Missouri Shareholders who wish to dissent may do so under the
Missouri Act with respect to the Reincorporation Merger. See "Reincorporation
Merger - Canadian Federal Income Tax Consequences of the Reincorporation
Merger".
Article XIII of the Treaty will normally apply to exempt a Canadian holder
from U.S. capital gains tax provided the value of the DAHI Common Stock is not
at the time of the Share Exchange derived principally from real property or
interests therein situated in the United States and provided the holder does not
have and has not had within 12 months preceding the Share Exchange a permanent
establishment or fixed base available to such holder in the United States of
which such stock was part or to which such stock pertains.
ISSUE AND RESALE OF DRAXIS COMMON STOCK TO BE RECEIVED IN THE SHARE EXCHANGE
Canada
Draxis has applied for orders and rulings from the relevant Canadian
securities regulatory authorities to the effect that: (i) the issue of shares of
Draxis Common Stock to DAHI Shareholders at the Effective Time in connection
with the Share Exchange be exempt from the prospectus and registration
requirements otherwise imposed by applicable Canadian securities laws; and (ii)
provided that Draxis remains a "reporting issuer" for
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the purposes of relevant Canadian securities laws, such shares of Draxis Common
Stock may be resold in Canada without restriction by a shareholder who is not a
person or company or a group of persons or companies (a "control person")
holding a sufficient number of shares of Draxis Common Stock to materially
affect control of Draxis. The securities legislation of certain Canadian
provinces provides a rebuttable presumption that a person or company is a
control person in relation to a reporting issuer where the person or company,
alone or in combination with others, holds more than 20% of the outstanding
voting securities of the reporting issuer.
United States
The shares of Draxis Common Stock to be issued in connection with the Share
Exchange will have been registered under the Securities Act. Such shares will
be freely transferable under the Securities Act, except for shares issued to any
person who is deemed to be an affiliate (as such term is defined for purposes of
Rule 145 under the Securities Act, an "Affiliate") of DAHI at the time of the
DAHI Louisiana Special Meeting. Persons who may be deemed to be Affiliates of
DAHI include individuals or entities that control, are controlled by, or are
under common control with DAHI and may include certain officers and directors of
DAHI as well as principal shareholders of DAHI. Affiliates may not sell their
shares of Draxis Common Stock acquired in connection with the Share Exchange
except pursuant to (i) an effective registration statement under the Securities
Act covering the resale of such shares, (ii) paragraph (d) of Rule 145 under the
Securities Act or (iii) any other applicable exemption under the Securities Act.
The registration statement filed by Draxis under the Securities Act in
connection with the Share Exchange, of which this Joint Management Proxy
Statement-Prospectus forms a part, does not cover the resale of shares of Draxis
Common Stock to be received by Affiliates of DAHI in the Share Exchange.
Pursuant to the Exchange Agreement, DAHI has agreed that at least 30 days
prior to the Effective Time, DAHI will cause to be delivered to Draxis a letter
identifying all persons who are or will be, at the time of the DAHI Record Date,
Affiliates of DAHI. DAHI is obligated under the Exchange Agreement to use
reasonable best efforts to procure written agreements ("Affiliate Agreements")
from such persons containing appropriate representations and covenants intended
to ensure compliance with the Securities Act. Draxis' obligations under the
Exchange Agreement to effect the Share Exchange are conditioned upon the receipt
of an Affiliate Agreement from each Affiliate so identified by DAHI.
QUOTATION OF DRAXIS COMMON STOCK ON THE TSE AND NASDAQ
Subject to the approval and adoption by the Draxis Shareholders of the
Draxis Common Stock Offering, and other requirements of the TSE and Nasdaq, the
shares of Draxis Common Stock to be issued in connection with the Share
Exchange, the Draxis Common Stock Offering and the Draxis Stock Option Plan
Adjustment have been conditionally approved for listing on the TSE and on
Nasdaq.
DELISTING AND DEREGISTRATION OF DAHI COMMON SHARES AFTER THE SHARE EXCHANGE
If the Share Exchange is consummated, the DAHI Common Shares will be
delisted from the TSE and Nasdaq and will be deregistered under the Exchange
Act.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF MISSOURI AND CANADA
General
If the Mandatory Share Exchange is consummated, holders of DAHI Common
Stock who do not exercise Dissenter's Rights under the Missouri Act will, at the
Effective Time, have their DAHI Common Stock exchanged for shares of Draxis on a
1 to 1.35 ratio. DAHI is a corporation organized under the Missouri Act.
Draxis is a corporation organized under the CANADA BUSINESS CORPORATIONS ACT
("CBCA"). While the rights and privileges of shareholders of a CBCA corporation
are, in many instances, comparable to stockholders of a Missouri corporation
there are certain differences. The following discussion is a summary of certain
material
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differences between the rights of shareholders under the Missouri Act and the
rights of shareholders under the CBCA. The following summary does not purport
to be complete and is qualified in its entirety by reference to the Missouri Act
and the CBCA.
Vote Required for Extraordinary Transactions
Under the CBCA, certain extraordinary corporate actions, such as certain
amalgamations, continuances, and sales, leases or exchanges of all or
substantially all the property of a corporation other than in the ordinary
course of business, and other extraordinary corporate actions such as
liquidations, dissolutions and (if ordered by a court) arrangements, are
required to be approved by special resolution. A special resolution is a
resolution passed at a meeting by not less than two thirds of the votes cast by
the shareholders entitled to vote on the resolution. In certain cases, a
special resolution to approve an extraordinary corporate action is also required
to be approved separately by the holders of a class or series of shares. The
CBCA does not have a provision analogous to Section 116 of the Louisiana Act
which permits mandatory share exchanges.
Except with respect to certain mergers between "affiliate" parties under
Section 351.459 and with respect to a parent and certain subsidiaries under
Section 351.447, the Missouri Act generally requires the affirmative vote of
holders of two-thirds of the voting power of outstanding shares of the Missouri
corporation to effect a merger. Under the Missouri Act, holders of stock which
is not by its terms entitled to vote on such a transaction are not entitled to
notice of the meeting at which the proposed transaction is to be considered.
Amendment to Governing Documents
Under the CBCA, any amendment to the articles generally requires approval
by special resolution, which is a resolution passed by a majority of not less
than two-thirds of the votes cast by shareholders entitled to vote on the
resolution. The CBCA provides that unless the articles or bylaws otherwise
provide, the directors may, by resolution, make, amend or repeal any bylaws that
regulate the business or affairs of a corporation. Where the directors make,
amend or repeal a bylaw, they are required under the CBCA to submit the bylaw,
or an amendment or a repeal of a bylaw to the shareholders at the next meeting
of shareholders, and the shareholders may confirm, reject or amend the bylaw,
amendment or repeal by an ordinary resolution, which is a resolution passed by a
majority of the votes cast by shareholders entitled to vote on the resolution.
Under the Missouri Act, amendments to the Articles of Incorporation
generally require the approval of the holders of a majority of the outstanding
stock entitled to vote thereon, with or without a resolution of the Board of
Directors recommending the amendment to the Articles of Incorporation, at an
annual or special meeting of the shareholders. Bylaws may be amended by a
majority vote of the shareholders of the corporation, unless otherwise provided
in the Articles of Incorporation to allow amendments by the Board of Directors.
Dissenters' Rights
The CBCA provides that shareholders of a CBCA corporation entitled to vote
on certain matters are entitled to exercise dissent rights and to be paid the
fair value of their shares in connection therewith. The CBCA does not
distinguish for this purpose between listed and unlisted shares. Such matters
include (a) any amalgamation with another corporation (other than with certain
affiliated corporations); (b) an amendment to the corporation's articles to add,
change or remove any provisions restricting the issue, transfer or ownership of
shares; (c) an amendment to the corporations's articles to add, change or remove
any restriction upon the business or businesses that the corporation may carry
on; (d) a continuance under the laws of another jurisdiction; (e) a sale, lease
or exchange of all or substantially all the property of the corporation other
than in the ordinary course of business; (f) a court order permitting a
shareholder to dissent in connection with an application to the court for an
order approving an arrangement proposed by the corporation; and (g) certain
amendments to the articles of a corporation which require a separate class or
series vote, provided that a shareholder is not entitled to dissent if an
amendment to the articles is effected by a court order approving a
reorganization or by a court order made in connection with an application for an
oppression remedy.
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The Missouri Act provides that shareholders have the right, in some
circumstances, to dissent from certain corporate mergers and other
reorganizations and instead to demand payment of the "fair value" of their
shares. For a more complete discussion of dissenters' rights, see
"Reincorporation Merger-Dissenters' Rights".
Oppression Remedy
The CBCA provides an oppression remedy that enables the court to make any
order, interim or final, to rectify the matters complained of where it is
satisfied upon application by a complainant (as defined below) that: (i) any act
or omission of the corporation or an affiliate effects a result; (ii) the
business or affairs of the corporation or an affiliate are, have been or are
threatened to be carried on or conducted in a manner; or (iii) the powers of the
directors of the corporation or an affiliate are, have been exercised in a
manner, that is oppressive or unfairly prejudicial to or that unfairly
disregards the interest of any security holder, creditor, director or officer of
the corporation. A complainant includes: (a) a present or former registered
holder or beneficial owner of securities of a corporation or any of its
affiliates; (b) a present or former officer or director of the corporation or
any of its affiliates; and (c) any other person who in the discretion of the
court is a proper person to make such application.
Due to the breadth of the conduct which can be complained of and the scope
of the court's remedial powers, the oppression remedy is very flexible and is
sometimes relied upon to safeguard the interests of shareholders and other
complainants with a substantial interest in the corporation. Under the CBCA, it
is not necessary to prove that the directors of a corporation acted in bad faith
in order to seek an oppression remedy. Furthermore, the court may order the
corporation or its subsidiary to pay the interim expenses of a complainant
seeking an oppression remedy, but the complainant may be held accountable for
such interim costs on final disposition of the complaint (as in the case of a
derivative action, which is described below).
The Missouri Act does not provide for a similar remedy.
Derivative Action
Under the CBCA, a complainant may apply to the court for leave to bring an
action in the name of and on behalf of a corporation or any subsidiary, or to
intervene in an existing action to which any such body corporate is a party, for
the purpose of prosecuting, defending or discontinuing the action on behalf of
the body corporate. Under the CBCA, no action may be brought and no
intervention in an action may be made unless the complainant has given
reasonable notice to the directors of the corporation or its subsidiary of the
complainant's intention to apply to the court if the directors of the
corporation or its subsidiary will not bring, diligently prosecute or defend or
discontinue the action and the court is satisfied that (a) the complainant is
acting in good faith; and (b) it appears to be in the interests of the
corporation or its subsidiary that the action be brought, prosecuted, defended
or discontinued.
Under the CBCA, the court in a derivative action may make any order it
thinks fit, including an order requiring a corporation or its subsidiary to pay
the complainant's interim costs, including reasonable legal fees and
disbursements.
Derivative actions may be brought in Missouri by a stockholder on behalf
of, and for the benefit of, the corporation. Under the Missouri Rules of Civil
Procedure, a stockholder must aver in the complaint that he or she was a
stockholder of the corporation at the time of the transaction of which he or she
complains, or that his or her shares thereafter devolved on him or her by
operation of law. The complaint must also allege the efforts, if any, made by
the stockholder to obtain the action he or she desires from the directors or
comparable authority and, if necessary, from the stockholders and the reasons
for his or her failure to obtain the action or for not making the effort.
Shareholder Consent in Lieu of, and calling of, Meeting
Under the CBCA, shareholder action without a meeting may be taken only by
written resolution signed by all shareholders who would be entitled to vote
thereon at a meeting. Special meetings of shareholders may
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be called by the board of directors, by a court or, in certain circumstances,
requisitioned by holders of at least 5% of the outstanding shares.
The Missouri Act allows shareholder actions to be taken by written consents
signed by all shareholders entitled to vote with respect thereto.
Director Qualifications
Under the CBCA, a corporation having outstanding securities which were
issued as part of a distribution to the public, must have not fewer than three
directors and a majority of the directors must be resident Canadians. The CBCA
also requires that at least two of the directors of such a corporation must not
be officers or employees of the corporation or any of its affiliates. The
Missouri Act does not have comparable requirements.
Under the Missouri Act, a corporation must have not fewer than three
directors unless otherwise provided by the corporation's Articles of
Incorporation in which case it can have one or two directors. Directors can be
elected for a term not to exceed three years.
Fiduciary Duties of Directors
Directors of corporations governed by the CBCA have fiduciary obligations
to the corporation. Under the CBCA, the duty of loyalty requires directors to
act honestly and in good faith with a view to the best interests of the
corporation as a whole, and the duty of care requires that the directors
exercise the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. Directors and officers who are a party to
a material contract or proposed material contract with the corporation or who
are a director or an officer of, or have a material interest in, any person who
is a party to a material contract or proposed material contract with the
corporation have a duty to disclose the nature and extent of such interest. If
such interest exists, the director generally may not vote on any resolution to
approve the contract. No such contract is void or voidable by reason only of
the relationship if such interest is properly disclosed, the contract is
approved by the other directors or by the shareholders and it was fair and
reasonable to the corporation at the time it was approved.
Directors of corporations incorporated or organized under the MISSOURI ACT
have fiduciary obligations to the corporation and its stockholders. In
fulfilling these fiduciary obligations, the directors must act in accordance
with the so-called duties of "due care" and "loyalty". The duty of due care
generally requires that the directors act in an informed and deliberative manner
and that they inform themselves, prior to making a business decision, of all
material information reasonably available to them. The duty of loyalty can be
summarized as the duty to act in good faith in a manner which the directors
reasonably believe to be in the interests of the stockholders. It generally
requires that there be no conflict between duty and self-interest. No contract
or transaction between a corporation and one or more of its directors and any
other corporation in which the directors shall have financial interest shall be
voidable if the material facts as to the director's relationship or interest in
the contract or the transaction are disclosed or are known to the Board of
Directors prior to a vote regarding the transaction is taken, and if the
director abstains from the vote regarding the transaction, and if the
transaction is approved by a majority of the "disinterested directors". i.e.,
directors without a financial interest in the transaction.
Indemnification of Officers and Directors
Under the CBCA, a corporation may, except in respect of an action by or on
behalf of the corporation to procure a judgment in its favor, indemnify a
director or officer, a former director or officer or a person who acts or acted
at the corporation's request as a director or officer of a body corporate of
which the corporation is or was a shareholder or creditor, and his or her heirs
and legal representatives (an "Indemnifiable Person"), against all costs,
charges and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by the Indemnifiable Person in respect of any
civil, criminal or administrative action or
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proceeding to which the Indemnifiable Person is made a party by reason of being
or having been a director or officer of such corporation or such body corporate,
if: (a) the Indemnifiable Person acted honestly and in good faith with a view to
the best interests of such corporation; and (b) in the case of a criminal or
administrative action or proceeding that is enforced by a monetary penalty, the
Indemnifiable Person had reasonable grounds for believing that his or her
conduct was lawful. An Indemnifiable Person is entitled to such indemnity from
the corporation if he or she was substantially successful on the merits in his
or her defense of the action or proceeding and fulfilled the conditions set out
in (a) and (b) above. A corporation may, with the approval of a court, also
indemnify an Indemnifiable Person in respect of an action by or on behalf of the
corporation or body corporate to procure a judgment in its favor, to which such
person is made a party by reason of being or having been a director or an
officer of the corporation or body corporate, if he or she fulfils the
conditions set out in (a) and (b) above. The Draxis By-laws provide for
indemnification of directors and officers to the fullest extent authorized by
the CBCA.
The DAHI Missouri Articles of Incorporation, as amended, require
indemnification of the directors and officers to the fullest extent permitted by
the MISSOURI ACT. Pursuant to the MISSOURI ACT, DAHI Missouri generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses, judgments and amounts paid in settlements incurred by
and in connection with any suit to which they are, or are threatened to be made,
a party by reason of serving such positions so long as they act in good faith
and in a manner they reasonably believe to be in and not opposed to the best
interest of DAHI Missouri, and with respect to any criminal action, they had no
reasonable cause to believe their conduct was unlawful. With respect to suits
by or in the right of a corporation, however, indemnification is not available
if such person is finally adjudged to be liable to DAHI Missouri for amounts
paid in settlement unless and only to the extent the Court determines the
indemnification is appropriate. Also, no indemnification shall be made to such
person in respect of any claim in which such person is adjudged to be liable for
negligence or misconduct in the performance of his duty to the corporation
unless and to the extent that the Court determines that indemnity is proper.
Anti-Takeover Provisions and Interested Stockholder Transactions
The CBCA provides that, in the absence of an exemption, if any person
offers to acquire shares that, if combined with shares already beneficially
owned or controlled, directly or indirectly, by the offeror or an affiliate or
associate of the offeror on the date of the offer, would exceed 10% of any class
of issued shares of the corporation, the offeror must prepare and send a take-
over bid circular to each shareholder of the corporation. Canadian provincial
securities laws augment and clarify this requirement to in effect require a
take-over bid offeror to offer the same consideration to all shareholders unless
certain exemptions are available, which include limited private agreement
purchases and limited market purchases.
The CBCA does not impose any limitations on the rights of non-residents or
foreigners to hold or vote Draxis Common Shares.
The Missouri Act also provides certain restrictions between a domestic
corporation and an "interested shareholder", which is defined to be one who is
the beneficial owner, directly or indirectly, of 20% or more of the outstanding
stock of the resident domestic corporation. Any "business combinations"
involving a domestic corporation and an interested shareholder must first be
approved by the domestic corporation's Board of Directors within sixty (60) days
of when a written proposal by the interested shareholder is submitted to the
Board of Directors.
The Missouri Act also regulates "control share acquisitions", which are
defined as acquisitions of blocks of stock which are deemed to give the
acquiring shareholder a "control" voting block in the Missouri corporation.
There are many exceptions to the control share acquisition rule, such as a
private placement of a corporation's stock, but the control share acquisition
statutes require the vote of a majority of the corporation's disinterested
shareholders present at a meeting duly called to confer voting rights upon any
such shares purchased in "control share acquisitions".
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The Missouri Act also does not impose any limitations on the rights of non-
residents or foreigners to hold or vote their domestic corporation stock.
DISSENTERS' RIGHTS
Under Section 131 of the Louisiana Act, which governs dissenters' rights in
Louisiana, only existing shareholders may exercise the right to dissent from a
transaction that is subject to dissenters' rights. At the time of the DAHI
Louisiana Special Meeting, DAHI Missouri will be the sole shareholder of DAHI
Louisiana. DAHI Missouri is the only entity that could exercise dissenters'
rights under the Louisiana Act in connection with the Share Exchange Plan, and
DAHI Missouri does not intend to exercise any such dissenters' rights. Thus, no
dissenters' rights will be exercised under the Louisiana Act in connection with
the Share Exchange Plan.
This will not adversely affect the rights of DAHI Missouri Shareholders to
exercise dissenters' rights under the Missouri Act in connection with the
Reincorporation Merger. See "Reincorporation Merger - Dissenters' Rights".
VOTES REQUIRED
Under Louisiana law, the affirmative vote of two-thirds of the votes cast
in person or by proxy at the DAHI Louisiana Special Meeting is required for
approval of the Share Exchange Plan. In addition, the Exchange Agreement
requires that the Share Exchange Plan be approved by the affirmative vote of a
majority of the votes cast in person or by proxy at the DAHI Louisiana Special
Meeting by persons other than Draxis or its affiliates or related parties. The
votes of directors and officers of Draxis who hold shares in DAHI will not be
considered for this purpose. If persons entitled to cast votes representing a
majority of the total voting power of DAHI Louisiana are present in person or by
proxy at the DAHI Louisiana Special Meeting, a quorum will be present.
Abstentions and broker non-votes will be considered present at the DAHI
Louisiana Special Meeting for the purpose of determining the presence of a
quorum but will have no effect on the vote in respect of the Share Exchange
Plan.
THE BOARD OF DIRECTORS OF DAHI MISSOURI HAS APPROVED THE SHARE EXCHANGE
PLAN BY UNANIMOUS VOTE OF ALL DIRECTORS INCLUDING AN INDEPENDENT COMMITTEE
THEREOF AND SUCH DIRECTORS UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS VOTE "FOR"
THE APPROVAL OF AND ADOPTION OF THE SHARE EXCHANGE PLAN. PROXIES SOLICITED BY
DAHI MISSOURI FROM DAHI MISSOURI SHAREHOLDERS WHO HAVE BEEN GIVEN THE RIGHT TO
VOTE SHARES OF COMMON STOCK OF DAHI LOUISIANA OWNED BY DAHI MISSOURI WILL BE
VOTED TO APPROVE THE SHARE EXCHANGE PLAN UNLESS DAHI MISSOURI SHAREHOLDERS
SPECIFY IN THEIR PROXIES A CONTRARY CHOICE.
DRAXIS COMMON STOCK OFFERING
GENERAL
As summarized in the discussion above on the Exchange Agreement, DPI is
required to cause the exchange of 1.35 shares of Draxis Common Stock for each
share of DAHI Common Stock pursuant to the Share Exchange. In order that DPI is
able to carry out this obligation, DPI has entered into an agreement with Draxis
(the "Draxis Share Delivery Agreement") whereby Draxis has agreed to issue
additional shares of Draxis Common Stock and deliver such shares to Draxis' duly
appointed transfer agent for issuance to DAHI Shareholders exchanging their
shares of DAHI Common Stock with DPI.
The Exchange Agreement also requires that existing options to acquire
shares of DAHI Common Stock will be exchanged for options ("New Options") to
acquire shares of Draxis Common Stock at the Exchange Ratio; provided, however,
that such DAHI options held by those directors of DAHI who will cease to be
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directors of DAHI and who are neither directors of Draxis nor employees of DAHI
or Draxis after the consummation of the Share Exchange shall be accelerated so
that they vest immediately upon the mailing of this Joint Management Proxy
Statement-Prospectus. Shares of Draxis Common Stock underlying the New Options
will be qualified for distribution in the United States and Canada.
Assuming that no dissenters' rights are exercised, approximately 5.8
million shares of Draxis Common Stock will be issued to DAHI Shareholders
pursuant to the Share Exchange if it is consummated. This number of shares of
Draxis Common Stock represents approximately 25% of the currently issued and
outstanding shares of Draxis Common Stock.
The Draxis Board, including the Draxis Independent Committee thereof, has
concluded that it is in the best interest of Draxis and the Draxis Shareholders
to enter into the Exchange Agreement and the Draxis Share Delivery Agreement.
The acquisition of all of the shares of DAHI Common Stock will result, among
other things, in expanded opportunities for the Draxis core business and, in the
longer term, strengthen overall combined operations. See "Share Exchange Plan -
Draxis Reasons for Transaction and Recommendation of Draxis Board".
VOTE REQUIRED
Under the rules of the National Association of Securities Dealers, Inc.,
the affirmative vote of the holders of the majority of the outstanding shares of
Draxis Common Stock represented in person or by proxy at the Draxis Special
Meeting is required for approval of the Draxis Common Stock Offering.
Abstentions and broker non-votes will be considered present at the Draxis
Special Meeting for the purpose of determining the presence of a quorum but will
have no effect on the vote in respect of the Draxis Common Stock Offering.
THE BOARD OF DIRECTORS OF DRAXIS HAS APPROVED THE DRAXIS COMMON STOCK
OFFERING BY UNANIMOUS VOTE OF ALL DIRECTORS INCLUDING AN INDEPENDENT COMMITTEE
THEREOF AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
SUCH OFFERING. PROXIES SOLICITED BY DRAXIS WILL BE VOTED TO APPROVE THE DRAXIS
COMMON STOCK OFFERING UNLESS SHAREHOLDERS SPECIFY IN THEIR PROXIES A CONTRARY
CHOICE.
DRAXIS STOCK OPTION PLAN ADJUSTMENT
GENERAL
The Draxis Stock Option Plan (the "Plan") provides that the Draxis Board
may from time to time grant options to purchase shares of Draxis Common Stock to
directors, officers and employees of Draxis and its subsidiaries. The maximum
number of shares of Draxis Common Stock that may be issued under the Plan is
2,500,000. The Draxis Board determines the exercise price per share of Draxis
Common Stock, the number of options which may be granted and all other terms and
conditions of the stock options, in accordance with the applicable policies of
any relevant regulatory authority or stock exchange. The exercise price of the
options may not be lower than the market price of the shares of Draxis Common
Stock on the TSE at the date of the grant and the options are exercisable for a
period not exceeding ten years from their date of grant.
EXCHANGE AGREEMENT
The Exchange Agreement provides that existing options to acquire shares of
DAHI Common Stock will be exchanged for options to acquire shares of Draxis
Common Stock at the Exchange Ratio; provided, however, that such DAHI options
held by those directors of DAHI who will cease to be directors of DAHI and who
are neither directors of Draxis nor employees of DAHI or Draxis after the
consummation of the Share Exchange shall be accelerated so that they vest
immediately upon the mailing of this Joint Management Proxy Statement-
Prospectus.
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As of the date hereof, DAHI has 1,221,976 options outstanding. Based on an
Exchange Ratio of 1.35, Draxis needs to reserve a minimum of 1,649,668 shares of
Draxis for the exercise of the currently outstanding DAHI options. In addition,
it will be necessary to recruit new employees at DAHI in connection with the
launch of ANIPRYL-Registered Trademark- in the United States and additional
options will be required to provide appropriate incentives. Draxis also plans
to continue to seek synergistic acquisitions of companies, technologies,
products and distribution rights which will build on Draxis' targeted niches in
Canada and the United States. As Draxis expands and implements its strategy,
additional options will also be required to provide appropriate incentives to
new employees. Draxis currently has 1,449,274 options outstanding under the
Plan with an approved maximum of 2,500,000. Accordingly, in order to satisfy
the Draxis obligations under the Exchange Agreement and to recruit and provide
incentives to new employees required to drive the growth of the combined entity,
management of Draxis is recommending that the maximum number of Draxis shares to
be reserved under the Plan be increased by 2,000,000, from 2,500,000 to
4,500,000. See also "Business of Draxis - Draxis Employee Participation Share
Purchase Plan".
VOTE REQUIRED
Under the rules of the TSE, the affirmative vote of the holders of the
majority of the outstanding shares of Draxis Common Stock represented in person
or by proxy at the Draxis Special Meeting is required for approval of the Draxis
Stock Option Plan Adjustment. Abstentions and broker non-votes will be
considered present at the Draxis Special Meeting for the purpose of determining
the presence of a quorum but will have no effect on the vote in respect of the
expansion of the Draxis Stock Option Plan.
BUSINESS OF DAHI MISSOURI
INTRODUCTION
Deprenyl Animal Health, Inc. ("DAHI") was incorporated as DEPL Animal Food
Supplements, Inc. under the laws of the State of Missouri in July 1990. In
November 1990, DAHI changed its name to its current name. DAHI's principal
executive offices are located at 10955 Lowell, Suite 710, Overland Park, Kansas
66210. (Telephone: (913) 338-2120).
BUSINESS OF DAHI
ANIPRYL-Registered Trademark-
DAHI was formed in July 1990, to continue the development and marketing
research commenced earlier by Deprenyl Animal Health (Canada) Inc. ("DAH
(Canada)"), a wholly-owned subsidiary of Draxis, relating to veterinary
prescription applications of l-deprenyl for the United States and Canadian
markets. DAHI is currently developing ANIPRYL-Registered Trademark-, a
selegiline product, for use in veterinary prescriptive applications,
particularly for use in dogs. The two indications being developed by DAHI are
canine Cushing's disease and canine cognitive dysfunction. Canine Cushing's
disease refers to increased blood cortisol and the presence of one or more
typical clinical signs, such as change in appetite, obesity, frequent urination,
abdominal distention, loss of hair, lethargy and other behavioural changes.
Approximately 15,000 cases of canine Cushing's disease are diagnosed each year
in Canada and 150,000 in the United States. Canine Cushing's disease is
progressive and ultimately fatal and there are no approved drugs for treating
this disease.
Canine cognitive dysfunction syndrome refers to the onset in elderly pet
dogs of two or more behavioural problems which are not due to the presence of a
general medical condition such as cancer or organ failure. Owners of affected
dogs often describe these symptoms as "senility" or "old age," but recent
publications indicate that canine cognitive dysfunction is quite likely due to
brain pathology similar to early-stage Alzheimer's disease in humans. Some
typical signs include confusion, disorientation, decreased activity, changes in
the sleep/wake cycle, inappropriate urination, and signs which suggest a
decrease in the dog's
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interest in, or ability to interact with, its owner and environment.
Approximately 150,000 older dogs in Canada and 1.5 million older dogs in the
United States are afflicted with cognitive dysfunction each year.
In September 1995, DAHI received from the Canadian Bureau of Veterinary
Drugs ("BVD") its first regulatory approval for the use of ANIPRYL-Registered
Trademark- in treating canine Cushing's disease. ANIPRYL-Registered Trademark-
is being promoted by the Draxis sales force in Canada as a first line treatment
for canine Cushing's disease. Marketing and sales efforts are directed towards
small animal and mixed animal veterinary practices. DAHI filed its first
complete New Animal Drug Application ("NADA") with the FDA on October 1, 1995
for the same indication and is also conducting Phase III equivalent trials to
obtain regulatory approval to market ANIPRYL-Registered Trademark- for canine
cognitive dysfunction. In May 1996, an application was filed with the BVD in
Canada for the treatment of canine cognitive dysfunction with ANIPRYL.-
Registered Trademark-
DAHI's primary supplier of l-deprenyl for the production of ANIPRYL-
Registered Trademark- is Chinoin Pharmaceutical and Chemical Works, Co. Ltd.
("Chinoin"), which owns approximately 5.2% of the outstanding DAHI Common Stock.
DAHI purchases its supply of l-deprenyl from Chinoin under a supply agreement
dated October 1, 1990, as amended (the "DAHI Chinoin Supply Agreement"). The
term of the DAHI Chinoin Supply Agreement ends on the earlier of (i) November
22, 2003, and (ii) an earlier date upon the occurrence of an event of force
majeure or certain other events. Under the DAHI Chinoin Supply Agreement, DAHI
has committed to purchase a specified quantity of l-deprenyl from Chinoin during
a four-year period commencing July 5, 1995 and is required to pay a 3% royalty
on DAHI's net sales of l-deprenyl products in its territory for a three-year
period ending on September 19, 1998. In 1995, DAHI announced that it had
developed the data required to qualify an alternative source of supply for l-
deprenyl. The data has been accepted by both the BVD and the FDA.
In September 1992, the United States Patent and Trademark Office issued a
patent to DAHI entitled "Use of l-deprenyl for Retention of Specific
Physiological Functions". The patent claims specific uses of l-deprenyl for use
in treating dogs. Similar patents have also issued to DAHI in Australia, New
Zealand and at the European Patent Office. Four additional United States
patents have also been issued to DAHI. Three of the patents cover several
veterinary pharmaceutical uses of l-deprenyl and the fourth patent relates to
immune system dysfunction in mammals. In March 1996, DAHI received from the
United States Patent and Trademark Office a Notice of Allowance covering
ANIPRYL-Registered Trademark- to extend the life expectancy of dogs. DAHI has
filed similar patent applications in Canada, Japan and other jurisdictions. A
seventh U.S. patent application was allowed in June 1996 covering an additional
veterinary use of 1-deprenyl.
The composition of matter patent on 1-selegiline held by Chinoin in the
United States and the product by - process patent in Canada have expired.
Expiration of these patents held by Chinoin permits competition with DAHI by
generic manufacturers, subject to required regulatory approval and provided such
competition does not infringe DAHI's issued use patents. Other manufacturers
are free to develop processes to manufacture 1-selegiline so long as the process
does not infringe the process patents held by Chinoin. During 1995, DAHI became
aware that Sanofi, S.A., a French subsidiary of Societe Nationale Elf Equitane
("Sanofi") has filed veterinary use patent applications in Europe disclosing
uses of 1-deprenyl. DAHI believes that the subject matter of Sanofi's patent
applications may contain claims that, if practised, could infringe DAHI's issued
European patents. There can be no assurance at this time that Sanofi's
applications will not issue or whether, if they issue, they will be dominated by
DAHI's patents. DAHI may not be able to afford the expense of enforcing its
proprietary rights or defending itself against infringement actions brought by
other patent holders.
During September 1994, DAHI entered into a manufacturing agreement with
Fermenta Animal Health Company ("FAH"). The manufacturing agreement provides
that FAH will manufacture ANIPRYL-Registered Trademark- for sale in the United
States and Canada. Under the agreement, DAHI is required to purchase minimum
annual quantities from FAH upon obtaining FDA approval to market ANIPRYL-
Registered Trademark- in the United States. DAHI has retained the ability to
seek additional manufacturers in the United States and Canada, subject to
certain conditions. The term of the agreement is for five years from the date
DAHI obtains FDA approval to market ANIPRYL-Registered Trademark- in the United
States, but may be terminated earlier under certain conditions or on the
occurrence of certain events. During 1995, DAHI established a second
manufacturing site which is being used to supply the Canadian market. FAH was
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sold in late 1995, and DAHI and FAH have mutually agreed to terminate the
manufacturing agreement, and thereafter DAHI will seek an alternate
manufacturing partner.
Under an agreement made in January 1996 (the "DAHI Distribution
Agreement"), DAHI granted to DAHI Animal Health (Ontario) Inc. and DAHI Animal
Health Inc., both wholly-owned subsidiaries of Draxis, the exclusive rights to
distribute ANIPRYL-Registered Trademark- in Canada for an initial term of 10
years. Draxis has paid DAHI a fee of U.S.$468,750 for these Canadian rights, as
well as U.S.$125,000 for reimbursement of expenses incurred by DAHI to prepare
marketing materials for a Canadian launch of ANIPRYL-Registered Trademark-.
Draxis and DAHI completed a training program for the Draxis sales
representatives in January 1996 and ANIPRYL-Registered Trademark- was launched
in Canada by Draxis in April 1996. Under the DAHI Distribution Agreement, DAHI
will manufacture ANIPRYL-Registered Trademark- and will operate a technical
support centre staffed with veterinarians to assure quality control and assist
clinical veterinarians in Canada. The DAHI Distribution Agreement is renewable
for an additional three year term. In the event that certain sales levels are
not achieved, DAHI may distribute ANIPRYL-Registered Trademark- in Canada itself
or appoint one or more additional distributors, or terminate the agreement.
Draxis has guaranteed the performance of its subsidiaries under the agreement.
DAHI continues to have the right to promote, sell and otherwise distribute the
product, including in Canada, for non-prescription, over-the-counter
distribution channels. Draxis expects to achieve the required sales levels but
given its costs of launching the product, it does not expect that its
distribution of this product will be profitable until 1997.
DAHI is currently developing its marketing and distribution plan for the
U.S. launch of ANIPRYL-Registered Trademark-. In addition, DAHI has entered
into a license and supply agreement with Hoechst Veterinar GmbH providing for
the registration and distribution of ANIPRYL-Registered Trademark- in certain
European markets. Under this agreement, HVG will assume responsibility for
obtaining European regulatory approval and will subsequently direct the European
marketing and distribution efforts for ANIPRYL-Registered Trademark-. In
return, DAHI will provide its proprietary intellectual property relating to
ANIPRYL-Registered Trademark- and regulatory and technical expertise to assist
in the registration and commercialization of ANIPRYL-Registered Trademark-.
During 1994, DAHI received from HVG revenue totalling U.S.$150,000, which
represents one of several milestones specified under the license and supply
agreement. DAHI has announced its intention to regain its European rights
ANIPRYL-Registered Trademark- and is currently evaluating alternative options
for the registration and distribution of ANIPRYL-Registered Trademark- in
Europe. However, a further milestone payment in the amount of U.S.$175,000 was
paid by HVG in March 1996.
DAHI's management is not aware of any other HPB/BVD or FDA-approved product
available at this time which competes with ANIPRYL-Registered Trademark-. If
the FDA approves ANIPRYL-Registered Trademark-, the 1988 generic animal drug law
will offer marketing protection from veterinary generic applicants in the United
States for a period of five years. However, that law does not prevent other
companies from repeating the full clinical NADA process to seek FDA approval for
a bio-equivalent product, nor does it prohibit human generic versions of
ANIPRYL-Registered Trademark- from being sold to veterinarians. Any such
competitor would be subject to DAHI's U.S. patent rights.
DAHI's management believes, but are not yet certain, that DAHI has
completed its clinical trial work in developing ANIPRYL-Registered Trademark-
for treating canine Cushing's disease. While DAHI has received marketing
approval for this indication from the BVD, its completed NADA for Cushing's
disease is still pending at the FDA. During 1996, DAHI has continued its Phase
III (equivalent) pivotal clinical trial evaluating the treatment of canine
cognitive dysfunction with ANIPRYL-Registered Trademark- for the FDA. The NADA
for canine cognitive dysfunction is dependent, in part, on DAHI's ability to
obtain additional funding for 1997 and thereafter.
<PAGE>
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PRICE RANGE AND TRADING VOLUME OF DAHI COMMON STOCK
NASDAQ BULLETIN BOARD (QUOTED IN US$)
1996 High Low Volume
- ---- ---- --- ------
October 1 - 15 $ 4 $ 3 3/4 77,470
September 4 1/8 3 3/4 91,500
August 4 1/8 3 5/8 122,500
July 4 1/8 2 3/4 365,000
June 4 3/4 3 5/8 296,000
May 4 7/8 3 7/8 256,500
April 4 1/4 3 1/8 256,500
March 3 1/4 2 3/4 109,100
February 3 1/8 1 31/32 344,300
January 2 1 3/4 114,500
1995
Fourth Quarter 2 1/8 1 1/2 134,100
Third Quarter 2 1/8 1 5/8 34,400
Second Quarter 2 1/8 1 1/2 561,701
First Quarter 2 3/8 1 1/2 368,905
THE TORONTO STOCK EXCHANGE (QUOTED IN CDN.$)
1996 High Low Volume
- ---- ---- --- ------
October 1 - 15 $ 5.40 $ 5.10 45,855
September 5.50 5.05 51,683
August 5.55 5.00 75,773
July 6.00 4.00 226,281
June 6.40 5.00 56,676
May 6.70 5.00 170,951
April 5.75 4.25 120,034
March 4.40 3.80 97,375
February 4.20 2.70 120,614
January 2.79 2.11 24,984
1995
- ----
Fourth Quarter 3.00 2.10 82,477
Third Quarter 3.20 2.10 166,278
Second Quarter 2.80 2.20 318,618
First Quarter 3.00 2.20 319,462
EMPLOYEES
Currently, DAHI has eight employees, including Dr. David R. Stevens,
President and Chief Executive Officer. DAHI utilizes the expertise of several
prominent consultants in the animal health field to minimize overhead expenses
during its development stage. DAHI is contracting with outside institutions and
individuals
<PAGE>
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for completing development tasks and for manufacturing. DAHI's management
anticipates that it may be necessary to hire additional employees, which will
require additional funding.
PROPERTIES
DAHI leases 2,621 square feet of office space in Overland Park, Kansas at a
rental rate of U.S.$3,479 per month. The lease expires on May 30, 1997. DAHI's
management believe that these leased premises are not sufficient for the
foreseeable needs of DAHI and that additional space will be required.
LEGAL PROCEEDINGS
DAHI is not a party to any pending legal proceedings and no such threatened
or pending proceedings are known to DAHI's Management.
DAHI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with DAHI's Financial
Statements and Notes to Financial Statements for the year ended December 31,
1995 appearing elsewhere in this Joint Management Proxy Statement-Prospectus, as
well as Management's Discussion and Analysis in DAHI's Form 10-K.
DAHI was formed on July 19, 1990 to assume the rights and continue the
development and marketing research regarding the use of 1-deprenyl (ANIPRYL-
Registered Trademark-) in animals previously performed by DAH (Canada), a
wholly-owned subsidiary of Draxis. Draxis Pharmaceutica Inc. ("DPI"), also a
wholly-owned subsidiary of Draxis, currently holds approximately a 30% equity
interest in DAHI and Draxis LLC, a Delaware limited liability company owned 90%
by Draxis and 10% by DPI, currently holds approximately a 14% equity interest in
DAHI. Thus, Draxis affiliates currently own approximately 44% equity interest
in DAHI. Draxis LLC holds convertible debt that could increase the ownership of
Draxis affiliates to approximately 52% of DAHI.
Financial Condition
Total assets increased during the period from U.S.$1,560,092 as of December 31,
1995 to U.S.$2,214,847 as of June 30, 1996, due primarily to financing received
in accordance with the Draxis Distribution Agreement (see discussion below).
Also during the quarter, DAHI made additional sales of its product to Draxis and
continues to build inventory levels.
Intangible assets increased from U.S.$442,877 as of December 31, 1995 to
U.S.$466,992 as of June 30, 1996 primarily due to DAHI's program to obtain
worldwide patent and trademark coverage for ANIPRYL-Registered Trademark-.
Amortization of debt issuance costs associated with the 1994 and 1996 Draxis
Financing, as defined below, also continue to reduce amounts recorded as
intangible assets.
Results of Operations
On October 2, 1995, DAHI received regulatory approval from the Canadian Health
Protection Branch Bureau of Veterinary Drugs ("BVD") to market ANIPRYL-
Registered Trademark- in Canada. DAHI had its first veterinary pharmaceutical
product sale for this indication in April 1996. Management believes that
revenues from the marketing of ANIPRYL-Registered Trademark- in Canada should
marginally reduce operating losses for 1996.
In January 1996, in order to obtain working capital through 1996 and to enhance
its capability to market its first approved product in Canada, DAHI signed an
agreement with Draxis providing Draxis a ten-year exclusive distribution right
in Canada for ANIPRYL-Registered Trademark- (the "Draxis Distribution
Agreement").
DAHI is awaiting action of the U.S. Food and Drug Administration with regard to
its canine Cushing's disease application and is awaiting action of the BVD with
regard to its canine cognitive dysfunction application. DAHI
<PAGE>
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is continuing its U.S. pivotal (Phase III equivalent) clinical trial for canine
cognitive dysfunction, at the current time, but lack of funds could curtail the
clinical development of ANIPRYL-Registered Trademark-. There is no way to
predict when, or if, regulatory approvals might be attained in the U.S. or the
timing or magnitude of the revenues from marketing of DAHI's products in the
U.S. or whether any such revenues will ever be realized.
Revenues totalled U.S.$75,114 and U.S.$890,326 for the three and six months
ended June 30, 1996 compared to U.S.$22,077 and U.S.$77,228 for the three and
six months ended June 30, 1995 and U.S.$2,249,170 for the period from July 19,
1990 (date of incorporation) to June 30, 1996. Interest and investment income
will continue to be DAHI's primary source of income, although revenue from
Canadian sales of ANIPRYL-Registered Trademark- is expected to increase in the
coming months. Interest income temporarily increased subsequent to the receipt
of funding from the Draxis Distribution Agreement but will continue to decline
over time as a result of fewer funds being available for investment as DAHI
continues its ANIPRYL-Registered Trademark- research and development program.
DAHI will also continue to incur interest expense associated with the 1994 and
1996 Draxis Financings. (See discussion of the 1994 and 1996 Draxis Financings
in "Liquidity and Capital Resources" below.) DAHI received other revenue of
U.S.$125,000 during the six months ended June 30, 1996, from Draxis in
accordance with the Draxis Distribution Agreement. DAHI also received other
revenue of U.S.$175,000 during the six months ended June 30, 1996, from HVG in
connection with the license and supply agreement DAHI signed in 1994.
Total expenses for the three and six months ended June 30, 1996 were
U.S.$734,862 and U.S.$1,333,644 while total expenses for the three and six
months ended June 30, 1995 and for the period from July 19, 1990 (date of
incorporation) to June 30, 1996 were U.S.$780,616, U.S.$1,469,889, and
U.S.$12,957,697 respectively. Total expenses result primarily from research and
development expenses associated with DAHI's pivotal (Phase III equivalent)
clinical trial under the ANIPRYL-Registered Trademark- development program,
development of the marketing and sales plan for the U.S. launch of ANIPRYL-
Registered Trademark-, general operating expenses and interest expense resulting
from the 1994 and 1996 Draxis Financings. Total expenses are expected to
increase somewhat during the remainder of 1996, due to preparation for the U.S.
marketing and sales of ANIPRYL-Registered Trademark- for canine Cushing's
disease, continuation of the ANIPRYL-Registered Trademark- development program
and extraordinary professional expenses incurred in connection with the Draxis
combination. Operating expenses continue to remain within expectations.
Research and development expenses for the three and six months ended June 30,
1996 aggregated U.S.$347,608 and U.S.$617,433 compared to U.S.$400,418 and
U.S.$820,490 for the corresponding periods during 1995 and U.S.$6,258,258 for
the period from July 19, 1990 (date of incorporation) to June 30, 1996.
Research and development expenses relate primarily to activities required to
obtain pre-marketing regulatory approval for ANIPRYL-Registered Trademark- for
use in pet dogs.
During the three and six months ended June 30, 1996, DAHI incurred interest
expense aggregating U.S.$84,630 compared to U.S.$155,874 for the corresponding
period in 1995, and U.S.$613,152 for the period from inception to June 30, 1996.
Interest expense is comprised of interest expense and amortization of debt
issuance costs associated with the Draxis Financings. Debt issuance costs
aggregating U.S.$155,200 are being amortized over the term of the debt using the
effective interest method. (See discussion of Draxis Financings in "Liquidity
and Capital Resources" below.)
DAHI had net losses of U.S.$659,748 or U.S.$0.09 per share and U.S.$443,318 or
U.S.$0.06 per share for the three and six month periods ended June 30, 1996
compared to U.S.$758,639 or U.S.$0.12 per share and U.S.$1,392,661 or U.S.$0.21
per share for the three and six month periods ended June 30, 1995. Net losses
for the period from inception to June 30, 1996 aggregate U.S.$10,708,527, or
U.S.$1.72 per share.
DAHI is in discussions with Hoechst Veterinae to regain the European rights to
the veterinary pharmaceutical ANIPRYL-Registered Trademark-. DAHI is currently
evaluating the best alternatives to accelerate the availability of ANIPRYL-
Registered Trademark- in Europe.
<PAGE>
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Liquidity and Capital Resources
As of June 30, 1996, DAHI had cash and cash equivalents of U.S.$1,488,552 of
which U.S.$1,458,373 is held in U.S. and Canadian interest-bearing accounts and
U.S.$30,179 is held in U.S. non-interest bearing operating accounts compared to
U.S.$1,130,374 as of June 30, 1995.
In January 1996, in order to obtain working capital through 1996 and to enhance
its capability to market its first approved product in Canada, DAHI signed an
agreement with Draxis providing Draxis a ten-year exclusive distribution right
in Canada for ANIPRYL-Registered Trademark-. As part of the Draxis Distribution
Agreement, Draxis converted, at the request of DAHI, approximately U.S.$1.5
million of debt it had previously loaned DAHI in 1994 (the "1994 Draxis
Financing") into common stock of DAHI at a renegotiated exercise price of
U.S.$1.55 per share, and provided another U.S.$1 million to DAHI for operating
capital in 1996 as convertible debt also with a conversion price of U.S.$1.55
per share (the "1996 Draxis Financing"). The repayment terms for the 1996
Draxis Financing are substantially equivalent to the terms described below for
the 1994 Draxis Financing, with instalment payments commencing October 1, 1999
and ending October 1, 2003. As a result of the conversion of debt, Draxis
through its affiliates, now owns approximately 44% of DAHI's common stock, with
options to convert the remaining debt that if fully converted would provide
Draxis with an indirect ownership position in DAHI of approximately 52%.
In connection with a loan agreement dated August 25, 1992 relating to DAHI's
investment in Phoenix Scientific, Inc., DAHI was required to pay Draxis
U.S.$250,000 on July 1, 1994 and U.S.$200,000 on October 1, 1994 pursuant to two
promissory notes. DAHI was also required to pay DAH (Canada), a wholly-owned
subsidiary of Draxis, U.S.$140,000 upon demand (collectively, the "Notes"). As
of March 24, 1994 and subject to certain terms and conditions, DAHI and Draxis
entered into the 1994 Draxis Financing whereby Draxis provided additional
funding of U.S.$2,500,000 on May 1, 1994, to DAHI so that DAHI could continue
pursuing the development and regulatory approval of ANIPRYL-Registered
Trademark-. Contemporaneously, DAHI paid to Draxis an up-front fee of
U.S.$155,200. Pursuant to the 1994 Draxis Financing, Draxis also agreed to
extend the repayment of the Notes until 1997. Furthermore, the parties agreed
to amend the Notes to provide that all amounts due thereunder may be converted
at the option of Draxis, upon written notice to DAHI, into shares of DAHI Common
Stock at U.S.$2.88 per share.
The portion of the 1994 loan, approximately U.S.$1.5 million, that was not
converted in the 1996 Draxis Financing as part of the consideration for the
Draxis Distribution Agreement is repayable as to (i) 60% of the outstanding
amount in equal quarterly instalments payable on the last day of each quarter
commencing January 1, 1997 and ending January 1, 2001, and (ii) 40% in a lump
sum on January 1, 2001, together with interest thereon payable quarterly on the
last day of each quarter at an annual rate equal to the prime rate plus 1% on
the outstanding principal amount commencing on the date of the loan.
In addition, the remaining portion of the 1994 loan may be converted, upon
written notice to DAHI, into: (a) shares of DAHI Common Stock at U.S.$2.88 per
share; or (b) a participation interest, in increments of U.S.$250,000, payable
in annual instalments until December 31, 2003. Participation interest is
defined as an entitlement to receive an amount per annum until December 31, 2003
equal to (i) 28% of the converted principal and unpaid and accrued interest
commencing the date of conversion by Draxis, if Draxis converts prior to the
receipt by DAHI of FDA approval of ANIPRYL-Registered Trademark- but after
receipt of BVD approval of ANIPRYL-Registered Trademark-; or (ii) 20% of the
converted principal and unpaid and accrued interest commencing the date of
conversion by Draxis, if Draxis converts after the receipt by DAHI of FDA
approval of ANIPRYL-Registered Trademark- and BVD approval of ANIPRYL-Registered
Trademark-. Participation interest payments will decrease to two-thirds of the
amount required to be paid for the year ending December 31, 2004, and to one-
third of such amount for the year ending December 31, 2005.
In the event a participation interest payment exceeds 50% of DAHI's pre-tax
income during any fiscal year, the difference between the participation interest
payment and 50% of such pre-tax net income shall be paid in the form of shares
of DAHI Common Stock at the average price of U.S.$2.88 per share. Draxis has
further agreed not to convert more than 50% of the loan into a participation
interest in any calendar year. The 1996 Draxis Financing does not contain a
provision for conversion into a participation interest. Under certain terms and
<PAGE>
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conditions, DAHI shall be required to register any shares acquired by Draxis
under any of the above-mentioned terms with the SEC.
Any additional debt incurred by DAHI, with a repayment term exceeding one year,
shall be subordinated to DAHI's outstanding indebtedness to Draxis. DAHI may
prepay any amounts outstanding at sixty (60) days written notice to Draxis,
during which time Draxis retains the right to exercise any remaining conversion
privileges.
The ability of DAHI to achieve its goal of bringing ANIPRYL-Registered
Trademark- to the U.S. market for use in dogs is dependent, in part, upon DAHI's
ability to raise adequate funding and to gain FDA regulatory approval of its
product. There can be no assurance that the remaining capital will be
sufficient to implement DAHI's objective of obtaining pre-marketing approval of
ANIPRYL-Registered Trademark- in the U.S. DAHI has invested the proceeds from
its financing activities primarily in short-term or liquid investments, so that
DAHI will be able to assess its cash requirements as needed for its development
plan during 1996. Insufficient funding may require DAHI to delay or eliminate
expenditures relating to the marketing of the product and further development.
DAHI has considered options for additional funding. Based upon DAHI's current
level of expenditures, DAHI has funds to support its development program through
year-end 1996. The Board of Directors appointed a committee of independent
members to evaluate any proposals that arose. The Committee retained an
investment banking firm to assist with the analysis and negotiations of any such
proposals. The Draxis acquisition offer was the only option available to DAHI.
PRINCIPAL SHAREHOLDERS OF DAHI MISSOURI
DAHI Missouri's management believes no shareholder, other than DPI and
Draxis LLC, owns, of record or beneficially, either directly or indirectly, more
than 10% of any class of voting securities of DAHI Missouri. As a group, the
directors and senior officers of DAHI Missouri own beneficially, directly or
indirectly, 645,963 shares of DAHI Missouri Common Stock, representing
approximately 8.56% of the outstanding shares of DAHI Missouri Common Stock as
at October 15, 1996.
BUSINESS OF DAHI LOUISIANA
DAHI Louisiana was formed in 1996 and currently has no assets or
liabilities and carries on no business. If the Reincorporation Merger is
approved by the DAHI Missouri Shareholder's, DAHI Louisiana will succeed to the
assets and assume the liabilities of DAHI Missouri. The mailing address of DAHI
Louisiana's registered office is 643 Magazine Street, New Orleans, Louisiana
70130. (Telephone: (504) 596-2791).
BUSINESS OF DRAXIS
INTRODUCTION
Draxis was incorporated as Deprenyl Research Limited on October 13, 1987
under the laws of Canada. In May 1994, Draxis changed its name to the current
name. On July 1, 1994, Draxis amalgamated with Bone Health Inc. under a plan of
arrangement. On July 14, 1995, Draxis amended its articles to create an
unlimited number of employee participation shares ("EP Shares"), issuable in
series. The registered and principal office of Draxis is located at 6870
Goreway Drive, Mississauga, Ontario, L4V 1P1. (Telephone: (905) 677-5500).
