<PAGE>
MCCARTHY TETRAULT
Toronto-Dominion Bank Tower
Toronto-Dominion Centre
Suite 4700
Toronto, Ontario M5K 1E6 Canada
October 23, 1996
VIA ELECTRONIC TRANSMISSION
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Filing Desk
RE: DRAXIS HEALTH INC.
REGISTRATION STATEMENT ON FORM F-4
Ladies and Gentlemen:
Enclosed for filing via EDGAR under the Securities Act of 1933, as amended
(the "Act"), is a Registration Statement (the "Registration Statement") on Form
F-4 of Draxis Health Inc. (the "Company") relating to the registration of up to
5,725,188 of the Company's Common Shares. Pursuant to Rule 457(b) under the
Act, $3,461 of the registration fee is offset by the filing fee previously paid
by the Company in connection with the filing of preliminary proxy materials on
Schedule 14A on September 12, 1996. The remaining $1,319 of the registration
fee has been wired to the Commission's lock box.
Pursuant to an acceleration request being filed concurrently herewith, the
Company is requesting that effectiveness of the Registration Statement be
accelerated so that the Registration Statement will become effective at 9:00
A.M., Washington, D.C. time, on October 24, 1996, or as soon thereafter as
possible.
If you have any questions regarding these matters, please call the
undersigned at (416) 601-7926.
Very truly yours,
/s/ Steven J. Rapkin
--------------------
Steven J. Rapkin
Enclosures
cc: Mr. David Lavan (Securities and Exchange Commission)
<PAGE>
As filed with the Securities and Exchange Commission on October 23, 1996
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
DRAXIS HEALTH INC.
(Exact name of registrant as specified in its charter)
CANANA 2834 N/A
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
6870 GOREWAY DRIVE
MISSISSAUGA, ONTARIO L4V 1P1 CANADA
(905) 677-5500
(Address, including ZIP Code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------------------
JACQUELINE H.R. LE SAUX
VICE PRESIDENT, CORPORATE DEVELOPMENT AND GENERAL COUNSEL
DRAXIS HEALTH INC.
6870 GOREWAY DRIVE
MISSISSAUGA, ONTARIO L4V 1P1 CANADA
(905) 677-5500
(Name, address, including ZIP Code, and telephone number, including area code,
of agent for service)
--------------------------------
WITH COPIES TO:
DAVID B. TENNANT ARTHUR E. FILLMORE, II
MCCARTHY TETRAULT FILLMORE & HOLMES, L.C.
TORONTO-DOMINION BANK TOWER 911 MAIN STREET
TORONTO-DOMINION CENTRE SUITE 1930
SUITE 4700 KANSAS CITY, MISSOURI 64105
TORONTO, ONTARIO M5K 1E6
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
UPON CONSUMMATION OF THE SHARE EXCHANGE DESCRIBED HEREIN (THE "SHARE EXCHANGE").
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Proposed Proposed
Title of Each Class Amount to be Maximum Offering Maximum Aggregate Amount of
of Securities to be Registered Registered(1) Price Per Share Offering Price(2) Registration Fee(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Shares. . . . . . . . . . . . 5,725,188 Not Applicable $15,770,772.50 $4,780.00
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon the maximum number of Common Shares of Draxis Health Inc.
("Draxis") that may be issued in connection with the Share Exchange.
(2) Estimated solely for purposes of calculating the registration fee required
by Section 6(b) of the Securities Act of 1933, as amended (the "Securities
Act") and computed pursuant to Rules 457(f) and (c) under the Securities
Act based on (i) $3.71875, the average of the bid and asked per share
prices of shares of Common Stock of Deprenyl Animal Health, Inc. ("DAHI")
on October 17, 1996 and (ii) the maximum number of shares of DAHI Common
Stock to be acquired by Draxis in connection with the Share Exchange.
(3) Pursuant to Rule 457(b) under the Securities Act, $3,461 of the
registration fee is offset by the filing fee previously paid by Draxis in
connection with the filing of preliminary proxy materials on Schedule 14A
on September 12, 1996. Accordingly, a registration fee of $1,319 is being
paid herewith.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
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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
<PAGE>
-24-
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
<PAGE>
-25-
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
<PAGE>
-26-
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.
<PAGE>
-27-
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
<PAGE>
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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.$175,000 was
paid by HVG in March 1996.
DAHI's management is not aware of any other HPB/BVD or FDA-approved product
available at this time which competes with ANIPRYL-Registered Trademark-. If
the FDA approves ANIPRYL-Registered Trademark-, the 1988 generic animal drug law
will offer marketing protection from veterinary generic applicants in the United
States for a period of five years. However, that law does not prevent other
companies from repeating the full clinical NADA process to seek FDA approval for
a bio-equivalent product, nor does it prohibit human generic versions of
ANIPRYL-Registered Trademark- from being sold to veterinarians. Any such
competitor would be subject to DAHI's U.S. patent rights.
DAHI's management believes, but are not yet certain, that DAHI has
completed its clinical trial work in developing ANIPRYL-Registered Trademark-
for treating canine Cushing's disease. While DAHI has received marketing
approval for this indication from the BVD, its completed NADA for Cushing's
disease is still pending at the FDA. During 1996, DAHI has continued its Phase
III (equivalent) pivotal clinical trial evaluating the treatment of canine
cognitive dysfunction with ANIPRYL-Registered Trademark- for the FDA. The NADA
for canine cognitive dysfunction is dependent, in part, on DAHI's ability to
obtain additional funding for 1997 and thereafter.