The following chart illustrates the corporate organization and
jurisdictions of incorporation of Draxis as at August 3, 1996 and its
significant affiliates and indicates each company's principal products:
<PAGE>
-73-
[FLOW CHART]
[Chart showing Draxis and its subsidiaries, its percentage holding in each
subsidiary and the various products being marketed by each company.]
Note (1): Draxis Pharmaceutica Inc. is responsible for Canadian sales (outside
Ontario) of ELDEPRYL-Registered Trademark-, PERMAX-Registered Trademark-,
PROLOPA-Registered Trademark-, BRITAJECT-Registered Trademark- and TEGRETOL-
Registered Trademark-.
OVERVIEW
Draxis is an emerging Canadian-based pharmaceutical company. Draxis has no
long-term or short-term debt and as at June 30, 1996 had cash reserves of
approximately Cdn.$30 million. Draxis' primary activities are marketing and
selling prescription pharmaceuticals and consumer health care products, as well
as researching and developing new products for its own marketing use, or for
licensing to others.
Draxis' marketing operations in Canada currently focus on neurological,
dermatologic and veterinary products. Sales of ELDEPRYL-Registered Trademark-
and NOVO-SELEGILINE, used in the treatment of Parkinson's disease, comprised
78.6% of Draxis' total sales in 1995. In addition, Draxis has marketing rights
to drugs in various stages of development for treating other conditions,
including narcolepsy, scarring, osteoporosis and renal osteodystrophy. Draxis
also has Canadian marketing rights to ALA Photodynamic Therapy and its potential
applications. Of its developmental drugs, MODAFINIL, a drug for the treatment of
narcolepsy, is at the most advanced stage, having successfully completed Phase
III of its clinical testing. In the United States, Draxis' marketing operations
focus on specific niches which include podiatric products which are marketed by
its U.S. subsidiary, Draxis U.S. Inc., and consumer nutritional and personal
care products, marketed through 30%-owned Stef International Corp.
Draxis' Canadian research and development operations focus on developing
specific topical drugs for world markets based on patented multilamellar
liposome technology licensed to Draxis, and on obtaining regulatory approval for
certain in-licensed products for which Draxis has exclusive Canadian rights.
Research and development operations in the United States are carried out through
DAHI.
<PAGE>
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TRADEMARKS
The following words are registered trademarks of the corporations indicated
below:
ELDEPRYL-Registered Trademark- is a registered trademark of Somerset
Pharmaceuticals, Inc.
PERMAX-Registered Trademark- is a registered trademark of Eli Lilly
and Company.
PROLOPA-Registered Trademark- is a registered trademark of Hoffmann-La
Roche Limited.
BRITAJECT-Registered Trademark- is a registered trademark of Britannia
Pharmaceuticals Limited.
TEGRETOL-Registered Trademark- is a registered trademark of Ciba-Geigy
Canada Ltd.
ANIPRYL-Registered Trademark- is a registered trademark of DAHI.
KERASAL-Registered Trademark- is a registered trademark of Spirig AG.
PARLODEL-Registered Trademark- is a registered trademark of Sandoz
Ltd.
SYMMETRYL-Registered Trademark- is a registered trademark of The
Dupont Merck Pharmaceutical Company.
LAC-HYDRIN-Registered Trademark- is a registered trademark of Bristol-
Myers Squibb Canada Inc.
Draxis' principal products, and their stages of development, are shown below:
<TABLE>
<CAPTION>
<S> <C>
Product Name Stage of Development Treatment for:
Filed
Pre-clinical Phase I Phase II Phase III
Eldepryl-Registered Trademark- ------------------------------------------------- Parkinson's
disease
Novo-Selegiline -------------------------------------------------- Parkinson's
disease
Permax-Registered Trademark- -------------------------------------------------- Parkinson's
disease
Prolopa-Registered Trademark- -------------------------------------------------- Parkinson's
disease
Britaject-Registered Trademark- (1) --------------------------------------------------- Parkinson's
disease
Tegretol CR --------------------------------------------------- Epilepsy
Tegretol Suspension --------------------------------------------------- Epilepsy
Anipryl-Registered Trademark- (Cushing's) --------------------------------------------------- Canine
Cushing's
disease
Kerasal-Registered Trademark- --------------------------------------------------- Psoriasis
Products Lipo-BASE-TM- products --------------------------------------------------- Dry Skin
Being
Marketed Tican Products --------------------------------------------------- Dermatological
products
..............................................................................................................
Products Eldepryl-Registered Trademark- (liquid form) --------------------------------------------------- Parkinson's
disease
Under
Anipryl-Registered Trademark- (Cognitive) (2)-------------------------------- Canine cognitive
Development dysfunction
LipoTeca-TM- ----------------------------- Keloid scars
Lipo-FORT-TM- ---------- Skin
Inflammation
LipoSporin-TM- ---------- Psoriasis
Modafinil --------------------------------------------------- Narcolepsy
One-Alpha D (2) ----------------------- Secondary
hyperparathyroidism
ALA PDT (AK) (2) ---------------------- Actinic
Keratoses
ALA PDT (Psoriasis) (2) ---------------------- Psoriasis
Ipriflavone (2) ---------------------- Osteoporosis
</TABLE>
(1) SOLD IN CANADA UNDER THE EMERGENCY DRUG RELEASE PROGRAM.
(2) LICENSOR IS RESPONSIBLE FOR ALL REQUIRED LABORATORY AND CLINICAL STUDIES.
<PAGE>
-75-
In connection with the July 1996 acquisition by Draxis of Tican
Pharmaceuticals Ltd. the following dermatological products, which are currently
being marketed, were acquired:
AQUACORT-Registered Trademark- Lotion (a mild topical cortico-steroid useful in
sensitive areas, i.e. face and hair);
CANSCREEN-Registered Trademark- Lotion (a sunscreen);
PROCUTANE-Registered Trademark- Gel (a compounding base);
SALSEB-Registered Trademark- (Shampoo);
TIACID-Registered Trademark- Solution (a wart remover);
TIAMOL-Registered Trademark- Cream (a potent steroid used to treat severe
dermatoses);
TILUB-Registered Trademark- Lotion (a moisturizer);
TILUB-Registered Trademark- Oil (a moisturizer);
TI-U-LAC-Registered Trademark- Lotion (a topical cortico-steroid/urea
combination emollient);
TI-UVA-B-Registered Trademark- Lotion (a sunscreen); and
TI-U-LAC-Registered Trademark- HC (a cortico-steroid cream).
BUSINESS STRATEGY
Draxis has focused on acquiring, developing for regulatory approval and
marketing treatments for chronic conditions addressed primarily by specialized
medical practitioners. Such conditions include Parkinson's disease, bone
disease, sleep disorders and certain skin disorders. Draxis believes that
products for chronic conditions, particularly where there are unmet needs, offer
opportunities to generate substantial sales and profits, depending on factors
such as market exclusivity and the product's ability to reduce overall health
costs and improve quality of life. Draxis has acquired or developed most of its
products based on these criteria. Draxis markets and sells a cluster of
products used in treating Parkinson's disease. Draxis also has other
neurological products in its pipeline in particular, for treating narcolepsy.
Draxis has adopted a disease marketing strategy, particularly in the case
of Parkinson's disease. This consists of an educational approach to Parkinson's
disease whereby the Draxis sales force is trained to promote the appropriate
therapy for the various stages of Parkinson's disease, which, in most cases, are
addressed by products in Draxis' Parkinson's disease cluster.
Recently, Draxis has targeted the veterinary market for chronic diseases in
ageing household pets. DAHI's ANIPRYL-Registered Trademark- product is a
veterinary application of ELDEPRYL-Registered Trademark-. Market research
indicates that most pet owners view their pets as members of the family and are
less sensitive to price than other segments of the market for veterinary
products. Moreover, this market is not subject to cost containment measures
being applied in the human pharmaceutical marketplace.
Draxis has also targeted podiatry as a specific niche market in the United
States. Many podiatrists in the United States are entitled to prescribe and
sell products directly from their offices, rather than writing a prescription to
be filled by a pharmacy. Draxis believes that this represents a unique
marketing and distribution opportunity. In addition, some of Draxis'
dermatological products may also be suitable for podiatric applications.
Draxis' strategy is to continue to expand its marketing and selling
operations in Canada and, increasingly, in the United States, for the purpose of
enhancing profitability and shareholder value. In the process, it intends to
continue to diversify its sources of revenues and decrease its reliance on
ELDEPRYL-Registered Trademark- and NOVO-SELEGILINE. It intends to expand its
business in several ways. Draxis will continue to pursue its research and
development activities, most of which are focused on late stage products, such
as MODAFINIL and LIPOTECA-TM-. These activities are expected to yield new
products for the marketing operations in the next few years. Draxis is also
seeking to collaborate with partners with an international presence for products
in respect of which Draxis has worldwide rights, such as LIPOTECA-TM- and other
products in earlier stages of development based on Draxis' liposome technology.
<PAGE>
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Draxis also intends to increase its presence to the United States market by
adding products to its podiatry division and, provided that the Share Exchange
is consummated, by continuing to fund the development and launch of ANIPRYL-
Registered Trademark- in the United States by DAHI.
Lastly, Draxis will continue to seek synergistic acquisitions of companies,
technologies, products and distribution rights which build on Draxis' targeted
niches in Canada and the United States. When markets are favourable, Draxis'
preference would be to acquire targets by issuing Draxis Common Stock as
consideration and to use Draxis' cash to finance the research, development and
the costs of new product launches that typically are associated with such
acquisitions.
PRODUCTS BEING MARKETED
NEUROLOGICAL PRODUCTS
Parkinson's disease is a progressive, neurological disorder caused by the
degeneration of specific neurons in the brain. These cells manufacture the
essential neurotransmitter, dopamine. When sufficient degeneration of these
cells occurs, Parkinson's disease results. Manifestations of the disease
include akinesia (paralysis of the motor nerves), muscular rigidity, tremor at
rest and a variety of postural abnormalities. While the disease itself is
seldom fatal, victims generally die from other diseases as a result of their
debilitated condition. Based on industry data, Draxis believes that
approximately 70,000 Canadians suffer from Parkinson's disease. Treatment for
Parkinson's disease is essentially symptomatic, involving drug therapy to
correct or modify neurotransmitter imbalances.
For the year ended December 31, 1995, drugs marketed by Draxis for the
treatment of Parkinson's disease contributed Cdn.$14,194,973 to Draxis' annual
revenues, representing approximately 85.3% of Draxis' total revenues for such
year. For the six month period ended June 30, 1996, this percentage decreased
to 76.7%.
ELDEPRYL-Registered Trademark-
ELDEPRYL-Registered Trademark- is a selective monoamine oxidase-type B
("MAO-B") inhibitor and is used in the treatment of Parkinson's disease. MAO-B
is an enzyme that degrades the structure of certain compounds, such as dopamine,
which regulate various physiological functions, including certain aspects of
central nervous system activity. Dopamine is a neurotransmitter which
facilitates movement, posture, balance and walking. ELDEPRYL-Registered
Trademark- has several common or generic names, including selegiline
hydrochloride, selegiline and l-deprenyl. In addition to being marketed by
Draxis in Canada, ELDEPRYL-Registered Trademark- is marketed by others in
Switzerland, Sweden, France, Finland, Germany, Hungary, Italy, the United
Kingdom, and the United States and other countries for the treatment of
Parkinson's disease. ELDEPRYL-Registered Trademark- is also marketed in Italy
for the treatment of Alzheimer's disease.
Under a sublicense agreement dated February 9, 1988 (the "Somerset
License") with Somerset Pharmaceuticals, Inc. ("Somerset"), Draxis acquired the
exclusive right to use Somerset technology to commercialize ELDEPRYL-Registered
Trademark- in Canada. Somerset, a pharmaceutical company owned by Mylan
Laboratories Inc. and Watson Pharmaceuticals Inc., is licensed by Chinoin to
market ELDEPRYL-Registered Trademark- in North America, Brazil, Chile and the
Caribbean Islands (except Cuba). Chinoin is a major Hungarian pharmaceutical
company controlled by Sanofi Winthrop, an alliance of Sanofi S.A. and Sterling
Winthrop S.A.
Under the Somerset License, Draxis is required to purchase for resale all
selegiline, either in bulk or ready-to-administer form, from Somerset. The
Somerset License will expire upon the expiration of Somerset's license with
Chinoin, which expires on November 22, 2003 and may be renewed for successive
five year terms with the agreement of the parties thereto. The Somerset License
provides for the purchase by Draxis of product from Somerset at the cost of such
product to Somerset and the payment of royalties to Somerset.
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Somerset is currently conducting an extensive research program with a
Selegiline Transdermal System (STS) for which it owns several U.S. and worldwide
patents. Somerset has completed Phase I and II trials and pivotal clinical
trials are presently ongoing in Alzheimer's disease, Parkinson's disease and
major depression.
In January 1990, Draxis obtained regulatory approval from the HPB for the
use of ELDEPRYL-Registered Trademark- as an adjunct to levodopa therapy in late-
stage Parkinson's disease. Levodopa therapy is designed to treat defective
dopamine transmitters which typically are associated with Parkinson's disease.
In April 1992, the HPB approved ELDEPRYL-Registered Trademark- as a first line
therapy in newly-diagnosed Parkinson's patients. In December 1992, ELDEPRYL-
Registered Trademark- was listed on the Ontario Drug Benefit Formulary. In
October 1995, Draxis received regulatory approvals from the HPB to market and
sell a liquid formulation of ELDEPRYL-Registered Trademark-. Draxis has not yet
determined when it will offer the liquid formulation for sale in Canada.
In jurisdictions where ELDEPRYL-Registered Trademark- has been granted
health regulatory approval, it is approved primarily for use as an adjunct to
levodopa therapy in late-stage Parkinson's disease. However, studies have
demonstrated that early treatment of Parkinson's disease with ELDEPRYL-
Registered Trademark- significantly delayed the need for treatment with
levodopa, the long-term use of which is known to have side effects. The United
Kingdom has approved the use of ELDEPRYL-Registered Trademark- for early stage
Parkinson's disease based on the results of these studies. However, there
remains uncertainty as to whether ELDEPRYL-Registered Trademark- can itself
actually delay the progression of Parkinson's disease.
In the December 1995 issue of BRITISH MEDICAL JOURNAL, the Parkinson's
Disease Research Group (the "PDRG") of the United Kingdom reported a significant
increase in mortality over five years in patients with Parkinson's disease
taking levodopa and selegiline compared with those taking levodopa alone.
Draxis has conferred with specialists in the treatment of Parkinson's disease,
other companies selling ELDEPRYL-Registered Trademark- in other jurisdictions,
and Somerset and has participated in or attended several expert panels on the
subject. The European Medicine Evaluation Agency reviewed the PDRG's report at
a special seminar on January 3, 1996 and recommended no change in prescribing
patterns of selegiline. A special advisory board of Canadian and U.S.
neurologists reviewed the PDRG's report on January 26, 1996 and concluded that
the UK study had flaws and, as a result, also did not recommend any change in
prescribing patterns of selegiline. It is too early for Draxis to determine
whether the article in the BRITISH MEDICAL JOURNAL will affect sales in Canada
of selegiline.
In 1993, Draxis received Notices of Allegation from Apotex Inc. ("Apotex")
and Genpharm Inc. ("Genpharm"). At that time, Draxis applied under the Patented
Drugs Regulations to the Federal Court of Canada (Trial Division) (the "Court")
for an order prohibiting the Minister of National Health and Welfare from
issuing a Notice of Compliance to either Apotex or Genpharm until the issue of
patent infringement of ELDEPRYL-Registered Trademark- has been resolved.
On April 19, 1994, Draxis announced that the Court had dismissed its
application against Apotex. The Court held that Draxis' process patent for
ELDEPRYL-Registered Trademark- did not fall within the scope of the Patented
Drugs Regulations. In April 1995, the Federal Court of Canada (Appeal Division)
dismissed Draxis' appeal of the Court's decision. Draxis' application with
respect to Genpharm was withdrawn. No determination has been made by the Court
on the issue of patent infringement by Apotex or the validity of Draxis' process
patent for ELDEPRYL-Registered Trademark-. Draxis intends to defend its patent
rights by all appropriate legal means, including instituting proceedings, as
warranted, for patent infringement against Apotex in the event that it commences
to produce a generic version of ELDEPRYL-Registered Trademark- in Canada using
the same process.
NOVO-SELEGILINE
In December 1993, Draxis entered into a five-year distribution agreement
(the "Novopharm Agreement") with Novopharm Limited ("Novopharm") with respect
to the sale of NOVO-SELEGILINE, a generic version of ELDEPRYL -Registered
Trademark-. Under the Novopharm Agreement, Draxis records all sales of
NOVO-SELEGILINE as revenues of Draxis and retains 50% of the net profit
therefrom, before payment of the required royalty for the selegiline under
the Somerset License. In addition, Novopharm retains responsibility for all
aspects of the Canadian marketing and distribution of NOVO-SELEGILINE as
Draxis' sole Canadian distributor. Novopharm must
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purchase all of its selegiline from Draxis. Draxis' purpose in entering into
the Novopharm Agreement was to permit a generic version of ELDEPRYL-Registered
Trademark- from which Draxis profits to be the first in the generic market.
Draxis believes that this positions NOVO-SELEGILINE to retain a substantial
portion of the Canadian market in the face of new generic competition.
Draxis anticipates that another generic version of ELDEPRYL-Registered
Trademark- will be introduced to the Canadian market by a competitor in the near
future.
PERMAX-Registered Trademark-
In 1994, Draxis acquired an exclusive sublicense from Eli Lilly Canada Inc.
("Lilly") to market PERMAX-Registered Trademark- in Canada for the management of
the signs and symptoms of Parkinson's disease. PERMAX-Registered Trademark- is
a D(1) and D(2) dopamine receptor agonist that is used as adjunctive therapy to
levodopa in the management of Parkinson's disease. When used in combination
with other Parkinson's therapies, PERMAX-Registered Trademark- has been shown to
reduce significantly the symptoms of the disease. PERMAX-Registered Trademark-
has proven to be effective in allowing physicians to lower the necessary daily
doses of levodopa, thereby alleviating some of the side effects of long-term
levodopa therapy and helping retain a patient's functionality over a longer
period of time. Lilly will continue to manufacture PERMAX-Registered Trademark-
and to supply it exclusively to Draxis for marketing and distribution in Canada
for an initial term ending on December 31, 1998. Subject to satisfaction of
certain conditions, including achieving minimum net sales in 1996 and 1997 and
other performance parameters, payment of a lump sum and agreement upon certain
profit-sharing provisions, the term can be renewed for an additional 10 years.
Lilly may terminate its manufacturing and supply obligations with two years
notice to Draxis provided it grants Draxis an exclusive sublicense to
manufacture PERMAX-Registered Trademark- for sale in Canada. Since 1994, Draxis
has paid to Lilly Cdn.$3,500,000 for its sublicense and is using its Canadian
sales force to promote the use of PERMAX-Registered Trademark- by Canadian
neurologists and a selected group of family physicians as a unique addition to
levodopa for the treatment of Parkinson's disease. Draxis believes it will be
difficult to achieve the minimum sales targets in 1996 and 1997, which are
conditions of renewal of the sublicense. As a result, Draxis is negotiating a
renewal of its agreement with Lilly.
PROLOPA-Registered Trademark-
In 1990, Draxis began an exclusive promotion and sales arrangement with
Hoffmann-La Roche Limited ("Roche"), a Canadian corporation, for the marketing
in Canada of PROLOPA-Registered Trademark-, Roche's drug for the treatment of
Parkinson's disease. PROLOPA-Registered Trademark- is a product containing
levodopa. Under the agreement, Roche maintains the ownership and distribution
rights for PROLOPA-Registered Trademark- and is responsible for all scientific,
regulatory and manufacturing activities. Draxis is responsible, at its cost,
for marketing PROLOPA-Registered Trademark-, including the development and
production of all advertising, promotional, and detailing material. Roche may
not authorize or grant the right to promote, market or detail the product in
Canada to any other third party. Roche sets all pricing of the product and is
responsible for its physical distribution. Draxis is entitled to commissions on
sales, to be paid on a quarterly basis, ranging from 10% to 40%, depending upon
the volume of net sales above certain prescribed levels. Draxis must spend a
minimum amount of funds annually on marketing activities to support PROLOPA-
Registered Trademark-. The initial term of the agreement expired in 1995, but
Draxis has exercised its option to renew the agreement for a further five years.
The agreement may be terminated if sales of PROLOPA-Registered Trademark- fall
below a certain level in any year during the renewal term. For the year ended
December 31, 1995, sales exceeded the prescribed level by 6%.
BRITAJECT-Registered Trademark-
BRITAJECT-Registered Trademark- is an injectable dopamine agonist used by
the patient or care-giver to ameliorate abrupt and often unpredictable decreases
in the mobility of patients afflicted with Parkinson's disease. Draxis is
making BRITAJECT-Registered Trademark- available under the Canadian Emergency
Drug Release Program. In May 1992, Draxis filed a New Drug Submission with the
HPB in respect of BRITAJECT-Registered Trademark-. The HPB subsequently
notified Draxis that the data submitted was insufficient for regulatory approval
and requested the conduct of a sophisticated clinical trial. Draxis does not
believe that the market size for this drug justifies the cost of such a study.
Consequently,
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BRITAJECT-Registered Trademark- will continue to be available only under the
Emergency Drug Release Program. Draxis purchases BRITAJECT-Registered
Trademark- from Britannia Pharmaceuticals Inc.
TEGRETOL-Registered Trademark-
In December 1994, Draxis entered into a promotion agreement with Ciba-Geigy
Canada Ltd. for the promotion of TEGRETOL-Registered Trademark- CR to
neurologists and general practitioners with a primary interest in neurology.
The agreement was renewed as of January 15, 1996 and TEGRETOL-Registered
Trademark- Suspension was added. TEGRETOL-Registered Trademark- CR and
TEGRETOL-Registered Trademark- Suspension are used in the treatment of epilepsy.
The agreement remains in effect until December 31, 1996, subject to earlier
termination by either party on three months notice. Draxis is responsible for
promoting TEGRETOL-Registered Trademark- CR and TEGRETOL-Registered Trademark-
Suspension to the physician target audience, based on the product promotion
strategies developed by Ciba-Geigy Canada Ltd. The promotion agreement provides
for a payment to Draxis for each call made by Draxis on a neurologist or
targeted general practitioner, with bonus payments upon achievement of certain
sales targets.
PODIATRIC PRODUCTS
KERASAL-Registered Trademark-
In 1992, Draxis acquired the exclusive rights from Spirig AG ("Spirig") of
Switzerland to market KERASAL-Registered Trademark- in Canada, the United States
and Mexico. KERASAL-Registered Trademark- is a potent skin conditioning agent
whose active ingredient, salicylic acid, is carried in a vehicle containing
urea. KERASAL-Registered Trademark- ointment and solution are marketed by
Draxis in Canada to dermatologists for use in pre-conditioning the skin prior to
the main therapy for skin conditions such as psoriasis. It is used as
alternating therapy with potent topical drugs to allow the skin to rest and
overcome increasing resistance to therapy. The initial term of Draxis'
agreement with Spirig expires on August 28, 2001, but it can be terminated
earlier upon 12 months' notice, failing which the agreement extends year to
year. Either party may terminate the agreement by written notice if minimum
sales levels are not achieved. Draxis also has an option to manufacture
KERASAL-Registered Trademark- after August 28, 1996 upon entering into a license
agreement with Spirig. Such license must provide for a ten-year term, a deposit
of 20,000 Swiss Francs and a royalty on net sales.
In August 1995, Draxis formed a new division to market products exclusively
to podiatrists in the United States. The first product for the division is a
newly formulated version of KERASAL-Registered Trademark-. KERASAL-Registered
Trademark- is used by podiatrists to treat patients with dry, cracked or
callused skin on the dorsal and plantar surfaces of the foot. According to the
American Podiatric Medical Association, approximately 19% of the American
population has an average of 1.4 foot problems each year. Draxis believes that
approximately 5% of U.S. residents experience corns or calluses each year. For
82% of the 12.5 million Americans who suffer from corns or calluses, podiatrists
are the primary providers of treatments for such conditions. Podiatric
physicians are the major providers of footcare services, providing 39% of all
footcare in the United States. As people age, the prevalence of foot problems,
such as corns, calluses and cracking skin increases. Patients with foot
problems visit podiatric physicians an average of 3.7 times a year.
In a clinical evaluation of KERASAL-Registered Trademark-, virtually all
patients experienced moderate or complete response with few adverse side
effects. Draxis began telemarketing to podiatrists late in the fourth quarter
of 1995. Draxis officially launched the product in the United States on January
29, 1996 and began recording sales in February 1996. Given start-up, marketing
and selling costs and the time required to achieve listing on managed care
formularies, Draxis does not expect this division to become profitable until the
second half of 1997.
OTHER
Draxis is currently developing a second product for use by podiatrists in
the removal of plaster casts. Clinical evaluations and market research are
currently underway and Draxis has filed a patent application for this product in
the United States. Subject to favourable results, this second product is
expected to be introduced in late 1996 or early 1997.
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DERMATOLOGICAL PRODUCTS
In July 1992, Draxis acquired a 78.6% controlling interest in Lipopharm
Inc. and, about a year later, Draxis acquired the remaining minority interest of
Lipopharm Inc. Lipopharm Inc. was a development-stage Canadian pharmaceutical
company with a patented liposome technology for enhancing the safety and
therapeutic effectiveness of topical dermatological drugs. By using liposomes,
drugs or nutrients can be encapsulated to target these active ingredients to the
desired skin region. In connection with its acquisition of Lipopharm Inc.,
Draxis acquired from Mezei Associates Limited ("Mezei") the exclusive worldwide
rights to produce, manufacture, fabricate, assemble, sell or otherwise promote
Mezei's patented liposomed technology for a number of compounds and the right to
grant sublicenses in respect thereto. Under the relevant license agreement,
Draxis is required to pay to Mezei a royalty on net sales of all products using
the proprietary liposome technology. Following the acquisition of all of the
shares of Lipopharm Inc. in July 1993, Lipopharm Inc. was amalgamated with
Draxis and now carries on business as Draxis' Lipopharm Division ("Lipopharm").
The over-the-counter products which Lipopharm currently markets in Canada
include the following: LIPO-BASE, LIPO-BASE WITH VITAMIN E and LIPO-BASE ANTI-
AGING MOISTURIZER, which are over-the-counter products, and KERASAL-Registered
Trademark- ointment and solution, non-prescription drug products launched in
November 1992. Lipopharm has created unique skin care products based on its
patented liposome technology. In LIPO-BASE, the liposomes carry moisture,
emollients and nutrients that maintain the integrity of the skin's natural
barrier. LIPO-BASE WITH VITAMIN E combines LIPO-BASE and Vitamin E.
In July 1996, Draxis broadened its dermatology product line by purchasing
privately held Tican Pharmaceuticals of Markham, Ontario for Cdn.$900,000 and
Cdn.$200,000 worth of Draxis Common Stock. An additional Cdn.$200,000 will be
payable by Draxis if Canadian sales exceed specified targets in the next 18
months. The acquisition provides Draxis with several prescription and over-the-
counter dermatological compounds that have already received regulatory approval
and are currently being sold in the United States and Canada. The Tican product
line includes cortico-steroid cream and lotion, moisturizers, sunscreens, a
compounding base and shampoos. Brand names include Aquacort-Registered
Trademark-, Canscreen-Registered Trademark-, Tiamol-Registered Trademark- and
Salseb-Registered Trademark-.
VETERINARY PRODUCTS
Draxis has targeted the veterinary market for chronic diseases in ageing
household pets. Under the January 1996 DAHI Distribution Agreement, DAHI
granted to DAHI Animal Health (Ontario) Inc. and DAHI Animal Health Inc., both
wholly-owned subsidiaries of Draxis, the exclusive rights to distribute ANIPRYL-
Registered Trademark- in Canada for an initial term of 10 years. Draxis has
paid DAHI a fee of U.S.$468,750 for these Canadian rights and the purchase of
start-up inventory, as well as U.S.$125,000 for reimbursement of expenses
incurred by DAHI to prepare marketing materials for a Canadian launch of
ANIPRYL-Registered Trademark-. ANIPRYL-Registered Trademark- is a selegiline
product currently being developed by DAHI for use in veterinary prescriptive
applications, particularly for use in dogs. The two indications being developed
by DAHI are canine Cushing's disease and canine cognitive dysfunction.
ANIPRYL-Registered Trademark- was launched by Draxis in Canada in April
1996 in the 2 mg, 5 mg and 15 mg doses. Canadian veterinary health regulatory
approval of the 10 mg and 30 mg doses is expected in the near future. As of
August 31, 1996, total sales of ANIPRYL-Registered Trademark- in Canada since
its launch in April 1996 amounted to Cdn.$131,224. At this time, it is too
early to predict the market acceptance which ANIPRYL-Registered Trademark- will
ultimately achieve in Canada. Sales to August 31, 1996, may have been adversely
affected by, among other factors, the summer holiday period. In addition, a
sampling program was undertaken to introduce ANIPRYL-Registered Trademark- and
raise awareness within the Canadian veterinarian community.
CONSUMER HEALTH PRODUCTS
In June 1995, Draxis U.S. Inc., a Delaware company wholly-owned by Draxis,
acquired a 50% interest in New IHS, LLC ("IHS"), a limited liability U.S.
network marketing company specialized in science-based consumer health products
which carries on business as Innovative Health Systems. In August 1996, Draxis
and the other IHS stakeholder, Decatur-McCallon Inc., sold their interest in IHS
to Stef International
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Corp. ("Stef") in exchange for Stef common shares, warrants to purchase Stef
common shares and Stef debt convertible into Stef common shares, valued, in the
aggregate, at Cdn.$2.25 million. The transaction resulted in Draxis acquiring a
30% equity stake in Stef, which would increase to 40% following the exercise of
the warrants and conversion of the debt. Stef is a network marketing company
operating in the United States which distributes nutritional and personal care
products for women and men, including skin, shaving and hair care products.
Network marketing is a business development opportunity for individuals to
create their own business by building a network of distributors through which a
company's products or services are distributed to the final consumer. Home
based, independent distributors sell products or services to their relatives and
friends and earn commissions on personal sales as well as on sales of
distributors they recruit.
PRODUCTS UNDER DEVELOPMENT
Draxis has rights to a number of products in various stages of development.
Draxis has not received approval from any regulatory authority to market any of
the products being developed by or for Draxis described below and there can be
no assurance that Draxis will successfully commercialize any such products.
DERMATOLOGICAL PRODUCTS
Draxis, through its Lipopharm division, is developing a line of
prescription products for the treatment of a variety of skin conditions,
including psoriasis and atopic eczema, as well as a product used in wound
healing, LIPOTECA-TM-.
The most advanced liposomed product being developed by Draxis is LIPOTECA-
TM-, which is intended to be used for the treatment of keloids. Keloids are
abnormal scar formations which can occur following surgery, burns, trauma and
skin infections. Based on independently-audited industry data, Draxis estimates
that the worldwide market for LIPOTECA-TM- is approximately Cdn.$300 million.
At the end of 1995, Draxis completed a Phase III multi-centered, double-
blind, placebo-controlled, 55 patient trial for LIPOTECA-TM-, which was the
first of two such trials planned. The final results of this clinical trial
indicated that LIPOTECA-TM- demonstrated a statistically significant effect on
the induration of well-established keloid scars. The study was conducted in two
different centers by two independent certified plastic surgeons. The primary
objective of the treatment of keloids is the reduction of indurations/elevation.
Co-variance analysis indicates that LIPOTECA -TM- was statistically superior to
its placebo liposome cream base. Draxis commenced the second multi-centered
double-blind clinical trial in November 1995 designed to confirm the results of
the first trial and expand the understanding of the efficacy of LIPOTECA-TM-.
Draxis expects to complete the second clinical trial during the first half of
1997. Draxis has conducted an informal interim review of the data from the
second clinical trial, which shows that there is an apparent difference between
the two treatments only with respect to erythema (redness) of the keloid. At
this time, it is too early to predict the statistical outcome of any of the
variables in the second clinical trial. In 1996, Draxis intends to commence,
subject to HPB approval, a clinical trial designed to demonstrate a preventative
therapeutic effect of LIPOTECA-TM- in the treatment of surgically excised
keloids.
Draxis also has other liposome drugs in pre-clinical development, including
LIPO-FORT-TM- and LIPOSPORIN. LIPO-FORT-TM- is a high-potency topical
corticosteroid designed to reduce side effects, to enhance effectiveness and to
lower the cost of therapy compared to currently available corticosteroid
treatments. Corticosteroids are used to treat certain skin inflammation
conditions, including psoriasis. The National Research Council of Canada's
Industrial Research Assistance Program ("IRAP") has committed Cdn.$200,000 to
help finance the development of LIPO-FORT-TM-, to be disbursed in instalments
between 1996 and 1998. LIPOSPORIN is a liposomal form of cyclosporin used for
the treatment of psoriasis.
In 1996, Draxis will increase its research and development efforts on
liposomal drug delivery, which will be partially funded by the IRAP. Draxis
will explore factors which optimize the efficacy of topical drugs encapsulated
in liposomes. Although the results of this research will be relevant to other
liposomed products, it should initially lead to a topical liposomed steroid
cream. The liposomed formulation is expected to allow for a
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reduced level of active ingredient with an equivalent or a superior therapeutic
value effect compared to traditional topical steroids. Such liposomal
formulations may also be safer and more effective than competing products.
These research efforts are still at the pre-clinical stage.
OTHER
MODAFINIL
In November 1992, Draxis entered into a license agreement with Laboratoire
L. Lafon ("Lafon") for the right to market in Canada any product containing the
compound MODAFINIL. Draxis has agreed to purchase from Lafon all quantities of
MODAFINIL as Draxis may require during the term of the Agreement and Lafon has
agreed to supply such product or allow Draxis to take over the manufacture of
such product. The license agreement terminates in Canada 15 years after the
date of the last HPB approval obtained for a dosage form of and/or a new
indication for MODAFINIL in Canada.
MODAFINIL regulates wakefulness, without cardiovascular effects, in
patients with sleeping disorders such as narcolepsy. Narcolepsy is a primary
sleep disorder characterized by uncontrolled episodes of falling asleep at
unexpected times and conditions.
No treatment for narcolepsy has been approved in Canada since 1959.
Current therapies for treating narcolepsy, such as amphetamine-like stimulants,
are often addictive, may have undesirable side effects and may require
increasing dosages to maintain therapeutic effectiveness. MODAFINIL is an
original, new medication for narcolepsy with a novel mechanism unrelated to
amphetamines. MODAFINIL, which has been approved in France under certain
prescription requirements for the treatment of narcolepsy, has been shown to
possess an acceptable safety profile. Lafon has informed Draxis that the drug
has received extensive testing in Europe. The MODAFINIL license requires Draxis
to pay royalty fees to Lafon based on Draxis' net sales of MODAFINIL. Draxis is
required to make a further cash payment of U.S.$300,000 to Lafon upon receiving
HPB approval to market MODAFINIL for the treatment of narcolepsy.
In February 1996, Draxis reported statistically significant results of its
year-long double-blind randomized placebo-controlled cross-over Phase III
clinical study of MODAFINIL 200 mg and MODAFINIL 400 mg in the treatment of
narcolepsy. The full results of this study have been used by Draxis to complete
its New Drug Submission to the HPB for regulatory approval in Canada which was
filed in August 1996. The results of those clinical trials have not yet been
reviewed or approved by the HPB.
ONE-ALPHA D(2)
In March 1990, Bone Care International, Inc. ("Bone Care") granted to
Draxis an exclusive Canadian license to market ONE-ALPHA D(2) for treating
osteoporosis. Osteoporosis is a disease characterized by thinning and weakening
of the bones to the point of spontaneous fracture. Its incidence increases with
age and it occurs predominantly in women. Among its more common complications
are broken hips and vertebra fractures. Draxis' management estimates that the
cost of treatment of broken hips in Canada alone is more than Cdn.$100 million a
year. The market for anti-osteoporosis drugs in Canada is based on the
frequency of complications and is estimated by Draxis at between 500,000 and
800,000 patients. Current treatment of osteoporosis includes hormone
replacement therapy and calcium supplements with Vitamin D and drug therapy.
Based on independently audited 1995 industry data, there are about 286,000
visits per year to physicians for this diagnosis and approximately 198,000
prescriptions are written.
Draxis owns approximately 3% of the outstanding common stock of Bone Care.
In March 1996, the license was extended to cover ONE-ALPHA D(2) for other
metabolic bone diseases, including renal osteodystrophy and secondary
hyperparathyroidism. The license also covers all know-how developed by or on
behalf of Bone Care relating to the use of ONE-ALPHA D(2) for those indications.
No royalties are payable under this license. The initial term of the license
agreement expires in March 2010. The term renews automatically thereafter from
year to year unless terminated under certain conditions.
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ONE-ALPHA D(2) is a vitamin D compound licensed by Bone Care from the
Wisconsin Alumni Research Foundation. The initial indication for which ONE-
ALPHA D(2) is being developed by Bone Care is secondary hyperparathyroidism
associated with end-stage renal disease. Multi-centered Phase III clinical
trials will begin in 1996. Under its license agreement with Bone Care, Draxis
is responsible for obtaining HPB approval for ONE-ALPHA D(2). Bone Care is
required to provide reasonable technical and other assistance, including all
data and information Bone Care submits to the United States FDA and any other
regulatory agency to support its request for such approval in the United States.
Draxis has agreed to purchase its requirements of ONE-ALPHA D(2) from Bone Care,
subject to Draxis and Bone Care mutually agreeing to a supply price.
Bone Care has launched a multi-centre Phase III clinical trial in the
United States to confirm the efficacy and safety of One-Alpha D(2) as a
treatment for secondary hyperparathyroidism associated with renal disease. Bone
Care has scheduled this trial for completion in mid 1997. Draxis has not yet
applied for Canadian health regulatory approval for ONE-ALPHA D(2) and is
awaiting the results of Bone Care's clinical trials and regulatory approvals.
IPRIFLAVONE
In January 1995, Draxis acquired from Somerset the exclusive Canadian
marketing rights to IPRIFLAVONE, a drug for use in treating osteoporosis.
Somerset obtained these rights pursuant to an agreement with Chinoin whereby
Somerset has been granted a license to market IPRIFLAVONE in North America.
IPRIFLAVONE was developed by Chinoin, the developers of ELDEPRYL-Registered
Trademark- , and is now marketed in several countries in Europe and Asia for
treatment of osteoporosis. IPRIFLAVONE is currently in Phase II clinical trials
for the United States and Canadian markets. Completed studies have already
shown that IPRIFLAVONE inhibits loss of bone mass. Draxis will file an
investigational new drug submission with the HPB as soon as Somerset has decided
on the numbers of Canadian clinical centres which will participate in the
clinical program.
Draxis paid US$100,000 upon signing its agreement with Somerset and will be
required to make additional payments of US$200,000 at the time Somerset files a
new drug submission with the HPB and US$400,000 upon issuance of a Notice of
Compliance by the HPB.
Somerset has the right to terminate the IPRIFLAVONE license agreement if it
does not receive approval to market and sell the product in the United States or
Canada by January 2003 or if it determines to terminate clinical trials relating
to IPRIFLAVONE for any reason. If the agreement between Somerset and Chinoin is
extended or terminated, the agreement with Draxis governing IPRIFLAVONE will be
extended to, or terminated on, the same date.
Draxis will provide scientific and regulatory assistance to Somerset with
respect to Canadian regulatory approvals for IPRIFLAVONE and will conduct
certain research and development activities in Canada. Somerset will take
overall responsibility, including financial responsibility, for research and
development activity through the regulatory approval process in the United
States and Canada. Draxis and Somerset will share equally in the profits from
marketing and selling IPRIFLAVONE in Canada. Somerset will recover a part of
its expenditures proportionate to the size of the Canadian market over time and
at a pre-determined rate after regulatory approval has been achieved in Canada.
ALA PHOTODYNAMIC THERAPY
The information set forth in this paragraph and the fourth paragraph below
is derived from public information disclosed by DUSA Pharmaceuticals, Inc.
("DUSA"). DUSA, formerly an affiliate of Draxis, has the worldwide rights to
certain uses of photodynamic therapy ("PDT") utilizing 5-aminolevulinic acid
("ALA Photodynamic Therapy" or "ALA PDT-TM-") under a license (the "PARTEQ
License") from PARTEQ Research & Development Innovations ("PARTEQ"), the
licensing arm of Queen's University, Canada. Under the terms of the PARTEQ
License, DUSA assumed responsibility for all clinical development and regulatory
submissions relating to commercial exploitation of ALA PDT-TM-.
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In October 1991, DUSA, PARTEQ and Draxis entered into an agreement (the
"ALA Assignment Agreement") under which DUSA assigned to Draxis its rights and
obligations under the PARTEQ License insofar as they relate to Canada. In
addition, DUSA has agreed to disclose to Draxis on an ongoing basis any
technology available to DUSA and relating to the subject matter of the PARTEQ
License which would assist Draxis in developing the Canadian market for ALA PDT-
TM-. As consideration, Draxis has agreed to pay directly to PARTEQ 5% of all
future lump sums, together with royalties which would otherwise be payable by
DUSA in accordance with the PARTEQ License in respect of net Canadian sales of
products and sublicensing revenues. As further consideration, Draxis agreed to
reimburse to DUSA five percent of all lump sums previously paid by DUSA to
PARTEQ under the PARTEQ License and to pay to DUSA a royalty of two percent of
net Canadian sales of products.
The initial term of this agreement expires on August 27, 1996 and is
renewable on a year-to-year basis thereafter. Draxis has guaranteed the
obligations of DUSA under the PARTEQ License. DUSA has agreed to use its
reasonable best efforts to secure the release of this guarantee from PARTEQ.
After FDA approval is obtained, DUSA will be required to pay minimum annual
royalties to PARTEQ of up to Cdn.$100,000.
In general, PDT is a two-step medical treatment. The first step involves
the application of a drug (termed a photosensitizer) that collects
preferentially in target tissue. The second step involves the application of
controlled light to the photosensitized tissue. Energy from the light activates
the photosensitizer, which destroys or alters the sensitized cells. The
appropriate combination of drug and light can affect target tissue with
relatively minimal damage to surrounding tissue. Patent applications to protect
the use of ALA Photodynamic Therapy in treating various disorders have been
filed in several countries and United States and Australian patents have issued.
DUSA is developing ALA PDT in the treatment of several conditions,
including AKs (precancerous skin lesions), acne and psoriasis (chronic skin
disorder). Phase II clinical trials on AKs will be completed by the end of
1996. Phase III clinical trials on AKs are scheduled to being in late 1996.
DUSA is also conducting Phase I/II clinical trials in the photodiagnosis of
bladder cancer, endometrial ablation and hair removal.
SALES AND MARKETING
Draxis markets its products in Canada using its Canadian sales force of
thirteen full time representatives. The sales force in Canada calls on all
neurologists and high prescribing general practitioners in the neurology area
and on targeted dermatologists. Draxis is specialized in the area of movement
disorders based on its cluster of Parkinson's disease products, ELDEPRYL-
Registered Trademark-, PERMAX-Registered Trademark-, PROLOPA-Registered
Trademark-, BRITAJECT-Registered Trademark- and TEGRETOL-Registered Trademark-
for seizures. The Canadian sales force also calls on substantially all
veterinarians in Canada with small animal or mixed animal practices to
distribute ANIPRYL-Registered Trademark- on behalf of Draxis' animal health
subsidiaries, DAHI Animal Health (Ontario) Inc., which markets ANIPRYL-
Registered Trademark- exclusively in Ontario, and DAHI Animal Health Inc., which
markets ANIPRYL-Registered Trademark- in all other Canadian jurisdictions.
In the United States, Draxis has a contract sales organization comprised of
13 dedicated representatives and two sales managers who call exclusively on
podiatrists. In addition, Draxis has contracted with a telemarketing service to
reach podiatrists located in states with large podiatry concentrations outside
of the key geographic areas covered by the representatives.
COMPETITION
Draxis competes with fully integrated pharmaceutical companies, many of
which have more financial and other resources and experience and expertise in
research and development, manufacturing, testing, obtaining regulatory
approvals, marketing and distribution. Smaller companies may also be
significant competitors, particularly through their collaborative arrangements
with other pharmaceutical companies and research institutions.
<PAGE>
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Draxis is aware of several other products which are presently being used as
an adjunctive therapy to levodopa for Parkinson's disease in the United States
and Canada. These include PARLODEL-Registered Trademark- and SYMMETRYL-
Registered Trademark-. Draxis believes that these products may compete with
ELDEPRYL-Registered Trademark-, NOVO-SELEGILINE and PERMAX-Registered
Trademark-. Draxis believes that the unique safety profile of selegiline in
this treatment phase provides a significant competitive advantage. At this
time, no other product competes with selegiline with respect to use as
monotherapy for early use treatment in delaying the progression of symptoms
requiring the use of a levodopa preparation. This delay provides a financial
benefit to the patients and health care providers permitting patients to
remain at work longer than would otherwise be possible. PERMAX-Registered
Trademark- competes directly with PARLODEL-Registered Trademark- as a
dopamine agonist providing several benefits for patients related to duration
of action and potency. SYMMETRYL-Registered Trademark- and other similar
products are used primarily to reduce mild symptoms and the tremor often
associated with Parkinson's disease. Draxis is aware of competitive products
to both ELDEPRYL-Registered Trademark- and PERMAX-Registered Trademark- that
are currently in clinical testing and which may be approved for sale in the
future, including cabergoline being developed by Pharmacia & Upjohn
Incorporated, pramipexole being developed by affiliates of Boehringer
Ingelheim Canada Ltd., ropinirole being developed by Smith Kline Beecham and
tolcapone being developed by affiliates of Roche.
A time-released levodopa therapy has entered the Canadian market, which has
been positioned as the replacement for the same non-time-released levodopa
brand. Competition from this time-released product is likely to have an adverse
impact on the growth of PROLOPA-Registered Trademark-. However, Draxis believes
that its promotion of PROLOPA-Registered Trademark-, ELDEPRYL-Registered
Trademark- and PERMAX-Registered Trademark- creates a strong position in the
marketplace with a combination of products from one company dedicated to the
treatment of the Parkinson's patient.
Draxis expects generic competition to ELDEPRYL-Registered Trademark- to
emerge in 1996. Draxis already has implemented part of its generic defense
strategy in forming its strategic alliance with Novopharm, whereby Novopharm has
been engaged to market and sell NOVO-SELEGILINE, a generic version of ELDEPRYL-
Registered Trademark-, in Canada. In this manner, Draxis and Novopharm will
maximize their combined share of this market and Draxis will participate in
revenue from sales of a generic version of ELDEPRYL-Registered Trademark- by
Novopharm. Draxis expects that NOVO-SELEGILINE will retain a substantial part
of the generic selegiline market based on its early introduction.
Draxis has maintained a strong cash position and it has no debt. Draxis
endeavours to manage its expenses carefully and focuses on the development and
marketing of products in its pipeline and on the acquisition of new products,
either directly or through alliances and partnerships. Sales of PERMAX-
Registered Trademark-, KERASAL-Registered Trademark- and ANIPRYL-Registered
Trademark- are now adding to Draxis' basic revenue base and are reducing its
dependence on ELDEPRYL-Registered Trademark-. Nevertheless, the introduction of
a generic form of selegiline, other than NOVO-SELEGILINE, could have a
materially adverse effect on Draxis' revenues and income. It is not possible at
this time to predict the timing or magnitude of such effect.
KERASAL-Registered Trademark- combines salicylic acid with a moisturizing
vehicle for use on dry, cracked feet. There are several prescription products
used to treat this condition which are more costly than KERASAL-Registered
Trademark-, the main brand being LAC-HYDRIN-Registered Trademark-. In addition,
the condition is treated by an array of cosmetic and over-the-counter
moisturizers which are generally found to be less effective than the
prescription alternatives.
To Draxis' knowledge, ANIPRYL-Registered Trademark- is the only known
treatment approved by the HPB for canine Cushing's disease. The animal health
market place is served, generally, by veterinary, agricultural or animal health
divisions of large international pharmaceutical and chemical companies which are
involved in research and development activities. These companies may have
resources available which would far exceed those available to Draxis and
products resulting from their activities, may, in the future, compete directly
with ANIPRYL-Registered Trademark-.
RESEARCH AND DEVELOPMENT
During 1995, Draxis invested Cdn.$2,318,000 on research and development
activities, as compared to Cdn.$2,079,000 during 1994 and Cdn.$2,722,000 during
1993. Draxis' affiliated company, DAHI, also continued to invest heavily in
research and development in 1995 with expenditures of US$1,400,000.
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Draxis expects that its research and development expenses in 1996 will
continue to increase as its new product development program continues to
progress through the various clinical trial phases, new drug submissions,
notices of compliance and, ultimately, marketing. In 1996, clinical studies
will continue with MODAFINIL and dermatological liposomal formulations. A
multicenter clinical study is being completed on the anti-narcoleptic effect of
MODAFINIL. A second multi-centered double-blind clinical trial is being
completed for LIPOTECA-TM- in the treatment of keloids.
PATENTS
Draxis' policy is to protect its technology, inventions and improvements
by, among other things, filing patent applications for technology which it
considers important to the development of its business. Draxis also relies upon
trade-secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. Historically,
pharmaceutical companies have relied heavily upon patents to protect proprietary
positions on drug products. Patent positions generally, including those of
Draxis, can be uncertain and involve complex legal issues and factual questions.
No assurance can be given that Draxis' patent applications or those that it has
been licensed under will issue as or that any patents, if issued, will provide
Draxis with adequate protection with respect to the covered products,
technologies or processes.
All of the products marketed by Draxis are licensed under one or more
patents or patent applications. In addition, Draxis has patent applications for
its own research efforts on file with the U.S. Patent and Trade-Mark office and
in other jurisdictions, including Canada. There can be no assurance that any of
the patent applications made by or for the benefit of Draxis will be approved
or, if approved, will be as wide in scope as such patent applications or that
the claims of any issued patent will withstand challenge.
With respect to ELDEPRYL-Registered Trademark-, the basic Canadian patent
covering an original process for preparing the active ingredient in ELDEPRYL-
Registered Trademark- expired on May 18, 1988. A further process patent held by
Chinoin, under which Draxis holds the Canadian rights, employs a more modern and
efficient process for the preparation of the active ingredient and will expire
on December 16, 2003. This later patent does not prevent a third party from
entering the market with selegiline made using a different process, subject to
obtaining health regulatory approvals.
The University of Toronto Innovations Foundation has granted to Draxis an
exclusive license for Canada and the United States to exploit the commercial
opportunities resulting from original research by Dr. William Tatton and others
covering the use of ELDEPRYL-Registered Trademark- to maintain, prevent loss or
recover nerve cell function. Patent applications have been made in the United
States and are pending. A patent on a method for rescuing damaged nerve cells
resulting from hypoxia, ischemia, stroke and trauma has now been allowed in the
United States and is pending in Canada.
Draxis' exclusive liposome technology is covered by a number of patents
held by Draxis' licensor Mezei which have issued in Canada, the United States,
Europe and Japan.
DAHI FUNDING
In March 1994, DAHI and Draxis entered into an agreement under which Draxis
agreed to extend the maturities of certain promissory notes (the "Notes") issued
by DAHI to Draxis in 1992 and provided a loan (the "1994 Loan") of US$2,500,000
to DAHI so that DAHI could pursue the development of ANIPRYL-Registered
Trademark-. The 1994 Loan is repayable as to (i) 60% of the outstanding amount
in equal quarterly instalments payable on the last day of each quarter
commencing January 1, 1997 and ending January 1, 2001, and (ii) 40% in a lump
sum on January 1, 2001, together with interest thereon payable quarterly on the
last day of each quarter at an annual rate equal to the prime rate plus 1% on
the outstanding principal amount commencing on the date of the loan. The 1994
Loan is convertible by Draxis at any time into shares of DAHI Common Stock at
US$2.88 per share.
In January 1996, in connection with entering into the DAHI Distribution
Agreement, Draxis converted approximately half of the US$3.0 million then
outstanding in respect of the Notes and the 1994 Loan into shares of DAHI Common
Stock at Cdn.$2.11 (or US$1.55) per share and loaned US$1.0 million to DAHI (the
"1996
<PAGE>
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Loan"). The 1996 Loan is convertible into DAHI Common Stock at the rate of
Cdn.$2.11 (or US$1.55) per share and is repayable in instalments commencing
October 1, 1999 and ending October 1, 2003. The conversion feature of the 1996
Loan was approved by the DAHI Shareholders, excluding votes cast by Draxis or
any associate or insider of Draxis, in June 1996. As a result of the foregoing,
Draxis indirectly holds approximately 44 percent of the shares of DAHI Common
Stock, and its ownership could increase to approximately 52 percent of DAHI, on
a non-diluted basis, through the conversion of the balance of the amounts
outstanding under the Notes, the 1994 Loan and the 1996 Loan.
The balance of the principal owing on the 1994 Loan and the Notes may be
converted into: (a) shares of DAHI Common Stock at US$2.88 per share; or (b) a
Participation Interest, in increments of US$250,000, payable in annual
instalments until December 31, 2003. "Participation Interest" is defined as an
entitlement to receive an annual amount until December 31, 2003 equal to (i) 35%
of the converted principal and unpaid and accrued interest commencing on the
date of conversion by Draxis, if Draxis converts prior to the receipt by DAHI of
HPB approval of ANIPRYL-Registered Trademark- and prior to receipt of FDA
approval of ANIPRYL-Registered Trademark-; or (ii) 28% of the converted
principal and unpaid and accrued interest commencing the date of conversion by
Draxis, if Draxis converts prior to the receipt by DAHI of FDA approval of
ANIPRYL-Registered Trademark- but after receipt of HPB approval of ANIPRYL-
Registered Trademark-; or (iii) 20% of the converted principal and unpaid
interest commencing the date of conversion by Draxis, if Draxis converts after
the receipt by DAHI of FDA approval of ANIPRYL-Registered Trademark- and HPB
approval of ANIPRYL-Registered Trademark-. Participation Interest payments will
decrease to two-thirds of the amount otherwise required to be paid for the year
ending December 31, 2004, and to one-third of such amount for the year ending
December 31, 2005.
In the event a Participation Interest payment exceeds 50% of DAHI's pre-tax
net income during any fiscal year, the difference between the Participation
Interest payment and 50% of such pre-tax net income shall be paid in the form of
shares of DAHI at the price of US$2.88 per share. Draxis has further agreed not
to convert more than 50% of the 1994 Loan and the Notes into a Participation
Interest in any calendar year. Under certain terms and conditions, DAHI shall
be required to register any shares acquired by Draxis under any of the above-
mentioned terms with the United States Securities and Exchange Commission.
Any additional debt incurred by DAHI having a repayment term exceeding one
year must be subordinated to DAHI's outstanding indebtedness to Draxis. DAHI
may prepay any amounts outstanding on 60 days, written notice to Draxis, during
which time Draxis retains the rights to exercise any remaining conversion
privileges.
EMPLOYEES
As of the date of this Joint Management Proxy Statement-Prospectus, Draxis
had 41 full-time employees.
PROPERTIES
All of Draxis' operations are conducted at leased premises. Since May
1994, Draxis has leased and is occupying an aggregate of 24,910 square feet of
office and warehouse space located at 6870 Goreway Drive, Mississauga, Ontario
L4V 1P1, at an aggregate rent of Cdn.$141,000 per year. The lease has a five-
year term, expiring in May 1999.
PRINCIPAL HOLDERS OF DRAXIS COMMON STOCK
Draxis' management believes no shareholder owns, of record or beneficially,
either directly or indirectly, more than 10% of any class of voting securities
of Draxis. As a group, the directors and senior officers of Draxis own
beneficially, directly or indirectly, 1,813,610 shares of Draxis Common Stock,
representing 7.7% of the outstanding shares of Draxis Common Stock as at
October 15, 1996.
<PAGE>
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DESCRIPTION OF SHARE CAPITAL
The share capital of Draxis currently consists of an unlimited number of
shares of Draxis Common Stock, an unlimited number of Preferred Shares and an
unlimited number of EP Shares, issuable in series, of which there are
outstanding 23,375,220 shares of Draxis Common Stock, no Preferred Shares,
965,500 EP Shares, Series A and 555,000 EP Shares, Series B, in each case
determined as at June 30, 1996.
The following is a summary of the material rights, privileges, restrictions
and conditions which attach to the Draxis Common Stock, the Preferred Shares and
the EP Shares.
COMMON SHARES
Holders of shares of Draxis Common Stock are entitled to receive notice of
and attend all annual and special meetings of Draxis Shareholders and to one
vote in respect of each share of Draxis Common Stock held at such meetings.
Draxis Shareholders are entitled to receive dividends if, as and when declared
by the Draxis Board. Upon the liquidation, dissolution or winding up of Draxis
or other distribution of Draxis' assets among its shareholders, Draxis
Shareholders are, subject to the rights of any class of shares of Draxis,
entitled to receive such assets rateably with the other Draxis Shareholders.
PREFERRED SHARES
The Preferred Shares are issuable in one or more series. Subject to
Draxis' articles, the Board of Directors is authorized to fix by resolution,
before issuance, the designation, rights, privileges, restrictions and
conditions attaching to the shares of each series, including without limitation,
any rights to receive preferential dividends, to receive notice of, attend and
vote at meetings of Draxis' meetings of shareholders and to convert such shares
into other securities. The Preferred Shares rank prior to the Common Stock and
any other shares ranking junior to the Preferred Shares in the distribution of
assets in the event of any liquidation, dissolution or winding up of Draxis. To
date, no Preferred Shares have been issued by Draxis and no series of Preferred
Shares has been authorized by the Board of Directors for issuance.
EMPLOYEE PARTICIPATION SHARES
The EP Shares are issuable in one or more series. Draxis has securities
regulatory approval to issue a maximum of 2,000,000 such shares. Subject to
Draxis' articles, the Board of Directors is authorized to fix by resolution,
before issuance, the designation, rights, privileges, restrictions and
conditions attaching to the shares of each series of EP Shares. EP Shares do
not entitle the holders to vote at meetings of Draxis' shareholders, except
where such right is conferred by the CANADA BUSINESS CORPORATIONS ACT. Draxis
has created an unlimited number of EP Shares, Series A and an unlimited number
of EP Shares, Series B.
DIVIDENDS
Holders of EP Shares are entitled to receive dividends, if, as and when
dividends are paid on the Common Stock, in an amount per EP Share equal to the
proportion of the amount of the dividend declared on each share of Draxis Common
Stock that the subscription price of the EP Share is of the Fair Market Value of
the Common Stock at the date of issuance of such EP Share. For purposes of the
EP Shares, "Fair Market Value" of the Common Stock means, the average of the
daily high and low board lot trading prices on the TSE on each of the five
trading days immediately preceding the date on which the value is to be
determined.
CONVERSION
In the event of any liquidation, dissolution or winding-up of Draxis; or on
the Automatic Conversion Date (as defined below); or at the option of a holder
on a Conversion Date (as defined below) other than the Automatic Conversion
Date, the EP Shares will become shares of Draxis Common Stock, and the number of
shares of Draxis Common Stock a holder receives on conversion is the number of
shares of Draxis Common
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Stock which is determined by multiplying the number of EP Shares held, or in the
case of conversion on a Conversion Date other than the Automatic Conversion
Date, the number of EP Shares which the holder elects to convert, by a fraction:
(i) the numerator of which shall be the Employee Participation Share Value
(as defined below) of an EP Share of a particular series as at the
earlier of the Automatic Conversion Date and a Conversion Date, as the
case may be; and
(ii) the denominator of which shall be the Fair Market Value of a share of
Draxis Common Stock as at the earlier of the two dates described in
(i).
For the purposes of the EP Shares, the "Automatic Conversion Date" means
the date that is the fifth anniversary date of the date of issue of the EP
Shares of a particular series and is the date on which all EP Shares of such
series will, to the extent not theretofore redeemed, be converted into shares of
Draxis Common Stock. "Conversion Date" means any business day following the
date on which the EP Shares of a particular series were issued, provided,
however, that no Conversion Date shall include a date other than the Automatic
Conversion Date unless on or prior to such date the Minimum Vesting Period (as
defined below) has expired and the Fair Market Value of the Common Shares on
such date is at least twenty-five percent (25%) greater than the Fair Market
Value of the shares of Draxis Common Stock on the issue date of the EP Shares of
such series. "Minimum Vesting Period" means, except as otherwise agreed upon by
the holder and Draxis, the period of time commencing at the time of issuance of
the EP Shares of a particular series and ending on an anniversary date of such
issuance and occurring in the following percentages:
Year 1 - 20%
Year 2 - 20%
Year 3 - 20%
Year 4 - 40%
"Employee Participation Share Value" means the greater of (i) the amount,
if any, by which the Fair Market Value of a share of Draxis Common Stock as at
that time exceeds the Fair Market Value of a share of Draxis Common Stock as at
the date on which the first EP Share of a particular series was issued; and (ii)
the issue price.
TRANSFERABILITY
EP Shares are not transferable.
PRICE RANGE AND TRADING VOLUME OF DRAXIS COMMON STOCK
The shares of Draxis Common Stock are listed on the TSE and are quoted on
Nasdaq. The following table sets out the high and low sale prices on the TSE
and on NASDAQ and the aggregate volume of trading on such exchanges of such
shares for the periods indicated:
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THE TORONTO STOCK EXCHANGE (QUOTED IN CDN.$)
1996 High Low Volume
- ---- ---- --- ------
October 1 - 15 $ 4.20 $ 3.75 111,636
September 4.40 3.85 338,507
August 4.65 4.20 349,161
July 4.80 3.40 449,982
June 6.55 4.50 976,568
May 5.60 4.57 517,965
April 5.20 4.10 498,208
First Quarter 5.63 3.65 4,962,601
1995
First Quarter 2.80 1.90 1,690,690
Second Quarter 3.00 2.00 803,928
Third Quarter 3.35 2.10 1,584,746
Fourth Quarter 2.95 2.03 1,279,755
NASDAQ (QUOTED IN U.S.$)
1996
- ----
October 1 - 15 $ 3 1/8 $ 2 11/16 309,516
September 3 1/16 2 13/16 1,569,103
August 3 3/8 3 1/16 1,149,500
July 3 1/2 2 9/16 2,615,690
June 4 5/8 3 5/16 6,082,200
May 3 15/16 3 3/8 2,292,200
April 3.88 2.94 2,162,500
First Quarter 4.13 2.94 12,439,600
1995
- ----
First Quarter 2.00 1.3125 5,309,900
Second Quarter 2.25 1.3750 2,132,600
Third Quarter 2.50 1.5625 4,264,400
Fourth Quarter 2.25 1.4375 2,473,200
OUTSTANDING RIGHTS, OPTIONS AND WARRANTS
In addition to shares of Draxis Common Stock issuable upon exercise of the
options described under "Stock Plans" or upon conversion of the EP Shares held
by employees, shares of Draxis Common Stock are issuable under certain
agreements described below.
In connection with entering into the Novopharm Agreement on December 10,
1993, Draxis issued to Novopharm 1,176,470 shares of Draxis Common Stock and
1,176,470 warrants. Each warrant is non-transferable and entitles Novopharm to
purchase one share of Draxis Common Stock on or before December 10, 1997. If
exercised prior to December 10, 1996, the exercise price is Cdn.$2.97 per share
of Draxis Common Stock. Thereafter, the exercise price will be Cdn.$3.27 per
share of Draxis Common Stock. On April 19, 1995, Novopharm agreed to amend the
Novopharm Agreement by extending the term of the profit sharing formula to the
end of the 1995 second quarter. In connection with this amendment, Draxis
issued to
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Novopharm warrants to purchase an additional 500,000 shares of Draxis Common
Stock at Cdn.$2.09 per share of Draxis Common Stock, the closing price on the
TSE on April 18, 1995. The warrants are non-assignable and expire on April 18,
2000.
Shares of Draxis Common Stock are issuable to the former shareholders of
Lipopharm Inc. The first tranche of shares is issuable if gross revenues of
Lipopharm in any fiscal year ending December 31, 1992 through 1997 exceed
Cdn.$2,000,000. The second tranche of shares is issuable if gross revenues of
Lipopharm in any fiscal year ending December 31, 1992 through 1997 exceed
Cdn.$4,000,000. The number of shares of Draxis Common Stock issuable under each
of these tranches is equal to that number obtained by dividing Cdn.$393,221 by
the average closing price of the Draxis Common Stock on the TSE for the 15
trading days immediately prior to the end of the month during which the gross
revenue target was exceeded.
Pursuant to an underwriting agreement dated as of April 22, 1996 between
Yorkton Securities Inc., RBC Dominion Securities Inc. (collectively, the
"Underwriters") and Draxis, Draxis granted to the Underwriters a non-assignable
warrant (the "Compensation Warrant") exercisable at any time and without payment
of any additional consideration, to acquire up to 300,000 share purchase options
(the "Compensation Options"). Each Compensation Option entitles the
Underwriters to acquire, on or before April 22, 1998, one Draxis Common Share at
an exercise price of Cdn.$4.25 per share. The Compensation Warrant was issued
as part of the consideration for the Underwriters' services in connection with
the issue and sale by Draxis of 300,000 special warrants on April 22, 1996.
DIRECTORS AND OFFICERS
The names, municipalities of residence, positions with Draxis and principal
occupations of the directors and officers of Draxis are as follows:
NAME AND MUNICIPALITY PRINCIPAL
OF RESIDENCE OFFICE OCCUPATION
- --------------------- ------ -----------
Martin Barkin, MD, FRCSC President, Chief Executive Officer of Draxis
Toronto, Ontario Officer, Chief Operating
Officer and Director
Leslie L. Dan(1) Director Chairman and
Toronto, Ontario Chief Executive
Officer of
Novopharm Limited
(a pharmaceuticals
company)
James P. Doherty(1)(3) Vice Chairman and Director Corporate
Toronto, Ontario Director
Laszlo Kadar Director Managing
London, England Director, KMK
Pharma Limited (a
healthcare
licensing
company)
Brian M. King(2)(3) Chairman of the Board Corporate
Scarborough, Ontario Director
Jacqueline H.R. Le Saux, Esq. Vice-President, Corporate Officer of Draxis
Toronto, Ontario Development and Secretary
Roger Mailhot, PhD Vice-President, Scientific Officer of Draxis
Oakville, Ontario and Regulatory Affairs
Bernard J. Marzalik Vice-President, Marketing Officer of Draxis
Acton, Ontario and Sales
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NAME AND MUNICIPALITY PRINCIPAL
OF RESIDENCE OFFICE OCCUPATION
- --------------------- ------ -----------
Samuel Sarick(1)(2)(3) Director President, Samuel
Toronto, Ontario Sarick Limited (a
real estate
development
company)
Stewart D. Saxe, Esq.(2) Director Partner
Toronto, Ontario Baker & McKenzie
(a law firm)
James A.H. Garner Vice-President, Finance and Officer of Draxis
Toronto, Ontario Chief Financial Officer
A. Cameron Strong, CA Controller Officer of Draxis
Mississauga, Ontario
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating and Corporate Governance Committee.
Each of the foregoing has held the principal occupation shown opposite his
or her name for the last five years, except for Mr. Laszlo Kadar, Dr. Martin
Barkin, Mr. Leslie L. Dan, Mr. Bernard J. Marzalik, Ms. Jacqueline H.R. Le Saux,
Mr. Brian M. King and Mr. Cameron Strong. Prior to June 1, 1994, Mr. Kadar was
Directeur Delegue, Sanofi Pharma, S.A., a pharmaceutical company. Dr. Martin
Barkin, until March 1992, was a Partner and National Practice Leader for Health
Care of Peat Marwick, Stevenson & Kellogg, before which he served for four years
as Deputy Minister of Health for the Province of Ontario. Prior to June 1993,
Mr. Leslie L. Dan was President and Chief Executive Officer of Novopharm. Mr.
Marzalik joined Draxis in 1994 and was an independent marketing consultant prior
to such time, having held senior positions with Ciba-Geigy and CIBA Vision. Ms.
Le Saux was a partner of McCarthy Tetrault until 1992 when she joined Draxis.
Prior to June 1990, Mr. Brian M. King was a Chairman and Chief Executive Officer
of Connaught BioSciences Inc. Since that time he has been a director of a
number of public and private companies. Until his appointment on September 3,
1996 as Vice-President, Finance and Chief Financial Officer of Draxis, Mr. James
A.H. Garner was Director of Corporate Finance for Algoma Steel Inc. and, prior
to March 1995, was a Senior Vice-President and Director of Rothschild Canada
Limited. During the period beginning on April 12, 1996 and ending on September
3, 1996, Mr. Cameron Strong was the Acting Chief Financial Officer of Draxis.
Prior to his appointment on April 12, 1996 as Chief Financial Officer, Mr.
Cameron Strong was the Controller of Draxis.
MANAGEMENT COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth all annual and long term compensation for
services in all capacities to Draxis and its subsidiaries for the fiscal years
ended December 1995, 1994, and 1993 in respect of each of the individuals who
were, at December 31, 1995, the Chief Executive Officer or other named executive
officers (as defined in the Regulation to the SECURITIES ACT (Ontario)) of
Draxis and who received salary and bonus in excess of Cdn.$100,000 in the 1995
fiscal year.
<PAGE>
-93-
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------------------- ------------------------------
Securities Employee
Other Annual Under Participation
Name & Principal Position Year Salary Bonus Compensation(1)(5) Options(7)(8) Shares(9)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Martin Barkin, M.D.,(2) 1995 $300,000 $ -- 26,666 340,000 500,000
President & Chief Executive 1994 210,000 17,500 11,501 340,000 --
Officer 1993 210,000 67,500(3) 7,197 290,000 --
Jacqueline H.R. Le Saux 1995 183,750 22,000 27,891 125,000 150,000
Vice-President, Corporate 1994 183,750 8,000 18,349 125,000 --
Development, General 1993 183,750 4,500 15,000 100,000 --
Counsel and Secretary
Bernie J. Marzalik 1995 129,375 21,875 6,758(6) 20,000 150,000
Vice-President, Marketing 1994 133,333(4) 6,000 -- 20,000 --
and Sales 1993 -- -- -- -- --
Edward L. Foster 1995 135,000 13,000 15,260 22,500 150,000
Vice-President, Finance and 1994 135,000 21,500 13,232 22,500 --
Chief Financial Officer(10) 1993 159,720 -- 8,401 22,500 --
Roger Mailhot 1995 155,000 14,500 15,021 42,500 150,000
Vice-President, Scientific 1994 153,000 13,000 9,729 42,500 --
and Regulatory Affairs 1993 145,530 5,000 5,319 42,500 --
</TABLE>
(1) Perquisites and other personal benefits do not exceed the lesser of
Cdn.$50,000 and 10% of the total of the annual salary and bonus for any of
the named executive officers in the financial year, except as noted in (7).
(2) Dr. Barkin was appointed President and Chief Executive Officer in September
1993. Dr. Barkin's employment with Draxis commenced in March 1992 as
President and Chief Operating Officer.
(3) This amount includes a bonus of Cdn.$50,000 awarded for 1992 but paid in
1993.
(4) Mr. Bernard Marzalik was appointed Vice-President, Marketing and Sales in
October 1994. From May 1993 to October 1994, he was a consultant to
Draxis.
(5) The amount includes the dollar value of imputed interest on loans to Dr.
Barkin. See "Indebtedness of Directors and Officers". This amount does
not include fees of US$4,166 per month paid by DAHI to Dr. Barkin on
account of advisory and consulting services rendered to DAHI. Dr. Barkin
is the Chairman of DAHI.
(6) This amount includes the dollar value of imputed interest on a loan to Mr.
Bernard Marzalik. See "Indebtedness of Directors and Officers".
(7) The amounts in this column represent the options granted by Draxis under
the Stock Purchase and Bonus Plan. The named executive officers
participate in this plan on the same basis as all other employees of
Draxis. See "Incentive Plans - Stock Purchase and Bonus Plan" below.
(8) Includes all stock options repriced in May 1994.
(9) See "Management Compensation -Indebtedness of Directors and Officers".
(10) Edward L. Foster resigned as Vice-President, Finance and Chief Financial
Officer on April 8, 1996. James A.H. Garner was appointed Chief Financial
Officer as of September 3, 1996. Mr. Garner has been granted options under
the Plan to purchase 225,000 shares of Draxis Common Stock exercisable at
Cdn.$4.30 per share.
TERMINATION OF EMPLOYMENT
Commencing in 1988, as executive officers joined Draxis, Draxis entered
into employment agreements with certain of these individuals. The agreements
provide for the compensation described under "Executive Compensation - Summary
Compensation Table". In the event of his termination of employment without
cause, Dr. Barkin will be entitled to receive a payment equal to three times his
annual remuneration. In the event of his termination of employment following a
change of control of Draxis, Dr. Barkin is entitled to receive a payment equal
to five times his annual remuneration. In the event of her termination of
employment without cause, Ms. Le Saux will be entitled to receive a payment
equal to two times her annual remuneration. In the event of her termination of
employment following a change of control of Draxis, Ms. Le Saux is entitled to
receive a payment equal to three times her annual remuneration. In the event of
his termination of employment
<PAGE>
-94-
without cause, Dr. Mailhot will be entitled to receive a payment equal to two
times his annual remuneration. In the event of their termination of employment
without cause, Mr. Marzalik will be entitled to receive a payment equal to one
year's current annual remuneration and, in the event of his termination of
employment following a change of control of Draxis to receive a payment equal to
two times his annual remuneration.
As of March 13, 1996, Dr. Geoffrey Shulman resigned as a Director and
Chairman of the Board of Directors of Draxis upon completion of the sale by
Draxis of its equity interest in DUSA. Upon his resignation, Draxis agreed to
pay Dr. Shulman Cdn.$300,000 in recognition of past contribution to Draxis and
in settlement of all outstanding obligations. In addition, Dr. Shulman was
allowed to retain 387,500 options to purchase Draxis Common Stock previously
granted to him with exercise prices between Cdn.$1.94 and Cdn.$2.55 and expiry
dates ranging from December 4, 1996 to September 30, 2000.
REMUNERATION OF DRAXIS DIRECTORS
The compensation paid to each director of Draxis is Cdn.$7,500 per annum,
plus Cdn.$1,000 for each board meeting attended in person, Cdn.$500 for each
board meeting attended by telephone, Cdn.$500 for each meeting of a committee of
the Board of Directors attended in person and Cdn.$250 for each meeting of a
committee of the Board of Directors attended by telephone. An annual retainer
of Cdn.$1,000 is paid to the Chair of each committee of the Board of Directors.
Directors who are employees of Draxis do not receive any compensation in their
capacity as directors. For the year ended December 31, 1995, Dr. Geoffrey
Shulman received Cdn.$75,000 as non-executive Chairman of the Board. Draxis
also made a payment to him of Cdn.$5,074 under the Stock Purchase and Bonus
Plan. He did not otherwise receive fees as a director. As of March 13, 1996,
Dr. Geoffrey Shulman resigned as a Director and Chairman of the Draxis Board
upon completion of the sale by Draxis of all of its equity interest in DUSA. As
of March 13, 1996, Mr. Brian King was appointed Chairman of the Draxis Board and
his remuneration was fixed at Cdn.$50,000 per year for services rendered as
Chairman.
DRAXIS DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
Draxis currently maintains Cdn.$20,000,000 of directors' and officers'
liability insurance coverage for the officers and directors of Draxis and its
affiliates at an annual cost to Draxis of Cdn.$36,356. The issuance coverage is
subject generally to a deductible of Cdn.$1,000 per claim against a single
director or officer per loss or Cdn.$5,000 per claim against all directors and
officers per loss or Cdn.$25,000 per claim against Draxis or its affiliates.
INDEBTEDNESS OF DIRECTORS AND OFFICERS OF DRAXIS
At December 31, 1995, Dr. Martin Barkin, Draxis' President, and Chief
Executive Officer, was indebted to Draxis in the amount of Cdn.$110,720. This
amount was also the largest aggregate amount outstanding since January 1, 1995.
The advance was made as an incentive to enter into an employment agreement with
Draxis for the purpose of purchasing shares of DUSA, a corporation then owned as
to approximately 20% by Draxis, and is interest free. The advance was repayable
on the earlier of the disposition by Dr. Barkin of the securities or January 31,
1997. The advance was secured by, and recourse of Draxis in respect of the loan
was limited to, the DUSA securities. The advance was repaid in full by Dr.
Barkin on April 29, 1996.
During fiscal 1995, Mr. Bernard Marzalik, Draxis' Vice-President, Marketing
& Sales, was indebted to Draxis in the amount of Cdn.$40,000 which amount was
also the largest aggregate outstanding since the beginning of Draxis' last
completed fiscal year. The advance was made as an employee incentive, was
interest free and secured against salary and an income tax rebate. The advance
was repaid in full on February 19, 1996.
On May 3, 1996, Draxis advanced Cdn.$75,000 to Bernard J. Marzalik, the
Vice-President, Marketing and Sales. The advance was made as an employee
incentive, is interest free and is secured against salary and an income tax
rebate.
<PAGE>
-95-
Each employee who has received EP Shares has been loaned Cdn.$0.30 per
share, the subscription price for such shares. These loans are interest free.
The obligation to repay these loans is limited to the value of the EP Shares
issued.
DRAXIS STOCK PURCHASE AND BONUS PLAN
In 1991, Draxis implemented a stock purchase and bonus plan (the "Stock
Purchase and Bonus Plan") to give employees and sales representatives providing
services in the day-to-day operations of Draxis (collectively, "Participants")
an opportunity to purchase Draxis Common Stock. The Stock Purchase and Bonus
Plan is intended to provide an incentive to Participants by giving them a direct
interest in Draxis' growth and development. To qualify in any year, a
Participant must have been continuously employed or engaged by Draxis from June
30 to December 31 of the preceding year.
On or before December 1 in each year, Draxis determines the number of
shares of Draxis Common Stock to be made available under the Stock Purchase and
Bonus Plan for purchase in the following year on the terms described below.
Shares of Draxis Common Stock to be made available for this purpose are
purchased on the open market for the benefit of Participants by Montreal Trust
Company of Canada (the "Trustee") appointed by Draxis using funds advanced by
Draxis. The Trustee controls the time, price, amount and manner of purchases
and the choice of broker through which purchases are to be made.
Under the Stock Purchase and Bonus Plan, a Participant is permitted, in the
first week of January of a particular year, to purchase, by way of a lump sum
payment to the Trustee, up to that number of shares of Draxis Common Stock (the
"Elected Number") equal to 10% of the cash compensation or fees paid by Draxis
to the Participant during the preceding year divided by the purchase price per
share of Draxis Common Stock. The purchase price per share of Draxis Common
Stock is the last reported sale price of the Common Stock on the TSE on the last
business day of the preceding year. In addition, the Participant is entitled to
purchase at the same price a number of shares of Draxis Common Stock equal to
the Elected Number (the "Deferred Number") in consideration of a non-interest
bearing promissory note (the "Note") payable to the Trustee in equal instalments
on the first, second and third anniversary of the purchase date. The Trustee
shall hold the Deferred Number as security for the payment of the Note. The
Deferred Number of shares of Draxis Common Stock will be released to the
Participants as the instalments are paid.
Draxis has agreed, on each anniversary referred to above, to pay to the
Participant a cash bonus or fee in respect of past services, the gross amount of
which shall be equal to the amount then payable under the Note. The Participant
must execute a direction to Draxis to pay over the amount of such cash bonus or
fee (net of usual source deductions in the case of employees) to the Trustee in
partial satisfaction of the amount then due. Payment of the remaining amount is
the responsibility of the Participant.
If the total of the Elected Number and the Deferred Number for all
Participants in a particular year is less than the number of shares of Draxis
Common Stock purchased by the Trustee for that year, the number of shares of
Draxis Common Stock available to each Participant is reduced PRO RATA.
During the year ended December 31, 1995, the Trustee purchased an aggregate
of 80,172 shares of Draxis Common Stock in the open market in full satisfaction
of the requirements of the Stock Purchase and Bonus Plan. The following named
executive officers purchased the following number of shares of Draxis Common
Stock (the aggregate of the Elected Number and the Deferred Number) in January
1995 at Cdn.$2.15, the closing price on the TSE on December 31, 1995: Martin
Barkin - 27,906; Jacqueline H.R. Le Saux - 19,140; Bernard J. Marzalik - 14,070.
The following table sets forth the financial year-end value of the named
executive officers' unexercised options, on an aggregated basis:
<PAGE>
-96-
<TABLE>
<CAPTION>
Unexercised Options at Value ($) of Unexercised in the Money
December 31, 1995 Options at December 31, 1995
----------------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Martin Barkin. . . . . . . . . . . 173,333 166,667 3,500 6,999
Jacqueline Le Saux . . . . . . . . 86,333 38,667 3,749 7,500
Bernard Marzalik . . . . . . . . . 6,667 13,333 2,333 4,666
Edward Foster. . . . . . . . . . . 22,500 -- -- --
Roger Mailhot. . . . . . . . . . . 42,500 -- -- --
</TABLE>
DRAXIS STOCK OPTION PLAN
The Draxis Stock Option Plan (the "Plan") provides that the Draxis Board
may from time to time grant options to purchase shares of Draxis Common Stock to
directors, officers, employees and sales representatives of Draxis and its
subsidiaries. Currently, the maximum number of shares of Draxis Common Stock
that may be issued under the Plan is 2,500,000. The Draxis Board determines the
exercise price per share of Draxis Common Stock, the number of options to be
granted and all other terms and conditions of the options, in accordance with
the applicable policies of any relevant regulatory authority or stock exchange.
The exercise price of the options may not be lower than the market price of the
Common Stock on the TSE at the date of the grant and the options are exercisable
for a period not exceeding ten years from their date of grant.
There were no grants of stock options to the named executive officers
during the year ended December 31, 1995. There were no exercises of options by
the named executive officers during the year ended December 31, 1995. At
December 31, 1995, there were 1,693,500 options outstanding under the Plan with
exercise prices ranging from Cdn.$1.70 to Cdn.$2.70 per share.
The following table sets out information on repriced options held by the
named executive officers of Draxis.
<TABLE>
<CAPTION>
Market Price Length of
of Securities Original Option
Securities at Time of Exercise Price at New Term Remaining at
Date of Under Option Repricing Time of Repricing Exercise Price Date of Repricing
Name Repricing Repriced ($/Security) ($/Security) ($/Security) (in months)
- ---- ------------ ----------- -------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
M. Barkin May 26, 1994 225,000 $1.94 $7.00 $2.55 94
President & Chief May 26, 1994 40,000 1.94 7.00 2.55 42
Executive Officer May 26, 1994 25,000 1.94 4.00 2.55 50
J.H.R. Le Saux May 26, 1994 75,000 1.94 9.88 2.55 98
Vice-President, May 26, 1994 25,000 1.94 7.00 2.55 42
Corporate Development,
General Counsel &
Secretary
B. Marzalik -- -- -- -- -- --
Vice-President,
Marketing and Sales
E.L. Foster May 26, 1994 7,500 1.94 7.00 2.55 42
Vice-President and May 26, 1994 15,000 1.94 7.00 2.55 30
Chief Financial Officer
R. Mailhot May 26, 1994 20,000 1.94 5.13 2.55 76
Vice-President, May 26, 1994 15,000 1.94 7.00 2.55 30
Scientific and May 26, 1994 7,500 1.94 7.00 2.55 42
Regulatory Affairs
</TABLE>
<PAGE>
-97-
The following table summarizes certain information regarding the 1,449,274
options held under the Plan as at June 30, 1996.
<TABLE>
<CAPTION>
Number of Exercise
Common Shares Price
------------- --------------
<S> <C> <C>
Options held by 5 executive officers of Draxis . . . . . . . . . . . . 478,400 $ 1.70 -- 2.55
Options held by 6 directors who are not
executive officers of Draxis. . . . . . . . . . . . . . . . . . . . 172,500 $ 1.94 -- 2.55
Options held by employees of Draxis, excluding
Draxis' executive officers and directors. . . . . . . . . . . . . . 141,374 $ 1.75 -- 2.55
Options held by any person or company other than
persons described above . . . . . . . . . . . . . . . . . . . . . . 657,000 $ 1.75 -- 2.55
</TABLE>
DRAXIS OPTION REPRICING
At the annual and special meeting of shareholders of Draxis held on May 26,
1994, Draxis' Shareholders approved the repricing of all outstanding stock
options granted under the Plan as of April 8, 1994 to Cdn.$2.55. The Draxis
Board recommended the approval of the repricing on the basis that it was
necessary so that the stock options could serve the purpose for which they were
intended, namely, to provide an incentive for directors, officers, employees and
sales representatives to work towards the success of Draxis. The recommended
exercise price of Cdn.$2.55 was the same price at which shares of Draxis Common
Stock were issued to Novopharm in December 1993 in connection with the formation
of its strategic alliance with Novopharm. The formation of this alliance marked
the emergence of a new and strategically refocused Draxis, which Draxis believed
provided a useful benchmark for the repricing of options. The closing price of
the Common Stock on the TSE on May 26, 1994 was Cdn.$1.94. The exercise prices
of options outstanding prior to May 30, 1992 were reduced to Cdn.$7.00 in
September 1992, with the consent of the TSE.
DRAXIS EMPLOYEE PARTICIPATION SHARE PLAN
In February 1995, Draxis established the Employee Participation Share Plan
for the directors, officers and employees of Draxis. Draxis Shareholders
approved the Plan in June 1995. The Employee Participation Share Plan provides
that the Compensation Committee of Draxis may designate eligible persons to be
participants ("Participants"), who will be entitled to subscribe for EP Shares
and the number of EP Shares available to be subscribed for by such Participants.
The subscription price of the EP Shares will be the fair market value of the EP
Shares at the time of issuance, as determined by the Draxis Board. Generally,
each series of EP Shares will vest over a period of four years on the basis of
20%, 20%, 20% and 40% on the respective anniversary dates of issuance.
Vested EP Shares are convertible into shares of Draxis Common Stock at the
election of the holder, provided that the Draxis Common Stock has increased in
value by at least 25% since the date the EP Shares were issued. Vested EP
Shares convert automatically into shares of Draxis Common Stock at the fifth
anniversary date of the issue of the particular series of EP Shares, if not
already converted. Pursuant to agreements with the Participants, the EP Shares
are non-transferable, except to the holder's Registered Retirement Savings Plan
or to the estate of a former Participant. Upon conversion of EP Shares, the
number of shares of Draxis Common Stock issuable is determined by multiplying
the number of EP Shares held by a Participant by a fraction whose numerator is
the amount, if any, by which the fair market value of a share of Draxis Common
Stock at the date of conversion exceeds the fair market value of a share of
Draxis Common Stock as at the date on which the EP Shares were issued and whose
denominator is the fair market value of the shares of Draxis Common Stock at the
date of conversion. The fair market value of a share of Draxis Common Stock on
a particular date will be the average of the daily high and low board lot
trading prices on each of the five immediately preceding trading days on the
TSE.
<PAGE>
-98-
In the event of the liquidation, dissolution or winding-up of Draxis, the
EP Shares of the series will become shares of Draxis Common Stock on the basis
of the formula described above. Holders of EP Shares are entitled to dividends
when dividends are paid on the Draxis Common Stock equal to the proportion of
the amount of the dividend declared on each share of Draxis Common Stock that
the applicable subscription price of the EP Share is of the fair market value of
a share of Draxis Common Stock at the date of issuance of the EP Share. The EP
Shares shall not be entitled to vote at meetings of shareholders, except in
special circumstances prescribed by the CANADA BUSINESS CORPORATION ACT. In the
event of a takeover bid, an offer to purchase substantially all of the assets of
Draxis or any offer, by way of merger, amalgamation, reorganization or otherwise
which would result in a change of control, where the Draxis Board recommends
acceptance of such offer to the shareholders or, the shareholders have approved
or accepted the offer, the EP Shares shall become convertible for a period of 21
days or such longer period as the Compensation Committee may determine,
notwithstanding that the minimum vesting period has not expired. In the event
of any subdivision, consolidation or other change in the Draxis Common Stock,
corresponding adjustments shall be made with respect to any shares of Draxis
Common Stock to be issued upon conversion of EP Shares.
Draxis has reserved the right to redeem for cancellation all or part of the
EP Shares of any series held by a Participant, at any time, without notice and
whether or not the minimum vesting period has elapsed. Unless the Compensation
Committee determines otherwise, on termination of a Participant's employment,
office or directorship with Draxis for any reason, Draxis has a right to redeem
the EP Shares held by the Participant for the issue price of such EP Shares, if
the EP Shares have not vested. If such EP Shares have vested, unless the
Compensation Committee determines otherwise, the Participant shall be deemed to
have converted all vested EP Shares into shares of Draxis Common Stock on a date
that is 30 days after the termination date on the formula described above.
Draxis will lend Participants the funds necessary to purchase the EP Shares on a
non-interest bearing, limited recourse basis. The only recourse Draxis will
have against the Participants will be against the EP Shares pledged to it as
security for such loans.
On February 16, 1995, Draxis issued 975,000 EP Shares, Series A and on
December 18, 1995, Draxis issued 555,000 EP Shares, Series B. The following
table sets forth individual issues of EP Shares to the named executive officers
during the financial year ended December 31, 1995.
<TABLE>
<CAPTION>
% of Total Market Value of
Employee Securities
Participation Underlying Employee
# of Employee Shares Issued to Participation
Participation Employees in Conversion Price Shares on Issue
Name Shares Issued fiscal 1995 ($/Security) Date ($/Security) Expiration Date
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Martin Barkin 500,000 32.7% 2.45 2.45 February 16, 2000
Jacqueline Le Saux 50,000 9.8% 2.45 2.45 February 16, 2000
100,000 2.25 2.25 December 18, 2000
Bernard Marzalik 50,000 9.8% 2.45 2.45 February 16, 2000
100,000 2.25 2.25 December 18, 2000
Edward Foster 50,000 9.8% 2.45 2.45 February 16, 2000
100,000 2.45 2.45 December 18, 2000
Roger Mailhot 50,000 9.8% 2.45 2.45 February 16, 2000
100,000 2.25 2.25 December 18, 2000
</TABLE>
<PAGE>
-99-
DIVIDEND POLICY AND RECORD
Draxis has not paid dividends on its Common Stock since fiscal 1992. Any
decision to pay dividends on the Draxis Common Stock in the future will be made
by the Draxis Board on the basis of Draxis' earnings, financial requirements and
other conditions existing at the time. Currently, Draxis intends to retain its
earnings for reinvestment in Draxis' business and does not anticipate paying any
dividends on its Common Stock in the foreseeable future.
During the five years ending December 31, 1995, Draxis paid per share
dividends on its Common Stock as follows: 1992 - Cdn.$0.19 in cash and
Cdn.$0.268 in specie; and 1991 - Cdn.$0.29 in cash and Cdn.$0.137 in specie.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
AGREEMENT WITH NOVOPHARM
Mr. Leslie L. Dan, a director of Draxis, controls Novopharm. In December
1993, Novopharm purchased 1,176,470 shares of Draxis Common Stock from Draxis'
treasury at an aggregate acquisition price of Cdn.$3,000,000. In addition, in
connection with entering into the Novopharm Agreement, Novopharm was granted
1,176,470 warrants, each exercisable for one share of Draxis Common Stock for up
to four years at a base exercise price of Cdn.$2.70, escalating by 10% in each
of years three and four. At the same time, Draxis engaged Novopharm to market
and sell a generic version of ELDEPRYL-Registered Trademark-, NOVO-SELEGILINE.
Novopharm commenced selling NOVO-SELEGILINE in Canada in June 1994. Draxis will
continue to participate in profit sharing from sales of NOVO-SELEGILINE. The
strategic alliance between Draxis and Novopharm also provided for the
appointment of Mr. Dan to the Draxis Board.
The Novopharm Agreement originally provided for a profit sharing formula
which favoured Draxis until December 10, 1994. On April 19, 1995, Novopharm
agreed to extend this profit sharing formula to the end of the second quarter of
1995. In connection with this amendment to the agreement, Draxis issued to
Novopharm warrants to purchase an additional 500,000 shares of Draxis Common
Stock at Cdn.$2.09 per share, the closing price on the TSE on April 18, 1995.
The warrants are non-assignable and expire on April 18, 2000. The issuance was
subject to applicable securities regulatory requirements.
HEAD OFFICE LEASE
Draxis leases an aggregate of 24,910 square feet of office and warehouse
space located at 6870 Goreway Drive, Mississauga, Ontario, L4V 1P1 at an
aggregate rent of Cdn.$141,000 per year. The lease has a five-year term
expiring on April 30, 1999. The building is 50% owned by Samuel Sarick Limited,
a corporation wholly-owned by Mr. Samuel Sarick, a director of Draxis. Prior to
entering into a lease for the Goreway Drive premises, Draxis investigated and
evaluated a number of possible sites in the Toronto, Markham and Mississauga
areas. Based on a number of arm's length comparables, the Goreway Drive
premises were best suited to Draxis' needs and were available at the lowest
rent. Management considers Draxis' current premises to be adequate to meet the
current and foreseeable needs of Draxis.
DAHI TRANSACTIONS
In January 1995, Draxis purchased 170,000 shares of DAHI Common Stock. The
price paid for each share was Cdn.$2.40, the TSE closing price on the date of
purchase. Dr. Martin Barkin, the President and Chief Executive Officer of
Draxis, is also the Chairman of the Board of Directors of DAHI. Mr. Stewart
Saxe, a director of Draxis, is also a director of DAHI. Dr. Barkin receives
US$4,166 per month on account of advisory and consulting services rendered to
DAHI.
Draxis and DAHI have entered into certain arrangements relating to the
funding of DAHI's development of ANIPRYL-Registered Trademark-. See "Business
of Draxis - DAHI Funding".
<PAGE>
-100-
If Draxis converts all current DAHI debt into DAHI Common Stock, Draxis'
ownership of DAHI could increase from 44% to approximately 52% (undiluted).
SEPARATION AGREEMENT
As of March 13, 1996, Dr. Geoffrey Shulman resigned as a Director and
Chairman of the Draxis Board upon completion of the sale by Draxis of all of its
equity interest in DUSA. Upon the resignation of Dr. Shulman, Draxis agreed to
pay him Cdn.$300,000 in recognition of his past contribution to Draxis and
settlement of all outstanding obligations. In addition, he was allowed to
retain 387,500 options to purchase Draxis Common Stock previously granted to him
with exercise prices between Cdn.$1.94 and Cdn.$2.55 and expiry dates ranging
from December 4, 1996 to September 30, 2000.
LEGAL PROCEEDINGS
On April 11, 1996, the contract marketing organization used by Draxis in
the United States and one of its employees were sued in the State of New York.
Three individuals have claimed that the failure by that organization to hire two
of the plaintiffs and the termination of the employment of the third plaintiff
amounted to unlawful discriminatory hiring or termination practices in violation
of New York law. A consultant under contract with Draxis has also been sued.
Draxis and Draxis U.S. Inc. have been sued based on the consultant's alleged
conduct. Each of the plaintiffs is seeking US$5,000,000 in damages. Draxis has
retained counsel and has instructed such counsel to defend the claim vigorously.
Based on information made available to Draxis to date, Draxis does not believe
that this litigation will have a material adverse effect on its results of
operations or financial condition.
AUDITORS, TRANSFER AGENT AND REGISTRAR
The auditors of Draxis are Deloitte & Touche, BCE Place, 181 Bay Street,
Toronto.
The transfer agent and registrar for the Draxis Common Stock is Montreal
Trust at its principal offices in Vancouver, Calgary and Toronto.
DRAXIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REVENUES
SALES
SIX MONTHS ENDED JUNE 30, 1996
Sales declined by Cdn.$486,000 or 6.5% for the six months ended June 30,
1996 in comparison to the six months ended June 30, 1995. Sales declined
because the proportion of sales of Draxis' lower-priced NOVO-SELEGILINE product
continued to increase during the second quarter. Combined sales of ELDEPRYL-
Registered Trademark- and NOVO-SELEGILINE were Cdn.$4,599,000 for the six months
ended June 30, 1996 versus Cdn.$6,082,000 for the same period last year. The
decline in sales of ELDEPRYL-Registered Trademark- in the period was partially
offset by increased revenues from Draxis' diversified Canadian operations and
from U.S. sales of podiatry and consumer-health products.
1995 FINANCIAL YEAR
Sales declined by Cdn.$809,000 or 5% for the year ended December 31, 1995
in comparison to the previous fiscal year despite the fact volume sales of
ELDEPRYL-Registered Trademark- (in number of tablets sold) rose by 7.6% over the
previous year. Sales declined because an increasing proportion of Draxis'
selegiline sales were of the lower-priced NOVO-SELEGILINE product. As a result,
combined sales of ELDEPRYL-Registered Trademark- and NOVO-SELEGILINE declined by
Cdn.$1,947,000 or 13.8%. A 25.3% increase in sales of PERMAX-Registered
Trademark- and nine month sales of approximately Cdn.$600,000 from Draxis' joint
venture in IHS, helped offset the decline of selegiline revenues.
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On October 1, 1995, NOVO-SELEGILINE was listed on the Ontario Drug Benefit
Plan. Novopharm, one of the world's largest generic companies, now distributes
NOVO-SELEGILINE in Canada, and is expected by Draxis to maintain a significant
share of the generic selegiline market even after the introduction of other
generic versions of selegiline. Draxis and Novopharm share equally in the
profits of these sales.
1994 FINANCIAL YEAR
Sales increased by Cdn.$1,156,000 or 7.7% for the year ended December 31,
1994 over the previous year mainly due to sales of PERMAX-Registered Trademark-,
a drug acquired from Eli Lilly on February 10, 1994. PERMAX-Registered
Trademark- is used as a specific adjunct to levodopa in the treatment of
Parkinson's disease.
1993 FINANCIAL YEAR
Sales declined by Cdn.$2,337,000 or 13.4% for the year ended December 31,
1993 versus the prior year as wholesalers reduced their ELDEPRYL-Registered
Trademark- inventory levels.
INTEREST INCOME
For the six months ended June 30, 1996, interest income was Cdn.$771,000,
an increase of 31.8% when compared to the six months ended June 30, 1995. The
increased interest income is attributable to higher holdings of cash and
treasury bills arising from the net proceeds of Cdn.$11.6 million received by
Draxis in April 1996 from the issue and sale of 3,000,000 special warrants and
the net proceeds of Cdn.$9.3 million from the sale of Draxis' entire investment
in DUSA.
Interest income increased Cdn.$354,000 or 41.9% to Cdn.$1,197,000 during
the 1995 year compared to Cdn.$843,000 for the previous year, mainly due to
higher average cash reserves.
INCOME FROM OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
For the six months ended June 30, 1996, Draxis had a loss from operations
of Cdn.$2,676,000, compared to income from operations of Cdn.$1,655,000 for the
corresponding period in fiscal 1995. The decline is attributable to launch
costs for ANIPRYL-Registered Trademark- and KERASAL-Registered Trademark- and
the costs of Draxis' profit-sharing arrangement with Novopharm which changed
from 95% to 50%. The loss from operations in the second quarter of 1996 of
Cdn.$1,056,000 declined from a loss of Cdn.$1,620,000 in the first quarter of
1996 as a result of lower launch costs and increased sales during the second
quarter.
1995 FINANCIAL YEAR
Income from operations declined to Cdn.$565,000 in 1995 compared to
Cdn.$4,944,000 in 1994, in large part as a result of: additional research and
development costs for LIPOTECA-TM- and MODAFINIL; a shift in sales from
ELDEPRYL-Registered Trademark- to NOVO-SELEGILINE and the lower gross margins
attributed thereto; costs associated with the launch of KERASAL-Registered
Trademark- into the United States, and start-up costs at IHS, including costs in
preparing its infrastructure to market skin care products.
1994 FINANCIAL YEAR
In 1994, income from operations rose 405% to Cdn.$4,944,000 from
Cdn.$979,000 in the previous year due mainly to Draxis' cost reduction program.
As a result of the entry of Draxis' strategic partner, Novopharm, into the
Parkinson's market on June 15, 1994 with NOVO-SELEGILINE-Registered Trademark-,
a generic version of ELDEPRYL-Registered Trademark-, the contribution by
ELDEPRYL-Registered Trademark- to income from operations declined by 21%. More
than half of this was recovered as a result of Draxis' right to share in the
revenues generated by NOVO-SELEGILINE-Registered Trademark- sales.
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1993 FINANCIAL YEAR
Income from operations for the year ended December 31, 1993 was
Cdn.$979,000 compared to Cdn.$3,457,000 in 1992 due to a loss of Cdn.$2,841,000
in the dermatological division reflecting Draxis' commitment to invest heavily
in research and new product development in this therapeutic category. As a
result of Draxis' cost reduction program, income from operations in the
neurological division actually grew to Cdn.$3,634,000 in 1993 compared to
Cdn.$3,206,000 in 1992 even though there was a Cdn.$2 million reduction in sales
volume.
COST OF SALES, ADMINISTRATION, MARKETING AND SELLING EXPENSES
SIX MONTHS ENDED JUNE 30, 1996
During the six months ended June 30, 1996, operating expenses were
Cdn.$9,215,000, representing an increase of 77.2% from the corresponding six
month period in fiscal 1995. The increase is attributable to launch costs for
ANIPRYL-Registered Trademark- and KERASAL-Registered Trademark- and the costs of
Draxis' profit-sharing arrangement with Novopharm which changed from 95% to 50%.
1995 FINANCIAL YEAR
Operating expenses in 1995 increased Cdn.$3,141,000 or 30.8% over the year
earlier as Draxis continued to invest heavily in advertising and sales promotion
costs to promote sales of NOVO-SELEGILINE. Also responsible for this increase
were costs associated with the launch of KERASAL-Registered Trademark- into the
United States and non-recurring costs associated with the start up of IHC, and
the subsequent restructuring, repositioning and relaunch of its product line.
Partially offsetting these increases was a decrease in the Lipopharm
division operating costs. All other operating costs were approximately the same
as in the prior year.
1994 FINANCIAL YEAR
Cost of sales and operating expenses declined in 1994 by Cdn.$1,976,000 or
16.2%, mainly the result of Draxis' cost reduction program. Cost of sales
increased proportionately with the increase in pharmaceutical revenues.
Administrative expenses declined Cdn.$261,000 or 7.0% from Cdn.$3,732,000 in
1993 to Cdn.$3,471,000 in 1994. Marketing and selling expenses decreased
Cdn.$1,350,000 or 23.4% from Cdn.$5,777,000 in 1993 to Cdn.$4,427,000 in 1994
despite the launch of a new product, PERMAX-Registered Trademark-, and the
absorption of a portion of the marketing costs of NOVO-SELEGILINE.
1993 FINANCIAL YEAR
Cost of sales and operating expenses in 1993 declined Cdn.$345,000 or 2.8%
over 1992. Excluding those expenses associated with the Lipopharm division,
expenses actually declined in 1993 as a result of Draxis' cost reduction
program.
Administrative expenses for the year ended December 31, 1993 were
Cdn.$3,732,000 a decline of Cdn.$270,000 or 6.8% from the previous year.
Excluding those expenses associated with the dermatological division,
administration expenses for the year ended December 31, 1993 declined compared
to the prior year, again as a result of the cost restructuring program.
Marketing and selling expenses for the year ended December 31, 1993 were
Cdn.$5,777,000 compared to Cdn.$5,928,000 for the year ended December 31, 1992.
<PAGE>
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RESEARCH AND DEVELOPMENT
SIX MONTHS ENDED JUNE 30, 1996
For the six months ended June 30, 1996, research and development costs were
Cdn.$647,000 as compared to Cdn.$1,319,000 for the corresponding period in 1995.
Research and development activity in the first half of 1996 continued to be
focused primarily on MODAFINIL AND LIPO TECA.
1995 FINANCIAL YEAR
Research and development costs in 1995, mainly associated with the
development of MODAFINIL and LIPOTECA-TM- increased 11.5% to Cdn.$2,318,000 from
Cdn.$2,079,000 one year earlier. MODAFINIL results showed a statistically
significant difference in reducing excessive somnolence in narcoleptic patients
when compared to a placebo. Similarly, the first clinical study with LIPOTECA-
TM- demonstrated a statistically significant difference against placebo in the
treatment of keloids.
Draxis received permission to market a liquid form of ELDEPRYL-Registered
Trademark- in Canada, but has determined to delay its launch of this product
until it has completed further tests to determine the most appropriate use of
the drug.
1994 FINANCIAL YEAR
Research and development costs in 1994 were Cdn.$2,079,000; a decrease of
Cdn.$643,000 or 23.6% as funds designated for the development of a sustained
release tablet were cancelled. Draxis continued to demonstrate its commitment
to research and development; spending Cdn.$2,079,000 or 12.8% of sales.
1993 FINANCIAL YEAR
Research and development in 1993 was Cdn.$2,722,000 or 18.0% of sales; an
increase of Cdn.$720,000 or 36.0% over the previous year representing costs
associated with the development of a sustained release formulation of ELDEPRYL-
Registered Trademark-.
DEPRECIATION AND AMORTIZATION
SIX MONTHS ENDED JUNE 30, 1996
Effective January 1, 1996, Draxis adopted a policy of amortizing the cost
of product licenses on a straight line basis over the minimum term of the
related license agreements. Prior to 1996, the cost of product licenses were
amortized on the basis of actual product sales during a period as a percentage
of total estimated sales over the minimum term of the related license agreement.
As the aggregate, cumulative effect of this change on prior periods is not
significant, prior years' figures have not been restated.
For the six months ended June 30, 1996, depreciation and amortization
expense increased to Cdn.$786,000 as compared to Cdn.$463,000 for the
corresponding period in 1995. This increase is attributable to the change in
accounting policy described above as well as increased fixed asset depreciation
and the commencement of amortizing the cost of the ANIPRYL-Registered Trademark-
license.
1995 FINANCIAL YEAR
Included in this expense category is the amortization of the cost of
Draxis' ELDEPRYL-Registered Trademark- and PERMAX-Registered Trademark- licenses
with Somerset Pharmaceuticals, Inc. and Eli Lilly Canada Inc., respectively,
which are amortized on the basis of actual sales during the year as a percentage
of anticipated sales over the term of the licenses, the amortization of the
goodwill on the acquisition of Lipopharm and the depreciation of fixed assets.
<PAGE>
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On October 1, 1995, The Ontario Drug Formulary made ELDEPRYL-Registered
Trademark- subject to generic substitution, the last formulary to do so. As a
direct consequence, Draxis decided to review its sales forecast of both
ELDEPRYL-Registered Trademark- and PERMAX-Registered Trademark- and accelerated
the amortization of both of these licenses, incurring an increase in the annual
rate of amortization of approximately Cdn.$296,000.
OTHER INCOME (EXPENSES)
In October 1992, Draxis undertook a gradual disposition of its non-
affiliate equity investments. Draxis continued the liquidation of its portfolio
throughout 1993 and 1994 resulting in a loss on disposition of Cdn.$2,716,000 in
1993 and a gain on disposition of Cdn.$58,000 in 1994. Draxis continued the
liquidation of the portfolio throughout 1995 until it had been completely
converted into cash and treasury bills. At December 31, 1994, the cost of the
portfolio was Cdn.$732,000 (1993 - Cdn.$777,000) above the market value and, as
such, a provision for unrealized investment losses in a similar amount was set
up. The gain of Cdn.$549,000 in 1995 is composed of the reversal of the 1994
reserve of Cdn.$732,000 less a loss of Cdn.$183,000 on the disposition of the
remainder of the portfolio.
In the first quarter of 1996, Draxis had Cdn.$6,001,000 of other income
attributable to the gain incurred by Draxis on the sale of its shares in DUSA.
Included in fiscal 1995 other income is a gain of Cdn.$1,833,000 on the
dilution of Draxis' investment in DUSA as a result of DUSA's public offering on
December 8, 1995, and a gain of Cdn.$3,067,000 on the sale of Draxis' option to
purchase two million shares of DUSA. Included in 1994 and 1993 are provisions
for severance costs and retiring allowances as well as further gains on dilution
through public offerings and private placements of Draxis' investments in its
development stage affiliates.
INCOME TAXES (RECOVERABLE)
For the six months ended June 30, 1996, income taxes were $393,000 which
represents an effective tax rate of 11%, as compared to $650,000 or an effective
tax rate of 38% for the same period last year. The decline in the effective tax
rate is attributable to lower taxes payable on capital gains generated by Draxis
on the sale of its shares in DUSA.
Income taxes increased to Cdn.$2,064,000 in 1995 from Cdn.$1,740,000 in
1994 reflecting the increase in income before income taxes. Draxis' effective
tax rate decreased to 34% in 1995 from 35% in 1994 due to the lower tax rate on
capital gains generated by Draxis during the year. In 1993, the 57% rate of
income tax refund was unusually high as a result of the utilization of certain
tax loss carry forwards on the amalgamation of Draxis with certain of its
subsidiaries.
EQUITY SHARE OF NET DEVELOPMENT STAGE COSTS OF AFFILIATED COMPANIES
Included in this cost category is Draxis' share of the net development
stage costs of its affiliated companies, DAHI and DUSA. At December 31, 1995,
Draxis held an equity interest in two publicly traded affiliates, DAHI and DUSA.
DEPRENYL ANIMAL HEALTH, INC.
On March 14, 1991, DAHI completed an initial public offering, generating
US$4,658,000 net of offering expenses to fund the development of ANIPRYL-
Registered Trademark-. Draxis held 2,460,000 shares or 57.7% of DAHI before the
public offering and was diluted to 38.8% as a result of the offering. At
December 31, 1993, Draxis' investment in DAHI was reduced further to 33% due in
large part to the exercise of stock options.
On May 1, 1994, Draxis advanced the 1994 Loan to DAHI.
<PAGE>
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On January 9, 1995, Draxis purchased 170,000 shares of DAHI on the open
market at Cdn.$2.40 per share thus increasing its equity interest to 35.7%.
As at June 30, 1995, Draxis' equity share of the losses of DAHI had fully
amortized the cost of its investment in DAHI. Accordingly, Draxis was not
required to and did not equity account for any further losses of DAHI for the
remainder of the year. At December 31, 1995, apart from the 1996 Loan made in
connection with the DAHI Distribution Agreement, Draxis' management had no
intention of making any further investment in DAHI. The equity share of the
losses of DAHI recorded in the books of Draxis in 1995 was Cdn.$577,000 and the
portion of unrecognized loss that would otherwise have been recorded at December
31, 1995 was Cdn.$685,000.
On January 10, 1996, Draxis entered into the DAHI Distribution Agreement,
under which Draxis acquired the rights to market ANIPRYL-Registered Trademark-
in Canada in consideration of the payment of a licensing fee of U.S.$469,000
plus marketing expenses of U.S.$125,000. In connection with entering into the
DAHI Distribution Agreement, Draxis advanced the 1996 Loan to DAHI and converted
U.S.$1,545,000 of the 1994 Loan into DAHI Common Stock at Cdn.$2.11, acquiring
993,999 shares of DAHI Common Stock in the process to hold indirectly 44%. As a
result, Draxis will again record its equity share of the losses of DAHI. Draxis
expects these amounts to be at lower levels than in the past due to revenue that
DAHI will have in 1996 from the sales of ANIPRYL-Registered Trademark- in Canada
and possibly the United States. Draxis commenced the sale and marketing of
ANIPRYL-Registered Trademark- for the treatment of canine Cushing's disease in
Canada in April 1996. DAHI expects to receive FDA approval for the same
indication in the United States in the first quarter of 1997. However, no
assurances can be provided as to whether or not FDA approval will be obtained.
In June 1996, DAHI Shareholders approved the conversion feature of the
US$1,000,000 advance made by Draxis to DAHI in January 1996 and Draxis clarified
its commitment with respect to the future financing requirements of DAHI. As a
result, in the second quarter of 1996, Draxis recorded its share of DAHI's net
development stage expenses of Cdn.$685,000, which had not been previously
recognized for accounting purposes.
If Draxis converts all of its loans into DAHI Common Stock, Draxis'
indirect ownership of DAHI could increase from the current 44% of outstanding
shares to approximately 52% (undiluted).
DUSA PHARMACEUTICALS, INC.
On January 17, 1992, DUSA completed its initial public offering which
raised US$14,785,000 million, net of offering expenses, to fund development of
ALA Photodynamic Therapy, at which time Draxis' then 100% holding was diluted to
21.4%.
On March 4, 1994 and November 23, 1994, DUSA issued 100,000 and 250,000
shares in private placements generating U.S.$1,700,000, further diluting the
Draxis interest to 20%. On December 8, 1995, DUSA issued 3 million shares in a
public offering generating U.S.$16.5 million before underwriting expenses.
Draxis' equity interest was consequently reduced from 20% to 12.8%.
On March 11, 1996, Draxis sold this 12.8% in DUSA in a U.S. public offering
for proceeds of Cdn.$9.3 million.
Draxis continues to hold the rights from DUSA to market all ALA PDT-TM-
products for all indications in Canada.
<PAGE>
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LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 1996
At June 30, 1996, Draxis had cash and treasury bills in the amount of
Cdn.$30,454,000, an increase of Cdn.$20,225,000 (198% from the same period last
year). The increase is attributable to two events: first, net proceeds of
Cdn.$11.5 million received by Draxis in April 1996 from the issue and sale of
3,000,000 special warrants; and second, net proceeds of Cdn.$9.3 million from
the sale of Draxis' entire investment in DUSA.
1995 FINANCIAL YEAR
Draxis' cash and working capital at December 31, 1995 was Cdn.$16.6 million
and Cdn.$16.4 million respectively compared to Cdn.$11.7 and Cdn.$12.5 million,
respectively, in 1994.
Operations generated a positive cash flow of Cdn.$2,282,000; down
Cdn.$4,026,000 from the previous year as a result of the following: lower
margins on sales of NOVO-SELEGILINE in comparison to sales of ELDEPRYL-
Registered Trademark-; non-recurring costs associated with the launch of
KERASAL-Registered Trademark- into the United States; and non-recurring costs at
IHS associated with the start up of the joint venture and the subsequent
repositioning and relaunch of its product line.
Cash flow decreases were partially offset by the following: increased
profitability on increased sales of PERMAX-Registered Trademark- and decreased
losses within the dermatological division. The major capital outlay Draxis
incurred in 1995 was the second payment of Cdn.$1,000,000 for the acquisition of
PERMAX-Registered Trademark- from Eli Lilly Canada Inc. Draxis also acquired
the Canadian rights to IPRIFLAVONE; a drug indicated for the treatment of
osteoporosis, from Somerset for Cdn.$141,450.
1994 FINANCIAL YEAR
Cash flow from operations added Cdn.$6,308,000 to Draxis' cash position in
1994. The main uses of cash included the first milestone payment of
Cdn.$2,000,000 for the acquisition of PERMAX-Registered Trademark- from Eli
Lilly Canada Inc., a loan to DAHI of Cdn.$3,432,000 (U.S.$2,500,000) and the
payment of the income taxes of Cdn.$1,663,000 on the profit in the previous year
on the sale of Draxis Common Stock held by Draxis' wholly-owned subsidiary,
Viapharm Inc.
The net result was a year-over-year reduction in Draxis' cash position of
Cdn.$514,000 from Cdn.$12,205,000 at the end of 1993 to Cdn.$11,691,000 at the
end of 1994. Working capital at December 31, 1994 was Cdn.$12,512,000, down
Cdn.$2,580,000 from the previous year for the reasons outlined above.
1993 FINANCIAL YEAR
Draxis' cash and working capital increased to Cdn.$12,205,000 and
Cdn.$15,092,000 respectively due mainly to the sale of 1,176,470 treasury shares
of Draxis to Novopharm for Cdn.$3,000,000 and the sale of the balance of Draxis'
shares held by Viapharm Inc. for Cdn.$6,020,000.
LEGAL MATTERS
The matters referred to under "Reincorporation Merger - Canadian Federal
Income Tax Consequences of the Reincorporation Merger", "Share Exchange Plan -
Canadian Federal Income Tax Consequences of the Share Exchange Plan" and certain
other legal matters relating to the transactions described in this Joint
Management Proxy Statement-Prospectus will be passed upon for Draxis in Canada
by McCarthy Tetrault. The matters referred to under "Reincorporation Merger -
U.S. Federal Income Tax Consequences of the Reincorporation Merger", "Share
Exchange Plan - U.S. Federal Income Tax Consequences of the Share Exchange Plan"
and certain other legal matters relating to the transactions described in this
Joint Management Proxy Statement-Prospectus will be passed upon for Draxis in
the United States by Gardner, Carton & Douglas and for DAHI Missouri in the
United States by Wilson, Sonsini, Goodrich & Rosati. Certain other legal
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matters relating to the transactions described in this Joint Management Proxy
Statement-Prospectus will be passed upon for DAHI Missouri in the United States
by Fillmore & Holmes, L.C.
SOURCES OF INFORMATION
The information concerning Draxis contained in this Joint Management Proxy
Statement-Prospectus has been supplied by the management of Draxis to DAHI
Missouri. The information concerning DAHI Missouri contained in this Joint
Management Proxy Statement-Prospectus has been supplied by the management of
DAHI Missouri to Draxis. Neither Draxis nor DAHI Missouri has any reason to
believe that the information so furnished with respect to the other corporation
contains any material misstatement or omits to state a material fact required to
be stated herein or necessary to make the statements herein not misleading.
EXPERTS
The audited financial statements of Draxis for each of the years in the
three year period ended December 31, 1995 and the pro forma financial statements
of Draxis have been included herein in reliance upon the report of Deloitte &
Touche, independent chartered accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The balance sheets of DAHI Missouri as of December 31, 1995 and 1994 and
the statements of operations, stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1995 and for the period from
inception (July 19, 1990) to December 31, 1995 together with the report of
independent public accountants contained on pages 17 through 34 of DAHI
Missouri's Annual Report to Stockholders for the year ended December 31, 1995,
incorporated herein by reference in this prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as set forth in their report. In
that report, that firm states that, with respect to the period from inception to
December 31, 1991, their opinion is based on the reports of other independent
public accountants, namely, Deloitte & Touche LLP. The financial statements
referred to above have been included herein in reliance upon the authority of
those firms as experts in giving said reports.
Representatives of Deloitte & Touche and Arthur Andersen LLP, principal
accountants and auditors for Draxis and DAHI Missouri, respectively, will be
present at the Special Meetings, will have the opportunity to make a statement
should they desire to do so, and are expected to be available to respond to
appropriate questions.
The matters referred to under "Share Exchange Plan - Opinion of Financial
Advisor to the DAHI Independent Committee" have been prepared and passed on by
Hambrecht & Quist, LLC.
SHAREHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING
OF DRAXIS SHAREHOLDERS
It is currently anticipated that the 1997 Annual Meeting of Draxis
Shareholders will be held in May 1997. Shareholder proposals intended to be
presented at such meeting must be received by Draxis not later than March 31,
1997 for inclusion in the proxy materials for such meeting.
SHAREHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING
OF DAHI SHAREHOLDERS
If the Reincorporation Merger and the Share Exchange are not consummated,
it is currently anticipated that the 1997 Annual Meeting of DAHI Missouri
Shareholders will be held on or about June 1997. If such meeting is held,
shareholder proposals intended to be presented at such meeting must be received
by DAHI Missouri not later than December 31, 1996 for inclusion in the proxy
materials for such meeting.
<PAGE>
FINANCIAL STATEMENTS AND
RELATED INFORMATION
TABLE OF CONTENTS
DRAXIS HISTORICAL FINANCIAL STATEMENTS
PAGE
----
Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Retained Earnings (Deficit) F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7 - F-31
DRAXIS PRO FORMA FINANCIAL STATEMENTS
Report of Chief Financial Officer and Compilation Report F-32
Pro Forma Consolidated Balance Sheet F-33
Pro Forma Consolidated Statement of Operations F-34 - F-35
Notes to the Pro Forma Financial Statements F-36 - F-38
DAHI HISTORICAL FINANCIAL STATEMENTS
The Form 10-K of DAHI for the period ended December 31, 1995 and the Forms 10-Q
of DAHI for the periods ending March 31, 1996 and June 30, 1996 are attached to
this Joint Management Proxy Statement-Prospectus as Appendices J, K and L,
respectively, and are incorporated herein by reference.
F-1
<PAGE>
AUDITORS' REPORT
To the Directors of
Draxis Health Inc.
We have audited the consolidated balance sheets of Draxis Health Inc. as at
December 31, 1995 and 1994 and the consolidated statements of operations,
retained earnings (deficit) and cash flows for each of the years in the three
year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1995
and 1994 and the results of its operations and cash flows for each of the years
in the three year period ended December 31, 1995 in accordance with generally
accepted accounting principles.
/s/ Deloitte & Touche
Chartered Accountants
Toronto, Ontario
February 7, 1996
except for Note 17, which
is as of August 13, 1996.
F-2
<PAGE>
DRAXIS HEALTH INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------------
1996 1995 1994
----------- ----------- ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT
Cash and treasury bills $ 30,454 $ 16,606 $ 11,691
Marketable securities (cost 1994 - $1,499) - - 767
Accounts receivable (Note 2) 2,209 1,486 1,807
Income taxes recoverable - 170 255
Inventory 1,167 705 1,014
Current portion of long-term receivables (Note 3) 691 - 365
Prepaid expenses 1,018 796 946
- ------------------------------------------------------------------------------------------------------------------------------------
35,539 19,763 16,845
LONG-TERM RECEIVABLES (Notes 3 and 15) 3,781 4,992 5,573
LONG-TERM INVESTMENTS (Note 4) 1,611 3,931 3,203
FIXED ASSETS (Note 5) 662 545 453
GOODWILL (Net of accumulated amortization:
June 30, 1996 - $802 (unaudited);
December 31, 1995 - $744;
December 31, 1994 - $509) 1,546 1,663 1,898
LICENSES AND OTHER DEFERRED CHARGES (Note 7) 4,209 4,158 5,090
- ------------------------------------------------------------------------------------------------------------------------------------
$ 47,348 $ 35,052 $ 33,062
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable and accrued charges $ 2,216 $ 1,569 $ 1,806
Royalties payable 492 1,335 1,527
Income taxes payable 388 - -
Current portion of license obligation (Note 8) - 500 1,000
- ------------------------------------------------------------------------------------------------------------------------------------
3,096 3,404 4,333
LICENSE OBLIGATION (Note 8) - - 500
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES (Note 9) 360 1,799 1,070
- ------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock; unlimited shares authorized, issued:
June 30, 1996 - 23,375,000 (unaudited);
December 31, 1995 - 20,127,000;
December 31, 1994 - 20,019,000 shares
(Note 10) 30,844 18,666 18,393
Preferred stock; unlimited shares
authorized, none outstanding - - -
Employee participation shares;
unlimited shares authorized, issued:
June 30, 1996 - 1,521,000 (unaudited);
December 31, 1995 - 1,530,000;
December 31, 1994 - nil 456 459 -
Less: loans receivable (456) (459) -
Contributed surplus 9,701 9,701 9,701
Retained earnings (deficit) 3,347 1,482 (935)
- ------------------------------------------------------------------------------------------------------------------------------------
43,892 29,849 27,159
- ------------------------------------------------------------------------------------------------------------------------------------
$ 47,348 $ 35,052 $ 33,062
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
EXCHANGE RATE AS AT BALANCE SHEET DATE U.S. $0.73 U.S. $0.73 U.S. $0.71
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
APPROVED BY THE BOARD
/s/ Brian M. King Director /s/ James P. Doherty Director
- ---------------------- -------------------------
F-3
<PAGE>
DRAXIS HEALTH INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months ended Year ended
June 30, December 31,
------------------------ ----------------------------------------
1996 1995 1995 1994 1993
--------- --------- ---------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF
THE YEAR $ 1,482 $ (935) $ (935) $ (1,747) $ 241
NET INCOME (LOSS)
FOR THE PERIOD 1,865 16 2,417 1,099 (2,079)
ADJUSTMENT FOR
BONE HEALTH INC.
AMALGAMATION (NOTE 6) - - - (287) -
DIVIDENDS
Unclaimed dividends of
Bone Health Inc. - - - - 230
COST OF DIVIDEND
DISTRIBUTION,
NET OF TAX - - - - (139)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF
THE PERIOD $ 3,347 $ (919) $ 1,482 $ (935) $ (1,747)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
EXCHANGE RATE AS AT
BALANCE SHEET DATE U.S. $0.73 U.S. $0.73 U.S. $0.73 U.S. $0.71 U.S.$0.75
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
DRAXIS HEALTH INC.}
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months ended Year ended
June 30, December 31,
-------- ------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE
Sales $ 7,025 $ 7,511 $ 15,434 $ 16,243 $ 15,087
Interest income 771 585 1,197 843 309
- ------------------------------------------------------------------------------------------------------------------------------------
7,796 8,096 16,631 17,086 15,396
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Cost of sales, selling and administration 9,215 5,200 13,328 10,187 12,163
Research and development 647 1,319 2,318 2,079 2,722
Investment tax credits on research and development (142) (283) (484) (456) (574)
Research and development recovered from an affiliated company (34) (258) (381) (534) (487)
Depreciation and amortization 786 463 1,285 866 593
- ------------------------------------------------------------------------------------------------------------------------------------
10,472 6,441 16,066 12,142 14,417
- ------------------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM OPERATIONS (2,676) 1,655 565 4,944 979
- ------------------------------------------------------------------------------------------------------------------------------------
GAIN (LOSS) ON SALES OF SECURITIES 110 37 549 58 (2,716)
OTHER INCOME (EXPENSE) (Note 11) 6,001 - 4,900 (68) 43
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND SHARE OF
NET DEVELOPMENT STAGE COSTS OF AFFILIATED COMPANIES 3,435 1,692 6,014 4,934 (1,694)
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME TAXES (Note 13)
Current 1,832 765 1,335 1,630 (477)
Deferred (1,439) (115) 729 110 (489)
- ------------------------------------------------------------------------------------------------------------------------------------
393 650 2,064 1,740 (966)
- ------------------------------------------------------------------------------------------------------------------------------------
EQUITY SHARE OF NET DEVELOPMENT STAGE
COSTS OF AFFILIATED COMPANIES (Note 12) (1,177) (1,026) (1,533) (2,095) (1,351)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE PERIOD $ 1,865 $ 16 $ 2,417 $ 1,099 $ (2,079)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE (Note 14) $ 0.09 $ 0.00 $ 0.12 $ 0.06 $ (0.11)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 20,499 20,019 20,058 19,927 18,217
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE EXCHANGE RATE U.S. $0.73 U.S. $0.72 U.S. $0.73 U.S. $0.73 U.S. $0.78
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE>
DRAXIS HEALTH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
-------- ------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
(Note 18) $ (4,657) $ 672 $ 2,282 $ 6,308 $ 6,800
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) INVESTING
ACTIVITIES
Payments for licenses (1,139) (1,000) (1,000) (2,000) -
Decrease (increase) in other deferred charges - (118) 8 (5) 648
Acquisition of fixed assets (199) (118) (219) (119) (149)
Acquisition of subsidiary and affiliated
companies (81) (428) (428) (298) (642)
Proceeds from sale of shares in DUSA
Pharmaceuticals, Inc. 9,323 - - - 90
Proceeds from sale of option in DUSA
Pharmaceuticals, Inc. - - 3,067 - -
Proceeds from sale of shares in
Deprenyl Animal Health, Inc. - - - - 328
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM (USED IN) INVESTING
ACTIVITIES 7,904 (1,664) 1,428 (2,422) 275
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES
Long-term receivables (1,574) (470) 946 (3,034) (2,249)
Exercise of stock options 613 - 259 - 128
Sale of Company shares owned by subsidiary
Proceeds of sale - - - - 6,020
Income taxes paid on sale - - - (1,663) (32)
Issuance of shares for subsidiary
acquisitions - - - 297 642
Redemption of Bone Health Inc. warrants - - - - (2,855)
Cost of dividend distribution, net of tax - - - - (139)
Unclaimed dividends of Bone Health Inc. - - - - 229
Treasury shares issued for cash - - - - 3,000
Special Warrant Offering, net of
related expenses 11,562 - - - -
Exercise of warrants - - - - 25
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES 10,601 (470) 1,205 (4,400) 4,769
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
TREASURY BILLS 13,848 (1,462) 4,915 (514) 11,844
CASH AND TREASURY BILLS AT BEGINNING
OF THE PERIOD 16,606 11,691 11,691 12,205 361
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND TREASURY BILLS AT END OF
THE PERIOD $ 30,454 $ 10,229 $ 16,606 $ 11,691 $ 12,205
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXPECT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND ACCOUNTING FOR LONG-TERM INVESTMENTS
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Draxis Pharmaceutica Inc., Draxis Animal
Health (Canada) Inc., Draxis U.S. Inc., Draxis L.L.C., Viapharm Inc., DAHI
Animal Health Inc., and DAHI Animal Health (Ontario) Inc.
The Company's investment in Deprenyl Animal Health, Inc., a company
incorporated in the United States to engage in the research, development
and marketing of pharmaceutical products for veterinary prescriptive
applications, is accounted for using the equity method.
The Company's 50% interest in the joint venture New IHS, L.L.C., a U.S.
company that specializes in developing and distributing science-based,
consumer health products through independent distributors and network
marketing, is recognized in the financial statements of the Company using
the proportionate consolidation method.
The Company's investment in DUSA Pharmaceuticals, Inc. was accounted for
using the equity method until December 14, 1995, at which time DUSA
Pharmaceuticals, Inc. completed the sale of additional common stock in a
public offering. The Company incurred a dilution of its investment from
20.0% to 12.8%. The Company's investment in DUSA Pharmaceuticals, Inc. is
recorded at cost after December 14, 1995. On March 11, 1996, the Company
disposed of its remaining investment (unaudited).
Bone Care International, Inc. is recorded at cost.
GOODWILL
Goodwill, which relates to the acquisition of Lipopharm Inc., is recorded
as an asset and is amortized on a straight-line basis over ten years to
2002.
On an ongoing basis, management reviews the valuation and amortization of
goodwill, including any events and circumstances which may have impaired
the fair value. The amount of goodwill impairment, if any, is determined
by assessing recoverability based on expected, discounted, future cash
flows using a discount rate reflecting the Company's cost of capital.
MARKETABLE SECURITIES
Marketable securities are stated at the lower of cost and market.
INVENTORY
Inventory is valued at the lower of cost and net realizable value and is
determined on a first-in, first-out basis.
F-7
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXPECT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
Fixed assets are recorded at cost. The Company provides for depreciation
using the diminishing balance method applying rates estimated to amortize
the cost over the useful life of the assets:
Computer equipment 30%
Laboratory equipment 30%
Furniture and equipment 20%
Leasehold improvements 5 years
LICENSES AND OTHER DEFERRED CHARGES
Licenses and other deferred charges are recorded at cost and consist of
licenses to market certain regulatory approved pharmaceutical products in
defined territories and the right to technical assistance. The Company
provides for amortization of licenses on the straight-line basis over the
minimum term of the license agreement which, in the case of Eldepryl
license is 15 years, Permax 5 years and Anipryl 10 years. This policy was
changed during 1996, from that of the previous years, whereby amortization
of licenses was provided for on the basis of actual sales during the period
as a percentage of total estimated sales over the minimum term of the
license agreement. As the effect of the change in prior periods is not
significant, the prior year's figures have not been restated.
The cost of the right to technical assistance is amortized on a straight-
line basis over the term of the agreement.
RESEARCH AND DEVELOPMENT COSTS
Research and product development costs, including the cost of licenses for
products under development, net of any government assistance and investment
tax credits, are charged to earnings in the period in which they are
incurred.
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities of domestic companies and integrated
foreign subsidiaries are translated into Canadian dollars at the exchange
rates in effect at the balance sheet date. Non-monetary items are
translated at historical exchange rates. Revenue and expense items are
translated at average exchange rates during the year. Exchange gains or
losses arising on translation are included in the determination of net
income for the year, except for long-term monetary assets and liabilities
which are deferred and amortized over the remaining lives of the related
items on a straight-line basis.
FINANCIAL INSTRUMENTS
The Company has a number of financial instruments. The fair value of cash,
accounts receivable, accounts payable and accruals are equivalent to their
carrying value because of the short-term maturity of those instruments.
COMPARATIVE INFORMATION
The Company has reclassified the presentation of certain prior years'
information to conform with the current presentation format.
F-8
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXPECT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
2. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------
1996 1995 1994
---------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Accounts receivable - trade $ 1,482 $ 1,097 $ 1,347
Interest and other receivables 597 344 339
DUSA Pharmaceuticals, Inc. 55 3 23
Deprenyl Animal Health, Inc. - 2 8
Loan to an officer 75 40 -
Loan to a former officer - - 90
-------------------------------------------------------------------------------------------------------------------------------
$ 2,209 $ 1,486 $ 1,807
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The advances to affiliated companies are unsecured, interest free and
repaid monthly. The $40 loan to an officer is non-interest bearing and was
repaid subsequent to December 31, 1995.
3. LONG-TERM RECEIVABLES
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------
1996 1995 1994
---------- --------- ---------
(unaudited)
<S> <C> <C> <C>
NOTE RECEIVABLE FROM DEPRENYL
ANIMAL HEALTH, INC.
(U.S. $955 - June 30, 1996
(unaudited); U.S. $2,500 -
December 31, 1995 and 1994)
The note bears interest at bank
prime rate plus 1% per annum,
payable quarterly, with 60% of
the outstanding principal due in
equal quarterly instalments
commencing January 1, 1997 and
ending January 1, 2001 and 40% of
outstanding principal due on
January 1, 2001. The note is
convertible to common stock of
Deprenyl Animal Health, Inc.
at U.S. $2.88 per share for all
or part of the principal and unpaid
and accrued interest outstanding
until December 31, 2003 subject
to certain conversion restrictions. $ 1,307 $ 3,397 $ 3,373
</TABLE>
F-9
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXPECT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
3. LONG-TERM RECEIVABLE (CONTINUED)
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------
1996 1995 1994
---------- --------- ---------
(unaudited)
<S> <C> <C> <C>
NOTE RECEIVABLE FROM DEPRENYL
ANIMAL HEALTH, INC.
(U. S. $1,000)
The note bears interest at 2% until
October 1, 1996, thereafter prime
plus 1% per annum, payable
quarterly, with 60% of the
outstanding principal due in equal
quarterly instalments commencing
October 1, 1999 and ending on
October 1, 2003. The note is
convertible to common stock of
Deprenyl Animal Health, Inc. at
CDN. $2.11 per share for all or
part of the principal and accrued
interest after July 1, 1996. The
loan is subject to the approval
of a majority of the Deprenyl Animal
Health, Inc. Board of Directors. $ 1,361 $ - $ -
NOTES RECEIVABLE FROM DEPRENYL
ANIMAL HEALTH, INC.
(U.S. $450)
The notes bear interest at 7% per
annum, payable quarterly, with
U.S. $250 due on July 1, 1997
and U.S. $200 due on
October 1, 1997. All amounts
due may be converted, at the
option of the Company, into shares
of common stock of Deprenyl Animal
Health, Inc. at U.S. $2.88 per share. 613 611 607
ADVANCE TO DEPRENYL ANIMAL
HEALTH, INC. (U.S. $140)
The advance is due October 1, 1997,
and bears interest at 7% per annum
commencing March 1, 1997. All
amounts due may be converted, at the
option of the Company, into shares
of common stock of Deprenyl Animal
Health, Inc. at U.S. $2.88 per share. 191 190 189
</TABLE>
F-10
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXPECT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
3. LONG-TERM RECEIVABLE (CONTINUED)
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------
1996 1995 1994
---------- --------- ---------
(unaudited)
<S> <C> <C> <C>
LOANS TO JOINT VENTURE PARTNER,
NEW IHS, L.L.C., WITH CONVERTIBLE
FEATURES
The loans are maturing, on various
dates, 180 days after their
provision and interest is computed
at U.S. prime plus 1% per annum.
The Company does not anticipate
that these loans will be repaid or
matched by a loan from the other
joint venture partner. Consequently,
these loans upon maturity would be
deemed to be an additional capital
contribution by the Company, and the
percentage interest the Company has
in the joint venture would be
adjusted in accordance with the joint
venture operating agreement $ 655 $ 338 $ -
PROMISSORY NOTES DUE FROM JOINT
VENTURE PARTNER, NEW IHS, L.L.C.
The promissory notes are due on demand
and interest is computed at U.S.
prime plus 1% per annum. The
Company does not anticipate
repayment of these notes within
the next 12 months. 345 345 -
ADVANCE TO AN OFFICER
The advance was made to fund the
acquisition of shares of an affiliated
company. The loan is non-interest
bearing and due on disposition
of the shares. - 111 111
</TABLE>
F-11
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXPECT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
3. LONG-TERM RECEIVABLE (CONTINUED)
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------
1996 1995 1994
---------- --------- ---------
(unaudited)
<S> <C> <C> <C>
ADVANCE TO RETIRED FOUNDER AND
FORMER CO-CHAIRMAN
The advance was made to fund the
acquisition of company shares,
bears interest at bank prime rate,
and was repaid in December, 1995. $ - $ - $ 1,293
ADVANCES TO MEDICIS
PHARMACEUTICAL CORPORATION
The advance bears interest at 5% per
annum effective from September 30,
1993 and was repayable in monthly
instalments of principal of
U.S. $20 from January 30, 1994
to September 30, 1995 and
U.S. $35 thereafter. - - 365
--------------------------------------------------------------------------------------------------------------------------------
4,472 4,992 5,938
CURRENT PORTION (691) - (365)
--------------------------------------------------------------------------------------------------------------------------------
$ 3,781 $ 4,992 $ 5,573
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXPECT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
4. LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------
1996 1995 1994
---------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Deprenyl Animal Health, Inc. (market
value - June 30, 1996 - $16,544
(unaudited); December 31, 1995 -
$4,977; December 31, 1994 -
$4,490) (ownership percentage
June 30, 1996 - 43.9% (unaudited);
December 31, 1995 - 35.7%;
December 31, 1994 - 33.0%) $ 920 $ - $ 148
DUSA Pharmaceuticals, Inc. (market
value - June 30, 1996 $nil (unaudited),
December 31, 1995 - $9,792;
December 31, 1994 - $7,480)
(ownership percentage June 30,
1996 - nil (unaudited), December 31,
1995 - 12.8%; December 31, 1994 - 20.0%) - 3,322 2,446
Bone Care International, Inc. (no quoted
market value) 691 609 609
--------------------------------------------------------------------------------------------------------------------------------
$ 1,611 $ 3,931 $ 3,203
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1995, the Company's investment in Deprenyl Animal Health, Inc. was
reduced to zero as a result of recording it's equity share of losses. The
portion of unrecognized loss that would otherwise have been recorded at
June 30, 1996 was $nil (unaudited) and December 31, 1995 was $685.
In June of 1996 (unaudited), shareholders of DAHI approved the conversion
feature of the U.S. $1,000 advance made by the Company to DAHI in January
of 1996 and the Company clarified its commitment with respect to the future
financing requirements of DAHI. As a result in the second quarter of 1996,
the Company recorded its share of DAHI's net development stage expenses of
$685, which had not been previously recognized for accounting purposes.
F-13
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXPECT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
5. FIXED ASSETS
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------
1996 1995 1994
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Computer equipment $ 534 $ 505 $ 407
Laboratory equipment 220 113 109
Furniture and fixtures 419 357 340
Leasehold improvements 39 39 35
-------------------------------------------------------------------------------------------------------------------------------
1,212 1,014 891
Accumulated depreciation and
amortization (550) (469) (438)
-------------------------------------------------------------------------------------------------------------------------------
$ 662 $ 545 $ 453
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6. ACQUISITION OF ADDITIONAL INTEREST IN SUBSIDIARY
On June 30, 1994 the Company purchased the remaining 2.38% interest in Bone
Health Inc. for 175,082 common shares of the Company valued at $298. The
excess of the purchase price over the net assets acquired of $288 has been
charged directly to the deficit. Bone Health Inc. was amalgamated with the
Company on June 30, 1994.
7. LICENSES AND OTHER DEFERRED CHARGES
<TABLE>
<CAPTION>
June 30, 1996 (unaudited)
------------------------------------------------
Accumulated Net Book
Cost Amortization Value
-------- ------------ --------
<S> <C> <C> <C>
Licenses
Eldepryl $ 1,330 $ 784 $ 546
Permax 3,500 1,407 2,093
Anipryl 639 32 607
Patents and trademarks 62 - 62
Technical assistance 1,800 900 900
-------------------------------------------------------------------------------------------------------------------------------
$ 7,331 $ 3,122 $ 4,209
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
December 31, 1995
------------------------------------------------
Accumulated Net Book
Cost Amortization Value
-------- ------------ --------
Licenses
Eldepryl $ 1,330 $ 717 $ 613
Permax 3,500 977 2,523
Patents and trademarks 62 - 62
Technical assistance 1,800 840 960
-------------------------------------------------------------------------------------------------------------------------------
$ 6,692 $ 2,534 $ 4,158
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXPECT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
7. LICENSES AND OTHER DEFERRED CHARGES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1994
------------------------------------------------
Accumulated Net Book
Cost Amortization Value
-------- ------------ --------
<S> <C> <C> <C>
Licenses
Eldepryl $ 1,330 $ 541 $ 789
Permax 3,500 350 3,150
Patents and trademarks 71 - 71
Technical assistance 1,800 720 1,080
-------------------------------------------------------------------------------------------------------------------------------
$6,701 $1,611 $5,090
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Amortization of licenses and other deferred charges was $924, $517, $209,
$588 (unaudited) and $288 (unaudited) for the years ended December 31,
1995, 1994, 1993, and the six months ended June 30, 1996 and 1995
respectively.
Under the terms of the Anipryl distribution agreement with Deprenyl Animal
Health, Inc., the Company is required to achieve certain minimum sales
projections. In the event, the sales projections are not achieved Deprenyl
Animal Health, Inc., has the right to either distribute Anipryl itself,
appoint one or more additional distributors of Anipryl, or terminate the
agreement.
8. LICENSE OBLIGATION
On February 10, 1994 the Company acquired the Canadian license to market
Permax, a Parkinson's disease drug. The agreement required the Company to
pay $3,500 for the first five years of the license. The initial payment of
$2,000 was made on signing, $1,000 was paid February 10, 1995 and $500 was
paid on February 10, 1996. At the end of the first five years, an extended
ten year license will be granted if certain sales achievements are met by
the Company over the initial five year term. The cost to the Company of an
extended license would be determined by an independent arbitrator at the
time of renewal.
F-15
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
9. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effects of timing differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts applicable for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
June 30, December 31,
---------- --------------------
1996 1995 1994
---------- ----- -----
(unaudited)
Gain on dilution of investment in
affiliates $ 691 $ 2,183 $ 1,660
Licenses and other deferred charges (394) (359) (483)
Unrealized investment loss - - (243)
Other 63 (25) 136
- -------------------------------------------------------------------------------
$ 360 $ 1,799 $ 1,070
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10. CAPITAL STOCK
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1996 1995 1994
------------------------- ------------------------ ------------------------
Number Number Number
of Shares Dollars of Shares Dollars of Shares Dollars
----------- --------- ---------- -------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Common stock
Balance at beginning
of the period 20,127,000 $ 18,666 20,019,000 $ 18,393 19,836,000 $ 18,083
Issued during
the period 3,248,000 12,178 108,000 273 183,000 310
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of
the period 23,375,000 $ 30,844 20,127,000 $ 18,666 20,019,000 $ 18,393
- -----------------------------------------------------------------------------------------------------------------------------
Issued during the period
Warrant offering 3,000,000 $ 11,562 - $ - - $ -
Exercise of options 244,000 613 102,000 258 - -
Exercise of participation
shares 4,000 3 - - - -
Shares issued in
lieu of salary - - 6,000 15 8,000 13
Shares issued for
Bone Health Inc.
acquisition - - - - 175,000 297
- -----------------------------------------------------------------------------------------------------------------------------
3,248,000 $ 12,178 108,000 $ 273 183,000 $ 310
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
10. CAPITAL STOCK AND CONTRIBUTED SURPLUS (CONTINUED)
WARRANTS
NOVOPHARM LIMITED
Novopharm Limited - On April 19, 1995 the Company issued 500,000 warrants
to Novopharm Limited each of which are exercisable to April 18, 2000 to
purchase one common share of the Company at $2.09. The Company issued the
warrants to Novopharm Limited in exchange for Novopharm Limited's grant of
a six month extension of a profit sharing agreement between the two
companies.
In December, 1993 the Company formed a strategic alliance with Novopharm
Limited. In addition to Novopharm Limited's purchase of 1,176,000 shares
from the Company's treasury at an aggregate acquisition price of $3,000,
Novopharm Limited was granted 1,176,000 warrants. Each warrant is
exercisable for one common share of the Company for up to four years at a
base exercise price of $2.70, escalating by 10% in each of years three and
four.
UNDERWRITERS
In connection with the completion of Draxis' public offering in April 1996,
a non-assignable warrant was issued to the Company's underwriters. The
warrant is exercisable for 300,000 Draxis shares at $4.25 per share and
expires on April 26, 1998 (unaudited).
JOINT VENTURE PARTNERS IN NEW IHS, L.L.C.
As part of the joint venture agreement between the Company and it's joint
venture partners in New IHS, L.L.C., the joint venture partners are
entitled to purchase from the Company 1,000,000 common shares of the
Company at $2.25 per common share upon exercise of a warrant which expires
March 31, 2000.
This warrant vests and becomes exercisable only if the following occurs:
(a) in the first year, the warrant, as to 10,000 common shares, will vest
for each U.S. $100 in profit after tax of New IHS, L.L.C. allocable to the
company and (b) in each of the second and subsequent years, for each U.S.
$100 of Joint venture partners in New IHS, L.L.C. net profit after tax
allocable to the company in excess of the largest net profit after tax in
any prior year following the year ended December 31, 1994, the warrant, as
to 10,000 common shares, will vest.
No portion of the warrant to the joint venture partners of New IHS, L.L.C.
had vested as of June 30, 1996.
In aggregate, there were 2,976,000 (unaudited), 2,676,000 and 1,176,000
warrants outstanding at June 30, 1996, December 31, 1995 and 1994
respectively.
F-17
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
10. CAPITAL STOCK AND CONTRIBUTED SURPLUS (CONTINUED)
STOCK OPTION PLAN
The Board of Directors has adopted a stock option plan in order to provide
an incentive for key directors, officers and employees. The plan provides
that the Board of Directors may, from time to time, at its discretion,
grant to key directors, officers and employees, the option to purchase
common shares. The Board of Directors will determine the price per common
share and the number of common shares which may be allotted to each
designated director, officer or employee and all other terms and conditions
of the option in accordance with the applicable requirements of any
relevant regulatory authority or stock exchange. These options will be
exercisable for a period not exceeding ten years from the date of the
grant.
On June 16, 1995, the Board Directors received shareholder approval to set
a maximum of 2,500,000 options for issuance under the stock option plan.
There were options outstanding of 1,449,000 (unaudited), 1,694,000 and
1,828,000 at June 30, 1996, December 31, 1995 and 1994, respectively. At
December 31, 1995 prices on options ranged from $1.70 to $2.70 per share.
EMPLOYEE PARTICIPATION SHARE PLAN
As proposed by the Compensation Committee and approved by the Board of
Directors, on February 16, 1995, the Company established the Employee
Participation Share Plan for the directors, officers and employees of the
Company to tie employee compensation more closely to shareholder value.
The Employee Participation Share Plan was approved by the shareholders on
June 16, 1995. The Board of Directors has provided that it would be a
condition to receiving any benefit from the Employee Participation Share
Plan that the share price have appreciated at least 25% from the date of
issuance of any Participation Shares. The maximum number of Participation
Shares issuable pursuant to the Employee Participation Share Plan is
2,000,000.
Vesting takes place over a four year period at the rate of 20%, 20%, 20%
and 40% commencing on the first anniversary of the issuance of the
Participation Shares and for each of the three years thereafter. Vested
Participation Shares are automatically convertible into shares of the
Company at the election of the holder, provided that the shares have
increased in value since the date of issuance of the vested Participation
Shares by the aforementioned 25%. The number of Company shares a
Participant will receive when converting Participation Shares is determined
by multiplying the number of Participation Shares held by a Participant by
a fraction whose numerator is the amount, by which the fair market value of
a share at the date of conversion exceeds the fair market value of a share
as at the date on which the Participation Shares were issued and whose
denominator is the fair market value of the shares at the date of
conversion.
F-18
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
10. CAPITAL STOCK AND CONTRIBUTED SURPLUS (CONTINUED)
EMPLOYEE PARTICIPATION SHARE PLAN (CONTINUED)
On February 16, 1995, the Board of Directors of the Company authorized the
issuance of 975,000 Series A Participation Shares at a subscription price
of $.30 each. The average of the daily high and low board lot trading
prices on each of the five trading days on the Toronto Stock Exchange
immediately preceding the issuance of the Series A Participation Shares was
$2.45.
On December 18, 1995, the Board of Directors of the Company authorized the
issuance of 555,000 Series B Participation Shares at a subscription price
of $.30 each. The average of the daily high and low board lot trading
prices on each of the five trading days on the Toronto Stock Exchange
immediately preceding the issuance of the Series B Participation Shares was
$2.25.
As at June 30, 1996 and December 31, 1995, respectively, 145,000
(unaudited) and nil of the participation shares had vested with the
employees.
The shares have been issued for $0.30 per share and paid for by the
employees through the issuance of a limited recourse promissory note and
secured only against the shares themselves.
11. OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
---------------------- -------------------------------------
1996 1995 1995 1994 1993
-------- ------ ------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
DUSA Pharmaceuticals, Inc.
Gain on dilution of investment $ - $ - $ 1,833 $ 219 $ -
Gain on sale of option - - 3,067 - -
Gain on sale of shares 6,002 - - - -
Bone Health Inc.
Loss from operations - - - (85) -
Gain on dilution of investment - - - - 305
Severance costs - - - (202) -
Retiring allowance - - - - (262)
- --------------------------------------------------------------------------------------------------------------------
$ 6,002 $ - $ 4,900 $ (68) $ 43
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
11. OTHER INCOME (EXPENSE) (CONTINUED)
GAIN ON DILUTION OF INVESTMENT IN DUSA PHARMACEUTICALS, INC.
On December 14, 1995, DUSA Pharmaceuticals, Inc. completed a public
offering for the sale of 3,000,000 shares of it's common stock. As a
result Draxis recorded a gain of $1,833 on dilution of its investment.
On March 4, 1994, DUSA Pharmaceuticals, Inc. completed a private placement
in the United States worth U.S. $1,200 consisting of 250,000 shares of its
common stock at U.S. $4.80 per share resulting in a gain to the Company of
$219 on dilution of its investment.
GAIN ON SALE OF SHARES IN DUSA PHARMACEUTICALS, INC.
On March 11, 1996, the Company sold the remaining 1,088,000 shares of
common stock of DUSA Pharmaceuticals, Inc. for net proceeds of $9,323
realizing a gain of $6,002 (unaudited). Subsequent to the sale, Draxis no
longer holds an ownership interest in DUSA Pharmaceuticals, Inc.
RETIRING ALLOWANCE
In the fourth quarter of 1993, the Company decided to absorb the full cost
of a retiring allowance to its founder which was scheduled to be provided
over a ten year period commencing from April 19, 1998.
12. EQUITY SHARE OF NET DEVELOPMENT STAGE COSTS OF AFFILIATED COMPANIES
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
---------------------- -------------------------------------
1996 1995 1995 1994 1993
-------- ------ -------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Equity share of net development
stage costs of Deprenyl Animal
Health, Inc. $ (1,177) $ (577) $ (577) $ (1,120) $ (750)
DUSA Pharmaceuticals, Inc. - (449) (956) (975) (601)
- -------------------------------------------------------------------------------------------------------------------
$ (1,177) $ (1,026) $ (1,533) $ (2,095) $ (1,351)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
13. INCOME TAXES
The provision for income taxes is different from the amount that would have
been computed by applying Canadian statutory Federal and Provincial income
tax rates due to the following:
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
---------------------- -------------------------------------
1996 1995 1995 1994 1993
-------- ------ -------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
% % % % %
Combined basic Federal and
Provincial rates 38 34 39 38 43
Capital gains/losses (12) - (5) - (11)
Reversal of deferred taxes (16) - - - -
Utilization of loss
carry forwards - - - (3) 18
Other permanent differences - 4 - - 7
-----------------------------------------------------------------------------------------------------------------
11 38 34 35 57
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
</TABLE>
14. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common shares
outstanding (basic) adjusted, to the extent they are dilutive, for
outstanding stock options and stock purchase warrants (fully diluted).
Basic earnings per share and fully diluted earnings per share are not
materially different for the years presented.
15. RELATED PARTY TRANSACTIONS
DUSA PHARMACEUTICALS, INC.
The Company entered into a management agreement, effective October 1, 1991,
with DUSA Pharmaceuticals, Inc., with a one year term and renewable
annually pursuant to which the Company provides administrative, financial,
scientific and marketing support as required. Services charged by the
Company to DUSA Pharmaceuticals, Inc. for the years ended December 31,
1995, 1994, 1993, and for the six months ended June 30, 1996 and 1995
totalled $85, $87, $95, $33 (unaudited) and $45 (unaudited) respectively.
As of June 30, 1996 and December 31, 1995 and 1994, the net amounts
receivable from DUSA Pharmaceuticals, Inc. were $55 (unaudited), $3 and
$23, respectively. Such amounts are paid to the Company monthly and are
included in accounts receivable.
F-21
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
15. RELATED PARTY TRANSACTIONS (CONTINUED)
DUSA PHARMACEUTICALS, INC. (CONTINUED)
The Company performs certain research and development functions for DUSA
Pharmaceuticals, Inc. in respect of which the Company has applied for
Canadian tax incentives. Research and development costs recovered from
DUSA Pharmaceuticals, Inc. for the years ended December 31, 1995, 1994,
1993 and for the six months ended June 30, 1996 and 1995 were $381, $534,
$487, $34 (unaudited) and $258 (unaudited), respectively.
DEPRENYL ANIMAL HEALTH, INC.
Included in interest income is interest received by the Company from
Deprenyl Animal Health, Inc. for the years ended December 31, 1995, 1994,
1993, and for the six months ended June 30, 1996 and 1995 of $334, $253,
$41, $120 (unaudited) and $169 (unaudited), respectively.
Accounts receivable includes $9 (unaudited), $2 and $8 due from Deprenyl
Animal Health, Inc. at June 30, 1996 and December 31, 1995 and 1994,
respectively.
NEW IHS, L.L.C. - JOINT VENTURE PARTNERSHIP
Effective March 31, 1995, the Company entered into a joint venture called
New IHS, L.L.C.. The Company's 50% interest in the joint venture is
accounted for by the proportionate consolidated basis. The Company's share
of the loss for the six months ending June 30, 1996 and June 30, 1995 and
for the year ending December 31, 1995 is $328 (unaudited), $197 (unaudited)
and $580, respectively which is included in income from operations.
The Company provided initial working capital of $345 in exchange for
demand, promissory notes bearing interest at U.S. prime plus 1%.
Additional financing for expansion of inventory was advanced, at various
dates in 1995 and in the six months ending June 30, 1996, in the amount of
$338 and $317 (unaudited), respectively bearing interest at U.S. prime plus
1%, payable not later than 180 days after each issue. At the end of the
aforementioned 180 days, any amounts loaned by the Company to New IHS,
L.L.C. and not repaid by New IHS, L.L.C. or matched by a loan in the same
amount by the other joint venture partner, shall be deemed to be an
additional capital contribution made by the Company to New IHS, L.L.C., and
the percentage interest of the Company shall be adjusted in accordance with
the joint venture operating agreement.
F-22
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
15. RELATED PARTY TRANSACTIONS (CONTINUED)
Included in interest income is $52 (unaudited) and $40 of interest accrued
by the Company from New IHS, L.L.C. at June 30, 1996 and December 31, 1995,
respectively. Summarized earnings statement and balance sheet of the
Company's proportionate combined interest in the joint venture is as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
-----------------------
1996 1995 1995
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
Proportionate statement of operations
Sales $ 305 $ 155 $ 598
Expenses 633 352 1,178
-------------------------------------------------------------------------------------
Net loss $ (328) $ (197) $ (580)
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Proportionate balance sheet
Current assets $ 422 $ 131 $ 205
Long-term assets 47 25 19
Current liabilities (377) (9) (122)
Long-term liabilities (999) (343) (682)
Capital stock (1) (1) (1)
-------------------------------------------------------------------------------------
Deficit $ (908) $ (197) $ (580)
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Proportionate statement of cash flows
Cash flows from operating activities $ (285) $ (318) $ (655)
Cash flows from investing activities (28) (25) (19)
Cash flows from financing activities 317 343 682
-------------------------------------------------------------------------------------
Net (decrease) increase in cash 4 - 8
Cash at beginning of year 8 - -
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Cash at end of period $ 12 $ - $ 8
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
OTHER
The Company has annual lease commitments of approximately $141 with a
company, controlled indirectly as to 50%, by a director of the Company.
The lease expires on April 30, 1999 and carries one option to renew for an
additional five years.
F-23
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
16. COMMITMENTS
On January 31, 1995, the Company acquired from Somerset Pharmaceuticals
Inc. the exclusive Canadian marketing rights to the osteoporosis drug
Ipriflavone. The Company paid U.S. $100 upon signing of the agreement and
will be required to make payments of U.S. $200 at the time Somerset
Pharmaceuticals Inc. files a New Drug Submission with the Health Protection
Branch, Health and Welfare Canada and U.S. $400 upon issuance of a Notice
of compliance on that New Drug Submission by the Health Protection Branch,
Health and Welfare Canada. In addition, the Company agreed that in the
event that during the twelve months prior to the third anniversary of the
launch of Ipriflavone, gross sales of Ipriflavone exceed $10,000, the
Company would pay to Somerset Pharmaceuticals Inc. an additional amount
equal to seven percent of all gross sales above $10,000 during such twelve-
month period.
As of May 16, 1991, Deprenyl Animal Health, Inc. entered into a license
agreement with Baker Cummins Pharmaceuticals, Inc. for the right to market
in Canada, the product Alzene. On July 25, 1991, Deprenyl Animal Health,
Inc. assigned its interest in the license agreement to the Company in
exchange for a 10% royalty on Alzene sales in Canada. This royalty
agreement will terminate on the later of the date of receipt of clearance
to market from Health Protection Branch, Health and Welfare Canada or
Federal Drug Administration. The cost of the license consisted of a cash
payment of U.S. $450 plus 3,238 common shares of the Company. Upon filing
a New Drug Submission with, and upon receiving Health Protection Branch,
Health and Welfare Canada approval for Alzene, the Company will be required
to make further cash payments of U.S. $1,000 and $3,500 respectively.
During November 1992, the Company entered into a license agreement with
Laboratoire L. Lafon for the right to market any product containing the
compound Modafinil in Canada. The cost of the license consisted of a cash
payment of U.S. $150 and the Company paid an additional U.S. $150 upon
filing a New Drug Submission in June, 1993. The Company will be required
to make a further cash payment of U.S. $300 upon receiving Health
Protection Branch, Health and Welfare Canada approval to market such
products.
F-24
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
16. COMMITMENTS (CONTINUED)
The Company may be required to pay an additional $786, should the gross
revenues of Lipopharm division (amalgamated July 30, 1993) exceed certain
amounts in any fiscal year through December 31, 1997. Such payments, if
any, would be satisfied through the issuance of common shares of the
Company based upon the average price of the common shares of the Company
for the fifteen days preceding the end of the month in which the gross
revenue targets were exceeded.
17. SUBSEQUENT EVENTS
On July 25, 1996, the Board of Directors approved the mandatory share
exchange agreement between the Company and Deprenyl Animal Health, Inc.
Under the terms of the agreement, Draxis will exchange 1.35 of its shares
for each share of Deprenyl Animal Health, Inc. The agreement is contingent
upon regulatory and shareholder approval, and if approved, approximately
5,725,000 shares will be issued. In connection with the share exchange
plan, the Company is requesting shareholder approval to increase the
maximum number of shares that may be issued under the Draxis stock option
plan from 2,500,000 shares to 4,500,000 shares.
On July 29, 1996 the Board of Directors approved the acquisition of Tican
Pharmaceuticals Ltd. for a purchase price of approximately $900 in cash and
$200 in common shares. An additional $200 becomes payable if sales exceed
specified targets during the next 18 months.
On August 13, 1996, the Company completed the sale of New IHS, L.L.C.
to STEF International Corp. (STEF). Under the terms of the
transaction, STEF paid Draxis and other IHS members for their stake in
IHS by issuing 3,000,000 STEF treasury shares, valued at $0.45 per
share and interest-bearing convertible debt in the amount of $900,
convertible to STEF shares at $0.75 per share. In addition, as part of
the transaction, Draxis purchased 1,000,000 treasury shares and 867,000
warrants of STEF for $0.50 per combination of one share plus 0.87 of a
warrant. The warrants are exercisable for a period of three years at
$0.75 per share during the first two years and at $1.00 during the last
year. The transaction resulted in Draxis acquiring a 30% equity stake
in STEF which would increase to 40% following the exercise of the
warrants and conversion of debt.
F-25
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
18. CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
---------------------- -------------------------------------
1996 1995 1995 1994 1993
-------- ------ -------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) FOR THE YEAR $ 1,865 $ 16 $ 2,417 $ 1,099 $ (2,079)
NON-CASH TRANSACTIONS REFLECTED IN
NET INCOME
Depreciation and amortization 669 346 1,051 632 391
Amortization of goodwill 117 117 234 234 202
Deferred income taxes (1,439) (115) 729 110 (489)
Equity share of net development stage
costs of affiliated companies 1,177 1,026 1,533 2,096 1,351
Gain on sale of shares in DUSA
Pharmaceuticals, Inc. (6,001) - - - -
Gain on sale of option in DUSA
Pharmaceuticals, Inc. - - (3,067) - -
Gain on dilution of investment in
DUSA Pharmaceuticals, Inc. - - (1,833) (219) -
(Gain) loss on sale of securities (110) 37 (549) (59) 2,716
Shares issued in lieu of salary - - 15 13 13
Loss on sales of shares in affiliated
companies - - - - 303
Leaseholds written off - - - - 123
------------------------------------------------------------------------------------------------------------------
(3,722) 1,427 530 3,906 2,531
------------------------------------------------------------------------------------------------------------------
CHANGES IN CURRENT ASSETS AND CURRENT
LIABILITIES IMPACTING CASH FLOWS
FROM OPERATIONS
Accounts receivable (723) (109) 321 1,253 925
Inventory (462) (132) 310 (412) (188)
Proceeds from sale (purchase) of
marketable securities 450 149 1,316 2,104 2,410
Prepaid expenses (222) (54) 150 (305) 693
Payables and accrued charges (196) (850) (430) (132) (469)
Income taxes 218 241 85 (106) 898
------------------------------------------------------------------------------------------------------------------
(935) (755) 1,752 2,402 4,269
------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities $ (4,657) $ 672 $ 2,282 $ 6,308 $ 6,800
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
NON-CASH TRANSACTIONS
Common shares of the Company issued in
exchange for shares of Bone Health Inc. $ - $ - $ - $ 298 $ -
Common shares of the Company issued in
exchange for shares of Lipopharm Inc. - - - - 642
------------------------------------------------------------------------------------------------------------------
$ - $ - $ - $ 298 $ 642
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>
F-26
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
19. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
---------------------- -------------------------------------
1996 1995 1995 1994 1993
-------- ------ -------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED NET INCOME (LOSS)
As reported under Canadian GAAP $ 1,865 $ 16 $ 2,417 $ 1,099 $ (2,079)
ADJUSTMENTS TO INCREASE REPORTED
CONSOLIDATED NET INCOME
Amortization of technical assistance
costs 60 60 120 120 120
Increase in gain on sale of shares
in affiliated company under U.S. GAAP 4,097 - - - -
(Increase) reduction in income tax
expense due to (increase) reduction in
net income from Canadian to U.S. GAAP
reconciling items (1,571) (27) 1,334 20 48
------------------------------------------------------------------------------------------------------------------
2,586 33 1,454 140 168
------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO DECREASE REPORTED
NET INCOME
Elimination of gain on dilution of
investment in affiliated companies - - (1,833) (219) (305)
Elimination of gain on sale of option
in affiliated company - - (3,067) - -
-------------------------------------------------------------------------------------------------------------------
- - (4,900) (219) (305)
------------------------------------------------------------------------------------------------------------------
AS ADJUSTED UNDER U.S. GAAP $ 4,451 $ 49 $ (1,029) $ 1,020 $ (2,216)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS PER SHARE - U.S. GAAP $ 0.19 $ 0.00 $ (0.05) $ 0.05 $ (0.12)
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES AND COMMON
SHARE EQUIVALENTS - U.S. GAAP 23,096 20,113 21,270 19,927 18,225
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>
F-27
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
19. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
DEFERRED CHARGES
Amortization of technical assistance costs are payments made to a
third-party licensor for technical assistance to be provided to the Company
for product development, market penetration and clinical testing of new
products.
Under Canadian GAAP these costs are deferred and charged to expense on a
straight-line basis beginning in 1989.
Under U.S. GAAP these costs are charged to expense as incurred. During
1988 such costs were charged to expense for U.S. GAAP purposes. Commencing
in 1989, amortization of these costs for Canadian GAAP has been added back
to pre-tax income for U.S. GAAP reconciliation purposes.
GAIN ON DILUTION OF INVESTMENTS IN AFFILIATED COMPANIES
Under Canadian GAAP, an offering that takes the form of an investee's
direct sale of its unissued shares, in an amount in excess of the
investor's carrying value, is reflected as a gain on dilution in the
investor's statement of operations.
Under U.S. GAAP, the additional equity raised by an investee in the
development stage is reflected as an equity transaction in the investor's
statement of shareholders' equity.
GAIN ON SALE OF DUSA OPTION IN AFFILIATED COMPANIES
Under Canadian GAAP, a gain is recognized for the excess of proceeds over
the carrying value of the option.
Under U.S. GAAP, a gain on sale of the option reduces the carrying value of
the Company's remaining investment in common stock of DUSA, since DUSA is
considered to be in the development stage.
SHAREHOLDERS' EQUITY
Shareholders' equity determined under U.S. GAAP as at June 30, 1996
(unaudited), December 31, 1995, 1994, and 1993, would increase (decrease)
by ($1,558), $770, $1,090, $984 respectively, compared to the amounts
determined under Canadian GAAP.
INVESTMENT IN NEW IHS, L.L.C. - JOINT VENTURE PARTNERSHIP
Under Canadian GAAP, the investment in New IHS, L.L.C. has been accounted
for using proportionate consolidation. Under U.S. GAAP, this investment
would be accounted for using the equity method. This difference has not
been quantified, however, there would be no effect on net income of this
difference. (See Note 15)
F-28
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
19. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
STATEMENT OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
---------------------- -------------------------------------
1996 1995 1995 1994 1993
-------- ------ -------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in cash and
cash equivalents under Canadian GAAP $ 10,602 $ (470) $ 4,915 $ (514) $ 11,844
Net decrease in treasury bills (see
note below) 7,494 1,697 (5,102) (9,938) -
------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash under
U.S. GAAP 18,096 1,227 (187) (10,452) 11,844
Cash and cash equivalents at beginning
of the year 1,567 1,754 1,754 12,205 361
------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of the period $ 19,663 $ 2,981 $ 1,567 $ 1,754 $ 12,205
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>
Treasury bills are considered cash equivalents for Canadian GAAP purposes.
For U.S. GAAP purposes only treasury bills with original maturities of
three months or less are considered as cash equivalents.
Income taxes paid for the years' ended December 31, 1995, 1994, 1993 and
for the six months ended June 30, 1996 and 1995 are $1,250, $3,410, $nil,
$1,273 (unaudited) and $523 (unaudited), respectively.
F-29
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
19. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Six months
ended Year ended
June 30, December 31,
----------- ------------------
1996 1995 1995
----------- ------ ------
(unaudited)
DEPRENYL ANIMAL HEALTH, INC.
Current assets $ 2,278 $ 1,442 $ 3,524
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total assets $ 3,020 $ 2,129 $ 6,516
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Current liabilities $ 170 $ 186 $ 57
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total liabilities $ 3,640 $ 4,402 $ 5,232
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total shareholders' equity $ (620) $ (2,273) $ 1,284
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Percentage ownership of common
shares held by the Company 44.0% 35.7% 33.0%
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Quoted market value of investment $ 16,544 $ 4,977 $ 4,490
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, December 31,
---------------------- -------------------------------------
1996 1995 1995 1994 1993
-------- ------ -------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest and other income $ 1,212 $ 107 $ 385 $ 288 $ 263
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Research and development expenses $ 811 $ 1,140 $ 1,921 $ 1,732 $ 1,108
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Net loss $ 603 $ 1,934 $ 2,581 $ 3,498 $ 2,388
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>
F-30
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF CANADIAN DOLLARS EXCEPT SHARE RELATED DATA)
- -------------------------------------------------------------------------------
19. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Year ended
December 31,
------------------
1995 1994
-------- --------
DUSA PHARMACEUTICALS, INC.
Current assets $ 28,347 $ 14,748
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total assets $ 28,419 $ 14,817
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Current liabilities $ 830 $ 604
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total liabilities $ 830 $ 604
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total shareholders' equity $ 27,589 $ 14,213
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Percentage ownership of common
shares held by the Company 12.8% 20.0%
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Quoted market value of investment $ 9,792 $ 7,480
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Year ended
December 31,
---------------------------------------
1995 1994 1993
-------- -------- ---------
Interest income $ 795 $ 969 $ 973
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Research and development expenses $ 4,180 $ 3,769 $ 3,425
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Net loss $ 8,095 $ 4,838 $ 2,900
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
F-31
<PAGE>
PRO FORMA FINANCIAL INFORMATION CONCERNING DRAXIS
REPORT OF CHIEF FINANCIAL OFFICER
The PRO FORMA consolidated balance sheet of Draxis as at June 30, 1996
and the PRO FORMA consolidated statements of operations for the year ended
December 31, 1995 and for the six-month period ended June 30, 1996 have not
been audited, but have been prepared in accordance with the Part V of the
CANADA BUSINESS CORPORATIONS REGULATIONS.
/s/ James A. H. Garner
James A.H. Garner
October 15, 1996 Chief Financial Officer
Draxis Health Inc.
COMPILATION REPORT
To the Directors of Draxis Health Inc.
We have reviewed, as to compilation only, the PRO FORMA consolidated
balance sheet of Draxis Health Inc. as at June 30, 1996 and the PRO FORMA
consolidated statements of operations for the year ended December 31, 1995
and for the six-month period ended June 30, 1996. These PRO FORMA financial
statements have been prepared for inclusion in the Joint Management Proxy
Statement-Prospectus dated October 15, 1996 relating to a proposed mandatory
share exchange involving Draxis Health Inc., Draxis Pharmaceutica Inc. and
Deprenyl Animal Health, Inc. In our opinion, these PRO FORMA consolidated
financial statements have been properly compiled to give effect to the
proposed transaction and the assumptions described in the accompanying notes.
/s/ Deloitte & Touche
Toronto, Canada Deloitte & Touche
October 15, 1996 Chartered Accountants
F-32
<PAGE>
DRAXIS HEALTH INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(IN THOUSANDS OF CDN. DOLLARS EXCEPT PER SHARE AMOUNTS - UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Actual Pro forma
---------------------- --------------------------------------
Draxis DAHI Adjustments Note Consolidated
---------- --------- ------------ ------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and treasury bills $ 30,454 $ 2,031 $ - $ 32,485
Accounts receivable 2,209 8 (8) (D) 2,209
Inventory 1,167 237 - 1,404
Current portion of long-term
receivables 691 - - 691
Prepaid expenses 1,018 3 - 1,021
- --------------------------------------------------------------------------------------------------------------
35,539 2,279 (8) 37,810
- --------------------------------------------------------------------------------------------------------------
Long-term receivables 3,781 - (3,472) (D) 309
Long-term investments 1,611 - (920) (B) 691
Fixed assets 662 100 - 762
Goodwill 1,546 - - 1,546
Licenses and other deferred charges 4,209 642 30,204 (C)
(607) (E) 34,448
- --------------------------------------------------------------------------------------------------------------
$ 47,348 $ 3,021 $ 25,197 $ 75,566
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
LIABILITIES
Accounts payable and accrued charges $ 2,216 $ 170 $ (8) (D) $ 2,378
Royalties payable 492 - - 492
Income taxes payable 388 - - 388
- --------------------------------------------------------------------------------------------------------------
3,096 170 (8) 3,258
- --------------------------------------------------------------------------------------------------------------
NOTES PAYABLE - 3,472 (3,472) (D) -
DEFERRED INCOME TAXES 360 - - 360
- --------------------------------------------------------------------------------------------------------------
360 3,472 (3,472) 360
- --------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock 30,844 11,759 (11,759) (F)
- - 28,663 (B) 59,507
Contributed surplus 9,701 - - 9,701
Retained earnings (deficit) 3,347 (12,380) 12,380 (F) -
(607) (E) 2,740
- --------------------------------------------------------------------------------------------------------------
43,892 (621) 28,677 71,948
- --------------------------------------------------------------------------------------------------------------
$ 47,348 $ 3,021 $ 25,197 $ 75,566
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-33
<PAGE>
DRAXIS HEALTH INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS OF CDN. DOLLARS EXCEPT PER SHARE AMOUNTS - UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------------------------------------
Actual Pro forma
---------------------- --------------------------------------
Draxis DAHI Adjustments Note Consolidated
---------- --------- ------------ ------ --------------
<S> <C> <C> <C> <C> <C>
SALES $ 7,025 $ 97 $ (97) (G) $ 7,025
INTEREST INCOME 771 60 (116) (H) 715
- --------------------------------------------------------------------------------------------------------------
7,796 157 7,740
- --------------------------------------------------------------------------------------------------------------
COST OF SALES, SELLING AND
ADMINISTRATION 9,214 829 (97) (G)
(170) (I) 9,776
RESEARCH AND DEVELOPMENT 647 840 - 1,487
INVESTMENT TAX CREDITS ON
RESEARCH AND DEVELOPMENT (142) - - (142)
RESEARCH AND DEVELOPMENT RECOVERED
FROM AN AFFILIATED COMPANY (34) - - (34)
DEPRECIATION AND AMORTIZATION 787 31 (32) (E) -
1,510 (C) 2,296
- --------------------------------------------------------------------------------------------------------------
10,472 1,700 13,383
- --------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (2,676) (1,543) (5,643)
- --------------------------------------------------------------------------------------------------------------
GAIN ON SALE OF SECURITIES 109 - 109
- --------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE - 116 (116) (H) -
- --------------------------------------------------------------------------------------------------------------
OTHER INCOME 6,002 1,055 (639) (E) -
(170) (I) 6,248
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND SHARE OF NET DEVELOPMENT
STAGE COST OF AFFILIATED COMPANIES 3,435 (604) 714
- --------------------------------------------------------------------------------------------------------------
INCOME TAXES
Current 1,832 - - 1,832
Deferred (1,439) - - (1,439)
- --------------------------------------------------------------------------------------------------------------
393 - - 393
- --------------------------------------------------------------------------------------------------------------
EQUITY SHARE OF NET DEVELOPMENT
STAGE COSTS OF AFFILIATED
COMPANIES (1,177) - 1,177 (J) -
- --------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE YEAR $ 1,865 $ (604) $ 321
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ 0.01
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 26,217
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-34
<PAGE>
DRAXIS HEALTH INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS OF CDN. DOLLARS EXCEPT PER SHARE AMOUNTS - UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1995
--------------------------------------------------------------------
Actual Pro forma
---------------------- --------------------------------------
Draxis DAHI Adjustments Note Consolidated
---------- --------- ------------ ------ --------------
<S> <C> <C> <C> <C> <C>
SALES $ 15,434 $ - $ - $ 15,434
INTEREST INCOME 1,197 108 (334) (H) 971
- --------------------------------------------------------------------------------------------------------------
16,631 108 16,405
- --------------------------------------------------------------------------------------------------------------
COST OF SALES, SELLING AND
ADMINISTRATION 13,328 1,501 - 14,829
RESEARCH AND DEVELOPMENT 2,318 1,922 - 4,240
INVESTMENT TAX CREDITS ON
RESEARCH AND DEVELOPMENT (484) - - (484)
RESEARCH AND DEVELOPMENT RECOVERED
FROM AN AFFILIATED COMPANY (381) - - (381)
DEPRECIATION AND AMORTIZATION 1,285 180 3,020 (C) 4,485
- --------------------------------------------------------------------------------------------------------------
16,066 3,603 22,689
- --------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS 565 (3,495) - (6,284)
- --------------------------------------------------------------------------------------------------------------
GAIN ON SALE OF SECURITIES 549 - - 549
- --------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE - 394 334 (H) 60
- --------------------------------------------------------------------------------------------------------------
OTHER INCOME 4,900 277 - 5,177
- --------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
AND SHARE OF NET DEVELOPMENT
STAGE COST OF AFFILIATED COMPANIES 6,014 (3,612) - (618)
- --------------------------------------------------------------------------------------------------------------
INCOME TAXES
Current 1,335 - - 1,335
Deferred 729 - - 729
- --------------------------------------------------------------------------------------------------------------
2,064 - - 2,064
- --------------------------------------------------------------------------------------------------------------
EQUITY SHARE OF NET DEVELOPMENT
STAGE COSTS OF AFFILIATED
COMPANIES (1,533) - 577 (J) (956)
- --------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE YEAR $ 2,417 $ (3,612) $ (3,638)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE $ (0.14)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 25,776
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-35
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
JUNE 30, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS OF CDN. DOLLARS EXCEPT PER SHARE AMOUNTS - UNAUDITED)
- -------------------------------------------------------------------------------
(a) The unaudited pro forma consolidated balance sheet as at June 30, 1996
combines the financial position of Draxis Health Inc. (Draxis), with
Deprenyl Animal Health Inc. (DAHI), and reflects the proposed transaction
as if it had occurred on June 30, 1996.
The pro forma income statement for the year ended December 31, 1995
includes the results of Draxis for the year ended December 31, 1995 and
DAHI for the year ended December 31, 1995. The pro forma income statement
for the six months ended June 30, 1996 includes the unaudited results of
Draxis and DAHI for the six months ended June 30, 1996. The pro forma
income statements have been prepared assuming that the proposed transaction
had occurred on January 1, 1995.
The pro forma consolidated income statements may not necessarily be
indicative of the results which would have been achieved if the acquisition
had occurred on the dates noted above.
The balance sheet of DAHI as at June 30, 1996 has been translated into
Canadian dollars at the exchange rate of U.S.$1.00 = Cdn.$1.3637. The
income statement of DAHI for the year ended December 31, 1995 and the six
months ended June 30, 1996 have been translated at an average rate of
U.S.$1.00 = Cdn. 1.3726.
(b) The purchase price is based on Draxis issuing 5,718,449 shares, to
shareholders of DAHI other than Draxis, at a price of $4.75 (June 30, 1996
market price) per share plus expenses, estimated to be $1,500.
The aggregate purchase price exceeds the net fair value of the identifiable
assets by $30,204. The amount has been shown as an increase in licenses
and deferred charges as follows:
Deferred development expense $ 8,075
Licenses 22,129
----------
$ 30,204
(c) To account for the amortization of licenses and deferred charges arising on
the acquisition of DAHI to be amortized over a 10 year period:
Six months ended June 30, 1996 $ 1,510
Year ended December 31, 1995 $ 3,020
(d) To account for the elimination of the intercompany loans which would be
required upon consolidation of Draxis and DAHI.
(e) To account for the elimination of the capitalized Anipryl license purchased
by Draxis from DAHI and its related accumulated amortization.
(f) To account for the elimination of DAHI shareholders' equity as would be
required upon consolidation.
F-36
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
JUNE 30, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS OF CDN. DOLLARS EXCEPT PER SHARE AMOUNTS - UNAUDITED)
- -------------------------------------------------------------------------------
(g) To account for the elimination of intercompany sales of between Draxis and
DAHI.
(h) To account for the elimination of intercompany interest related to the
outstanding loans.
(i) To account for the elimination of the marketing expenses which were
reimbursed by Draxis to DAHI in connection with the acquisition of the
Anipryl license.
(j) To account for the elimination of the equity share of net development stage
expenses recognized by Draxis.
(k) United States Generally Accepted Accounting Principles
<TABLE>
<CAPTION>
SIX MONTHS
ENDED Year ended
JUNE 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
Consolidated pro forma net income (loss)
as reported under Canadian GAAP $ 321 $ (3,638)
---------------------------------------------------------------------------------------
Adjusted to increase (decrease) reported
consolidated pro forma net income:
Amortization of technical assistance
costs 60 120
Increase in gain on sale of shares in
affiliated company under U.S. GAAP 4,097 -
Elimination of gain on dilution of
investment in affiliated companies - (1,833)
Elimination of gain on sale of option
in affiliated company - (3,067)
Amortization of deferred development
expenses and license 1,510 3,020
Elimination of deferred expenses and
license - (30,204)
(Increase) reduction in income tax
expense due to (increase) reduction
in net income from Canadian to U.S.
GAAP reconciling items (1,185) 1,332
---------------------------------------------------------------------------------------
4,482 (30,632)
---------------------------------------------------------------------------------------
As adjusted under U.S. GAAP $ 4,803 $ (34,270)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Earnings (loss) per share - U.S. GAAP $ 0.20 $ (1.68)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Average common shares and common share
equivalents - U.S. GAAP 23,940 20,424
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
F-37
<PAGE>
DRAXIS HEALTH INC.
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
JUNE 30, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS OF CDN. DOLLARS EXCEPT PER SHARE AMOUNTS - UNAUDITED)
- -------------------------------------------------------------------------------
(k) United States Generally Accepted Accounting Principles (continued)
U.S. GAAP CONSOLIDATED PRO FORMA BALANCE SHEET AS AT JUNE 30, 1996
<TABLE>
<CAPTION>
Pro forma U.S. GAAP Purchase Price U.S. GAAP
Draxis Adjustments Adjustments Note Consolidated
--------- ----------- -------------- ---- ------------
<S> <C> <C> <C> <C> <C>
ASSETS $ 75,566 $ (30,204) (I)
$ (900) (II)
(658) (III) $ 43,804
---------------------------------------------------------------------------------------------------
$ 75,566 $ (1,558) $ (30,204) $ 43,804
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
LIABILITIES $ 3,258 $ 3,258
DEFERRED INCOME TAXES 360 360
---------------------------------------------------------------------------------------------------
3,618 3,618
SHAREHOLDERS' EQUITY 71,948 (1,558) (30,204) 40,186
---------------------------------------------------------------------------------------------------
$ 75,566 $ (1,558) $ (30,204) $ 43,804
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
i) Under U.S. GAAP the purchase price discrepancy allocated to
licenses for which marketing approval has not yet been received,
and deferred development expenses would be expensed on
acquisition.
ii) Elimination of the carrying value of technical assistance.
iii) Reduction in the carrying value of investment in DAHI.
REFER TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR EXPLANATIONS OF
GAAP DIFFERENCES.
F-38
<PAGE>
A-1
APPROVALS
The contents and the sending of this Joint Management Proxy Statement-
Prospectus have been approved by the Board of Directors of DAHI Missouri, DAHI
Louisiana and Draxis.
/s/ David R. Stevens /s/ Jacqueline H.R. Le Saux
David R. Stevens Jacqueline H.R. Le Saux
President and Chief Executive Officer Vice-President, Corporate
Development & Secretary
Deprenyl Animal Health, Inc.,
a Missouri corporation Draxis Health Inc.
October 15, 1996 October 15, 1996
Overland Park, Kansas Mississauga, Ontario
/s/ David R. Stevens
David R. Stevens
President and Chief
Executive Officer
Deprenyl Animal Health, Inc.,
a Louisiana corporation
October 15, 1996
Overland Park, Kansas
<PAGE>
APPENDIX A
SPECIAL RESOLUTION OF THE SHAREHOLDERS OF
DEPRENYL ANIMAL HEALTH, INC., A MISSOURI CORPORATION
RESOLVED AS A SPECIAL RESOLUTION THAT:
1. The state of incorporation of the Corporation be changed from the State of
Missouri to the State of Louisiana and that a Plan of Merger attached as
Appendix D to the Joint Management Proxy Statement-Prospectus dated
October 15, 1996 and providing for the merger of the Corporation into
Deprenyl Animal Health, Inc., a Louisiana corporation, which is a wholly-
owned subsidiary of the Corporation, be approved and adopted.
2. Any director or officer of the Corporation is authorized and empowered,
acting for, in the name of and on behalf of the Corporation, to execute or
cause to be executed under the seal of the Corporation or otherwise, and to
deliver or cause to be delivered, all documents and instruments, and to do
or cause to be done all acts and things, as in the opinion of such director
or officer of the Corporation may be necessary or desirable in order to
fulfil the intent of the foregoing including, without limitation, the
filing of the Plan of Merger with the appropriate authorities in the State
of Missouri and the State of Louisiana.
<PAGE>
APPENDIX B
SPECIAL RESOLUTION OF THE SOLE SHAREHOLDER OF
DEPRENYL ANIMAL HEALTH, INC., A LOUISIANA CORPORATION
RESOLVED AS A SPECIAL RESOLUTION THAT:
1. A plan of share exchange, substantially on the terms and conditions of the
draft Plan of Share Exchange attached as Appendix E to the Joint Management
Proxy Statement-Prospectus dated October 15, 1996, is approved, and any
director or officer of the Corporation is authorized for and on behalf of
the Corporation to execute and deliver such Plan of Share Exchange, with
such changes as such director or officer may approve, such approval to be
conclusively evidenced by the execution and delivery of the Plan of Share
Exchange.
2. Any director or officer of the Corporation is authorized and empowered,
acting for, in the name of and on behalf of the Corporation, to execute or
cause to be executed under the seal of the Corporation or otherwise, and to
deliver or cause to be delivered, all documents and instruments, and to do
or cause to be done all acts and things, as in the opinion of such director
or officer of the Corporation may be necessary or desirable in order to
fulfil the intent of the foregoing including, without limitation, the
filing of the Articles of Share Exchange with the Secretary of State of the
State of Louisiana.
<PAGE>
APPENDIX C
RESOLUTIONS OF THE SHAREHOLDERS OF
DRAXIS HEALTH INC.
RESOLVED THAT:
1. Up to 5,725,188 common shares of the Corporation be issued to holders of
common stock in Deprenyl Animal Health, Inc., a Louisiana corporation
("DAHI Louisiana"), in connection with a Plan of Share Exchange pursuant to
which, among other things, each issued and outstanding share of common
stock of DAHI Louisiana will be mandatorily exchanged for 1.35 common
shares of the Corporation (the "Share Exchange Plan"), a form of which is
attached as Appendix E to the Joint Management Proxy Statement-Prospectus
dated October 15, 1996.
2. The Stock Option Plan of the Corporation (the "Plan") be changed to
provide, in connection with the Share Exchange Plan, that the maximum
number of common shares of the Corporation that may be issued under the
Plan be increased from 2,500,000 to 4,500,000.
3. Any director or officer of the Corporation is authorized and empowered,
acting for, in the name of and on behalf of the Corporation, to execute or
cause to be executed under the seal of the Corporation or otherwise, and to
deliver or cause to be delivered, all documents and instruments, and to do
or cause to be done all acts and things, as in the opinion of such director
or officer of the Corporation may be necessary or desirable in order to
fulfil the intent of the foregoing.
<PAGE>
APPENDIX D
PLAN OF MERGER
OF
DEPRENYL ANIMAL HEALTH, INC.,
A MISSOURI CORPORATION
INTO
DEPRENYL ANIMAL HEALTH, INC.
A LOUISIANA CORPORATION
This Plan of Merger (the "Merger Agreement") is dated as of the _______ day
of _________________, 1996, between Deprenyl Animal Health, Inc., a Missouri
corporation (hereinafter sometimes called "Merging Corporation") and Deprenyl
Animal Health, Inc., a Louisiana corporation (hereinafter sometimes called
"Surviving Corporation"), Merging Corporation and Surviving Corporation being
hereinafter sometimes together called the "Constituent Corporations".
RECITALS
A. Merging Corporation is a corporation organized and existing under the
laws of the State of Missouri. Merging Corporation owns all of the issued and
outstanding shares of Surviving Corporation.
B. Surviving Corporation is a corporation organized and existing under
the laws of the State of Louisiana. Surviving Corporation is a wholly-owned
subsidiary of Merging Corporation.
C. The aggregate number of shares that Merging Corporation is authorized
to issue is 20,000,000 shares of no par value Common Stock (the "DAHI Missouri
Common Stock"), of which - shares of DAHI Missouri Common Stock are issued and
outstanding and entitled to vote.
D. The aggregate number of shares that Surviving Corporation is
authorized to issue is 20,000,000 shares of no par value Common Stock (the "DAHI
Louisiana Common Stock") of which - shares of DAHI Louisiana Common Stock are
issued and outstanding and registered in the name of Merging Corporation.
E. The Board of Directors of each of the respective Constituent
Corporations deems it advisable for the welfare and best interests of said
corporations and for the best interests of the respective shareholders of said
corporations that Merging Corporation be merged with and into Surviving
Corporation on the terms and conditions hereinafter set forth in accordance with
the provisions of the laws of the States of Missouri and Louisiana, and each
such Board of Directors has duly approved this Merger Agreement.
<PAGE>
- 2 -
AGREEMENT
Therefore, the parties hereto, subject to the approval of the shareholders
of the Constituent Corporations as required by law, in consideration of the
premises and of the mutual covenants and agreements contained herein and of the
benefits to accrue to the parties hereto, have agreed and do hereby agree that
Merging Corporation and Surviving Corporation be merged (the "Merger") into a
single corporation, which shall be Surviving Corporation, and do hereby agree,
prescribe, and set forth the terms and conditions of the Merger and the mode of
carrying the same into effect.
ARTICLE I
MERGER AND NAME OF SURVIVING CORPORATION
Merging Corporation shall be merged into Surviving Corporation and, upon
the "Effective Time of the Merger" as defined in Article IV, the separate
existence of Merging Corporation shall cease, except to the extent provided by
law in the case of a corporation after its merger into another corporation; and
Surviving Corporation shall continue under the laws of the State of Louisiana
under the name Deprenyl Animal Health, Inc.
ARTICLE II
ARTICLES OF INCORPORATION AND BYLAWS
OF SURVIVING CORPORATION
The Articles of Incorporation and the bylaws of Surviving Corporation, as
presently constituted, shall be and continue to be the Articles of Incorporation
and bylaws of the Surviving Corporation until the same shall be amended and
changed as provided by law. The directors and board of directors of the Merging
Corporation shall continue in office until their successors are duly elected and
qualified under the provisions of the by-laws of the Surviving Corporation.
ARTICLE III
MANNER OF CONVERSION OF SHARES
The manner and basis of converting the shares of the Constituent
Corporations into shares of Surviving Corporation shall be as follows:
1. All shares of DAHI Louisiana Common Stock issued and outstanding and
held by Merging Corporation immediately prior to the Effective Time of the
Merger shall be cancelled and cease to be outstanding.
<PAGE>
- 3 -
2. Shares of DAHI Missouri Common Stock issued and outstanding and held
by stockholders of Merging Corporation (the "Dissenting Shareholders") who
exercise their dissenters' rights under Section 351.455 of the Missouri General
and Business Corporation Law of Missouri (the "MISSOURI ACT") shall not be
converted into or represent a right to receive the merger consideration pursuant
to Section 3 of Article III, but the Dissenting Shareholders shall be entitled
only to such rights as are granted by Section 351.455 of the Missouri Act.
3. Each share of DAHI Missouri Common Stock issued and outstanding and
held by the stockholders of Merging Corporation other than Dissenting
Shareholders immediately prior to the Effective Time of the Merger, shall be
converted into one share of DAHI Louisiana Common Stock so that immediately
after the Effective Time of the Merger no shares of DAHI Missouri Common Stock
shall be outstanding and the number of shares of DAHI Louisiana Common Stock
held by each person who was a stockholder of Merging Corporation other than a
Dissenting Shareholder shall be equal to the number of shares of DAHI Missouri
Common Stock owned by such person immediately prior to the Effective Time of the
Merger, and the pro rata amount of the total outstanding shares of DAHI
Louisiana Common Stock held by each such person immediately after the Effective
Time of the Merger shall be equal to the pro rata amount of the total shares of
DAHI Missouri Common Stock held by that person immediately prior to the
Effective Time of the Merger, except as such pro rata amount may be affected by
the fact that Dissenting Shareholders will not own shares of DAHI Louisiana
Common Stock after the Effective Time of the Merger.
ARTICLE IV
SUBMISSION TO STOCKHOLDERS AND EFFECTIVENESS
1. This Merger Agreement shall be submitted for consideration and vote by
the stockholders of Merging Corporation and the sole stockholder of Surviving
Corporation as provided by the laws of the States of Missouri and Louisiana.
2. The sole stockholder of Surviving Corporation may, in its discretion,
grant to the stockholders of Merging Corporation proxies to vote the sole
stockholder's shares of DAHI Louisiana Common Stock.
3. If adopted by the stockholders of the Constituent Corporations, then
(a) Articles of Merger, sufficient under the laws of the State of Missouri for
filing, and (b) a certificate of merger, sufficient under the laws of the State
of Louisiana, shall be delivered to the Secretary of State of the State of
Louisiana for filing, all in accordance with the applicable provisions of the
laws of each such state, and the officers of each of the Constituent
Corporations shall execute all such other documents and shall take all such
other actions as may be necessary to make this Merger Agreement effective.
<PAGE>
- 4 -
4. This Merger is of a parent corporation domiciled in Missouri into a
wholly-owned subsidiary domiciled in Louisiana. This Merger is being effected
under the merger provisions of (a) the Missouri Act, including without
limitation Section 351.458, and (b) the Louisiana Business Corporation Law
including without limitation La. R.S. 12:112G.
5. The Effective Time of the Merger shall be the close of business on the
date this Merger Agreement, as approved by the stockholders of the Constituent
Corporations, is filed with the Louisiana Secretary of State.
ARTICLE V
TRANSFER OF ASSETS AND LIABILITIES
At the Effective Time of the Merger:
1. The separate existence of Merging Corporation shall cease, and the
corporate existence and identity of Surviving Corporation shall continue as the
Surviving Corporation.
2. Surviving Corporation shall have the rights, privileges, immunities
and powers, and shall be subject to all of the duties and liabilities, of a
corporation organized under the Louisiana Business Corporation Law.
3. Surviving Corporation shall thereupon and thereafter possess all the
rights, privileges, immunities, and franchises, of a public as well as of a
private nature, of each of the Constituent Corporations; and all property, real,
personal, and mixed, and all debts due on whatever account, including
subscriptions to shares, and all other choses in action, and all and every other
interest, of or belonging to or due to each of the Constituent Corporations,
shall be taken and deemed to be transferred to and vested in Surviving
Corporation without further act or deed. The officers and board of directors of
the Constituent Corporations are authorized to execute all deeds, assignments
and documents of every nature which may be needed to effect a full and complete
transfer of ownership.
4. Surviving Corporation shall thenceforth be responsible and liable for
all liabilities and obligations of each of the Constituent Corporations, and any
claim existing or action or proceeding pending by or against either of the
Constituent Corporations may be prosecuted as if such Merger had not taken place
or Surviving Corporation may be substituted in its place. Neither the rights of
creditors nor liens upon the property of either of the Constituent Corporations
shall be impaired by the Merger.
<PAGE>
- 5 -
ARTICLE VI
COVENANTS OF SURVIVING CORPORATION
1. Surviving Corporation agrees that from and after the Effective Time of
the Merger, Surviving Corporation may be served with process in Missouri in any
proceeding based upon any cause of action against Merging Corporation arising in
Missouri prior to the Effective Date of the Merger and in any proceeding for the
enforcement of the rights of a dissenting shareholder of Merging Corporation
against the Surviving Corporation, if any such rights exist, and Surviving
Corporation shall irrevocably appoint the Secretary of State of the State of
Missouri as its agent to accept such service of process.
2. The Secretary of State of the State of Missouri shall be and hereby is
irrevocably appointed as the agent of the Surviving Corporation to accept
service of process in any such proceeding; the address to which the service of
process in any such proceeding shall be mailed in 643 Magazine Street, New
Orleans, Louisiana 70130.
3. Surviving Corporation agrees that it will promptly pay to the
Dissenting Shareholders the amount, if any, to which they shall be entitled
under applicable provisions of the Missouri Act dealing with the rights of
dissenting shareholders.
ARTICLE VII
ABANDONMENT
Anything herein to the contrary notwithstanding, this Merger Agreement and
the Merger contemplated hereby may be terminated at any time before the
Effective Time of the Merger, whether before or after approval of this Merger
Agreement by the stockholders of the respective Constituent Corporations, upon
the mutual consent of the Constituent Corporations.
IN WITNESS WHEREOF, the parties hereto have caused this Merger Agreement to
be signed in their respective corporate names by a majority of the members of
the Board of Directors of each corporation, on the day, month, and year first
above written.
<PAGE>
- 6 -
DEPRENYL ANIMAL HEALTH, DEPRENYL ANIMAL HEALTH,
INC., a Louisiana corporation INC., a Missouri corporation
_________________________________ ____________________________
_________________________________ ____________________________
_________________________________ ____________________________
_________________________________ ____________________________
_________________________________ ____________________________
_________________________________ ____________________________
<PAGE>
- 7 -
IN WITNESS WHEREOF, Deprenyl Animal Health, Inc, a Louisiana corporation,
has caused this Plan of Merger to be signed and acknowledged by its President
and Secretary.
DEPRENYL ANIMAL HEALTH, INC., a Louisiana
corporation
By: ________________________________________
David R. Stevens, President
By: ________________________________________
Arthur E. Fillmore, II, Secretary
STATE OF MISSOURI
COUNTY OF ____________________
Be it remembered that on this _____________ day of __________________,
1996, personally came before the undersigned Notary Public in and for the County
and State aforesaid, David R. Stevens, the President of Deprenyl Animal Health,
Inc., a corporation organized under the laws of the State of Louisiana and one
of the corporations described in the foregoing instrument, and that he, as such
President, duly executed said instrument before me and acknowledged the said
instrument to be his true act and deed and the act, deed and agreement of said
corporation, and that the facts stated therein are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of office on the
day and year aforesaid.
__________________________________________________
Notary Public
<PAGE>
- 8 -
IN WITNESS WHEREOF, Deprenyl Animal Health, Inc., a Missouri corporation,
has caused this Plan of Merger to be signed and acknowledged by its President
and Secretary. The Merger has been approved by the affirmative vote of at least
two-thirds of the outstanding shares of Deprenyl Animal Health, Inc., a Missouri
corporation, at a meeting of such shareholders duly called and held on November
26, 1996.
DEPRENYL ANIMAL HEALTH, INC., a Missouri
corporation
By: _____________________________________________
David R. Stevens, President
By: _____________________________________________
Arthur E. Fillmore, II, Secretary
STATE OF MISSOURI
COUNTY OF _______________
Be it remembered that on this __________ day of ____________, 1996,
personally came before the undersigned Notary Public in and for the Parish and
State aforesaid, David R. Stevens, the President of Deprenyl Animal Health,
Inc., a corporation organized under the laws of the State of Missouri and one of
the corporations described in the foregoing instrument, and that he, as such
President, duly executed said instrument before me and acknowledged the said
instrument to be his true act and deed and the act, deed and agreement of said
corporation, and that the facts stated therein are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of office on this
day and year aforesaid.
_________________________________________________
Notary Public
<PAGE>
- 9 -
CERTIFICATE OF SECRETARY
OF
DEPRENYL ANIMAL HEALTH, INC.,
A LOUISIANA CORPORATION
I, Arthur E. Fillmore, II, Secretary of Deprenyl Animal Health, Inc., a
corporation organized under the laws of the State of Louisiana, do hereby
certify that the above and foregoing Plan of Merger of Deprenyl Animal Health,
Inc., a Missouri Corporation, into Deprenyl Animal Health, Inc., a Louisiana
corporation, has been signed by a majority of the Directors of Deprenyl Animal
Health, Inc., a Louisiana corporation, and approval of the Plan of Merger by the
sole stockholder of Deprenyl Animal Health, Inc., a Louisiana corporation, has
been effected by the vote of ______ votes cast in favour of the Plan of Merger,
__________ votes cast against the Plan of Merger, and ______ votes abstaining or
not being cast, which constitutes the affirmative vote of more than two-thirds
of the voting power present at a meeting for the stockholder of Deprenyl Animal
Health, Inc., a Louisiana corporation, held on __________, 1996.
IN WITNESS WHEREOF, I have executed this Certificate effective the________
day of _________________, 1996.
__________________________________________________
Arthur E. Fillmore, II, Secretary
<PAGE>
- 10 -
CERTIFICATE OF SECRETARY
OF
DEPRENYL ANIMAL HEALTH, INC.,
A MISSOURI CORPORATION
I, Arthur E. Fillmore, II, Secretary of Deprenyl Animal Health, Inc., a
corporation organized under the laws of the State of Missouri, do hereby certify
that the above and foregoing Plan of Merger of Deprenyl Animal Health, Inc., a
Missouri corporation, into Deprenyl Animal Health, Inc., a Louisiana
corporation, has been signed by a majority of the Directors of Deprenyl Animal
Health, Inc., a Missouri corporation, and approval of the Plan of Merger by the
stockholders of Deprenyl Animal Health, Inc., a Missouri corporation, has been
effected by the vote of ______ shares in favor of the Plan of Merger, __________
shares against the Plan of Merger, and ______ shares abstaining or not being
voted on the Plan of Merger, which constitutes the affirmative vote of the
holders of more than two-thirds of the outstanding shares of common stock of
Deprenyl Animal Health, Inc., a Missouri corporation, at a meeting of the
stockholders held on ________________________, 1996.
IN WITNESS WHEREOF, I have executed this Certificate effective the
_________ day of __________________, 1996.
__________________________________________________
Arthur E. Fillmore, II, Secretary
<PAGE>
APPENDIX E
PLAN OF SHARE EXCHANGE
This Plan of Share Exchange (the "Exchange Plan"), dated as of____________,
1996, is by and between Deprenyl Animal Health, Inc., a Louisiana corporation
("DAHI Louisiana"), and Draxis Pharmaceutica Inc., a Canadian corporation
("DPI").
RECITALS
A. DAHI Louisiana is a wholly owned subsidiary of Deprenyl Animal Health,
Inc., a Missouri corporation ("DAHI Missouri") and the number of shares of DAHI
Louisiana Common Stock owned by DAHI Missouri is equal to the number of issued
and outstanding shares of DAHI Missouri Common Stock owned by shareholders of
DAHI Missouri.
B. Pursuant to the terms of the Exchange Agreement dated as of July 25,
1996, by and among Draxis Health Inc., a Canadian corporation ("Draxis"), DPI
and DAHI Missouri, each of DPI and DAHI Louisiana desire to adopt a plan of
share exchange in accordance with the provisions of Section 116 of the Louisiana
Business Corporation Law (the "Louisiana Act").
C. This Exchange Plan has been approved by the boards of directors of
each of DAHI Missouri, DAHI Louisiana, and DPI.
D. In accordance with the provisions and procedures set forth in Section
116 of the Louisiana Act, this Exchange Plan will be submitted to the
shareholders of DAHI Louisiana for approval at a special meeting of the
shareholders of DAHI Louisiana (the "DAHI Louisiana Special Meeting").
E. When the DAHI Louisiana Special Meeting is held, the sole shareholder
of record as of the "Record Date" for the DAHI Louisiana Special Meeting will be
DAHI Missouri.
F. After the DAHI Louisiana Special Meeting is held, and prior to the
Effective Date (as hereinafter defined) of this Exchange Plan, DAHI Missouri
shall merge (the "Merger") into DAHI Louisiana and DAHI Louisiana shall be the
surviving corporation.
G. As a result of the Merger, the persons who are shareholders of DAHI
Missouri immediately prior to the Merger shall become shareholders of DAHI
Louisiana, and all shares of DAHI Missouri Common Stock held by those persons
immediately prior to the Merger (other than persons who exercise dissenters'
rights under Missouri law) shall be automatically converted into an identical
number of shares of DAHI Louisiana Common Stock at the effective time of the
Merger.
<PAGE>
- 2 -
H. DAHI Missouri wishes the Exchange Plan to be approved or not approved
by the persons who are shareholders of DAHI Missouri as of the Record Date (the
"DAHI Missouri Shareholders"), who are the real parties in interest to the
Exchange Plan.
I. To permit the DAHI Missouri Shareholders to cast votes for or against
the Exchange Plan at the DAHI Louisiana Special Meeting, DAHI Missouri has
granted a proxy to each DAHI Missouri Shareholder to cast that number of votes
for or against the Exchange Plan equal to the number of shares of DAHI Missouri
Common Stock held by such DAHI Missouri Shareholder on the Record Date.
J. This Exchange Plan is subject to approval as set forth below.
AGREEMENT
NOW THEREFORE, the parties hereto agree as follows:
1. On the Effective Date, (i) each share of DAHI Louisiana Common Stock
then issued and outstanding (which shares were shares of DAHI Missouri Common
Stock prior to the Merger), other than any shares of DAHI Louisiana Common Stock
then held by DPI and its Affiliates (as such term is hereinafter defined), shall
be exchanged for 1.35 shares of Draxis no par value common stock ("Draxis Common
Stock"), and (ii) each outstanding option to purchase one share of DAHI Missouri
Common Stock shall be exchanged for an option to purchase 1.35 shares of Draxis
Common Stock. To the extent that the exchange in (i) above would result in a
fractional share of Draxis Common Stock being issued, each holder of DAHI
Louisiana Common Stock who would otherwise have been entitled to a fractional
share of Draxis Common Stock will receive a cash payment (without interest)
determined by multiplying (a) the fractional interest to which such holder would
otherwise be entitled (after taking into account all shares of DAHI Louisiana
Common Stock then held by such holder) and (b) the average of the per share
closing prices for Draxis Common Stock on the NASDAQ National Market System for
the five trading days immediately preceding the Effective Date.
2. In order for this Exchange Plan to be deemed approved by the
shareholders of DAHI Louisiana, it must be approved by the DAHI Missouri
shareholders acting pursuant to the proxies granted to them by DAHI Missouri,
and the DAHI Missouri Shareholders must vote at least two-thirds of all
outstanding shares of DAHI Louisiana Common Stock for approval of the Exchange
Plan and the DAHI Missouri Shareholders other than DPI and its Affiliates must
cast the vote of at least a majority of the outstanding shares of DAHI Louisiana
Common Stock not held by DPI or its affiliates in favor of the Exchange Plan.
3. This Exchange Plan shall take effect and the exchange contemplated
hereby shall become effective at 10:00 a.m. (Toronto time) on the date of filing
of Articles of Share Exchange with the Louisiana Secretary of State (the
"Effective Date").
<PAGE>
- 3 -
4. Upon the Effective Date, all of the DAHI Louisiana Common Stock not
then held by DPI or its Affiliates shall become the property of DPI. Share
certificates that formerly evidenced shares of DAHI Missouri Common Stock, which
shares were automatically converted into shares of DAHI Louisiana Common Stock
as a result of the Merger, shall only evidence the right of the holder thereof
to receive the consideration provided for in this Exchange Plan.
Notwithstanding anything to the contrary set forth herein, if any holders of
DAHI Missouri Common Stock exercise dissenters' rights under Missouri law in
connection with the Merger, the shares of DAHI Missouri Common Stock held by
those persons shall not be converted into shares of DAHI Louisiana Common Stock
and shall be deemed to not be outstanding (they shall instead represent merely
the right of such persons to receive the fair value of their shares as of the
day prior to the vote for the Merger) and such persons shall not be entitled to
receive any shares of Draxis Common Stock under this Exchange Plan. Share
option agreements or other documentation evidencing an option to purchase shares
of DAHI Missouri Common Stock shall only evidence the right of the holder
thereof to receive the consideration provided for in this Exchange Plan.
5. For purposes hereof, the term "Affiliate" shall mean, with respect to
any Person, any other person who controls, is controlled by, or is under common
control with such Person, and the term "Person" shall mean and include an
individual, corporation, partnership, or limited liability company.
IN WITNESS WHEREOF, this Exchange Plan is executed as of the date first set
forth above.
DEPRENYL ANIMAL HEALTH, INC.
a Louisiana corporation
By:____________________________
, President
DRAXIS PHARMACEUTICA INC.
By:____________________________
, President
<PAGE>
ARTICLES OF SHARE EXCHANGE
These Articles of Share Exchange are hereby adopted for the purpose of
effecting the acquisition of shares of Deprenyl Animal Health, Inc., a Louisiana
corporation ("DAHI Louisiana"), by Draxis Pharmaceutica Inc., a corporation
incorporated under the laws of Canada ("DPI"), in accordance with the mandatory
share exchange provisions of Section 116 of the Louisiana Business Corporation
Law (the "Louisiana Act").
WHEREAS, DAHI Louisiana is the surviving corporation of a merger (the
"Merger") of Deprenyl Animal Health, Inc., a Missouri corporation ("DAHI
Missouri"), into DAHI Louisiana, and
WHEREAS, DAHI Louisiana was created as a wholly-owned subsidiary of DAHI
Missouri for the purpose of effecting the Merger to change the state of
incorporation of DAHI Missouri, and DAHI Missouri is for all intents and
purposes the predecessor of DAHI Louisiana, and
WHEREAS, pursuant to the terms of the Exchange Agreement, dated as of July
25, 1996, by and among DAHI Missouri, DPI and Draxis Health Inc., a corporation
incorporated under the laws of Canada ("Draxis"), the Board of Directors of each
of DPI, DAHI Missouri, and DAHI Louisiana have adopted a plan of share exchange
(the "Exchange Plan") in accordance with the provisions of Section 116 of the
Louisiana Act; and
WHEREAS, in accordance with the provisions and procedures set forth in
Section 116 of the Louisiana Act, at a special meeting of the sole shareholder
of DAHI Louisiana, held on _________________, 1996, the Exchange Plan was
submitted for approval and so approved as required under the Exchange Plan,
including the favorable vote of more than two-thirds of the entire voting power
of DAHI Louisiana, and the favorable vote of a majority of all votes cast by
persons other than DPI or its Affiliates (as defined in the Exchange Plan).
NOW THEREFORE, the following information is submitted in accordance with
Subsection H of Section 116 of the Louisiana Act.
A. A true and correct copy of the Exchange Plan as adopted by the boards
of directors of DPI, DAHI Missouri, and DAHI Louisiana and approved by the
requisite vote of shares of DAHI Louisiana Common Stock is attached hereto as
Exhibit A.
B. Designation of, and number of outstanding shares, of each class of
shares included in the exchange:
Common Stock, no par value per share, of DAHI Louisiana: ____________
shares outstanding
<PAGE>
- 2 -
Common Stock, no par value per share, of Draxis: ____________ shares
outstanding
C. Number of votes entitled to be cast by each class of shares included
in the exchange:
DAHI Louisiana Common Stock:
Votes entitled to be cast by all persons: ________
Votes entitled to be cast by persons other than DPI and its
Affiliates: ________
Draxis Common Stock: no votes entitled to be cast
D. Total number of votes cast for and against the Exchange Plan by each
class entitled to vote thereon:
ALL PERSONS VOTING DAHI LOUISIANA COMMON STOCK:
Number of votes cast for the Exchange Plan: ________ votes
Number of votes cast against the Exchange Plan: ________ votes
PERSONS VOTING DAHI LOUISIANA COMMON STOCK OTHER THAN DPI AND ITS
AFFILIATES:
Number of votes cast for the Exchange Plan: ________ votes
Number of votes entitled to be cast by persons other than DPI and its
Affiliates: ________ votes
E. The number of votes cast for the Exchange Plan by each class or series
entitled to vote was sufficient for approval of the Exchange Plan by that class
or series.
IN WITNESS WHEREOF, these Articles of Share Exchange are executed this
_____ day of ____________, 1996.
DRAXIS PHARMACEUTICA INC.
By:________________________________
, President
DEPRENYL ANIMAL HEALTH, INC.,
a Louisiana corporation
By:________________________________
, President
<PAGE>
APPENDIX F
HAMBRECHT & QUIST LLC
ONE BUSH STREET
SAN FRANCISCO, CA 94104
(415)576-3300
July 25, 1996
CONFIDENTIAL
The Special Committee
Board of Directors
Deprenyl Animal Health, Inc.
10955 Lowell
Suite 710
Overland Park, KS 66210
Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the holders of the outstanding shares of common stock (the "Common Stock") of
Deprenyl Animal Health, Inc. ("DAHI" or the "Company") of the consideration to
be received by such shareholders in connection with the proposed exchange offer
of Draxis Pharmaceutical Inc. ("Merger Sub"), a wholly owned subsidiary of
Draxis Health Inc. ("Draxis"), with and into DAHI (the "Proposed Transaction")
pursuant to the Exchange Agreement to be dated as of July 25, 1996, among
Draxis, Merger Sub, and DAHI (the "Agreement").
We understand that the terms of the Agreement provide, among other things, that
each issued and outstanding share of Common Stock, other than shares held by
Draxis or its affiliates, shall be exchanged into the right to receive 1.35
shares of common stock of Draxis, as more fully set forth in the Agreement. For
purposes of this opinion, we have assumed that the Proposed Transaction will
qualify as a tax-free reorganization under the United States Internal Revenue
Code for the shareholders of the Company.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment banking
services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Special
Committee of the Board of Directors of DAHI in connection with the Proposed
Transaction, and we will receive a fee for our services, which include the
rendering of this opinion.
In connection with our review of the Proposed Transaction, and in arriving at
our opinion, we have, among other things:
SAN FRANCISCO - NEW YORK - BOSTON
MEMBERS NEW YORK STOCK EXCHANGE-AMERICAN STOCK EXCHANGE-PACIFIC STOCK EXCHANGE
<PAGE>
Special Committee of the Board of Directors
Deprenyl Animal Health, Inc.
Page 2
(i) reviewed the publicly available consolidated financial statements
of Draxis for recent years and interim periods to date and
certain other relevant financial and operating data of Draxis
(including its capital structure) made available to us from
published sources and from the internal records of Draxis;
(ii) reviewed certain internal financial and operating information,
including certain projections, relating to Draxis prepared by the
management of Draxis;
(iii) discussed the business, financial condition and prospects of
Draxis with certain of its officers;
(iv) reviewed the publicly available financial statements of DAHI for
recent years and interim periods to date and certain other
relevant financial and operating data of DAHI made available to
us from published sources and from the internal records of DAHI;
(v) reviewed certain internal financial and operating information,
including certain projections, relating to DAHI prepared by the
management of DAHI;
(vi) discussed the business, financial condition and prospects of the
DAHI with certain of its officers;
(vii) reviewed the recent reported prices and trading activity for the
common stocks of Draxis and DAHI and compared such information
and certain financial information for Draxis and DAHI with
similar information for certain other companies engaged in
businesses we consider comparable;
(viii) reviewed the financial terms, to the extent publicly available,
of certain comparable merger and acquisition transactions;
(ix) reviewed the Exchange Agreement;
(x) discussed the tax and accounting treatment of the Proposed
Transaction with Draxis and Draxis's lawyers and accountants; and
(xi) performed such other analyses and examinations and considered
such other information, financial studies, analyses and
investigations and financial, economic and market data as we
deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Draxis or DAHI considered in
connection with our review of the Proposed Transaction, and we have not assumed
any responsibility for independent verification of such information. We have
not prepared any independent valuation or appraisal of any of the assets or
liabilities of Draxis or DAHI, nor have we conducted a physical inspection of
the properties and facilities of either company. With respect to the financial
forecasts and projections made available to us and used in our analysis, we have
assumed that they reflect the best currently available estimates and judgments
of the expected future financial performance of Draxis and DAHI. For purposes
of this opinion, we have assumed that neither Draxis nor DAHI is party to any
pending transactions, including external financings, recapitalizations or
material merger
<PAGE>
Special Committee of the Board of Directors
Deprenyl Animal Health, Inc.
Page 3
discussions, other than the Proposed Transaction and those activities undertaken
in the ordinary course of conducting their respective businesses. Our opinion
is necessarily based upon market, economic, financial and other conditions as
they exist and can be evaluated as of the date of this letter and any change in
such conditions would require a reevaluation of this opinion. We express no
opinion as to the price at which Draxis common stock will trade subsequent to
the Effective Time (as defined in the Agreement). We were not requested to, and
did not, solicit indications of interest from any other parties in connection
with a possible acquisition of, or business combination with, DAHI.
It is understood that his letter is for the information of the Special Committee
of the Board of Directors only an may not be used for any other purpose without
our prior written consent; provided, however, that this letter may be reproduced
in full in the Joint Proxy Statement/Prospectus. This letter does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the Proposed Transaction.
Based upon and subject to the foregoing and after considering such other matters
as we deem relevant, we are of the opinion that as of the date hereof the
consideration to be received by the holders of the Common Stock in the Proposed
Transaction is fair to such holders from a financial point of view. We express
no opinion, however, as to the adequacy of any consideration received in the
Proposed Transaction by Draxis or any of its affiliates.
Very truly yours,
HAMBRECHT & QUIST LLC
By /s/ David G. Golden
--------------------------------
David G. Golden
Managing Director
<PAGE>
APPENDIX G
Extract From The General Business Corporations Act of Missouri
SECTION 351.455 - DISSENTER'S RIGHTS
1. If a shareholder of a corporation which is a party to a merger or
consolidation shall file with such corporation, prior to or at the meeting of
shareholders at which the plan of merger or consolidation is submitted to a
vote, a written objection to such plan of merger or consolidation, and shall not
vote in favor thereof, and such shareholder, within twenty days after the merger
or consolidation is effected, shall make written demand on the surviving or new
corporation for payment of the fair value of his shares as of the day prior to
the date on which the vote was taken approving the merger or consolidation, the
surviving or new corporation shall pay to such shareholder, upon surrender of
his certificate or certificates representing said shares, the fair value
thereof. Such demand shall state the number and class of the shares owned by
such dissenting shareholder. Any shareholder failing to make demand within the
twenty day period shall be conclusively presumed to have consented to the merger
or consolidation and shall be bound by the terms thereof.
2. If within thirty days after the date on which such merger or consolidation
was effected the value of such shares is agreed upon between the dissenting
shareholder and the surviving or new corporation, payment therefor shall be made
within ninety days after the date on which such merger or consolidation was
effected, upon the surrender of his certificate or certificates representing
said shares. Upon payment of the agreed value the dissenting shareholder shall
cease to have any interest in such shares or in the corporation.
3. If within such period of thirty days the shareholder and the surviving or
new corporation do not so agree, then the dissenting shareholder may, within
sixty days after the expiration of the thirty day period, file a petition in any
court of competent jurisdiction within the county in which the registered office
of the surviving or new corporation is situated, asking for a finding and
determination of the fair value of such shares, and shall be entitled to
judgment against the surviving or new corporation for the amount of such fair
value as of the day prior to the date on which such vote was taken approving
such merger or consolidation, together with interest thereon to the date of such
judgment. The judgment shall be payable only upon and simultaneously with the
surrender to the surviving or new corporation of the certificate or certificates
representing said shares. Upon the payment of the judgment, the dissenting
shareholder shall cease to have any interest in such shares, or in the surviving
or new corporation. Such shares may be held and disposed of by the surviving or
new corporation as it may see fit. Unless the dissenting shareholder shall file
such petition within the time herein limited, such shareholder and all persons
claiming under him shall be conclusively presumed to have approved and ratified
the merger or consolidation, and shall be bound by the terms thereof.
4. The right of a dissenting shareholder to be paid the fair value of his
shares as herein provided shall cease if and when the corporation shall abandon
the merger or consolidation.
<PAGE>
APPENDIX H
ARTICLES OF INCORPORATION
OF
DEPRENYL ANIMAL HEALTH, INC.
The undersigned, a person of the full age of majority, acting as
incorporator of a corporation under the Louisiana Business Corporation Law, does
hereby form, effective August 30, 1996, a corporation under such law and for
such purposes does hereby adopt the following Articles of Incorporation:
ARTICLE 1
The name of this corporation shall be:
Deprenyl Animal Health, Inc.
ARTICLE 2
The aggregate number, class, and par value, if any, of shares which the
corporation shall have authority to issue shall be Twenty Million (20,000,000)
shares of common stock at no par value.
ARTICLE 3
Shareholders shall have preemptive rights.
ARTICLE 4
The number of directors to constitute the Board of Directors shall be not
less than three natural persons (unless there are less than three shareholders,
in which case there need be only as many directors as there are shareholders).
Directors shall be elected for three year terms and the board of directors
shall be classified so as to have two (2) directors serving in each of three (3)
classes. The names and original terms of the first directors of this
corporation shall be set forth in this corporation's Initial Report. At the
expiration of each original term, directors or the successor nominee holding
each class of seat shall be nominated for a three (3) year term.
<PAGE>
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ARTICLE 5
The powers to make, alter, amend, or repeal the By-laws of the corporation
shall be vested in the board of directors. Any such alteration, amendment or
repeal shall be accomplished by a majority vote of the board of directors.
ARTICLE 6
The duration of the corporation is perpetual.
ARTICLE 7
The corporation is formed for the following purposes:
To engage in the development and marketing of pharmaceutical and related
animal health products;
To conduct the business of such and to do all things necessary and
incidental to the furtherance, promotion and operation of such enterprise, at
one or more locations;
To buy or otherwise acquire, to won, to hold, to lease, to sell or
otherwise dispose of, to mortgage or otherwise encumber, real and personal
property of all kinds, and to operate, manage and maintain the same;
To borrow money and for such purposes to execute notes, bonds or any other
form of evidence of indebtedness, and to secure the payment of same by mortgage,
deed of trust, security agreement or other form of encumbrance, pledge or other
form of hypothecation;
To purchase, acquire, own, hold, sell, assign, transfer or otherwise
dispose of, mortgage, pledge or otherwise encounter, shares of stock of this
corporation or any other corporation or corporations in this state, or any other
state, parish/county, nation or government, or any interest therein, to exercise
all rights, powers and privileges of ownership pertaining thereto;
To develop, acquire, own, hold, buy, sell, transfer and otherwise dispose
of patents and patent rights, trade-marks and trade names, copyrights, licenses,
franchises, permits or other evidences of right;
To establish pension plans, profit-sharing plans, stock bonus plans, stock
option plans and other incentive plans for any or all of its directors, officers
and employees; and
To do all things necessary and incidental to the furtherance, promotion,
conduction and operation of such enterprises, at one or more locations, and to
have and exercise all of the
<PAGE>
- 3 -
powers conferred by the laws of the State of Louisiana upon corporations formed
under the Louisiana Business Corporation Law and all acts amendatory thereof and
supplemental thereto, it being expressly provided that the foregoing enumeration
of powers shall be construed both as objectives and powers to be in furtherance
of, and no in limitation of, powers conferred by the laws of the State of
Louisiana, and the foregoing enumeration of specific powers shall not be held to
alter or restrict in any manner the general powers of this corporation.
ARTICLE 8
(a) 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,
suite 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 he is or was a director, officer, employee or agent of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he 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
reasonably cause to believe his 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 he
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 his conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a party or is
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 he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees and amounts paid in
settlement actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit if he acted in good faith and in a
manner he 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 for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the court in which the action or
suit was brought determines upon application that despite the adjudication of
liability and in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for such expenses which the court shall
deem proper.
<PAGE>
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(c) To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Paragraphs (a) and (b) of this
Article, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with the action, suit or proceeding.
ARTICLE 9
The full name and street address of the incorporator are:
Vivian B. Crane
643 Magazine Street
New Orleans, Louisiana 70130
Thus executed on August 30, 1996.
["Vivian B. Crane"]
-----------------------------
Vivian B. Crane, Incorporator
<PAGE>
ACKNOWLEDGEMENT
STATE OF LOUISIANA
PARISH OF ORLEANS
BE IT KNOWN, that on this _________ day of ____________, 1996, before me,
the undersigned Notary Public, duly commissioned, qualified and sworn within and
for the State and Parish aforesaid, personally came and appeared Vivian B.
Crane, to me know to be the identical person who executed the above and
foregoing instrument, who declared and acknowledged to me, Notary, in the
presence of the undersigned competent witnesses, that she executed the above and
foregoing instrument of her own free will, as her own act and deed, for the
uses, purposes and benefits therein expressed.
WITNESSES:
______________________________ _______________________________
Vivian B. Crane
Incorporator
______________________________
________________________
NOTARY PUBLIC
<PAGE>
INITIAL REPORT
OF
DEPRENYL ANIMAL HEALTH, INC.
1 - The location and municipal address of the corporation's registered
office is:
643 Magazine Street
New Orleans, louisiana 70130
2 - The name and municipal address of the corporation's registered
agent is:
James M. Fantaci
643 Magazine Street
New Orleans, Louisiana 70130.
3 - The names, municipal addresses, and term of office of the first
directors of the corporation are as follows:
The directors whose term ends in 1997 are: David R. Stevens
Martin Barkin
The directors whose term ends in 1998 are: Stewart Saxe
George Darnell
The directors whose term ends in 1999 are: Charles L. Wood
Samuel W. Sarick
--------------------------------------
VIVIAN B. CRANE, INCORPORATOR
<PAGE>
AFFIDAVIT OF ACCEPTANCE OF APPOINTMENT
BY DESIGNATED REGISTERED AGENT
STATE OF LOUISIANA
PARISH OF ORLEANS
On this ____ day of ____________, 1996, before me, a Notary Public in and for
the State and Parish aforesaid, personally came and appeared James M. Fantaci,
who is to me known to be the person, and who, being duly sworn, acknowledged to
me that he does hereby accept appointment as the Registered Agent of Deprenyl
Animal Health, Inc.
----------------------------------
REGISTERED AGENT
SWORN TO AND SUBSCRIBED BEFORE ME ON THE DAY, MONTH, AND YEAR FIRST ABOVE SET
FORTH
---------------------
NOTARY PUBLIC
<PAGE>
WRITTEN CONSENT
OF THE INCORPORATOR OF
DEPRENYL ANIMAL HEALTH, INC.
I, the undersigned, being the sole incorporator of Deprenyl Animal Health,
Inc., a Louisiana corporation, do hereby consent to the adoption of the
following resolutions, effective immediately:
RESOLVED, that 643 Magazine Street, New Orleans, Louisiana
70130, be and it is hereby designated as the registered
office of the corporation.
FURTHER RESOLVED, that James M. Fantaci, 643 Magazine
Street, New Orleans, Louisiana 70130, be and he is hereby
designated as the registered agent for the service of legal
process on the corporation.
FURTHER RESOLVED, that the following persons be and they are
hereby elected the first directors of the corporation to
serve for the term listed below, and that the management of
the affairs of the corporation be henceforth committed to
them and their successors in office:
Term ending in 1997: David R. Stevens
Martin Barkin
Term ending in 1998: Stewart Saxe
George Darnell
Term ending in 1999: Samuel W. Sarick
Charles L. Wood
FURTHER RESOLVED, that the incorporator of the corporation
execute and file an initial report on its behalf with the
Secretary of State of Louisiana, certifying the contents of
the foregoing resolutions.
Thus done effective the ____ day of ________________________, 1996.
-----------------------------
VIVIAN B. CRANE, INCORPORATOR
<PAGE>
SCHEDULE I
BYLAWS OF
DEPRENYL ANIMAL HEALTH, INC.,
A LOUISIANA CORPORATION
ARTICLE I
SECTION 1.1. All meetings of the shareholders of the corporation may be
held in the principal office or place of business of the corporation or in any
other location.
SECTION 1.2. The annual meeting of shareholders shall be held on the first
Monday of May of each year or, if a legal holiday, the day thereafter. Notice
of the meeting shall be given as provided by law. However, notice may be waived
by appropriate action of the shareholders.
ARTICLE II
SECTION 2.1. The Board of Directors shall consist of six (6) persons or as
otherwise determined, from time to time, by the Board of Directors.
ARTICLE III
SECTION 3.1. The officers of the corporation shall consist of a Chairman
of the Board, a President and a Secretary. Other officers may be appointed by
the Board of Directors.
SECTION 3.2. The salaries and other compensation of all officers and
employees may, by order of the Board of Directors, be fixed by the President.
SECTION 3.3. An annual meeting of Directors shall be held each year
immediately following the annual meeting of shareholders.
ARTICLE IV
SECTION 4.1. The duties of the officers of the corporation shall be such
as are usually entrusted upon such officers, or such as may be required by law,
and such as may be assigned to such officers upon determination by resolution of
the Board of Directors.
ARTICLE V
SECTION 5.1. The corporate seal of the corporation shall be a circular
seal, with the name of the company in the outer circle, and the words "corporate
seal" in the center. The form of the seal may be changed from time to time by
resolution of the Board of Directors.
<PAGE>
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ARTICLE VI
SECTION 6.1. Certificates of the capital stock, signed by the President
and the Secretary, sealed with the seal of the corporation, and in the form
approved by the Board of Directors and in accordance with the law, shall be
issued by the corporation to the holders of its capital stock.
SECTION 6.2. Transfer of the capital stock shall be made either in person
or by attorney only on the books of the corporation in a transfer book kept for
that purpose and upon surrender of the old certificates.
SECTION 6.3. Each shareholder shall be entitled to one (1) vote for every
share owned by him or her, appearing of record on the books of the corporation,
as of such date as may be designated by the Board of Directors, at any election
or any annual or special meeting of the shareholders. A shareholder may vote
either in person or by proxy executed in writing by the shareholder or by his
duly-authorized attorney-in-fact.
SECTION 6.4. Any shareholder claiming a certificate of stock to have been
lost or destroyed and requesting a new certificate to be issued in lieu thereof
shall make an affidavit reciting the circumstances attending such loss or
destruction, and thereupon, the Board of Directors may cause a new certificate
to be issued upon such terms and conditions and upon receiving such indemnity or
security as in the judgment of the Board of Directors shall fully protect the
corporation.
ARTICLE VII
SECTION 7.1. The fiscal year of the corporation shall be for such period
of twelve (12) months as the Board of Directors shall determine.
ARTICLE VIII
SECTION 8.1. All checks, drafts, or other orders for the payment of money,
notes, or other evidences of indebtedness issued in the name of the corporation
shall be signed by the President in such manner as shall from time to time be
determined by resolution of the board of Directors.
SECTION 8.2. All funds of the corporation not otherwise employed shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies, or other depositories as the President may select.
ARTICLE IX
SECTION 9.1. Any action required by law to be taken at a meeting of
shareholders or the directors of the corporation or any which may be taken at a
meeting of the shareholders or the directors may be taken without a meeting if
consents in writing setting forth the action so taken
<PAGE>
- 3 -
shall be signed by all of the shareholders and directors entitled to vote with
respect to the subject matter hereof, and such consents shall have the same
force and effect as a unanimous vote of the shareholders or directors at a
meeting duly held. The secretary shall file such consents with the minutes of
the meetings of the shareholders and the directors.
ARTICLE X
SECTION 10.1. The power to make, alter, amend, or repeal these Bylaws is
vested in the Board of Directors.
The foregoing Bylaws were duly approved and adopted by the shareholders of
the corporation the _______ day of __________________, 1996.
-----------------------------------
President
Attested to:
- -----------------------------------
Secretary
<PAGE>
APPENDIX J
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
DEPRENYL ANIMAL HEALTH, INC.
(Exact name of registrant as specified in its charter)
MISSOURI 36-3716293
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10955 Lowell, Suite 710
Overland Park, Kansas 66210
(Address of principal executive offices) (Zip Code)
Commission File Number 0-19059
Registrant's telephone number, including area code: (913) 338-2120
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock
---------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 or Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the closing price of such stock as of
March 22, 1996 was $10,446,825.
The number of shares of common stock of the registrant as of March 22,
1996 was 7,502,674.
<PAGE>
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference to this Report are:
(1) Annual Report to Shareholders for the year ended December 31, 1995
PART II, Items 5 through 8;
(2) Proxy Statement for the 1996 Annual Meeting of Shareholders
PART III, Items 10 through 13.
PART I
ITEM 1. BUSINESS
The Company was incorporated by Certificate of Incorporation dated July
19, 1990, under the laws of the State of Missouri under the name DEPL Animal
Food Supplements, Inc. The Company's name was changed to Deprenyl Animal
Health, Inc. on November 6, 1990. Immediately prior to November 29, 1990,
the Company was a wholly-owned subsidiary of DAH (Canada), a Canadian
corporation located in Mississauga, Ontario. DAH (Canada) is a wholly-owned
subsidiary of Draxis Health Inc. ("Draxis"), also located in Mississauga.
The Company has financed its development stage operations primarily from
sales of its common stock in its initial public offering in March, 1991, and
in private transactions and with convertible loans from Draxis. Draxis owns
approximately 44% of the issued and outstanding shares of the Company's
common stock and holds convertible loans which, if converted, would give
Draxis an ownership interest of approximately 52%. The Company's principal
office is located at 10955 Lowell, Suite 710, Overland Park, Kansas 66210;
its telephone number is (913) 338-2120. The Company's registered office in
the State of Missouri is 1100 Main, Suite 2980, Kansas City, Missouri 64105.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Company was formed to develop for the United States, Canadian and
other markets animal health applications of the drug 1-deprenyl
(ANIPRYL-Registered Trademark-, 1-selegiline HCI). Pursuant to an agreement
between the Company and Chinoin Pharmaceutical and Chemical Works, Ltd. (the
"Chinoin Supply Agreement"), Chinoin (Budapest, Hungary) has agreed to supply
the Company on an exclusive basis with, and granted the Company the exclusive
right to sell, 1-selegiline for veterinary prescriptive applications in the
United States and Canada. Chinoin owns approximately 5.2% of the Company's
common stock. During 1995, the Company renegotiated certain provisions of
the Chinoin Supply Agreement. See "Business - Chinoin Supply Agreement".
Since its inception, the Company has directed its efforts and resources
to conducting the research and development required to obtain veterinary
regulatory approval of ANIPRYL-Registered Trademark-. The Company received
its first drug approval in late 1995 from the Canadian Health Protection
Branch/Bureau of Veterinary Drugs ("HPB/BVD") to market ANIPRYL-Registered
Trademark-for canine Cushing's disease. The Company submitted its first New
Animal Drug Application ("NADA") to the U.S. Food and Drug Administration
("FDA") for the same therapeutic indication on October 1, 1995. During 1996,
the Company will continue with the pivotal clinical trial (Phase III
equivalent) required for pre-marketing approval of ANIPRYL-Registered
Trademark- for canine cognitive dysfunction in the U.S. The Company conducts
its Phase III (equivalent) clinical trials in collaboration with veterinary
schools and private veterinary clinics in the U.S. The Company anticipates
that it will file for a cognitive dysfunction label indication at the
Canadian BVD during 1996. See "Business - Regulatory Environment". The
Company intends to restrict its efforts to small companion animals, mainly
dogs and cats, due to its own market analysis and the significant
environmental and tissue residue regulatory issues which are often associated
with obtaining approvals for food animal products.
In January 1996, the Company signed an agreement with Draxis, providing
Draxis exclusive distribution rights in Canada for a term of ten years to
market ANIPRYL-Registered Trademark- for canine Cushing's disease. The
Company received a cash payment of $468,750, reimbursement of certain
previously incurred marketing expenses, and appointed Draxis to perform
specified marketing and sales obligations. The agreement provides for a
revenue sharing arrangement based upon net sales of ANIPRYL-Registered
Trademark- in the Canadian market. In connection with the distribution
agreement, Draxis converted approximately $1.5 million of loans it has made
to the Company into common stock of the Company at a renegotiated exercise
price of $1.55 per share, and provided another $1 million loan to the Company
for operating capital in 1996 which is also convertible into shares of common
stock at a conversion price of $1.55 per share. The Company expects to begin
sales of ANIPRYL-Registered Trademark- to Canada during March, 1996.
In May, 1994, the Company entered into a comprehensive License and
Supply agreement with Hoechst Veterinir GmbH ("HVG") for European rights to
ANIPRYL-Registered Trademark-. HVG will register and distribute
ANIPRYL-Registered Trademark- in targeted European
<PAGE>
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countries. The Company will provide its intellectual property pursuant to
its two European patents for veterinary uses of 1-deprenyl in addition to
regulatory and technical expertise for the registration and commercialization
of ANIPRYL-Registered Trademark-. The Company and HVG are currently
renegotiating certain terms of the 1994 agreement. See "Business -
Marketing/Sales/Distribution"; and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
On September 21, 1988, a Canadian patent application based upon the work
conducted by Dr. Jozsef Knoll at Semmelweis University in Budapest, Hungary,
in which it was found that chronic low dose administration of l-selegiline
extended the healthy period of life in laboratory rats and maintained certain
physiological functions during old age (the "Knoll Study") was filed by
Draxis entitled "Optically Active Phenylisopropylamine Derivatives,
Compositions Containing Same and Methods for Increasing Life Span and Sexual
Activity in Mammals". On August 31, 1990, Dr. N. William Milgram, a
Professor at the University of Toronto and a consultant to the Company, after
having replicated and expanded the Knoll Study (the "Milgram Study'), filed a
use patent application with the U.S. Patent and Trademark Office entitled
"Use of 1-Deprenyl for Retention of Specific Physiological Functions" which
has been assigned to the Company. This patent issued on September 29, 1992
as Patent No. 5,151,449. Four additional United States patents have also
issued that cover several veterinary pharmaceutical uses of 1-deprenyl and
one which relates to immune system dysfunction in mammals. Similar patents
have also issued in Taiwan, Australia, New Zealand and at the European Patent
Office. Additional patent applications have been filed by the Company in
Canada, Europe, Japan, and other countries. See "Business - Patents and
Trademarks".
The Company is not aware of any other product available in Canada or in
the U.S. at this time which would compete with ANIPRYL-Registered Trademark-.
See "Business - Competition".
The Company will likely require additional funding in order to complete
the regulatory approval process in the United States and Canada for cognitive
dysfunction and market the Company's initial product. The Company is
currently considering options for such additional funding. There can be no
assurance that the product will be successfully approved for marketing of any
indication in the United States. The Company's long-range plan is to become
a multi-product companion animal health company, however any other animal
health product opportunities would require separate funding. The Board of
Directors has approved a committee of independent members to evaluate any
proposals that may arise. The Committee plans to retain an investment
banking firm to assist with the analysis and negotiations of any such
proposals. Draxis has indicated an interest in further supporting the
Company's efforts, but no proposal has yet been received. It is not possible
at this time to predict with assurance whether any of these activities will
result in additional funding for the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PRODUCT
The only product which is currently under development by the Company is
ANIPRYL-Registered Trademark- for use in veterinary prescriptive
applications, particularly for use in dogs. The two indications being
developed are canine Cushing's disease and cognitive dysfunction. The
Company received its first regulatory approval for ANIPRYL-Registered
Trademark- from the Canadian BVD in September, 1995, for treating canine
Cushing's disease. The Company filed its first complete NADA with the U.S.
FDA on October 1, 1995 for the same indication.
ANIPRYL-Registered Trademark- is a selective inhibitor of monoamine
oxidase-type B. Monoamine oxidase (MAO) is an enzyme that degrades the
structure of certain compounds, such as dopamine, which regulate various
physiological functions, including certain aspects of central nervous system
activity.
There are two kinds of MAO: Type A and Type B. Prior to the development
of I-selegiline, MAO inhibitors were non-selective and inhibited both types
of MAO. Other MAO inhibitors were under development in the 1950's and 1960's
for use as antidepressants until a serious side-effect became apparent. The
side-effect is a manifestation of dietary tyramine-induced acute high blood
pressure. Tyramine is, under normal conditions, metabolized in the liver by
MAO-A. When MAO-A is inhibited, tyramine enters the blood stream and may
cause acute high blood pressure. Tyramine is found in cheese, among other
foods, so the effect of rising blood pressure by MAO-A inhibition became
known as the "cheese effect". In order to avoid elevated blood pressure,
patients receiving such products were required to follow specific dietary
restrictions. L-selegiline, as a selective MAO-B inhibitor, does not cause
the cheese effect at therapeutic dose levels in humans.
Although mechanisms accounting for l-selegiline beneficial action in the
rat and dog studies are not completely understood, inhibition of MAO-B with
low dose treatment is considered to be of primary importance. Whether the
biological effects of l-selegiline are directly dependent upon inhibition of
MAO-B found in the brain has not been definitively resolved. L-selegiline
may also inhibit the uptake of monoamines into nerve terminals.
<PAGE>
-4-
REGULATORY ENVIRONMENT
The manufacturing and marketing of ANIPRYL-Registered Trademark- by the
Company are subject to extensive regulation by governmental authorities in
the United States and Canada. The respective authorities regulate or
influence the testing, manufacture, safety, efficacy, labelling, storage,
record-keeping, approval, pricing, advertising and promotion of veterinary
pharmaceuticals.
To receive regulatory approval, a new animal drug must successfully
complete a number of development phases. The phases include safety and
efficacy in target species as well as the establishment of manufacturing
procedures and final product labelling. The final phase of this process
includes controlled clinical trials in which the drug is administered to a
larger number of such animals, and in which further information relating to
safety and efficacy is gathered. Following the clinical trials, the drug
sponsor submits an application to the appropriate regulatory agency for
marketing approval.
The Company has one application pending at the FDA in the United States
and received an approval from the HPB in Canada in order to obtain marketing
approval of ANIPRYL-Registered Trademark- for use in treating canine
Cushing's disease. The Canadian HPB/BVD approved the product in September,
1995. There can be no assurance as to when, or if, ANIPRYL-Registered
Trademark- will be approved for animal use in the United States.
PATENT AND TRADEMARKS
The composition of matter patent on 1-selegiline held by Chinoin in the
United States and product by-process patent in Canada have expired.
Expiration of these patents held by Chinoin permits competition with the
Company by generic manufacturers, subject to required regulatory approval and
subject to the Company's issued use patents. See "Business - Competition'.
Also, Chinoin holds United States and Canadian process patents on the
production of l-selegiline which expire on dates ranging from January 14,
2003 to December 9, 2014. Pursuant to the Chinoin Supply Agreement, Chinoin,
a major supplier of l-selegiline, agreed to supply the Company on an
exclusive basis as well as grant the Company the exclusive rights to sell
l-selegiline for veterinary prescription applications in the United States
and Canada. Chinoin has also granted to the Company the exclusive right and
license, in certain circumstances, to manufacture or have manufactured
l-selegiline for veterinary prescriptive applications in the United States
and Canada under Chinoin's process patents. Other manufacturers are free to
develop processes to manufacture the drug so long as the process does not
infringe the process patents held by Chinoin. During the year, the Company
became aware that Sanofi, S.A., a French subsidiary of Societe Nationale Elf
Equitane, ("Sanofi"), has filed veterinary use patent applications in Europe
disclosing uses of l-deprenyl. The Company believes that the subject matter
of Sanofi's patent applications may contain claims that, if practiced, could
infringe the Company's issued European patents. There can be no assurance at
this time that Sanofi's applications will not issue, or whether, if they
issue, they will be dominated by the Company's patents. The Company may not
be able to afford the expense of enforcing its proprietary rights or
defending itself against infringement charges by other patent holders. Also
see "Business - Chinoin Supply Agreement; - Competition."
On September 29, 1992, the United States Patent and Trademark office
issued to the Company Patent No. 5.151,449 entitled "Use of l-Deprenyl for
Retention of Specific Physiological Functions" claiming specific uses of
l-selegiline in dogs. Four additional United States patents have also issued
which cover several veterinary pharmaceutical uses of l-selegiline and one
which relates to immune system dysfunction in mammals. Similar patents have
also issued to the Company in Taiwan, Australia, New Zealand and at the
European Patent Office. The Company has filed similar patent applications in
Canada, Japan and other jurisdictions. The Company believes that the subject
matter claimed in additional pending foreign applications may represent
patentable inventive subject matter. However, there can be no assurance as
to when, if at all, such remaining foreign patents will issue.
Notwithstanding the issuance of the above U.S. and European patents,
other manufacturers are free to develop methods of manufacturing and other
uses of l-selegiline and to market l-selegiline for such uses, assuming that
such parties have obtained appropriate regulatory approval. Even if third
parties were to infringe any of the Company's patents, the Company may not be
able to afford the expense of enforcing its proprietary rights. There can be
no assurance that the Company will not have asserted against it a claim by a
third party of infringement of such third party's proprietary rights. In
such event, the Company may not be able to afford the expense of defending
itself against such a claim.
Based upon rights assigned to it by Dr. Jozsef Knoll, Draxis filed a
Canadian patent application (No. 578,021) on September 21, 1988 directed to
the use of l-selegiline in mammals for certain purposes ("Knoll Patent").
Pursuant to the terms of a Consulting Agreement dated December 9, 1990, the
Company agreed to pay Dr. Knoll three and one-half percent (3.5%) of the net
profits of the Company from the sale of animal products in Canada containing
l-selegiline, pursuant to such grant of Dr. Knoll's patent rights. Should
Canadian regulatory approval be received for a label claim covered by the
Knoll Patent, Dr. Knoll would be entitled to a royalty on net sales in
Canada. However, the Company is not pursuing a label claim covered by the
Knoll
<PAGE>
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Patent, and has no plans to do so. As further consideration, the Company
also issued to Dr. Knoll warrants to purchase 200,000 shares of common stock
of the Company at an exercise price of $3.00 per share. The warrants become
exercisable only if the Company has net profits, as defined, within seven
years of March 14, 1991. In light of the anticipated launch of
ANIPRYL-Registered Trademark- in Canada, it is possible that Dr. Knoll's
warrants may become exercisable, but the Company does not know whether, in
fact, he will do so. See "Certain Transactions - Consulting Agreement"
incorporated herein by reference to the Company's 1996 Proxy Statement.
The Company has three trademarks registered by the U.S. Patent and
Trademark Office, as ANIPRYL-Registered Trademark-, LIFE TABS-Registered
Trademark-, and LIFE TREATS-Registered Trademark-. The trademark,
ANIPRYL-Registered Trademark-, has been issued in numerous countries
worldwide including Canada.
CHINOIN SUPPLY AGREEMENT
Chinoin is the Company's primary supplier in the United States and
Canada of l-selegiline by virtue of a supply agreement dated October 1, 1990
which was amended during 1995. Chinoin is a prominent pharmaceutical company
located in Budapest, Hungary. Sanofi owns a majority interest in Chinoin.
The term of the Chinoin Supply Agreement ends on the sooner of (i) 12:01
a.m. Toronto time on the tenth anniversary of the date of the first arm's
length sale in the United States or Canada of the product subsequent to
regulatory approval, (ii) November 22, 2003, or any extended expiration date
agreed upon by Chinoin and its U.S. licensee that has rights for l-deprenyl
for human use, or (iii) an earlier date upon the occurrence of an event of
force majeure or certain other events.
As partial consideration for the Chinoin Supply Agreement, the Company
granted to Chinoin the right to subscribe for a number of shares of common
stock of the Company equal to ten percent (10%) of the number of shares
subscribed for originally, or in the future, if at all, by DAH (Canada) at
the price paid by DAH (Canada) for its shares of common stock of the Company.
Due to delays in obtaining Hungarian approvals and internal licenses required
to exercise its option, Chinoin, the Company and DAH (Canada) entered into
the Letter Agreement dated November 30, 1990 whereby Chinoin waived its then
current right to subscribe for shares under the above-noted option. As an
accommodation to Chinoin, DAH (Canada) purchased 340,000 shares of common
stock at $.325 per share and subsequently granted an option to Chinoin to
purchase such shares of common stock at $.325 per share within a reasonable
time. Chinoin has since exercised its option to purchase such 340,000
shares. The Company was advised by legal counsel to the Company, that such
agreement is valid consideration for the right to subscribe to shares under
Missouri law.
During 1995, the Company renegotiated certain provisions of the Chinoin
Supply Agreement. In return for a reduction in the price paid by the Company
for l-selegiline and other considerations, the Company has committed to
purchase a specified quantity of l-selegiline from Chinoin during a four-year
period commencing July 5, 1995, and to pay a 3% royalty on the Company's net
sales of l-selegiline products in its territory for a three-year period
ending on September 19, 1998. The Company also issued to Chinoin 25,000
restricted shares of common stock of the Company as part of the revised
agreement. Chinoin now owns approximately 5.2% of the common stock of the
Company.
In 1995, the Company developed the data required to qualify an
alternative source of supply for l-selegiline. The data has been submitted
for approval to the Canadian BVD and the U.S. FDA.
MANUFACTURING
During September, 1994, the Company entered into a manufacturing
agreement with Fermenta Animal Health Company ("FAH"). The agreement
provides that FAH will manufacture ANIPRYL-Registered Trademark- for sale in
the United States and Canada. The Company will be required to purchase
annual minimum quantities from FAH upon FDA approval to market
ANIPRYL-Registered Trademark- in the United States and Canada. The Company
has retained the ability to seek additional manufacturers in the United
States and Canada under specified conditions. The agreement is for a term of
five years from the date of FDA approval in the United States to market
ANIPRYL-Registered Trademark-, but may be terminated earlier under certain
conditions or if specified events occur. During 1995, the Company
established a second manufacturing site whose product will be used to supply
the Canadian market at this time. The Company is currently negotiating
certain terms of the 1994 FAH agreement, See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
MARKETING/SALES/DISTRIBUTION
The Company signed an agreement with Draxis providing Draxis exclusive
distribution rights in Canada for a term of ten years to market
ANIPRYL-Registered Trademark- for canine Cushing's disease. The Company
received a cash payment of $468,750,
<PAGE>
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reimbursement of certain previously incurred marketing expenses, and
appointed Draxis to perform specified marketing and sales obligations. The
agreement provides for a revenue sharing arrangement based upon net sales of
ANIPRYL-Registered Trademark- in the Canadian market. In connection with the
distribution agreement, Draxis converted approximately $1.5 million of loans
it had made to the Company into common stock of the Company at a renegotiated
exercise price of $1.55 per share, and provided another $1 million loan to
the Company for operating capital in 1996 which is also convertible into
shares of common stock of the Company at a conversion price of $1.55 per
share. As a result, Draxis now owns approximately 44% of common stock of the
Company, with options to convert the remaining $2,500,000 debt, that if fully
converted would provide Draxis with an ownership position in the Company of
approximately 52%. The Company expects to begin sales of ANIPRYL-Registered
Trademark- to Canada in March, 1996.
The Company is currently evaluating options for the distribution of
ANIPRYL-Registered Trademark- in the U.S. With regard to certain targeted
European markets, the Company entered a License and Supply Agreement with
HVG. Under the agreement, HVG will assume responsibility for obtaining
European regulatory approval and subsequently direct the European marketing
and distribution efforts for ANIPRYL-Registered Trademark-. The Company will
provide its intellectual property pursuant to its patent applications filed
and pending in Europe for veterinary uses of l-deprenyl in addition to
regulatory and technical expertise for the registration and commercialization
of ANIPRYL-Registered Trademark-. During 1994, the Company received from HVG
revenue totalling $150,000 which represents one of several milestones
specified under the agreement. The Company and HVG are currently
renegotiating certain aspects of the 1994 agreement and a further milestone
in the amount of $175,000 has been paid by HVG, in escrow, pending resolution
of certain supply issues which may affect the regulatory process in certain
European territories. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PRODUCT LIABILITY INSURANCE
The Company is subject to the inherent business risk of exposure to
product liability claims in the event that the use of its technology or
product is alleged to have resulted in adverse effects during testing or
following approval for commercial sale. The Company has obtained product
liability insurance in reasonable amounts to insure against certain of these
commercial risks.
COMPETITION
The animal health marketplace is served by veterinary, agricultural or
animal health divisions of large international pharmaceutical and chemical
companies. These companies have resources available which far exceed those
of the Company. In addition to the transnational drug companies, there are
many smaller companies, as well as biotechnology start-up firms that claim to
have an interest in animal health.
ANIPRYL-Registered Trademark- for treatment of canine Cushing's disease
will be the Company's first product. The Company does not know of any other
HPB/BVD or FDA approved product available at this time which competes with
it. While the 1988 Generic Animal Drug Law offers exclusive marketing
protection to the Company in the United States should the Company's product
be approved, for up to a period of five (5) years from generic applicants,
the law does not prevent other companies from repeating the full clinical
NADA process to seek FDA approval for a bioequivalent product. However, the
Company holds five use patents in the U.S., and therefore any potential
competitor will face patent infringement claims relating to the sale of
l-deprenyl for any such patented use in pets. See "Business - Patents and
Trademarks".
During the year, the Company became aware that Sanofi has filed
veterinary use patent applications in Europe disclosing uses of l-deprenyl.
The Company believes that the subject matter of Sanofi's patent applications
may contain claims, if practiced, that could infringe the Company's issued
European patents. There can be no assurance at this time that Sanofi's
applications will not issue, or whether, if they issue, they will be
dominated by the Company's patents.
RESEARCH AND DEVELOPMENT
Prior to formation of the Company, Draxis on behalf of DAH (Canada),
spent approximately CDN.$200,000 on the Milgram Study. The Company has
received and is entitled to use all of the information which resulted from
the Milgram Study.
The Company has spent a significant portion of the proceeds raised from
its initial public and private offerings and from convertible loans from
Draxis on the research and development efforts required by the regulatory
process in the United States and Canada. The Company believes, but is not
yet certain, that it has completed its clinical trial work on treating canine
Cushing's disease with ANIPRYL-Registered Trademark-. The Company received
marketing approval for this indication in September, 1995 from the Canadian
BVD. The Company's completed NADA for Cushing's disease is pending at the
U.S. FDA.
During 1996, the Company will continue its Phase III (equivalent)
pivotal clinical trial evaluating the treatment of canine cognitive
dysfunction with ANIPRYL-Registered Trademark- for the U.S. FDA. The Company
expects to file a completed application for this
<PAGE>
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indication in Canada in 1996 based upon data already collected. The NADA for
canine cognitive dysfunction is dependent, in part, on the Company's ability
to obtain additional funding for 1997 and thereafter. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EMPLOYEES
Currently, the Company has eight employees, including Dr. David R.
Stevens, President and Chief Executive Officer. The Company utilizes the
expertise of several prominent consultants in the animal health field in
order to minimize overhead expenses at this early stage. The Company is
contracting with outside institutions and individuals for completion of
development tasks. The Company anticipates that subsequent to the date of
this report, additional employees may be hired as additional corporate
activities commence, which activities would require separate funding.
ITEM 2. PROPERTIES
The Company has leased 2,621 square feet of office space in Overland
Park, Kansas at a rental of $3,418 per month through June, 1996, Rent will
increase thereafter to $3,479 per month until the lease expires on May 30,
1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings and no such
proceedings are planned.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 is hereby incorporated by reference
from the section entitled "Market Information" of the Registrant's Annual
Report to Shareholders for the year ended December 31, 1995.
ITEM 6. SELECTED FINANCIAL DATA
The following information is qualified by reference to, and should be
read in conjunction with, the Company's Financial Statements and the Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations. The selected financial data for the Company presented
below for the years ending December 31, 1995, 1994, 1993, 1992, 1991 and for
the periods from July 19, 1990 (date of incorporation) to December 31, 1990
and December 31, 1995, respectively, have been derived from the financial
statements of the Company. The financial statements of the Company for the
years ended December 31, 1995, 1994, 1993 and 1992 were audited by Arthur
Andersen LLP, independent public accountants, whose report appears elsewhere
herein. The financial statements for the year ending December 31, 1991 and
for the period from July 19, 1990 (date of incorporation) to December 31,
1990 were audited by Deloitte & Touche LLP. Certain amounts in the 1991,
1992, 1993 and 1994 financial statements have been reclassified to conform
with the 1995 presentations.
THE COMPANY
<PAGE>
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Statement of Operations Data
<TABLE>
<CAPTION>
Year ended December 31, Period from July 19, 1990
(Date of Incorporation)
to December 31,
1995 1994 1993 1992 1991 1990 1995
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income 78,526 162,165 188,466 297,070 318,013 26,007 1,070,247
Research and development 1,399,846 1,750,940 985,054 840,939 573,113 90,933 5,640,825
Compensation - officer
and employees 635,040 541,283 504,368 422,641 353,501 589,406 3,046,239
Net loss (2,631,147) (2,561,292) (1,848,218) (1,421,046) (1,047,306) (756,200) (10,265,209)
Net loss per common
share (.41) (.40) (.29) (.22) (.17) (.16) (1.66)
Weighted average number
of shares outstanding 6,491,552 6,483,675 6,483,675 6,469,684 6,081,560 4,750,000 6,198,903
</TABLE>
Balance Sheet Data
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets 1,560,092 4,645,803 4,408,447 5,980,855 5,790,909 2,235,412
Advances from DAH (Canada) - - 140,000 140,000 140,000 140,000
Notes payable to Draxis
Health, Inc. 3,090,000 3,090,000 450,000 450,000 - -
Obligations under contract - 600,000 800,000 800,000 - -
Cash and cash equivalents 1,054,759 240,902 240,461 299,534 1,073,443 1,756,852
Investment securities - 2,219,185 1,923,045 3,443,289 4,251,132 -
Stockholders' equity
(deficit) (1,665,871) 915,276 2,918,331 4,494,974 5,540,145 1,738,680
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
information set forth under "Business" and with the Financial Statements and
Notes to Financial Statements contained herein.
THE COMPANY
The Company is in the development stage and, as such, is subject to a
number of risks and uncertainties. Since its incorporation in July, 1990,
the Company's efforts and resources have been directed primarily to
developing animal health applications for its product, ANIPRYL-Registered
Trademark- (l-deprenyl), in the United States, Canada, and other markets.
The Company has experienced significant losses, accumulating an operating
deficit of approximately $10.2 million. The Company received its first
regulatory approval during September, 1995, in Canada, for the use of
ANIPRYL-Registered Trademark- to treat Cushing's disease in the dog. The
Company expects to ship the product to Draxis during March, 1996. (See below
"Draxis Distribution Agreement".) The Company's application at the FDA for
the same use has been filed and is being reviewed. However, there is no way
to accurately predict whether, or when, an approval might be received. The
Company is also developing ANIPRYL-Registered Trademark- for cognitive
dysfunction in dogs. Additional financing and/or equity contributions will
be required to complete the ANIPRYL-Registered Trademark- development
<PAGE>
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program for this use and to market the product for any use in the United
States. The Company is currently considering options for additional funding.
It is not possible at this time to predict with assurance the outcome of
these activities.
RESULTS OF OPERATIONS
The Company has had no sales of product to date but anticipates that
ANIPRYL-Registered Trademark- will be launched in Canada, for the treatment
of Cushing's disease in dogs, during 1996. There is no way to predict the
magnitude of the revenues from the marketing of this product but management
believes that revenues should marginally reduce operating losses for 1996.
During 1995, the Company completed its regulatory filings in Canada and the
United States for Cushing's disease and continued to support clinical trials
for use of ANIPRYL-Registered Trademark- in treating cognitive dysfunction in
dogs. See "Business".
Revenue of $280,779 for the year ended December 31, 1995, consisted
primarily of realized gains on sale of its equity interest in Phoenix
Scientific, Inc., as interest income for the year declined due primarily to
use of the Company's funds in its research and development program. Revenue
of $211,561 for the year ended December 31, 1994 and $203,575 for the year
ended December 31, 1993, which was comprised of interest income of $162,165
and $188,466, respectively, was generated from investments of funds received
from advances from DAH (Canada), funds raised by the issuance of 1,200,000
shares of common stock to ten (10) Canadian private investors on November 29,
1990, funds received from the net proceeds of the initial public offering of
$4,658,436 and approximately $3,000,000 provided by loans from Draxis. The
Company's management anticipates that interest revenue may increase in the
short term with the additional funds recently provided by Draxis (as partial
consideration for the Draxis Distribution Agreement) but will decline during
the year as funds are utilized in the Company's continuing research and
development efforts. During 1994, $150,000 was received as milestone
payments from a European license. See Note 12 to the Notes to Financial
Statements.
Total expenses for the years ended December 31, 1995, 1994, and 1993
were $2,911,926, $2,772,853, and $2,051,793, respectively. General and
administrative expenses increased during 1995 due primarily to negotiations
regarding the amendment to the Chinoin Supply Agreement and premiums for
directors' and officers' liability insurance; but had decreased from December
31, 1993 to December 31, 1994. These expenses were within anticipated levels
and are expected to remain constant during 1996, due to preparations for
anticipated U.S. marketing of ANIPRYL-Registered Trademark- for Cushing's
disease should it be approved, and continuation of the ANIPRYL-Registered
Trademark- development program for cognitive dysfunction.
Of the total expenses stated above, research and development expenses
for the years ended December 31, 1995, 1994, and 1993 aggregated $1,399,846,
$1,750,940, and $985,054, respectively. These expenses relate primarily to
research and development testing activities of the Company's first product,
ANIPRYL-Registered Trademark-, for use in dogs. The Company anticipates that
a significant portion of the current remaining funds of the Company will be
spent to continue the research and development required to obtain
pre-marketing approval in the U.S. for ANIPRYL-Registered Trademark-.
On March 24, 1994, the Company and Draxis entered into the Draxis
Financing, pursuant to certain terms and conditions, by which Draxis provided
additional funding to the Company. See "Liquidity and Capital Resources"
below. As a result, interest expenses increased significantly to $287,071
for the year ended December 31, 1995, as compared to $197,621 for the year
ended December 31, 1994, and $31,500 for the year ended December 31, 1993.
On January 10, 1996, the Company completed an agreement with Draxis to
distribute ANIPRYL-Registered Trademark- in Canada. As part of the 10-year
exclusive distribution agreement (the "Draxis Distribution Agreement"),
Draxis has paid an up front fee of $468,750 for specified Canadian rights to
ANIPRYL-Registered Trademark-, as well as $125,000 for reimbursement of
expenses incurred to date preparing for the Canadian launch of
ANIPRYL-Registered Trademark-. The companies entered into a revenue sharing
formula for Canadian sales of ANIPRYL-Registered Trademark-. The Company
will likely require additional funding in order to complete the regulatory
approval process in the United States and Canada for cognitive dysfunction
and market the Company's initial product. The Company is currently
considering options for such additional funding. Although the Company is
anticipating that the product will be approved for marketing for treating
canine Cushing's disease in the United States, there can be no assurance
whether, or when, such approval may occur.
As a consequence of the continuing development stage expenses, the
Company had net losses for the years ended December 31, 1995, 1994, and 1993
of $2,631,147, or $.41 per share, $2,561,292, or $.40 per share, and
$1,848,218, or $.29 per share, respectively. The Company expects that losses
will continue throughout the development stage and thereafter until marketing
approval is received and the product is launched in the United States. While
the Company's share of the revenues from Canadian sales will reduce some
losses, the Company does not expect that such revenues will be sufficient to
significantly offset operating losses during the year.
In July, 1991, the Company finalized its participation in a license
agreement to rights to a 10% royalty of sales of Alzene-TM- made by Draxis on
a compassionate use basis under Canadian health regulation prior to final
regulatory approval. The Company received a nominal amount of royalties
during 1995. In July, 1995 the unamortized balance of the investment was
<PAGE>
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written-off. Management determined there had been diminution in the value of
the investment due to a continuing decline in royalties. During 1996, the
Company was informed that Draxis is not making any additional compassionate
use sales, so no further royalties are expected.
On October 1, 1991, the Company entered into a Cooperative Research and
Development Agreement ("CRADA") with the Inhalation Toxicology Research
Institute operated for the U.S. Department of Energy by Lovelace Biomedical
and Environmental Research Institute, Inc. in Albuquerque, New Mexico. Under
the terms of the CRADA, the Company anticipated spending approximately
$1,000,000 over the five (5) year term of the agreement. In accordance with
provisions of the CRADA, the Company amicably terminated the CRADA on June
30, 1994. Other than CRADA activities associated with final data analyses
and reporting, all CRADA activities have been curtailed. For the years ended
December 31, 1994 and 1993, the Company incurred expenses under the CRADA of
$121,100 and $244,600, respectively, which is included in research and
development expenses for such years. The Company utilized the remainder of
funding originally budgeted for CRADA activities for other ANIPRYL-Registered
Trademark- development activities. See Note 12 to the Notes to Financial
Statements.
During June, 1992, the Company entered into a purchase agreement with
Phoenix Scientific, Inc., ("PSI"), a privately-owned firm established to
develop and manufacture generic veterinary pharmaceuticals, wherein the
Company received 12.5% of the then outstanding common stock of PSI for a
total purchase price of $1,750,000. The agreement stated that $800,000 of
the purchase price would be due in four $200,000 increments upon achievement
by PSI of certain milestones including FDA pre-marketing approvals for
specified Abbreviated New Animal Drug Applications. On June 30, 1994, PSI
notified the Company that it had received its first FDA pre-marketing
approval for one of the Abbreviated New Animal Drug Applications specified
under the agreement, triggering the Company's obligation to pay one milestone
payment of $200,000. The Company's Board of Directors determined that in
order to conserve cash resources and to focus the remaining cash resources on
the ANIPRYL-Registered Trademark- development program, the Company would not
make this $200,000 milestone payment to PSI. Accordingly, amounts recorded as
obligations under contract together with investment in PSI were reduced by
$200,000. During 1995, the Company sold its investment in PSI for
approximately $1,150,000 resulting in a realized gain, net of selling
expenses, of approximately $175,000. The remaining obligation under contract
due PSI has been adjusted from the accounts. See Note 5 to the Notes to
Financial Statements.
On October 1, 1990 and as subsequently amended on July 5, 1995, the
Company entered into the Chinoin Supply Agreement with Chinoin whereby
Chinoin has agreed to manufacture and supply the Company's requirements for
l-deprenyl in North America. The Chinoin Supply Agreement provides that the
Company will pay a fixed price for the product for a period of four years,
beginning on the effective date of the amendment. In addition, the Company
must pay a royalty of 3% to Chinoin on sales of ANIPRYL-Registered Trademark-
for a three year period. The Company has become aware of other sources of
l-deprenyl and has made arrangements for a back-up source of supply to
protect itself from any unanticipated interruption of supply from Chinoin.
According to the terms of the Chinoin agreement, the Company has the right to
renegotiate transfer pricing annually. The Chinoin Supply Agreement
terminates on the earliest of (i) 10 years from the date of the first arm's
length sale in the United States or Canada of the product, or (ii) November
22, 2003, or any extended expiration date agreed to by Chinoin and the United
States licensee for human use of l-deprenyl under a license agreement between
them, or (iii) a determination date pursuant to provisions regarding force
majeure or certain other events. In consideration for the July, 1995
amendment, the Company issued to Chinoin 25,000 shares of the Company's
common stock at no cost. The fair value of the common stock has been
recorded as an addition to common stock and the related unearned supply
agreement consideration has been expensed. Chinoin now owns approximately
5.2% of the Company's common stock. See Note 12 to the Notes to Financial
Statements.
When the Chinoin Supply Agreement was signed in 1990, consideration of
$603,500 represented the excess of the estimated fair value of the Company's
common stock which was subject to options to purchase 340,000 shares of
common stock granted by DAH (Canada) to Chinoin pursuant to a Letter
Agreement, above the exercise price of the options. This amount was recorded
as a research and development expense and was fully amortized as of December
31, 1994. See Note 10 to the Notes to Financial Statements.
During September, 1993, the Company entered into a Letter of Intent to
negotiate, on an exclusive basis for a period of six months, a comprehensive
license and supply agreement for the registration and distribution of
ANIPRYL-Registered Trademark- in Europe with Hoechst Veterinae GmbH ("HVG")
for European rights to ANIPRYL-Registered Trademark-. During October, 1993,
the Company received a non-refundable fee of the $25,000 as consideration for
such exclusive negotiations. In May, 1994, the Company entered into a
comprehensive License and Supply agreement with HVG for the registration and
distribution of ANIPRYL-Registered Trademark- in targeted European countries.
Under the agreement, HVG will assume responsibility for obtaining European
regulatory approval and subsequently direct the European marketing and
distribution efforts for ANIPRYL-Registered Trademark-. The Company will
provide its intellectual property pursuant to its patent applications filed
and pending in Europe for veterinary uses of l-deprenyl in addition to
regulatory and technical expertise for the registration and commercialisation
of ANIPRYL-Registered Trademark-. During 1994, the Company received from HVG
other revenue totalling $150,000 which represents one of several milestones
specified under the agreement. The Company
<PAGE>
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and HVG are currently renegotiating certain aspects of the 1994 agreement and
a further milestone in the amount of $175,000 has been paid by HVG, in
escrow, pending resolution of certain supply issues which may affect the
regulatory process in certain European territories.
During September, 1994, the Company entered into a manufacturing
agreement with Fermenta Animal Health Company ("FAH"). The agreement
provides that FAH will manufacture ANIPRYL-Registered Trademark- for sale in
the United States and Canada. The Company will be required to purchase
annual minimum quantities from FAH upon FDA approval to market
ANIPRYL-Registered Trademark- in the United States and Canada assuming
Fermenta meets FDA and BVD regulatory requirements. The Company has retained
the ability to seek additional manufacturers in the United States and Canada
above certain sales levels and in the event Fermenta is unable to manufacture
product for certain stated reasons. The agreement is for a term of five
years from the date of FDA approval in the United States to market
ANIPRYL-Registered Trademark-, but may be terminated earlier under certain
conditions or if specified events occur. In December, 1995, FAH was acquired
by Boehringer Ingelheim (BI) and the Company is currently renegotiating with
FAH/Bl certain terms of the September 1994 Agreement. In late 1995, the
Company was advised that Fermenta's export permit was denied by the FDA.
Therefore, the Company has established another third-party manufacturing
source for a four-year term to assure adequate supply of product to Canada
and elsewhere, if the product is approved. The Company is required to
purchase annual minimum requirements which are within the Company's
anticipated sales volume for such term. The Company has been advised that
this party is entitled to ship its product to Canada and the Company believes
that sufficient supply is currently available to ship its product to Draxis
in March, 1996, as planned.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its development stage operations primary from
sales of its common stock in its initial public offering and private
transactions, and with convertible loans from Draxis. See Note 10 to the
Company's Notes to Financial Statements. As a consequence of pursuing its
research and development program, the Company's total current assets declined
to $1,057,022 as of December 31, 1995 from $2,512,402 as of December 31,
1994. Total assets declined to $1,560,092 as of December 31, 1995 from
$4,645,803 as of December 31, 1994. See Notes 3 and 4 to the Notes to
Financial Statements.
In January, 1996, in order to obtain working capital through 1996 and to
enhance its capability to market its first approved product in Canada, the
Company signed an agreement with Draxis providing Draxis a ten-year exclusive
distribution right in Canada for ANIPRYL-Registered Trademark- (l-selegiline
HCl) in treating pet dogs afflicted with Cushing's disease. As part of the
Distribution Agreement, Draxis converted approximately $1.5 million of debt
from the 1994 Draxis Financing into common stock of the Company at a
renegotiated exercise price of $1.55 per share, and provided another $1
million to the Company for operating capital in 1996 as convertible debt with
a conversion price of $1.55 per share. The repayment terms are substantially
equivalent to the terms described below of the May 1, 1994 Draxis Financing,
with installment payments commencing October 1, 1999 and ending October 1,
2003. To meet requirements of the Toronto Stock Exchange, this new debt is
subject to approval by a majority of votes cast by the non-affiliate
shareholders of the Company, at its next annual meeting of shareholders. As
a result, Draxis now owns approximately 44% of the Company's common stock
with options to convert debt that if fully converted would provide Draxis
with an ownership position in the Company of approximately 52%. The Company
anticipates that it will require further funding in order to complete the
regulatory process in the United States; and market its product and is
directing efforts towards this goal.
In connection with a Loan Agreement dated August 25, 1992 relating to
the Company's investment in PSI, the Company was required to pay Draxis
U.S.$250,000 on July 1, 1994 and U.S.$200,000 on October 1, 1994 pursuant to
two promissory notes. The Company was also required to pay DAH (Canada)
U.S.$140,000 upon demand (collectively, the "Notes"). As of March 24, 1994
and subject to certain terms and conditions, the Company and Draxis entered
into a financing arrangement whereby Draxis provided a loan of U.S.$2,500,000
on May 1, 1994, to the Company so that the Company could pursue the
development and regulatory approval process of ANIPRYL-Registered Trademark-
(the "Draxis Financing"). Contemporaneously, the Company paid to Draxis an
up-front fee of U.S.$155,200. Pursuant to the Draxis Financing, Draxis also
agreed to extend the repayment of the Notes until 1997. Furthermore, the
parties agreed to amend the Notes to provide that all amounts due thereunder
may be converted at the option of Draxis, upon written notice to the Company,
into shares of common stock of the Company at U.S.$2.88 per share.
The portion of the loan that was not converted in January, 1996 as part
of the consideration for the Distribution Agreement is repayable as to (i)
60% of the outstanding amount in equal quarterly instalments payable on the
last day of each quarter commencing January 1, 1997 and ending January 1,
2001, and (ii) 40% in a lump sum on January 1, 2001, together with interest
thereon payable quarterly on the last day of each quarter at an annual rate
equal to the prime rate plus 1% on the outstanding principal amount
commencing on the date of the loan.
<PAGE>
-12-
In addition, the remaining portion of this loan may be converted, upon
written notice to the Company, into: (a) shares of common stock of the
Company at U.S.$2.88 per share; or (b) a participation interest, in
increments of U.S.$250,000, payable in annual instalments until December 31,
2003. Participation Interest is defined as an entitlement to receive an
amount per annum until December 31, 2003 equal to (i) 28% of the converted
principal and unpaid and accrued interest commencing the date of conversion
by Draxis, if Draxis converts prior to the receipt by the Company of FDA
approval of ANIPRYL-Registered Trademark- but after receipt of HPB approval
of ANIPRYL-Registered Trademark-; or (ii) 20% of the converted principal and
unpaid interest commencing the date of conversion by Draxis, if Draxis
converts after the receipt by the Company of FDA approval of
ANIPRYL-Registered Trademark- and HPB approval of ANIPRYL-Registered
Trademark-. Participation interest payments will decrease to 2/3 of the
amount required to be paid for the year ending December 31, 2004, and to 1/3
of such amount for the year ending December 31, 2005.
In the event a participation interest payment exceeds 50% of the
Company's pre-tax net income during any fiscal year, the difference between
the participation interest payment and 50% of such pre-tax net income shall
be paid in the form of shares of the Company at the average price of
U.S.$2.88 per share. Draxis has further agreed not to convert more than 50%
of the loan into a participation interest in any calendar year. The January,
1996 loan does not contain a provision for conversion into a participation
interest. Under certain terms and conditions, the Company shall be required
to register any shares acquired by Draxis under any of the above-mentioned
terms with the Securities and Exchange Commission.
The Company agrees that any additional debt incurred by the Company,
with a repayment term exceeding one year, shall be subordinated to the
Company's outstanding indebtedness to Draxis. The Company may prepay any
amounts outstanding at sixty (60) days written notice to Draxis, during which
time Draxis retains the right to exercise any remaining conversion privileges.
The ability of the Company to achieve its goal of bringing
ANIPRYL-Registered Trademark- to the U.S. market for use in dogs is dependent,
in part, upon the Company's ability to raise adequate funding and to gain FDA
regulatory approval of its product. Due to the pervasive regulatory
environment in which the Company operates, there can be no assurance that the
remaining capital will be sufficient to implement the Company's objective of
obtaining for pre-marketing approval of ANIPRYL-Registered Trademark- in the
U.S. The Company has invested the proceeds from its financing activities
primarily in short-term or liquid investments, so that the Company will be
able to access its cash requirements as needed for its development plan
during 1996. Insufficient funding may require the Company to delay or
eliminate expenditures relating to the marketing of the product and further
development. The Company is currently considering options for additional
funding. The Board of Directors has approved a committee of independent
members to evaluate any proposals that may arise. The Committee plans to
retain an investment banking firm to assist with the analysis and
negotiations of any such proposals. Draxis has indicated an interest in
further supporting the Company's efforts, but no proposal has yet been
received. It is not possible at this time to predict with assurance whether
any of these activities will result in additional funding for the Company.
Based upon the Company's current level of expenditures, the Company has funds
to support its development program through year-end 1996.
The Company currently has eight full-time employees. The Company may
hire additional employees during 1996. The Company has leased approximately
2,500 square feet of office space in Overland Park, Kansas, at a rental of
$3,418 per month through June, 1996. Rent will increase to $3,479 per month
until the lease expires in June, 1997.
INFLATION
Because the bulk of the Company's estimated expenditures are not
generally subject to inflationary risk, it is expected that the effect of
inflation on the Company's future operations will be minimal.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" which
is applicable for the Company's fiscal year ended December 31, 1996.
Management has not yet determined how the new standard will be implemented.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants, Arthur Anderson LLP . . F-1
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . F-2
Statements of Operations . . . . . . . . . . . . . . . . . F-3
Statements of Stockholders' Equity . . . . . . . . . . . . F-4
Statements of Cash Flows . . . . . . . . . . . . . . . . . F-7
<PAGE>
-13-
Notes to Financial Statements. . . . . . . . . . . . . . . F-9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
-14-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from the sections entitled "Nominees" and "Compliance with Section 16(a) of
the Exchange Act" of the Registrant's 1996 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required Item 11 is hereby incorporated by reference
from the sections entitled "Compensation of Executive Officer", "Restricted
Stock Options", "Incentive Stock Option Plan", "Non-Qualified Stock Option
Plan" and "Other Compensation" of the Registrant's 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from the section entitled "Security Ownership of Certain Beneficial Owners
and Management" of the Registrant's 1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from the section entitled "Certain Transactions" of the Registrant's 1996
Proxy Statement.
<PAGE>
-15-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
Page
A. LIST OF FINANCIAL STATEMENTS AND SCHEDULES Number
Report of Independent Accountants, Arthur Andersen LLP F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-7
Notes to Financial Statements F-9
Schedules other than those referred to above are omitted because they
are not required or the information is included in Notes to Financial
Statements.
B. REPORTS ON FORM 8-K
The Company was not required to file a report on Form 8-K during the
quarter ended December 31, 1995.
C. EXHIBITS FILED AS PART OF THIS REPORT
3(a) Certificate of Incorporation, as amended, filed as Exhibits 3,
3.3, 3.4 and 3.5 to the Registrant's Registration Statement on
Form S-1, No. 33-38395, and incorporated herein by reference;
3(b) By-laws of the Registrant, as amended to date, filed as Exhibit
3.1 to the Registrant's Registration Statement on Form S-1, No.
33-38395, and incorporated herein by reference;
3(c) Resolution of a special meeting of the Board of Directors of the
Company amending the by-laws on July 23, 1990, as Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1, No. 33-38395,
and incorporated herein by reference;
3(d) Resolutions of a special meeting of the Board of Directors
amending the by-laws on November 29, 1990, filed as Exhibit 3.6 to
the Registrant's Registration Statement on Form S-1, No. 33-38395,
and incorporated herein by reference;
4(a) Knoll Warrant, filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form S-1, No. 33-38395, and incorporated
herein by reference;
4(b) Stock specimen, filed as Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1, No. 33-38395, and incorporated
herein by reference;
4(c) Warrant, filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1, No. 33-38395, and incorporated herein by
reference;
10(a) Employment Agreement of Dr. David R. Stevens, filed as Exhibit
10.2 to the Registrant's Registration Statement on Form S-1, No.
33-38395, and incorporated herein by reference;
10(b) Supply Agreement with Chinoin Pharmaceutical and Chemical Works,
Ltd., filed as Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1, No. 33-38395, and incorporated herein by
reference;
10(c) CRADA with Inhalation Therapy Research Institute, filed as Exhibit
10.9 to Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-1, No. 33-38395, and incorporated
herein by reference;
10(d) Employment Agreement of Dr. David R. Stevens, filed as Exhibit
10.10 to Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form S-1, No. 33-38395, and incorporated
herein by reference;
10(e) Stock Purchase, Dividend, Option and Manufacturing Agreement
between the Registrant and Phoenix Scientific, Inc., filed as
Exhibit 10.11 to Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form S-1, No. 33-38395, and incorporated
herein by reference;
10(f) Loan Agreement between the Registrant and Draxis, filed as Exhibit
10.12 to Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form S-1, No. 33-38395, and incorporated
herein by reference;
10(g) Letter Agreement between the Registrant and Draxis, dated March
23, 1994 filed as Exhibit 10. 13 to Post-Effective Amendment No. 4
to the Registrant's Registration on Statement on Form S-1, No.
33-38395 and incorporated herein by reference;
<PAGE>
-16-
10(h) License and Supply Agreement between the Company and Hoechst
Veterinar GmbH, dated May 9, 1994, filed as Exhibit 10 to
Registrant's Form 10-Q for the period ended June 30, 1994, is
incorporated herein by reference (Portions of this document have been
redacted pursuant to a Securities and Exchange Commission order,
dated October 14, 1994, File No. 0-19059, granting the Company
confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934);
10(i) First Amendment and Supplement to Supply Agreement between the
Company and Chinoin Pharmaceutical and Chemical Works Co. Ltd.,
dated July 5, 1995. Confidential treatment is being sought for
portions of this exhibit pursuant to Rule 24b-2 under the
Securities and Exchange Act of 1934, as amended. Such portions
of this exhibit have been omitted and separately filed with the
Securities and Exchange Commission.
10(j) Distribution Agreement between the Company, DAHI Animal Health
(Ontario) Inc., DAHI Animal Health, Inc. and Draxis Health Inc.
dated January 10, 1996. Confidential treatment is being sought for
portions of this exhibit pursuant to Rule 24b-2 under the
Securities and Exchange Act of 1934, as amended. Such portions of
this exhibit have been omitted and separately filed with the
Securities and Exchange Commission.
13 1995 Annual Report to Shareholders (only those portions which are
incorporated herein by reference) filed with the Registrant's 1996
Proxy Statement.
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Deprenyl Animal Health, Inc.
We have audited the accompanying balance sheets of Deprenyl Animal Health,
Inc. (a Missouri corporation in the development stage - Note 1), as of
December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995 and for the period from inception (July 19, 1990) to
December 31, 1995. These financial statements are the responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the financial statements of Deprenyl Animal Health, Inc. for the
period from inception to December 31, 1991. Such statements are included in
the cumulative inception to December 31, 1995, totals of the statements of
operations and cash flows and reflect total revenues and net loss of 26% and
18%, respectively, of the related cumulative totals. Those statements were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to amounts for the period from inception to
December 31, 1991, included in the cumulative totals, is based solely upon
the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Deprenyl Animal Health, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 and
for the period from inception (July 19, 1990) to December 31, 1995, in
conformity with generally accepted accounting principles in the United States
(Note 13).
/s/ Arthur Andersen
January 12, 1996
Kansas City, Missouri
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheets
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
____________________________________________________________________________________
December 31, December 31,
ASSETS Note 1995 1994
--------- ------------- ------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents (2)(3) $ 1,054,759 $ 240,902
Investment securities (2)(4) -- 2,219,185
Receivables:
Interest -- 49,186
Draxis Health Inc. 431 1,130
Prepaid expenses 1,832 1,999
------------ -----------
Total Current Assets 1,057,022 2,512,402
Furniture, equipment and leasehold
improvements, net of accumulated
depreciation (2)(7) 55,575 55,300
Other Assets:
Investment-Phoenix Scientific, Inc. (2)(5) -- 1,575,000
Intangibles, net (2)(6) 442,877 499,683
Other 4,618 3,418
------------ -----------
Total Assets $ 1,560,092 $ 4,645,803
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (8) $ 135,963 $ 40,527
------------ -----------
Total Current Liabilities 135,963 40,527
Notes Payable - Draxis Health Inc. (8) 3,090,000 3,090,000
Obligations under contract (5) -- 600,000
------------ -----------
Total Liabilities 3,225,963 3,730,527
------------ -----------
Commitments (12)
Stockholders' Equity:
Common stock, no par, 20,000,000
shares authorized, 6,508,675
shares issued and outstanding,
as of December 31, 1995 and
20,000,000 shares authorized,
6,483,675 shares issued and
outstanding, as of December 31,
1994. 8,599,338 8,549,338
Deficit accumulated during
development stage (10,265,209) (7,634,062)
------------ -----------
Total Stockholders' Equity
(Deficit) (1,665,871) 915,276
------------ -----------
Total Liabilities and
Stockholders' Equity $ 1,560,092 $ 4,645,803
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Operations
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
______________________________________________________________________________________________________
Period From
Year Ended December 31, July 19, 1990 (Date of
Incorporation) to
December 31,
1995 1994 1993 1995
<S> <C> <C> <C> <C>
REVENUE:
Interest and investment income $ 78,526 $ 162,165 $ 188,466 $ 1,070,247
Gain (loss) on foreign currency
exchange (67) (122)_ 419 15,454
Realized gain (loss) on
investment securities 175,391 (100,482)_ (10,310) 71,214
Other 26,929 150,000 25,000 201,929
----------- ----------- ----------- ------------
280,779 211,561 203,575 1,358,844
----------- ----------- ----------- ------------
EXPENSES:
Research and development (Note 2) 1,399,846 1,750,940 985,054 5,640,825
General and administrative 1,093,663 776,142 990,255 5,177,041
Interest 287,071 197,621 31,500 528,522
Depreciation and amortization 131,346 48,150 44,984 277,665
----------- ----------- ----------- ------------
2,911,926 2,772,853 2,051,793 11,574,053
----------- ----------- ----------- ------------
NET LOSS $(2,631,147) $(2,561,292) $(1,848,218) $(10,265,209)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
NET LOSS PER COMMON SHARE ($0.41)_ ($0.40)_ ($0.29)_ ($1.66)
------- ------- ------- -------
------- ------- ------- -------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES (Note 2) 6,491,552 6,483,675 6,483,675 6,198,903
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Stockholders' Equity
(Stated in U.S. Dollars)
_______________________________________________________________________________
<TABLE>
<CAPTION>
Deficit
Accumulated Unearned
During Supply
Common Development Unearned Agreement
Stock Stage Compensation Consideration
------------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, July 19, 1990
(date of incorporation)
Issuance of 100 shares of
common stock for cash at
$1.00 per share (Note 10)
August 1990 $ 100 $ -- $ -- $ --
Issuance of 936,253 shares
for non cash consideration
(Note 10) November 1990 -- -- -- --
Issuance of 824,487 shares
of common stock for
intangibles acquired and
advances from parent
(Note 10) November 1990 267,958 -- -- --
Issuance of 699,160 shares
of common stock for cash
at $.325 per share
(Note 10) November 1990 227,227 -- -- --
Issuance of 500,000 shares
of common stock for cash
at $.325 per share
(Note 10) November 1990 162,500 -- -- --
Issuance of 100,000 shares
of common stock for cash
and services (Note 10)
November 1990 210,000 -- -- --
Issuance of 240,000 shares
of common stock for cash
and services (Note 10)
November 1990 504,000 -- -- --
Issuance of 960,000 shares
of common stock for cash
at $1.07 per share
(Note 10) November 1990 1,031,017 -- -- --
Stock options granted to
officer, employee and
Chairman of the Board of
Directors (Note 10) August
and September 1990 869,750 -- (869,750) --
Stock options granted in
consideration of supply
agreement (Note 10)
October 1990 603,500 -- -- (603,500)
Amortization of unearned
compensation (Note 10) -- -- 92,078 --
Net Loss -- (756,200) -- --
---------- ----------- --------- ----------
Balance, December 31, 1990 3,876,052 (756,200) (777,672) (603,500)
Issuance of 2,070,000
shares of common stock
for cash at $3.00 per
share through a public
offering, net of stock
offering costs (Note 10)
March 1991 4,658,436 -- -- --
Issuance of Underwriters'
Unit Purchase Options
for 45,000 units for cash
at $0.0022 per unit
(Note 10) March 1991 100 -- -- --
</TABLE>
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Stockholders' Equity
(Stated in U.S. Dollars)
_______________________________________________________________________________
<TABLE>
<CAPTION>
Deficit
Accumulated Unearned
During Supply
Common Development Unearned Agreement
Stock Stage Compensation Consideration
------------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
Increase in exercise price
of options previously
granted to the Chairman of
the Board and an employee
(Note 10) March 1991 $ (266,250) $ -- $ -- $ 266,250
Reversal of amortization of
unearned compensation
related to increase in
exercise price of options
granted to the Chairman of
the Board and an employee
(Note 10) -- -- (16,640) --
Options exercised for
85,000 shares of common
stock for cash at $.325
per share by an officer
(Note 10) August 1991 27,625 -- -- --
Warrants exercised for 5,675
shares of common stock for
cash at $5.00 per share
(Note 11) October 1991 28,375 -- -- --
Amortization of unearned
compensation (Note 10) -- -- 150,875 --
Net loss -- (1,047,306) -- --
----------- ----------- --------- ---------
Balance, December 31, 1991 8,324,338 (1,803,506) (377,187) (603,500)
Options exercised for
3,000 shares of common
stock for cash at $3.00
per share by a director
(Note 10) January 1992 9,000 -- -- --
Unit purchase options
exercised by the Canadian
Underwriter for 15,000
units (each unit consists
of 4 shares of common
stock and 1 warrant to
purchase common stock) for
cash at $14.40 per unit
(Note 10) March 1992 216,000 -- -- --
Amortization of unearned
compensation (Note 11) -- -- 150,875 --
Net loss -- (1,421,046) -- --
----------- ----------- --------- ---------
Balance, December 31, 1992 8,549,338 (3,224,552) (226,312) (603,500)
Amortization of unearned
compensation (Note 11) -- -- 150,875 --
Amortization of unearned
supply agreement
consideration (Note 10) -- -- -- 120,700
Net loss -- (1,848,218) -- --
----------- ----------- --------- ---------
Balance, December 31, 1993 $ 8,549,338 $(5,072,770) $ (75,437) $(482,800)
Amortization of unearned
compensation (Note 11) -- -- 75,437 --
Amortization of unearned
supply agreement
consideration (Note 10) -- -- -- 482,800
Net loss -- (2,561,292) -- --
----------- ----------- --------- ---------
Balance, December 31, 1994 $ 8,549,338 $(7,634,062) $ -- $ --
</TABLE>
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Stockholders' Equity
(Stated in U.S. Dollars)
________________________________________________________________________________
<TABLE>
<CAPTION>
Deficit
Accumulated Unearned
During Supply
Common Development Unearned Agreement
Stock Stage Compensation Consideration
------------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
Issuance of 25,000 shares
of common stock in
consideration of supply
agreement (Note 10)
September 1995 50,000 -- -- --
Net loss -- (2,631,147) -- --
----------- ------------ --------- ---------
Balance, December 31, 1995 $ 8,599,338 $(10,265,209) $ -- $ --
----------- ------------ --------- ---------
----------- ------------ --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
(Stated in U.S. Dollars)
_______________________________________________________________________________
<TABLE>
<CAPTION>
Period From
July 19, 1990
(Date of Incorporation)
Year Ended December 31, to December 31,
1995 1994 1993 1995
----------- ----------- ------------- -----------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,631,147) $(2,561,292) $(1,848,218) $(10,265,209)
Adjustments to reconcile
net loss to cash used in
operating activities:
Depreciation and
amortization 131,346 48,150 44,984 277,665
Amortization of
unearned supply
agreement
consideration 50,000 482,800 120,700 653,500
Amortization of premium
on investment securities -- 3,392 15,762 52,533
Realized (gain) loss on
investment securities
(gross) (175,391) 100,482 10,310 (71,214)
Compensation expense
resulting from stock
issued at price below
estimated market value -- -- -- 423,746
Amortization of
unearned compensation
resulting from stock option
grants -- 75,437 150,875 620,140
Benefit resulting from
increase in exercise
price of stock options -- -- -- (16,640)
(Gain) loss on foreign
currency exchange 67 122 (419) (15,454)
Changes in operating
accounts:
Receivable from Draxis
Health Inc. 699 1,320 1,774 (431)
Prepaid expenses 167 53,876 23,477 (1,832)
Accrued interest
receivable 49,186 (2,952) (6,124) --
Other assets (1,200) 582 -- (4,618)
Accounts payable and
accrued expenses 95,436 (59,589) 4,235 141,102
----------- ----------- ------------ -----------
Net cash used in
operating activities (2,480,837) (1,857,672) (1,482,644) (8,206,712)
----------- ----------- ------------ -----------
INVESTING ACTIVITIES:
Purchases of furniture,
equipment and leasehold
improvements (20,234) (36,581) (13,723) (126,272)
Purchases of investment
securities -- (4,275,920) (6,057,231) (20,054,735)
Proceeds from sales of
investment securities 2,219,185 3,875,877 7,551,433 19,898,024
Expenditures for intangible
assets (54,580) (62,983) (32,327) (467,927)
Investment in Phoenix
Scientific, Inc. 1,150,390 -- (25,000) 175,390
----------- ----------- ------------ -----------
Net cash provided by (used
in) investing activities 3,294,761 (499,607) 1,423,152 (575,520)
----------- ----------- ------------ -----------
</TABLE>
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
(Stated in U.S. Dollars)
________________________________________________________________________________
<TABLE>
<CAPTION>
Period From
July 19, 1990
(Date of Incorporation)
Year Ended December 31, to December 31,
1995 1994 1993 1995
----------- ----------- ------------- -----------------------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Loan from Draxis Health Inc. $ -- $2,500,000 $ -- $ 2,500,000
Debt issuance costs (net) -- (142,158) -- (142,158)
Deferred stock offering
costs -- -- -- (1,458,227)
Advances from Draxis
Animal Health (Canada) Inc. -- -- -- 279,724
Advances from Draxis Health
Inc. -- -- -- 450,000
Repayments of advances from
Draxis Animal Health
(Canada) Inc. -- -- -- (10,000)
Issuance of common stock -- -- -- 8,202,198
----------- ---------- ------------ -----------
Net cash provided by
financing activities -- 2,357,842 -- 9,821,537
----------- ---------- ------------ -----------
EFFECT OF EXCHANGE RATES
ON CASH (67) (122) 419 15,454
----------- ---------- ------------ -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 813,857 441 (59,073) 1,054,759
CASH AND CASH EQUIVALENTS:
Beginning of period 240,902 240,461 299,534 240,902
----------- ---------- ------------ -----------
End of period $ 1,054,759 $ 240,902 $ 240,461 $ 1,054,759
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION:
Issuance of common stock
for intangibles acquired
and other noncash
consideration $ -- $ -- $ -- $ 267,958
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
Reduction of amounts payable
in exchange for equipment $ -- $ -- $ -- $ 5,139
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
Deferred stock offering costs
offset against common stock $ -- $ -- $ -- $ 1,551,564
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
Investment in Phoenix
Scientific, Inc. financed
by obligations under
contract $ (600,000) $ (200,000) $ -- $ --
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
Interest paid $ 75,940 $ 184,579 $ 31,500 $ 304,349
----------- ---------- ------------ -----------
----------- ---------- ------------ -----------
</TABLE>
There have been no income taxes paid.
The accompanying notes are an integral part of these statements.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993, 1992
AND THE PERIOD FROM JULY 19, 1990 (DATE OF INCORPORATION)
TO DECEMBER 31, 1995
_______________________________________________________________________________
1. ORGANIZATION
Deprenyl Animal Health, Inc. ("the Company") was incorporated under the laws
of the state of Missouri on July 19, 1990, under the name DEPL Animal Food
Supplements, Inc. The Company's name was changed to Deprenyl Animal Health,
Inc. on November 6, 1990. Prior to November 29, 1990, the Company was a
wholly owned subsidiary of DEPL Animal Food Supplements, Inc. now known as
Draxis Animal Health (Canada) Inc. (formerly Deprenyl Animal Health (Canada)
Inc.) ("DAH (Canada)").
DAH (Canada) was incorporated under the Canada Business Corporations Act as a
wholly owned subsidiary of Draxis Health Inc. ("Draxis"), formerly Deprenyl
Research Limited, or DRL, to research, develop and market the pharmaceutical,
l-deprenyl for the United States, Canadian, Western European and other
markets for veterinary prescriptive applications. The management of DAH
(Canada) determined that such activities relating to the United States and
Canadian markets would be better accomplished in a company incorporated in
the United States. Accordingly, the Company was formed to assume the rights
and continue the development and marketing research relating to the drug for
the United States and Canadian markets and assess other animal health
products.
The Company has been in the development stage since inception. The Company's
successful completion of its development program of Anipryl-Registered
Trademark-and its transition, ultimately, to the attainment of profitable
operations is dependent upon the Company's ability to obtain pre-marketing
approval of l-deprenyl by regulatory agencies and the achievement of a level
of sales adequate to support the Company's cost structure. Based upon the
Company's current level of expenditures, the Company has secured funds to
support its development program through year end 1996 (Note 8). Additional
financing and/or equity contributions will be required to complete the
Anipryl-Registered Trademark- development program. The Company is currently
considering options for additional funding. It is not possible at this time
to predict with assurance the outcome of these activities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. BASIS OF PRESENTATION - These financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(U.S.). Note 13 reconciles the differences between the U.S. and Canadian
generally accepted accounting principles. Preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that effect the
reported amounts of assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
b. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include interest
bearing and non-interest bearing demand deposit accounts.
c. INVESTMENT SECURITIES - Investment securities are classified as held to
maturity under Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and are
carried at the lower of amortized cost or market value.
d. INVESTMENT-PHOENIX SCIENTIFIC, INC. - This investment was accounted for
using the cost method of accounting (Note 5).
e. INTANGIBLES - Intangibles include organization costs, patent costs, costs
associated with a royalty/license assignment agreement and unamortized debt
issuance costs (Note 6). Organizational costs are amortized using the
straight-line method over five years. At such time as patents are issued,
costs of patent applications will be amortized using the straight-line method
over the estimated economic lives of the patents. Costs relating to
unsuccessful patent applications are charged to operations. The cost of the
supply agreement has been fully amortized over the 15 months ended December
31, 1994 (Note 12). Costs relating to the royalty/license assignment
agreement are amortized over the periods during which compassionate use sales
of Alzene are anticipated. The unamortized balance of the royalty/license
agreement was written-off during 1995 as management determined there had been
a diminution in the value of the agreement in view of declining sales of
Alzene. Debt issuance costs associated with the Draxis financing (Note 8) are
being amortized over the term of the debt using the effective interest method.
f. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS - Furniture, equipment and
leasehold improvements are carried at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis (Note 7).
g. RESEARCH AND DEVELOPMENT EXPENSES - Research and development costs are
expensed as incurred.
h. INCOME TAXES - Deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. As discussed in Note 9,
deferred tax benefits were not provided as the Company has incurred losses
since inception.
<PAGE>
i. ACCOUNTING FOR STOCK BASED COMPENSATION - The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" which is applicable for the
Company's fiscal year ended December 31, 1996. Management has not yet
determined how the new standard will be implemented.
j. NET LOSS PER SHARE - Stock options and warrants are not included in the
computation of the weighted average number of shares outstanding during the
period as the effect would be antidilutive. Net loss per common share is
based on the weighted average number of shares outstanding during each period.
3. CASH AND CASH EQUIVALENTS
1995 1994
------------- ------------
Interest bearing deposits $1,027,938 $229,449
Non-interest bearing deposits 26,821 11,453
---------- --------
$1,054,759 $240,902
---------- --------
---------- --------
4. INVESTMENT SECURITIES
The Company invests in U.S. Treasury Bills with maturities generally less than
one year. As it is the Company's intention to hold investment securities to
maturity, all such securities are recorded at cost. The Company accounts for
gains and losses on investments under the specific identification method.
Unrealized holding gains were $40,940 at December 31, 1994.
5. INVESTMENT-PHOENIX SCIENTIFIC, INC.
During June 1992, the Company entered into a purchase agreement with Phoenix
Scientific, Inc. (PSI), a privately-owned firm established to develop and
manufacture generic veterinary pharmaceuticals, wherein the Company received
12.5% of the then outstanding common stock of PSI for a total purchase price
of $1,750,000. During 1992, the Company made payment to PSI of $950,000. The
$800,000 balance of the purchase price was recorded as obligations under
contract. The balance was to be paid in $200,000 increments upon receipt by
PSI of pre-marketing approvals for specified Abbreviated New Animal Drug
Applications.
On June 30, 1994, PSI notified the Company that it had received its first FDA
pre-marketing approval for one of the Abbreviated New Animal Drug Applications
specified under the agreement, triggering the Company's obligation to pay one
milestone payment of $200,000. The Company's Board of Directors determined
that in order to conserve cash resources and to focus the remaining cash
resources on the Anipryl-Registered Trademark- development program, the
Company would not make this $200,000 milestone payment to PSI. Accordingly,
amounts recorded as obligations under contract together with investment in PSI
have been reduced by $200,000.
During 1995, the Company sold it investment in PSI for approximately
$1,150,000 resulting in a realized gain, net of selling expenses, of
approximately $175,000. The remaining obligation under contract due PSI has
been adjusted from the accounts.
6. INTANGIBLES
1995 1994
-------- --------
Organization costs $ 20,142 $ 20,142
Patent and regulatory application costs 327,396 238,971
Supply agreement costs 33,845 33,845
Royalty/license agreement costs 167,000 167,000
Debt issuance costs 155,200 155,200
-------- --------
703,583 615,158
Less- accumulated amortization 260,706 115,475
-------- --------
$442,877 $499,683
-------- --------
-------- --------
7. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
1995 1994
-------- ---------
Furniture $ 28,278 $ 25,492
Equipment 87,423 69,974
Leasehold improvements 1,742 1,742
-------- --------
117,443 97,208
Less- accumulated depreciation 61,868 41,908
-------- --------
$ 55,575 $ 55,300
-------- --------
-------- --------
Depreciation expense for the years ended December 31, 1995, 1994, and
1993 was $19,960, $16,287, and $11,408, respectively.
8. RELATED-PARTY BALANCES AND TRANSACTIONS
<PAGE>
Accounts payable and accrued expenses include $1,582 and $6,290 due
Draxis at December 31, 1995 and 1994, respectively.
The Company has notes payable to Draxis aggregating $590,000 which
are to be repaid on July 1, 1997 and October 1, 1997. The notes bear
interest at the rate of 7% annually.
On March 24, 1994, Draxis loaned the Company $2,500,000 to fund
operating activities. The note bears interest at one percent over
the prime interest rate annually and matures January 1, 2001. The
loan may be converted, upon written notice to the Company, into: (a)
shares of common stock of the Company at $2.88 per share; or (b) a
participation interest, in increments of $250,000, payable in annual
installments until December 31, 2003. These installments are
calculated on a percentage basis which varies from 20% to 35%,
depending upon whether the Company has received United States or
Canadian health regulatory approval of Anipryl-Registered Trademark-.
Participation interest payments will decrease to 2/3 of the amount
required to be paid pursuant to the terms of the Draxis financing for
the year ending December 31, 2004, and to 1/3 of such amount for the
year ending December 31, 2005.
On January 10, 1996, the Company completed an agreement with Draxis
to distribute Anipryl-Registered Trademark- in Canada. As part of
the 10-year exclusive distribution agreement, Draxis paid an up front
fee of approximately $469,000 for specified Canadian rights to
Anipryl-Registered Trademark- as well as $125,000 for reimbursement
of expenses incurred to date to prepare marketing materials for the
Canadian launch of Anipryl-Registered Trademark-. The companies
entered into a revenue sharing formula for Canadian sales of Anipryl-
Registered Trademark-. As part of the distribution agreement, Draxis
will convert approximately $1.5 million of the $3 million in loans
outstanding into common shares of the Company. Draxis will also
provide $1 million of operating capital in the form of a loan
convertible to common shares of the company. As a result of the
conversion, Draxis will own approximately 44 percent of the shares of
the Company, and its ownership could increase to approximately 52
percent of the Company, on a non-diluted basis, through the
conversion of all of the loans outstanding.
9. INCOME TAXES
The tax effect of significant temporary differences representing
deferred tax assets and liabilities, estimated at a combined Federal
and state rate of 38% is as follows:
December 31, 1995 December 31, 1994
Unearned compensation $ 227,657 $ 227,657
Restricted stock 161,023 161,023
Research and development credit
carryforward 33,228 33,228
Net operating loss carryforward 3,172,939 2,181,287
General business credit
carryforward 148,782 148,782
Other 59,779 70,952
Valuation allowance (3,803,408) (2,822,929)
----------- -----------
$ - $ -
----------- -----------
----------- -----------
Management cannot assess the likelihood that the future tax benefits
will be realized because the Company is currently in the development
stage and has cumulative net losses. Accordingly, a valuation
allowance has been recorded.
As of December 31, 1995, the Company has net operating loss
carryforwards of approximately $8,350,000 and general business credit
carryforwards of $148,782 which expire in years 2005 through 2009.
Annual utilization of the net operating loss and general business
credit carryforwards may be affected by IRC sections 382 and 383,
respectively.
10. STOCKHOLDERS' EQUITY
On March 25, 1991, the Company completed an initial public offering
of 517,500 units at $12.00 per unit, with each unit consisting of
four shares of common stock, without par, and one warrant to purchase
one share of common stock at $5.00 per share until September 14,
1993, and at $7.50 per share thereafter until March 14, 1996, when
the warrants expire. The proceeds, net of offering costs of
$1,551,464, aggregated $4,658,436.
No value was assigned to the warrants as they were deemed to have
only a nominal value at the date of issuance.
The following represents stock transactions during the period from
July 19, 1990 (date of incorporation) to December 31, 1990:
a. The Company issued 100 shares of common stock at $1.00 per share
to an officer of the Company for cash. Such shares were
subsequently transferred to DAH (Canada) for $.65 per share.
b. The Company issued 936,253 shares of common stock in exchange for
the rights to research and development activities and certain
administrative expenses during the period in which DAH (Canada)
was developing l-deprenyl. The number of shares issued were based
on the historical costs of such expenditures and a price of $.325
per share. As research and development and administrative
expenses are not capitalizable, no value has been assigned to the
related shares of common stock issued.
<PAGE>
c. The Company issued 824,487 shares of common stock to DAH (Canada)
in exchange for organization costs of $11,052, costs related to
obtaining a supply agreement for l-deprenyl of $33,845, stock
offering costs of $93,337, all of which amounts were paid by DAH
(Canada) on behalf of the Company and operating funds advanced
during the period of $129,724.
d. The Company issued 699,160 shares of common stock at $.325 per
share to DAH (Canada) for cash.
e. The Company issued 500,000 shares of common stock at $.325 per
share to Draxis for cash.
f. The Company issued 100,000 shares of common stock in connection
with an employment agreement with an officer at a price less than
estimated fair value. The excess of the fair value over the
purchase price of $177,500 was recorded as compensation expense in
the period ended December 31, 1990.
g. The Company issued 240,000 shares of common stock to two members
of the Board of Directors at a price less than the estimated fair
value. The excess of the estimated fair value over the purchase
price of $246,246 was recorded as compensation expense in the
period ended December 31, 1990.
In conjunction with the initial public offering, the Company granted
Unit Purchase Options to the Underwriters to purchase up to 45,000
units at an exercise price of $14.40 per unit. The Unit Purchase
Options are exercisable from two to four years from March 14, 1992.
The Company's Canadian Underwriter exercised a Unit Purchase Option
for 15,000 units at $14.40 per unit during March 1992. Each unit
consisted of four shares of common stock and one warrant to purchase
one share of common stock at $7.00 per share until September 14,
1993, and at $7.50 per share thereafter until March 14, 1996, when
the warrants expire. The Company received cash in the amount of
$216,000.
During October 1990, pursuant to a supply agreement with Chinoin
Pharmaceutical and Chemical Works Co., Ltd. ("Chinoin") (Note 12),
the Company granted options to purchase 340,000 shares of common
stock at a price less than the estimated fair value. The supplier
and DAH (Canada) entered into a subsequent agreement whereby DAH
(Canada) purchased for cash at $.325 per share the 340,000 shares of
common stock subject to options and concurrently granted the supplier
options on those shares at the original exercise price of $.325 per
share. As such shares were issuable by the Company in consideration
of the supply agreement, the excess of the fair value of the options
over the exercise price of $603,500 has been recorded as an addition
to common stock and the related unearned supply agreement
consideration is deducted from stockholders' equity. Entry into the
market by new or alternative suppliers of l-deprenyl has led
management to conclude there has been diminution in the recorded
amount of the supply agreement and, as a result of the potential
availability of alternative sources of supply of l-deprenyl, the full
carrying value of the unearned supply agreement consideration has
been recorded as Research and Development expense and has been fully
amortized at December 31, 1994. The Company has identified an
alternative source of supply for selegiline and has developed the
data required to qualify a second source of active ingredient.
On July 5, 1995, the Company amended the supply agreement with
Chinoin and in consideration for the amendments, issued Chinoin
25,000 shares of common stock at no cost. The fair value of the
common stock has been recorded as an addition to common stock and the
related unearned supply agreement consideration has been expensed.
During August 1990, the Company granted options to purchase 340,000
shares of common stock pursuant to an employment agreement with an
officer. The exercise price of these options of $.325 per share is
less than the estimated fair value of the common stock. These
options are exercisable in four equal installments, beginning on July
1, 1991. The excess of the fair value of the common stock over the
exercise price of the options of $603,500 has been recorded as an
addition to common stock and the related unearned compensation has
been deducted from stockholders' equity. The unearned compensation
is amortized to non-cash compensation expense over the vesting
period. Compensation expense relating to these options of $75,437
and $150,875 has been recorded during the years ended December 31,
1994 and 1993, respectively. During 1991, the officer exercised
options to purchase 85,000 restricted shares of common stock of the
Company at $.325. At December 31, 1995, a total of 255,000 shares
were exercisable which were fully vested in 1994.
During September 1990, the Company granted options to purchase
150,000 shares of common stock. As of the date of grant, the
exercise price of these options of $.325 per share was less than the
estimated fair value of the common stock. These options are
exercisable in four equal installments, beginning on July 1, 1991.
The excess of the fair value of the common stock over the exercise
price of the options of $266,250 was recorded as an addition to
common stock and the related unearned compensation was deducted from
stockholders' equity. Compensation expense relating to these options
of $15,331 was recorded during the period ending December 31, 1990.
On March 1, 1991, the Company entered into a private letter agreement
with the Chairman of the Board and an employee whereby the exercise
price of the options previously granted was increased to the original
offering price of the common stock. The Company also revoked 39,000
of the 140,000 options granted to the Chairman of the Board. The
effect of the aforementioned transactions resulted in a $266,250
reduction of unearned compensation and common stock and a $16,640
decrease in compensation expense resulting from the reversal of the
amortization of unearned compensation.
In summary, unearned compensation included in stockholders' equity
consists of the following:
<PAGE>
1994 1993 1992 1991
-------- -------- --------- --------
Stock options granted
with exercise prices
below fair value as
follows:
Officer $603,500 $603,500 $603,500 $603,500
Less- accumulated
amortization
to compensation
expense 603,500 528,063 377,188 226,313
-------- -------- -------- --------
$ - $ 75,437 $226,312 $377,187
-------- -------- -------- --------
-------- -------- -------- --------
Unearned compensation was fully amortized as of December 31, 1994.
11. STOCK OPTIONS AND WARRANTS
In addition to the stock options discussed in Note 10, the Board of
Directors of the Company has reserved shares to be issued upon
granting of options to purchase common stock to members of the Board
of Directors and certain consultants. These options are exercisable
for a period not to exceed 10 years from the date of the grant. The
total number of shares of common stock subject to such options as of
December 31, 1995, was 215,000. The exercise prices of such options
which were granted prior to the initial public offering were set at
the initial public offering price. The exercise prices of subsequent
options granted were determined by the fair market value of the stock
on the day previous to the day of the grant. Shares issued pursuant
to the exercise of such options are restricted shares and may not be
sold without registration or exemption from registration under the
Securities Act of 1933 (the "1933 Act"). During 1994, the exercise
price of all such options was set at the initial public offering
price of $3.00 per share.
During 1992, a director of the Company exercised options to purchase
3,000 shares of common stock at an exercise price of $3.00 per share.
During 1992, the Company granted options to purchase 60,000 shares of
common stock to directors and consultants. These options were
granted at fair market value and become exercisable in four equal
installments, beginning one year from the date of grant. The options
terminate 10 years from the date of grant or earlier upon the event
of certain events defined in the option agreements. During 1994, the
Company revoked 25,000 options previously granted to one director.
Also during 1994, the exercise price of the remaining 35,000 options
was set at the initial public offering price of $3.00 per share.
The Company established an incentive stock option plan ("the Plan")
whereby the Company's Board of Directors may grant options to
selected employees to purchase common stock of the Company. During
1992, the Company granted a total of 60,000 options to two key
employees pursuant to the Plan. During 1992, the exercise price of
such options was set at the initial public offering price of $3.00
per share. During 1995 and 1994, the Company granted a total of
30,000 and 134,000 options, respectively, to employees pursuant to
the plan. All such options were granted at fair market value on the
day previous to the day of the grant. A total of 96,000 shares of
common stock remain in reserve and available for issuance under the
Plan.
During 1994, the Company granted options to purchase 185,000 shares
of common stock to directors and consultants under the non-qualified
stock option plan ("NQSO plan"). These options were granted at fair
market value and become exercisable in installments determined by the
Board of Directors. The options terminate 10 years from the date of
grant or earlier upon the event of certain events defined in the
option agreements.
In addition to the warrants granted pursuant to the initial public
offering (Note 10), the Company granted 200,000 warrants for the
purchase of the Company's common stock at $3.00 per share to a
scientist. The warrant will become exercisable only if the Company
has net profits, as defined, within seven years of March 14, 1991.
A summary of transactions relating to stock options and warrants for
the years ended December 31, 1995, 1994, and 1993.
1995 1994 1993
--------- ---------- ---------
Options outstanding beginning
of period 1,082,000 788,000 788,000
Options granted 30,000 319,000 -
Options exercised - - -
Options revoked (20,000) (25,000) -
--------- --------- -------
Options outstanding,
end of period 1,092,000 1,082,000 788,000
--------- --------- -------
Warrants outstanding,
beginning of period 726,825 726,825 726,825
Warrants granted - - -
Warrants exercised - - -
--------- --------- -------
Warrants outstanding, end of
period 726,825 726,825 726,825
--------- --------- -------
--------- --------- -------
Shares reserved for
future grants, end of
year 96,000 106,000 240,000
<PAGE>
Option prices per
share:
Exercised during period - - -
Outstanding, end of period $0.325-$3.00 $0.325-$3.00 $0.325-$8.00
Warrant prices per share:
Exercised during period - - -
Outstanding, end of period $3.00-$7.50 $3.00-$7.50 $3.00-$7.50
12. COMMITMENTS
During September, 1994, the Company entered into a manufacturing
agreement with Fermenta Animal Health Company ("FAH"). The agreement
provides that FAH will manufacture Anipryl-Registered Trademark- for
sale in the United States and Canada. The Company will be required
to purchase annual minimum quantities from FAH upon FDA approval to
market Anipryl-Registered Trademark- in the United States and Canada.
The agreement is for a term of five years from the date of FDA
approval in the United States to market Anipryl-Registered Trademark-
, but may be terminated earlier under certain conditions or if
specified events occur.
In May, 1994, the Company entered into a comprehensive License and
Supply agreement with Hoechst Veterinae GmbH ("HVG") for the
registration and distribution of Anipryl-Registered Trademark- in
targeted European countries.
Under the agreement, HVG will assume responsibility for obtaining
European regulatory approval and subsequently direct the European
marketing and distribution efforts for Anipryl-Registered Trademark-.
The Company will provide intellectual property pursuant to its patent
applications filed and pending in Europe for veterinary uses of l-
deprenyl in addition to regulatory and technical expertise for the
registration and commercialization of Anipryl-Registered Trademark-.
During 1994, the Company received $150,000 from HVG which is shown as
other revenue which represents one of several milestones specified
under the agreement.
In October, 1991, the Company entered into a Cooperative Research and
Development Agreement ("CRADA") with the Inhalation Toxicology
Research Institute, operated for the U.S. Department of Energy by
Lovelace Biomedical and Environmental Research Institute, Inc. in
Albuquerque, New Mexico. Under the terms of the CRADA, the Company
anticipated spending approximately $1,000,000 over the five (5) year
term of the agreement. In accordance with provisions of the CRADA,
the Company amicably terminated the CRADA on June 30, 1994. Other
than CRADA activities associated with final data analyses and
reporting, all CRADA activities have been curtailed. During 1994,
the Company recorded research and development expenses aggregating
$121,100 under the CRADA. In the aggregate the Company spent
$650,682 under the CRADA which is included in the research and
development expense. The Company utilized the remainder of funding
originally budgeted for CRADA activities for other Anipryl-Registered
Trademark- development activities.
On October 1, 1990 and subsequently amended on July 5, 1995, the
Company entered into an exclusive supply agreement (the "Supply
Agreement") with Chinoin whereby Chinoin has agreed to manufacture
and supply the Company's requirements for l-deprenyl in North
America. The Supply Agreement provides that the Company will
purchase the product from Chinoin for a period of four years,
beginning on the effective date of the amendment. In addition, the
Company must pay a royalty of 3% to Chinoin on net sales of Anipryl-
Registered Trademark- for a three year period. As discussed in Note
10, the Company has developed the data required to qualify an
alternative source of supply for l-selegiline. The Supply Agreement
ends on the earliest of (i) 10 years from the date of the first arm's
length sale in the United States or Canada of the product, or (ii)
November 22, 2003, or any extended expiration date agreed to by
Chinoin and the United States licensee under a license agreement
between them, or (iii) a determination date pursuant to provisions
regarding force majeure or certain other events.
The Company entered into an agreement with a scientist which provides
for annual consulting fees of at least $25,000 per year which expired
in 1995. However, the Company has agreed to pay the scientist 3.5%
of the net profits of the Company from the Canadian sale of animal
products containing l-deprenyl pursuant to the grant of patent
rights. The Company has no intention to exploit such patent rights.
As of April 1, 1994, the Company entered into a thirty eight (38)
month lease for 2,621 square feet of office space. The future
minimum lease commitment is $41,443 for the period from January 1,
1996 to December 31, 1996 and $17,394 for the period from January 1,
1997 to May 30, 1997, when the lease expires.
13. RECONCILIATION OF UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("U.S. GAAP" AND "CDN. GAAP")
The difference between U.S. GAAP and CDN. GAAP arises primarily in
accounting for the issuances of common stock and the granting of
options to purchase common stock to officers, directors and employees
and as consideration for products or services. Under U.S. GAAP, the
Company must account for the differential between the price paid for
common stock issued or, in the case of options, the exercise price,
and the estimated fair value of the common stock as compensation or
consideration for products or services. The differential is recorded
as compensation expense, unearned compensation expense or unearned
consideration with a corresponding increase in common stock. The
unearned compensation and unearned consideration are amortized to
operations as earned. Under CDN. GAAP, no such differentials are
recorded.
Additionally, U.S. GAAP treats common stock issued in connection with
a first time purchase offering, for which the purchase price is
significantly less than the purchase offering price, as outstanding
for all periods in the computation of weighted average shares
outstanding. Canadian GAAP does not have such a requirement.
<PAGE>
A reconciliation of U.S. and CDN. GAAP is as follows:
<PAGE>
STATEMENT OF OPERATIONS
(STATED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Period From
July 19, 1990
(Date of
Incorporation) to
Year Ended December 31, December 31,
------------------------------------- -----------------
1995 1994 1993 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net loss recorded
under U.S. GAAP $(2,631,147) $(2,561,292) $(1,848,218) $(10,265,209)
Adjustments --
Compensation to
officer upon
purchase of common
stock at price less
than estimated fair
value - - - 177,500
Compensation to members
of the Board of
Directors upon purchase
of stock at price less
than estimated fair
value - - - 246,246
Compensation accruing to
President, Chairman of
the Board and employee
for the period in
connection with stock
options granted - 75,437 150,875 620,140
Amortization of unearned
supply agreement
consideration - 482,500 121,000 603,500
Reversal of compensation
expense recorded during
the period from July 19,
1990 (date of
incorporation) to
December 31, 1990, in
connection with the
increase in the exercise
price of stock options
granted to Chairman of
the Board and an
employee - - - (16,640)
------------ ------------ ------------ -------------
Net loss as adjusted for
CDN. GAAP $(2,631,147) $(2,003,355) $(1,576,343) $(8,634,463)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Net loss per share $(.41) $(.31) $(.24) $(1.46)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Weighted average shares
outstanding - CDN. GAAP 6,491,552 6,483,675 6,483,675 5,905,482
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
Net loss per share is calculated for CDN. GAAP based on weighted
average shares outstanding. Had the calculation been made
pursuant to U.S. GAAP on the weighted average number of common
shares outstanding of 6,491,552, 6,483,675, 6,483,675, and
6,198,903 for the years ended December 31, 1995, 1994, 1993 and
for the period from July 19, 1990 (Date of incorporation) to
December 31, 1995, the net loss per share would have been $0.41,
$0.31, $0.24, and $1.39, respectively.
<PAGE>
BALANCE SHEET
(STATED IN U.S. DOLLARS)
DECEMBER 31, 1995 U.S. GAAP ADJ. CDN. GAAP
- ----------------- ------------ -------------- --------------
Total Assets $ 1,560,092 $ 1,560,092
------------ -----------
------------ -----------
Liabilities $ 3,225,963 $ 3,225,963
------------ -----------
------------ -----------
Stockholders' Equity:
Common stock $ 8,599,338 $(1,630,746)(1) $ 6,968,592
Deficit accumulated during
the development stage (10,265,209) 1,630,746(1) (8,634,463)
------------ ----------- -----------
(1,665,871) (1,665,871)
------------ -----------
$ 1,560,092 $ 1,560,092
------------ -----------
------------ -----------
- ----------------
1) To reverse compensation expense recorded for excess of estimated
fair value of stock issued over issuance price of $423,746, to
reverse unearned compensation credited to common stock of $603,500
and to reverse supply agreement consideration paid in common stock
of $603,500.
<PAGE>
BALANCE SHEET
(STATED IN U.S. DOLLARS)
DECEMBER 31, 1994 U.S. GAAP ADJ. CDN. GAAP
- ----------------- ------------ -------------- --------------
Total Assets $ 4,645,803 $ 4,645,803
---------- ----------
---------- ----------
Liabilities $ 3,730,527 $ 3,730,527
---------- ----------
---------- ----------
Stockholders' Equity:
Common stock $ 8,549,338 $(1,630,746)(1) $ 6,918,592
Deficit accumulated during
the development stage (7,634,062) 1,630,746(1) (6,003,316)
---------- ---------- ----------
915,276 915,276
---------- ----------
$ 4,645,803 $ 4,645,803
---------- ----------
---------- ----------
- -------------
(1) To reverse compensation expense recorded for excess of estimated
fair value of stock issued over issuance price of $423,746, to
reverse unearned compensation credited to common stock of $603,500
and to reverse supply agreement consideration paid in common stock
of $603,500.
- -------------
The following table is presented to comply with National Policy
Number 14 pursuant to the Securities Act (Ontario) (Note 2).
December 31
1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------
Rate at end of period
in Canadian dollars 1.3640 1.4018 1.3217 1.2689 1.1555 1.1599
Average noon rate for
the period in Canadian
dollars 1.3726 1.3659 1.3240 1.2709 1.1458 1.1668
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Deprenyl Animal Health, Inc.
-----------------------------------------------------------------
By (Signature and Title) /s/ David R. Stevens, President and Chief Executive
Officer
----------------------------------------------------
Date March 26, 1996
----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Martin Barkin Director, Chairman of the 3/26/96
- ----------------------------- Board --------------
Martin Barkin, MD, BSc (MED), Date
MA, FRCSC
Director, President, Chief
Executive Officer, Chief
Operating Officer, Chief
Financial Officer and Chief
/s/ David R. Stevens Accounting Officer 3/26/96
- ------------------------------- --------------
David R. Stevens, DVM, PhD Date
/s/ D. Geoffrey Shulman Director 3/26/96
- ------------------------------- --------------
D. Geoffrey Shulman, MD, FRCPC Date
/s/ Stewart D. Saxe Director 3/26/96
- ------------------------------- --------------
Stewart D. Saxe, Esq. Date
/s/ Charles L. Wood Director 3/26/96
- ------------------------------- --------------
Charles L. Wood Date
/s/ George M. Darnell Director 3/26/96
- ------------------------------- --------------
George M. Darnell Date
<PAGE>
APPENDIX K
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file number 0-19059
Deprenyl Animal Health, Inc.
(Exact name of registrant as specified in its charter)
Missouri 36-3716293
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10955 Lowell, Suite 710
Overland Park, Kansas 66210
(address of principal executive offices)
(Zip Code)
(913) 338-2120
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
------ -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court.
Yes No
------ -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
7,510,998 common shares as of May 8, 1996
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheets
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
March 31, December 31,
ASSETS Note 1996 1995
------------------------ ----------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents (2) $ 2,072,586 $ 1,054,759
Receivables:
Draxis Health Inc. 23,028 431
Prepaid expenses 735 1,832
Inventory (3) 123,645 --
------------ ------------
Total Current Assets 2,219,994 1,057,022
Furniture, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 66,743 55,575
Other Assets:
Intangibles (4) 463,106 442,877
Other 3,418 4,618
------------ ------------
Total Assets $2,753,261 $1,560,092
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 92,803 $ 135,963
------------ ------------
Total Current Liabilities 92,803 135,963
Notes Payable - Draxis Health Inc. (5) 2,545,000 3,090,000
------------ ------------
Total Liabilities 2,637,803 3,225,963
Commitments
Stockholders' Equity:
Common stock, no par, 20,000,000 shares
authorized, 7,502,674 shares issued and outstanding,
as of March 31, 1996 and 20,000,000 shares authorized,
6,508,675 shares issued and outstanding, as of
December 31, 1995. 10,144,338 8,599,338
Deficit accumulated during development stage (10,028,880) (10,265,209)
------------ ------------
Total Stockholders' Equity (Deficit) 115,458 (1,665,871)
------------ ------------
Total Liabilities and Stockholders' Equity $2,753,261 $1,560,092
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Operations
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Period From
July 19, 1990 (Date
of Incorporation) to
Period Ended March 31, March 31,
1996 1995 1996
<S> <C> <C> <C>
REVENUE:
Sales $23,028 $ -- $23,028
Interest and investment income 23,434 30,086 1,093,681
Gain on foreign currency exchange -- 65 15,454
Realized gain on investment securities -- -- 71,214
Distribution rights (Note 5) 468,750 -- 468,750
Other 300,000 25,000 501,929
---------- ---------- ----------
815,212 55,151 2,174,056
---------- ---------- ----------
EXPENSES:
Research and development 269,407 420,072 5,910,232
General and administrative 253,473 179,260 5,430,514
Interest 44,014 77,007 572,536
Depreciation and amortization 11,989 12,834 289,654
---------- ---------- ----------
578,883 689,173 12,202,936
---------- ---------- ----------
NET INCOME (LOSS) (Note 6) $236,329 $(634,022) $(10,028,880)
-------- --------- ------------
-------- --------- ------------
NET INCOME (LOSS) PER COMMON SHARE $0.03 ($0.10) ($1.61)
----- ------ ------
----- ------ ------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES 7,376,320 6,483,675 6,211,957
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Period From
July 19, 1990
(Date of Incorporation)
Period Ended March 31, to March 31,
1996 1995 1996
---------------- ---------------- ------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(634,022) $(634,022) $(8,268,084)
Adjustments to reconcile
net loss to cash used in
operating activities:
Depreciation and
amortization 12,834 12,834 159,153
Amortization of debt issuance
costs -- 6,241 19,283
Amortization of unearned supply
agreement consideration -- -- 603,500
Amortization of premium on
investment securities -- -- 52,533
Realized (gain) loss on
investment securities (gross) -- -- 104,177
Compensation expense
resulting from stock
issued at price below
estimated market value -- -- 423,746
Amortization of unearned
compensation resulting
from stock option grants -- -- 620,140
Benefit resulting from
increase in exercise
price of stock options -- -- (16,640)
(Gain) loss on foreign
currency exchange (65) (65) (15,586)
Changes in operating
accounts:
Receivable from Draxis
Health Inc. (263) (263) (1,393)
Prepaid expenses 1,246 1,246 (753)
Accrued interest
receivable 5,506 5,506 (43,680)
Other assets -- -- (3,418)
Accounts payable and
accrued expenses 113,384 113,384 159,050
--------- --------- ---------
Net cash used in
operating activities (495,139) (495,139) (6,207,972)
-------- -------- ----------
INVESTING ACTIVITIES:
Purchases of furniture,
equipment and leasehold
improvements (676) (676) (106,714)
Purchases of investment
securities -- -- (20,054,735)
Proceeds from sales of
investment securities 976,292 976,292 18,655,131
Expenditures for intangible
assets (20,596) (20,596) (433,943)
Investment in Phoenix
Scientific, Inc. -- -- (975,000)
--------- --------- ---------
Net cash provided by (used in)
investing activities 955,020 955,020 (2,915,261)
------- ------- ----------
</TABLE>
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Period From
July 19, 1990
(Date of Incorporation)
Period Ended March 31, to March 31,
1996 1995 1996
---------------- ------------- -----------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Loan from Draxis Health Inc. -- $ -- $ 2,500,000
Debt issuance costs -- -- (155,200)
Deferred stock offering
costs -- -- (1,458,227)
Advances from Draxis
Animal Health (Canada) Inc. -- -- 279,724
Advances from Draxis Health Inc. -- -- 450,000
Repayments of advances from
Draxis Animal Health (Canada) Inc. -- -- (10,000)
Issuance of common stock -- -- 8,202,198
----------- ----------- ------------
Net cash provided by
financing activities -- -- 9,808,495
----------- ----------- ------------
EFFECT OF EXCHANGE RATES
ON CASH 65 65 15,586
----------- ----------- ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 459,946 459,946 700,848
CASH AND CASH EQUIVALENTS:
Beginning of period 240,902 240,902 --
----------- ----------- ------------
End of period $ 700,848 $ 700,848 $ 700,848
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION:
Issuance of common stock for
intangibles acquired and
other noncash consideration $ -- $ -- $ 267,958
----------- ----------- ------------
----------- ----------- ------------
Reduction of amounts payable
in exchange for equipment $ -- $ -- $ 5,139
----------- ----------- ------------
----------- ----------- ------------
Deferred stock offering costs
offset against common stock $ -- $ -- $ 1,551,564
----------- ----------- ------------
----------- ----------- ------------
Investment in Phoenix
Scientific, Inc. financed by
obligations under contract $ (200,000) $ (200,000) $ 400,000
----------- ----------- ------------
----------- ----------- ------------
Interest paid $ 70,766 $ 70,766 $ 299,175
----------- ----------- ------------
----------- ----------- ------------
There have been no income taxes
paid.
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
(Unaudited)
1. The Balance Sheets as of March 31, 1996, the Statements of Operations
for the three months ended March 31, 1996 and 1995, and for the period
from July 19, 1990 (date of incorporation) to March 31, 1996, and the
Statements of Cash Flows for the three months ended March 31, 1996 and
1995 and for the period from July 19, 1990 (date of incorporation) to
March 31, 1996 have been prepared by the Company, without audit. In
the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position, results of operations and changes in cash flows as of and
for all periods presented have been made. Certain amounts included in
the 1995 presentation have been reclassified to conform with the 1996
presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the Company's December
31, 1995 financial statements and notes thereto.
2. As of March 31, 1996, cash and cash equivalents consists of $2,019,173
in interest bearing deposits and $53,413 in non-interest bearing
deposits.
3. Inventories are priced at the lower of first in - first out (FIFO)
cost. As of March 31, 1996, inventories consist of $90,000 in raw
materials and $33,645 in finished goods.
4. As of March 31, 1996, intangible assets include the unamortized
balance of debt issuance costs totaling $110,951 and costs associated
with securing patents of $352,155.
5. Pursuant to terms of the Draxis Health Inc. (formerly Deprenyl
Research Limited) financing, the Company has notes payable to Draxis
Health Inc. aggregating $2,545,000. In January, 1996, the Company
completed an agreement with Draxis Health Inc. to distribute Anipryl-
Registered Trademark- in Canada. As part of the 10-year exclusive
distribution agreement, Draxis Health Inc. paid an up front fee of
$468,750 for specified Canadian rights to Anipryl-Registered
Trademark- as well as $125,000 for reimbursement of expenses incurred
to date to prepare marketing materials for the Canadian launch of
Anipryl-Registered Trademark-. The companies entered into a revenue
sharing formula for Canadian sales of Anipryl-Registered Trademark-.
As part of the distribution agreement, Draxis Health Inc. converted
approximately $1.5 million of the $3 million in loans outstanding into
common shares of the Company. Draxis also provided $1 million of
operating capital in the form of a loan convertible to common shares
of the Company. (See Management's Discussion and Analysis for a
detailed description of this transaction.)
6. Net income (loss) per common share is based on the weighted average
number of shares outstanding during each period.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements and Notes to Financial Statements for the year ended
December 31, 1995, as well as Management's Discussion and Analysis in the
Company's Form 10-K.
The Company was formed on July 19, 1990 to assume the rights and continue the
development and marketing research regarding the use of l-deprenyl (Anipryl-
Registered Trademark-) in animals previously performed by Deprenyl Animal Health
(Canada) Inc. (DAH (Canada)), a wholly-owned subsidiary of Draxis Health Inc.
Draxis Pharmaceutica Inc. (also a wholly-owned subsidiary of Draxis Health Inc.)
currently holds approximately a 44% equity interest (formerly held by DAH
(Canada)). Draxis Health Inc. ("Draxis"), formerly Deprenyl Research Limited or
DRL, holds convertible debt that could increase its ownership to approximately
52% of the Company.
FINANCIAL CONDITION
Total assets increased during the period from $1,560,092 as of December 31, 1995
to $2,753,261 as of March 31, 1996, due primarily to financing received in
accordance with the Draxis Distribution Agreement (see discussion below). Also
during the quarter, the Company made its first sale of its product to Draxis and
has begun to build inventory levels.
Intangible assets increased from $442,877 as of December 31, 1995 to $463,106 as
of March 31, 1996 primarily due to the Company's program to obtain worldwide
patent and trademark coverage for Anipryl-Registered Trademark-. Amortization
of debt issuance costs associated with the 1994 and 1996 Draxis Financing, as
defined below, also continue to reduce amounts recorded as intangible assets.
The Company believes it has sufficient operating capital through the end of
1996. Management is actively seeking additional financing. Should such
additional financing not be attained in a timely manner, the Company could be
forced to curtail the clinical development of Anipryl-Registered Trademark- and
immediately reduce operations. See discussion of regulatory approval below
under "Results of Operations". See "Liquidity and Capital Resources".
RESULTS OF OPERATIONS
On October 2, 1995, the Company received regulatory approval by the Canadian
Health Protection Branch Bureau of Veterinary Drugs ("HPB") to market Anipryl-
Registered Trademark- in Canada. The Company had its first veterinary
pharmaceutical product sale for this indication in March, 1996. Management
believes that revenues from the marketing of Anipryl-Registered Trademark- in
Canada should marginally reduce operating losses for 1996.
In January, 1996, in order to obtain working capital through 1996 and to enhance
its capability to market its first approved product in Canada, the Company
signed an agreement with Draxis providing Draxis a ten-year exclusive
distribution right in Canada for Anipryl-Registered Trademark- (the "Draxis
Distribution Agreement").
The Company is awaiting action of the U.S. Food and Drug Administration with
regard to its
<PAGE>
Cushing's disease application. The Company is continuing its U.S. pivotal
clinical trial for canine cognitive dysfunction, at the current time, but
lack of funds would curtail the clinical development of Anipryl-Registered
Trademark-. There is no way to predict when, or if, regulatory approvals
might be attained in the U.S. or the timing or magnitude of the revenues from
marketing of the Company's products in the U.S. or whether any such revenues
will ever be realized.
Revenues totaled $815,212 for the three months ended March 31, 1996 compared to
$55,151 for the three months ended March 31, 1995 and $2,174,056 for the period
from July 19, 1990 (date of incorporation) to March 31, 1996. Interest and
investment income will continue to be the Company's primary source of income,
although revenue from Canadian sales of Anipryl-Registered Trademark- is
expected to increase in the coming months. Interest income may increase
temporarily subsequent to the receipt of funding from the Draxis Distribution
Agreement but will continue to decline over time as a result of fewer funds
being available for investment as the Company continues its Anipryl-Registered
Trademark- research and development program. The Company will also continue to
incur interest expense associated with the 1994 and 1996 Draxis Financings.
(See discussion of the 1994 and 1996 Draxis Financings in "Liquidity and Capital
Resources" below.) The Company received other revenue of $125,000 during the
three months ended March 31, 1996, from Draxis Health Inc. in accordance with
the Draxis Distribution Agreement. The Company also received other revenue of
$175,000 during the three months ended March 31, 1996, from Hoechst Veterinae in
connection with the License and Supply Agreement the Company signed during 1994.
Total expenses for the three months ended March 31, 1996 were $578,883 while
total expenses for the three months ended March 31, 1995 and for the period from
July 19, 1990 (date of incorporation) to March 31, 1996 were $689,173, and
$12,202,936, respectively. Total expenses result primarily from research and
development expenses associated with the Company's pivotal (Phase III
equivalent) clinical trials under the Anipryl-Registered Trademark- development
program, development of the marketing and sales plan for the U.S. launch of
Anipryl-Registered Trademark-, general operating expenses and interest expense
resulting from the 1994 and 1996 Draxis Financings. Total expenses are expected
to increase somewhat during the remainder of 1996, due to preparation for the
U.S. marketing and sales of Anipryl-Registered Trademark- for Cushing's disease
and continuation of the Anipryl-Registered Trademark- development program.
Operating expenses continue to remain within expectations.
Research and development expenses for the three months ended March 31, 1996
aggregated $269,407 compared to $420,072 for the three months ended March 31,
1995 and $5,910,232 for the period from July 19, 1990 (date of incorporation) to
March 31, 1996. Research and development expenses relate primarily to
activities required to obtain pre-marketing regulatory approval for Anipryl-
Registered Trademark- for use in pet dogs.
During the three months ended March 31, 1996, the Company incurred interest
expense aggregating $44,014 compared to $77,007 for the corresponding period in
1995, and $572,536 for the period from inception to March 31, 1996. Interest
expense is comprised of interest expense and amortization of debt issuance costs
associated with the Draxis Financings. Debt issuance costs aggregating $155,200
are being amortized over the term of the debt using the effective interest
method. (See discussion of Draxis Financings in "Liquidity and Capital
Resources" below.)
The Company had its first operating quarter of net income of $236,329 or $.03
per share compared to a net loss of $634,022 or $.10 per share, for the three
month period ended March 31, 1995. Net losses for the period from inception to
March 31, 1996 aggregate $10,028,880, or $1.61 per share.
<PAGE>
The Company is in discussions with Hoechst Veterinae to regain the European
rights to the veterinary pharmaceutical Anipryl-Registered Trademark-. The
Company is currently evaluating the best alternatives to accelerate the
availability of Anipryl-Registered Trademark- in Europe.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had cash and cash equivalents of $2,072,586 of
which $2,016,633 is held in U.S. and Canadian interest-bearing accounts and
$55,953 is held in U.S. non-interest bearing operating accounts compared to
$700,848 as of March 31, 1995.
In January, 1996, in order to obtain working capital through 1996 and to enhance
its capability to market its first approved product in Canada, the Company
signed an agreement with Draxis providing Draxis a ten-year exclusive
distribution right in Canada for Anipryl-Registered Trademark-. As part of the
Draxis Distribution Agreement, Draxis converted, at the request of the Company,
approximately $1.5 million of debt it had previously loaned the Company in 1994
(the "1994 Draxis Financing") into common stock of the Company at a renegotiated
exercise price of $1.55 per share, and provided another $1 million to the
Company for operating capital in 1996 as convertible debt also with a conversion
price of $1.55 per share (the "1996 Draxis Financing"). The repayment terms for
the 1996 Draxis Financing are substantially equivalent to the terms described
below for the 1994 Draxis Financing, with installment payments commencing
October 1, 1999 and ending October 1, 2003. To meet requirements of the Toronto
Stock Exchange, this new debt is subject to approval by a majority of votes cast
by the non-affiliate shareholders of the Company, at its next annual meeting of
shareholders. As a result of the conversion of debt, Draxis now owns
approximately 44% of the Company's common stock, with options to convert the
remaining debt that if fully converted would provide Draxis with an ownership
position in the Company of approximately 52%. The Company anticipates that it
will require further funding in order to complete the regulatory process in the
United States; and market its product and is directing efforts toward this goal.
In connection with a Loan Agreement dated August 25, 1992 relating to the
Company's investment in Phoenix Scientific, Inc., the Company was required to
pay Draxis U.S.$250,000 on July 1, 1994 and U.S.$200,000 on October 1, 1994
pursuant to two promissory notes. The Company was also required to pay DAH
(Canada), a wholly-owned subsidiary of Draxis, U.S.$140,000 upon demand
(collectively, the "Notes"). As of March 24, 1994 and subject to certain terms
and conditions, the Company and Draxis entered into the 1994 Draxis Financing
whereby Draxis provided additional funding of U.S.$2,500,000 on May 1, 1994, to
the Company so that the Company could continue pursuing the development and
regulatory approval process of Anipryl-Registered Trademark-.
Contemporaneously, the Company paid to Draxis an up-front fee of U.S.$155,200.
Pursuant to the 1994 Draxis Financing, Draxis also agreed to extend the
repayment of the Notes until 1997. Furthermore, the parties agreed to amend the
Notes to provide that all amounts due thereunder may be converted at the option
of Draxis, upon written notice to the Company, into shares of Common Stock of
the Company at U.S.$2.88 per share.
The portion of the 1994 loan that was not converted in the 1996 Draxis Financing
as part of the consideration for the Draxis Distribution Agreement is repayable
as to (i) 60% of the outstanding amount in equal quarterly installments payable
on the last day of each quarter commencing January 1, 1997 and ending January 1,
2001, and (ii) 40% in a lump sum on January 1, 2001, together with interest
thereon payable quarterly on the last day of each quarter at an annual rate
equal to the prime rate plus 1% on the outstanding principal amount commencing
on the date of the loan.
<PAGE>
In addition, the remaining portion of this loan may be converted, upon written
notice to the Company, into: (a) shares of Common Stock of the Company at
U.S.$2.88 per share; or (b) a participation interest, in increments of
U.S.$250,000, payable in annual installments until December 31, 2003.
Participation Interest is defined as an entitlement to receive an amount per
annum until December 31, 2003 equal to (i) 28% of the converted principal and
unpaid and accrued interest commencing the date of conversion by Draxis, if
Draxis converts prior to the receipt by the Company of FDA approval of Anipryl-
Registered Trademark- but after receipt of HPB approval of Anipryl-Registered
Trademark-; or (ii) 20% of the converted principal and unpaid and unpaid
interest commencing the date of conversion by Draxis, if Draxis converts after
the receipt by the Company of FDA approval of Anipryl-Registered Trademark- and
HPB approval of Anipryl-Registered Trademark-. Participation interest payments
will decrease to 2/3 of the amount required to be paid for the year ending
December 31, 2004, and to 1/3 of such amount for the year ending December 31,
2005.
In the event a participation interest payment exceeds 50% of the Company's pre-
tax net income during any fiscal year, the difference between the participation
interest payment and 50% of such pre-tax net income shall be paid in the form of
shares of the Company at the average price of U.S.$2.88 per share. Draxis has
further agreed not to convert more than 50% of the loan into a participation
interest in any calendar year. The 1996 Draxis Financing does not contain a
provision for conversion into a participation interest. Under certain terms and
conditions, the Company shall be required to register any shares acquired by
Draxis under any of the above-mentioned terms with the Securities and Exchange
Commission.
The Company agrees that any additional debt which may be incurred by the
Company, with a repayment term exceeding one year, shall be subordinated to the
Company's outstanding indebtedness to Draxis. The Company may prepay any
amounts outstanding at sixty (60) days written notice to Draxis, during which
time Draxis retains the right to exercise any remaining conversion privileges.
The ability of the Company to achieve its goal of bringing Anipryl-Registered
Trademark- to the U.S. market for use in dogs is dependent, in part, upon the
Company's ability to raise adequate funding and to gain FDA regulatory approval
of its product. There can be no assurance that the remaining capital will be
sufficient to implement the Company's objective of obtaining pre-marketing
approval of Anipryl-Registered Trademark- in the U.S. The Company has invested
the proceeds from its financing activities primarily in short-term or liquid
investments, so that the Company will be able to access its cash requirements as
needed for its development plan during 1996. Insufficient funding may require
the Company to delay or eliminate expenditures relating to the marketing of the
product and further development. The Company is currently considering options
for additional funding. The Board of Directors appointed a committee of
independent members to evaluate any proposals that may arise. The Committee has
retained an investment banking firm to assist with the analysis and negotiations
of any such proposals. Draxis has indicated an interest in further supporting
the Company's efforts and has submitted a proposal for consideration. It is not
possible at this time to predict with assurance whether any of these activities
will result in additional funding for the Company. Based upon the Company's
current level of expenditures, the Company has funds to support its development
program through year-end 1996.
PART II. - OTHER INFORMATION
<PAGE>
ITEM 1-6. NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DEPRENYL ANIMAL HEALTH, INC.
Date May 10, 1996 By:/s/ David R. Stevens
---------------------------
David R. Stevens
President, Chief Executive Officer, and
Chief Financial Officer
<PAGE>
APPENDIX L
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------------- -----------------
Commission file number 0-19059
Deprenyl Animal Health, Inc.
(Exact name of registrant as specified in its charter)
Missouri 36-3716293
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10955 Lowell, Suite 710
Overland Park, Kansas 66210
(address of principal executive offices)
(Zip Code)
(913) 338-2120
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
------- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
7,544,698 common shares as of July 17, 1996
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheets
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
June 30, December 31,
ASSETS Note 1996 1995
- ------ -------- ----------- ---------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents (2) $ 1,488,552 $ 1,054,759
Receivables:
Draxis Health Inc. 5,945 431
Prepaid expenses 2,136 1,832
Inventory (3) 174,124 --
----------- -----------
Total Current Assets 1,670,757 1,057,022
Furniture, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 73,080 55,575
Other Assets:
Intangibles (4) 466,992 442,877
Other 4,018 4,618
----------- -----------
Total Assets $ 2,214,847 $ 1,560,092
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 124,378 $ 135,963
----------- -----------
Total Current Liabilities 124,378 135,963
Notes Payable - Draxis Health Inc. (5) 2,545,000 3,090,000
----------- -----------
Total Liabilities 2,669,378 3,225,963
Commitments
Stockholders' Equity:
Common stock, no par, 20,000,000 shares
authorized, 7,544,698 shares issued and outstanding,
as of June 30, 1996 and 20,000,000 shares authorized,
6,508,675 shares issued and outstanding, as of
December 31, 1995. 10,253,996 8,599,338
Deficit accumulated during development stage (10,708,527) (10,265,209)
----------- -----------
Total Stockholders' Equity (Deficit) (454,531) (1,665,871)
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,214,847 $ 1,560,092
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Operations
(Stated in U.S. Dollars)
<TABLE>
<CAPTION>
Period From
July 19, 1990 (Date of
Three Months Six Months incorporation) to
Ended June 30, Ended June 30, June 30,
1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C>
REVENUE:
Sales $ 48,132 $ - $ 71,160 $ - $ 71,160
Interest and investment income 21,016 22,219 44,450 52,305 1,114,697
Gain on foreign currency exchange - (142) - (77) 15,454
Realized gain on investment securities - - - - 71,214
Distribution rights - - 468,750 - 468,750
Other 5,966 - 305,966 25,000 507,895
--------- --------- --------- ----------- ------------
75,114 22,077 890,326 77,228 2,249,170
--------- --------- --------- ----------- ------------
EXPENSES:
Research and development 347,608 400,418 617,433 820,490 6,258,258
General and administrative 335,607 288,564 608,561 467,824 5,785,602
Interest 40,616 78,867 84,630 155,874 613,152
Depreciation and amortization 11,031 12,867 23,020 25,701 300,685
--------- --------- --------- ----------- ------------
734,862 780,716 1,333,644 1,469,889 12,957,697
--------- --------- --------- ----------- ------------
NET LOSS $(659,748) $(758,639) $(443,318) $(1,392,661) $(10,708,527)
--------- --------- --------- ----------- ------------
--------- --------- --------- ----------- ------------
NET LOSS PER COMMON SHARE $(0.09) $(0.12) $(0.06) $(0.21) $(1.72)
------ ------ ------ ------ ------
------ ------ ------ ------ ------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 7,393,443 6,483,675 7,448,059 6,483,675 6,225,955
--------- --------- --------- ----------- ------------
--------- --------- --------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
(Stated in U.S. Dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period From
July 19, 1990
(Date of Incorporation)
Period Ended June 30, to June 30,
1996 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(443,318) $(1,392,661) $(10,708,527)
Adjustments to reconcile
net loss to cash used in
operating activities:
Depreciation and
amortization 23,020 38,183 300,685
Amortization of unearned
supply agreement
consideration -- -- 653,500
Amortization of premium on
investment securities -- -- 52,533
Realized gain on
investment securities
(gross) -- -- (71,214)
Compensation expense
resulting from stock
issued at price below
estimated market value -- -- 423,746
Amortization of unearned
compensation resulting
from stock option grants -- -- 620,140
Benefit resulting from
increase in exercise
price of stock options -- -- (16,640)
(Gain) loss on foreign
currency exchange -- 77 (15,454)
Changes in operating accounts:
Receivable from Draxis
Health Inc. (5,514) 346 (5,945)
Prepaid expenses (304) (949) (2,136)
Inventory (174,124) (24,500) (174,124)
Accrued interest
receivable -- 49,186 --
Other assets 600 -- (4,018)
Accounts payable and
accrued expenses (11,585) 62,324 129,517
---------- ---------- -----------
Net cash used in
operating activities (611,225) (1,267,994) (8,817,937)
---------- ---------- -----------
INVESTING ACTIVITIES:
Purchases of furniture,
equipment and leasehold
improvements (28,042) (32,128) (154,314)
Purchases of investment
securities -- -- (20,054,735)
Proceeds from sales of
investment securities -- 2,219,185 19,898,024
Expenditures for intangible
assets (36,598) (29,514) (504,525)
Investment in Phoenix
Scientific, Inc. -- -- 175,390
---------- ---------- -----------
Net cash provided by (used in)
investing activities (64,640) 2,157,543 (640,160)
---------- ---------- -----------
</TABLE>
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
(Stated in U.S. Dollars)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period From
July 19, 1990
(Date of Incorporation)
Period Ended June 30, to June 30,
1996 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
1994 Loan from Draxis Health Inc. $ (955,000) $ -- $1,545,000
1996 Loan from Draxis Health Inc. 1,000,000 1,000,000
Debt issuance costs -- -- (142,158)
Deferred stock offering
costs -- -- (1,458,227)
Advances from Draxis
Animal Health (Canada) Inc. (140,000) -- 139,724
Advances from Draxis Health Inc. (450,000) -- --
Repayments of advances from
Draxis Animal Health (Canada) Inc. -- -- (10,000)
Issuance of common stock 1,654,658 -- 9,856,856
---------- ---------- -----------
Net cash provided by
financing activities 1,109,658 -- 10,931,195
---------- ---------- -----------
EFFECT OF EXCHANGE RATES
ON CASH -- (77) 15,454
---------- ---------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 433,793 889,472 1,488,552
CASH AND CASH EQUIVALENTS:
Beginning of period 1,054,759 240,902 --
---------- ---------- -----------
End of period $1,488,552 $1,130,374 $ 1,488,552
---------- ---------- -----------
---------- ---------- -----------
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION:
Issuance of common stock for
intangibles acquired and
other noncash consideration $ -- $ -- $ 267,958
---------- ---------- -----------
---------- ---------- -----------
Reduction of amounts payable
in exchange for equipment $ -- $ -- $ 5,139
---------- ---------- -----------
---------- ---------- -----------
Deferred stock offering costs
offset against common stock $ -- $ -- $ 1,551,564
---------- ---------- -----------
---------- ---------- -----------
Investment in Phoenix
Scientific, Inc. financed by
obligations under contract $ -- $ (400,000) $ --
---------- ---------- -----------
---------- ---------- -----------
Interest paid $ 84,630 $ 143,392 $ 388,979
---------- ---------- -----------
---------- ---------- -----------
There have been no income taxes
paid.
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
(Unaudited)
1. The Balance Sheets as of June 30, 1996 and 1995, the Statements of
Operations for the three months ended June 30, 1996 and 1995, and for the
period from July 19, 1990 (date of incorporation) to June 30, 1996, and
the Statements of Cash Flows for the six months ended June 30, 1996 and
1995 and for the period from July 19, 1990 (date of incorporation) to
June 30, 1996 have been prepared by the Company, without audit. In the
opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position, results of operations and changes in cash flows as of and for
all periods presented have been made. Certain amounts included in the
1995 presentation have been reclassified to conform with the 1996
presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements should be read in conjunction with the Company's December 31,
1995 financial statements and notes thereto.
2. As of June 30, 1996, cash and cash equivalents consists of $1,458,373 in
interest bearing deposits and $30,179 in non-interest bearing deposits.
3. Inventories are priced at the lower of first in - first out (FIFO) cost.
As of June 30, 1996, inventories consist only of finished goods.
4. As of June 30, 1996, intangible assets include the unamortized balance of
debt issuance costs totaling $104,710 and costs associated with securing
patents of $362,282.
5. Pursuant to terms of the Draxis Health Inc. (formerly Deprenyl Research
Limited) financing, the Company has notes payable to Draxis Health Inc.
aggregating $2,545,000. In January, 1996, the Company completed an
agreement with Draxis Health Inc. to distribute Anipryl-Registered
Trademark- in Canada. As part of the 10-year exclusive distribution
agreement, Draxis Health Inc. paid an up front fee of $468,750 for
specified Canadian rights to Anipryl-Registered Trademark- as well as
$125,000 for reimbursement of expenses incurred to date to prepare
marketing materials for the Canadian launch of Anipryl-Registered
Trademark-. The companies entered into a revenue sharing formula for
Canadian sales of Anipryl-Registered Trademark-. As part of the
distribution agreement, Draxis Health Inc. converted approximately $1.5
million of the $3 million in loans outstanding into common shares of the
Company. Draxis also provided $1 million of operating capital in the
form of a loan convertible to common shares of the Company. (See
Management's Discussion and Analysis for a detailed description of this
transaction.)
6. Net loss per common share is based on the weighted average number of
shares outstanding during each period.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements and Notes to Financial Statements for the year ended
December 31, 1995, as well as Management's Discussion and Analysis in the
Company's Form 10-K.
The Company was formed on July 19, 1990 to assume the rights and continue the
development and marketing research regarding the use of l-deprenyl
(Anipryl-Registered Trademark-) in animals previously performed by Deprenyl
Animal Health (Canada) Inc. (DAH (Canada)), a wholly-owned subsidiary of
Draxis Health Inc. (Draxis). Draxis Pharmaceutica Inc. ("DPI"), also a
wholly-owned subsidiary of Draxis, currently holds approximately a 30% equity
interest in the Company and Draxis, LLC, a Delaware limited liability company
owned 90% by Draxis and 10% by DPI, currently holds approximately a 14%
equity interest in the Company. Thus, Draxis affiliates currently own
approximately 44% equity interest in the Company. DPI holds convertible debt
that could increase the ownership of Draxis affiliates to approximately 52%
of the Company.
FINANCIAL CONDITION
Total assets increased during the period from $1,560,092 as of December 31,
1995 to $2,214,847 as of June 30, 1996, due primarily to financing received
in accordance with the Draxis Distribution Agreement (see discussion below).
Also during the quarter, the Company made additional sales of its product to
Draxis and continues to build inventory levels.
Intangible assets increased from $442,877 as of December 31, 1995 to $466,992
as of June 30, 1996 primarily due to the Company's program to obtain
worldwide patent and trademark coverage for Anipryl-Registered Trademark-.
Amortization of debt issuance costs associated with the 1994 and 1996 Draxis
Financing, as defined below, also continue to reduce amounts recorded as
intangible assets.
RESULTS OF OPERATIONS
On October 2, 1995, the Company received regulatory approval from the
Canadian Health Protection Branch Bureau of Veterinary Drugs ("HPB") to
market Anipryl-Registered Trademark- in Canada. The Company had its first
veterinary pharmaceutical product sale for this indication in March, 1996.
Management believes that revenues from the marketing of Anipryl-Registered
Trademark- in Canada should marginally reduce operating losses for 1996.
In January, 1996, in order to obtain working capital through 1996 and to
enhance its capability to market its first approved product in Canada, the
Company signed an agreement with Draxis providing Draxis a ten-year exclusive
distribution right in Canada for Anipryl-Registered Trademark- (the "Draxis
Distribution Agreement").
The Company is awaiting action of the U.S. Food and Drug Administration with
regard to its Cushing's disease application and is awaiting action of the HPB
with regard to its canine cognitive dysfunction application. The Company is
continuing its U.S. pivotal (Phase III equivalent) clinical trial for canine
cognitive dysfunction, at the current time, but lack of funds could curtail
the clinical development of Anipryl-Registered Trademark-. There is no way
to predict when, or if, regulatory approvals might be attained in the U.S. or
the timing or magnitude of the revenues from marketing of the Company's
products in the U.S. or whether any such revenues will ever be realized.
<PAGE>
Revenues totaled $75,114 and $890,326 for the three and six months ended June
30, 1996 compared to $22,077 and $77,228 for the three and six months ended
June 30, 1995 and $2,249,170 for the period from July 19, 1990 (date of
incorporation) to June 30, 1996. Interest and investment income will
continue to be the Company's primary source of income, although revenue from
Canadian sales of Anipryl-Registered Trademark- is expected to increase in
the coming months. Interest income temporarily increased subsequent to the
receipt of funding from the Draxis Distribution Agreement but will continue
to decline over time as a result of fewer funds being available for
investment as the Company continues its Anipryl-Registered Trademark-
research and development program. The Company will also continue to incur
interest expense associated with the 1994 and 1996 Draxis Financings. (See
discussion of the 1994 and 1996 Draxis Financings in "Liquidity and Capital
Resources" below.) The Company received other revenue of $125,000 during the
six months ended June 30, 1996, from Draxis Health Inc. in accordance with
the Draxis Distribution Agreement. The Company also received other revenue
of $175,000 during the six months ended June 30, 1996, from Hoechst Veterinae
in connection with the License and Supply Agreement the Company signed during
1994.
Total expenses for the three and six months ended June 30, 1996 were $734,862
and $1,333,644 while total expenses for the three and six months ended June
30, 1995 and for the period from July 19, 1990 (date of incorporation) to
June 30, 1996 were $780,616, $1,469,889, and $12,957,697 respectively. Total
expenses result primarily from research and development expenses associated
with the Company's pivotal (Phase III equivalent) clinical trial under the
Anipryl-Registered Trademark- development program, development of the
marketing and sales plan for the U.S. launch of Anipryl-Registered
Trademark-, general operating expenses and interest expense resulting from
the 1994 and 1996 Draxis Financings. Total expenses are expected to increase
somewhat during the remainder of 1996, due to preparation for the U.S.
marketing and sales of Anipryl-Registered Trademark- for Cushing's disease
and continuation of the Anipryl-Registered Trademark- development program.
Operating expenses continue to remain within expectations.
Research and development expenses for the three and six months ended June 30,
1996 aggregated $347,608 and $617,433 compared to $400,418 and $820,490 for
the corresponding periods during 1995 and $6,258,258 for the period from July
19, 1990 (date of incorporation) to June 30, 1996. Research and development
expenses relate primarily to activities required to obtain pre-marketing
regulatory approval for Anipryl-Registered Trademark- for use in pet dogs.
During the three and six months ended June 30, 1996, the Company incurred
interest expense aggregating $84,630 compared to $155,874 for the
corresponding period in 1995, and $613,152 for the period from inception to
June 30, 1996. Interest expense is comprised of interest expense and
amortization of debt issuance costs associated with the Draxis Financings.
Debt issuance costs aggregating $155,200 are being amortized over the term of
the debt using the effective interest method. (See discussion of Draxis
Financings in "Liquidity and Capital Resources" below.)
The Company had net losses of $659,748 or $0.09 per share and $443,318 or
$0.06 per share for the three and six month periods ended June 30, 1996
compared to $758,639 or $0.12 per share and $1,392,661 or $0.21 per share for
the three and six month periods ended June 30, 1995. Net losses for the
period from inception to June 30, 1996 aggregate $10,708,527, or $1.72 per
share.
The Company is in discussions with Hoechst Veterinae to regain the European
rights to the veterinary pharmaceutical Anipryl-Registered Trademark-. The
Company is currently evaluating the best alternatives to accelerate the
availability of Anipryl-Registered Trademark- in Europe.
LIQUIDITY AND CAPITAL RESOURCES
<PAGE>
As of June 30, 1996, the Company had cash and cash equivalents of $1,488,552
of which $1,458,373 is held in U.S. and Canadian interest-bearing accounts
and $30,179 is held in U.S. non-interest bearing operating accounts compared
to $3,527,809 as of June 30, 1995.
In January, 1996, in order to obtain working capital through 1996 and to
enhance its capability to market its first approved product in Canada, the
Company signed an agreement with Draxis providing Draxis a ten-year exclusive
distribution right in Canada for Anipryl-Registered Trademark-. As part of
the Draxis Distribution Agreement, Draxis converted, at the request of the
Company, approximately $1.5 million of debt it had previously loaned the
Company in 1994 (the "1994 Draxis Financing") into common stock of the
Company at a renegotiated exercise price of $1.55 per share, and provided
another $1 million to the Company for operating capital in 1996 as
convertible debt also with a conversion price of $1.55 per share (the "1996
Draxis Financing"). The repayment terms for the 1996 Draxis Financing are
substantially equivalent to the terms described below for the 1994 Draxis
Financing, with installment payments commencing October 1, 1999 and ending
October 1, 2003. As a result of the conversion of debt, Draxis, through its
affiliates, now owns approximately 44% of the Company's common stock, with
options to convert the remaining debt that if fully converted would provide
Draxis with an indirect ownership position in the Company of approximately
52%.
In connection with a Loan Agreement dated August 25, 1992 relating to the
Company's investment in Phoenix Scientific, Inc., the Company was required to
pay Draxis U.S.$250,000 on July 1, 1994 and U.S.$200,000 on October 1, 1994
pursuant to two promissory notes. The Company was also required to pay DAH
(Canada), a wholly-owned subsidiary of Draxis, U.S.$140,000 upon demand
(collectively, the "Notes"). As of March 24, 1994 and subject to certain
terms and conditions, the Company and Draxis entered into the 1994 Draxis
Financing whereby Draxis provided additional funding of U.S.$2,500,000 on May
1, 1994, to the Company so that the Company could continue pursuing the
development and regulatory approval process of Anipryl-Registered Trademark-.
Contemporaneously, the Company paid to Draxis an up-front fee of
U.S.$155,200. Pursuant to the 1994 Draxis Financing, Draxis also agreed to
extend the repayment of the Notes until 1997. Furthermore, the parties
agreed to amend the Notes to provide that all amounts due thereunder may be
converted at the option of Draxis, upon written notice to the Company, into
shares of Common Stock of the Company at U.S.$2.88 per share.
The portion of the 1994 loan, approximately $1.5 million, that was not
converted in the 1996 Draxis Financing as part of the consideration for the
Draxis Distribution Agreement is repayable as to (i) 60% of the outstanding
amount in equal quarterly installments payable on the last day of each
quarter commencing January 1, 1997 and ending January 1, 2001, and (ii) 40%
in a lump sum on January 1, 2001, together with interest thereon payable
quarterly on the last day of each quarter at an annual rate equal to the
prime rate plus 1% on the outstanding principal amount commencing on the date
of the loan.
In addition, the remaining portion of the 1994 loan may be converted, upon
written notice to the Company, into: (a) shares of Common Stock of the
Company at U.S.$2.88 per share; or (b) a participation interest, in
increments of U.S.$250,000, payable in annual installments until December 31,
2003. Participation Interest is defined as an entitlement to receive an
amount per annum until December 31, 2003 equal to (i) 28% of the converted
principal and unpaid and accrued interest commencing the date of conversion
by Draxis, if Draxis converts prior to the receipt by the Company of FDA
approval of Anipryl-Registered Trademark- but after receipt of HPB approval
of Anipryl-Registered Trademark-; or (ii) 20% of the converted principal and
unpaid interest commencing the date of conversion by Draxis, if Draxis
converts after the receipt by the Company of FDA approval of
Anipryl-Registered Trademark- and HPB approval of Anipryl-Registered
Trademark-. Participation interest payments will decrease to 2/3 of the
amount required to be paid for the year ending December 31, 2004, and to 1/3
of such amount for the year ending December 31,
<PAGE>
2005.
In the event a participation interest payment exceeds 50% of the Company's
pre-tax net income during any fiscal year, the difference between the
participation interest payment and 50% of such pre-tax net income shall be
paid in the form of shares of the Company at the average price of U.S.$2.88
per share. Draxis has further agreed not to convert more than 50% of the
loan into a participation interest in any calendar year. The 1996 Draxis
Financing does not contain a provision for conversion into a participation
interest. Under certain terms and conditions, the Company shall be required
to register any shares acquired by Draxis under any of the above-mentioned
terms with the Securities and Exchange Commission.
The Company agrees that any additional debt which may be incurred by the
Company, with a repayment term exceeding one year, shall be subordinated to
the Company's outstanding indebtedness to Draxis. The Company may prepay any
amounts outstanding at sixty (60) days written notice to Draxis, during which
time Draxis retains the right to exercise any remaining conversion privileges.
The ability of the Company to achieve its goal of bringing Anipryl-Registered
Trademark- to the U.S. market for use in dogs is dependent, in part, upon the
Company's ability to raise adequate funding and to gain FDA regulatory
approval of its product. There can be no assurance that the remaining
capital will be sufficient to implement the Company's objective of obtaining
pre-marketing approval of Anipryl-Registered Trademark- in the U.S. The
Company has invested the proceeds from its financing activities primarily in
short-term or liquid investments, so that the Company will be able to access
its cash requirements as needed for its development plan during 1996.
Insufficient funding may require the Company to delay or eliminate
expenditures relating to the marketing of the product and further development.
The Company is currently considering options for additional funding. The
Board of Directors appointed a committee of independent members to evaluate
any proposals that may arise. The Committee has retained an investment
banking firm to assist with the analysis and negotiations of any such
proposals.
It is not possible at this time to predict with assurance whether any of
these activities will result in additional funding for the Company. Based
upon the Company's current level of expenditures, the Company has funds to
support its development program through year-end 1996.
SUBSEQUENT EVENT
Subsequent to the end of the reporting period, on July 25, 1996, the Boards
of Directors of the Company and Draxis voted to recommend to the respective
shareholders of each company the approval of an Exchange Agreement (the
"Exchange Agreement") executed on the same date by and among Draxis, DPI and
the Company. Pursuant to the Exchange Agreement, all outstanding shares of
the Company's common stock other than those owned by DPI or Draxis, LLC, and
other than dissenters' shares would be exchanged (the "Exchange") for shares
of common stock of Draxis on a 1.35 to 1 ratio, with each shareholder of the
Company receiving 1.35 shares of Draxis. The same ratio would be applicable
to options and warrants to acquire the Company's common shares. An
Independent Committee of the Company's Board of Directors approved the
Exchange Agreement and the Company's independent investment bankers delivered
an opinion that the Exchange was fair, from a financial point of view, to
shareholders.
If the Exchange Agreement is adopted by the shareholders and implemented,
Draxis will commit, subject to standard business judgement, approximately $10
million to the Company to complete the process of obtaining approval from the
U.S. Food and Drug Administration to launch
<PAGE>
Anipryl-Registered Trademark- in the United States and to acquire new
veterinary products, as appropriate. Additionally, the Company would be
given operational control over the development, marketing and distribution of
Anipryl-Registered Trademark- and any other veterinary product including,
without limitation, research and development, regulatory affairs,
manufacturing, business development and finance and specifically including
the U.S. launch and subsequent marketing, sales and distribution of
Anipryl-Registered Trademark- or any other veterinary product. The Company
will also be entitled to nominate a director to the Board of Directors of
Draxis to serve until the next annual meeting of the shareholders of Draxis,
at which time Draxis has agreed to nominate for one term a director selected
by the Company and agreeable to Draxis.
Under the Exchange Agreement, if adopted by the shareholders, all shares of
the Company stock exchanged for shares would be acquired by DPI. The
Exchange Agreement contemplates the following steps:
1. Draxis would create a new wholly owned subsidiary under the laws of
the State of Louisiana ("Draxis Sub").
2. The shareholders of the Company, at a special meeting called to
approve the proposals set forth in the Exchange Agreement, would
vote on a proposal to merge the Company, which is currently a
Missouri corporation, into Draxis Sub (the "Re-incorporation
Merger"). Such proposal requires a vote of two-thirds of the
outstanding shares of the Company and a vote of a majority of the
shares not owned by Draxis or Draxis affiliates and could generate
dissenters' rights.
3. If the Re-incorporation Merger is approved, the shareholders would
then vote on a proposal to adopt a Mandatory Share Exchange (the
"Mandatory Share Exchange") pursuant to Section 116 of the Louisiana
Business Corporation Law.
4. If the Mandatory Share Exchange is adopted by the vote of two-thirds
of the Company's outstanding shares and a majority of the Company's
outstanding share not owned by Draxis affiliates, all shares of
Company stock not owned by the Draxis affiliates would be purchased
by DPI in exchange for the issuance to the Company's shareholders of
shares of Draxis stock on a 1.35 to 1 ratio.
The Exchange Agreement is subject to numerous conditions to closing,
including among other things, that the parties receive opinions from tax
advisors that the exchange will be tax free to U.S. shareholders of the
Company. It is anticipated that the Exchange will be taxable to Company
shareholders residing in Canada and perhaps other jurisdictions.
The Exchange Agreement provides that it may be terminated by either party in
certain circumstances including upon a breach by the other party and in the
event that the Exchange has not occurred by January 31, 1997. The Company
has the right to abandon the plan contemplated by the Exchange Agreement
under certain circumstances, but if it so elects, it must pay Draxis a one
million dollar fee and must reimburse Draxis up to $750,000 for professional
expenses incurred by Draxis in the adoption and execution of the Exchange
Agreement. It is anticipated that the Company will incur substantial
professional fees throughout the remainder of 1996 in taking the corporate
actions contemplated by the Exchange Agreement.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Statements relating to anticipated revenues included in the "Results of
Operations" section above constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of
<PAGE>
1933, as amended and Section 21E of the Securities Act of 1934 and are
subject to the safe harbors created thereby. Actual operating results of the
Company could differ materially from anticipated results, as a result of,
among other things, the Company's need to obtain U.S. Food and Drug
Administration regulatory approval for its product and the ability to raise
additional financing.
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1-3. NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Matters submitted to a vote of security holders of the Company at the Annual
Meeting of Shareholders held June 13, 1996 included (1) the election of two
Class II directors; (2) ratification of the selection of Arthur Andersen LLP
as independent auditors for the Company for fiscal year 1996; and (3)
approval of the 1996 Draxis Financing.
(1) The following persons were elected to serve as directors of the
Company:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
--- ------- ------- ---------
Samuel W. Sarick 5,288,625 0 71,977 0
Charles L. Wood 5,290,515 0 71,977 0
(2) Shareholders ratified the selection of Arthur Andersen LLP as the
independent auditors for the Company for fiscal year 1996 as follows:
Votes cast for: 5,281,737
Votes cast against: 11,868
Abstained: 67,942
Broker non-votes: 0
(3) Shareholders approved the 1996 Draxis Financing as follows:
Votes cast for: 1,099,578
Votes cast against: 76,918
Abstained: 12,149
Broker non-votes: 4,172,902
ITEM 5-6. NONE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DEPRENYL ANIMAL HEALTH, INC.
Date August 12, 1996 By: /s/ David R. Stevens
----------------- ----------------------------------------
David R. Stevens
President, Chief Executive Officer, and
Chief Financial Officer