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PRICE RANGE AND TRADING VOLUME OF DAHI COMMON STOCK
NASDAQ BULLETIN BOARD (QUOTED IN US$)
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.
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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.
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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.
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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
<PAGE>
-91-
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
<PAGE>
-92-
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>
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<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".
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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.
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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.
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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.
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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.
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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>
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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>
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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>
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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>
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DEPRENYL ANIMAL HEALTH, DEPRENYL ANIMAL HEALTH,
INC., a Louisiana corporation INC., a Missouri corporation
_________________________________ ____________________________
_________________________________ ____________________________
_________________________________ ____________________________
_________________________________ ____________________________
_________________________________ ____________________________
_________________________________ ____________________________
<PAGE>
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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>
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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>
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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>
-11-
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
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 124 of the Canada Business Corporations Act, R.S.C. 1985,
c.C-44, as amended, provides that a corporation may indemnify a director or
officer of the corporation, a former director or officer of the corporation 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 heirs and legal representatives, against all costs, charges
and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him in respect of any civil, criminal or
administrative action or proceeding to which he is made a party by reason of
being or having been a director or officer of such corporation or body
corporate, if (a) he acted honestly and in good faith with a view to the best
interests of the corporation; and (b) in the case of a criminal or
administrative action or proceeding that is enforced by a monetary penalty, he
had reasonable grounds for believing that his conduct was lawful. Such a person
is entitled to indemnity from the corporation in respect of all costs, charges
and expenses reasonably incurred by him in connection with the defence of any
civil, criminal or administrative action or proceeding to which he is made a
party by reason of being or having been a director or officer of the corporation
or body corporate, if the person seeking indemnity (x) was substantially
successful in the merits in his defence of the action or proceeding, and (y)
fulfils the conditions set out in clauses (a) and (b) described above. The same
statutory provision provides that a corporation may purchase and maintain
insurance for the benefit of such person against any liability incurred by that
person (i) in his capacity as a director or officer of the corporation, except
where the liability relates to his failure to act honestly and in good faith
with a view to the best interests of the corporation, or (ii) in his capacity as
a director or officer of another body corporate where he acts or acted in that
capacity at the corporation's request, except where the liability relates to his
failure to act honestly and in good faith with a view to the best interests of
the body corporate.
The General By-Law of Draxis Health Inc. provides that the corporation
shall indemnify a director or officer of the corporation, a former director or
officer of the corporation 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 heirs and legal representatives, to
the extent permitted by the Canada Business Corporations Act.
Draxis Health Inc. has purchased directors' and officers' liability
insurance which would indemnify its directors and officers against damages
arising out of certain kinds of claims which might be made against them based on
their negligent acts or omissions while acting in their capacity as such.
ITEM 21. EXHIBITS
EXHIBIT NO. DESCRIPTION
2.1 Exchange Agreement by and among Draxis Health Inc., Draxis
Pharmaceutica Inc. and Deprenyl Animal Health, Inc. dated as of
July 25, 1996
3.1 Articles of Incorporation of Draxis Health Inc.
3.2 By-Laws of Draxis Health Inc.
5.1 Opinion of McCarthy Tetrault regarding legality of securities
being registered
8.1 Opinion of Gardner, Carton & Douglas as to federal income tax
consequences of the Share Exchange
8.2 Opinion of Wilson, Sonsini, Goodrich & Rosati as to federal
income tax consequences of the Share Exchange
11. Statement regarding computation of per share earnings
22. Subsidiaries of Draxis Health Inc.
II-1
<PAGE>
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche
23.3 Consent of McCarthy Tetrault (contained in the opinion filed as
Exhibit 5.1)
23.4 Consent of Gardner, Carton & Douglas (contained in the opinion
filed as Exhibit 8.1)
23.5 Consent of Wilson, Sonsini, Goodrich & Rosati (contained in the
opinion filed as Exhibit 8.2)
24.1 Power of Attorney (included on the signature page of this
Registration Statement)
99.1 Fairness Opinion of Hambrecht Quist LLC (attached as Appendix F
to Part I of this Registration Statement)
99.2 Valuation of KMPG
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form;
(2) that every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an offering or securities
subject to Rule 415, will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof;
(3)(i) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of Form F-4
under the Securities Act of 1933, within one business day of receipt of any such
request, and to send the incorporated documents by first class mail or other
equally prompt means, including information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to such request; and (ii) to arrange or provide for a facility in
the U.S. for the purpose of responding to such requests; and
(4) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 20 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In the event that a claim
of indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in a successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Mississauga, Ontario, on the 21st day of October, 1996.
DRAXIS HEALTH INC.
By: /s/ Martin Barkin
-------------------------------------
Martin Barkin, MD
CHIEF EXECUTIVE OFFICER, CHIEF
OPERATING OFFICER, PRESIDENT AND
DIRECTOR
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Martin Barkin and Jacqueline H.R. Le Saux, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, including any filings pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on October 21, 1996.
SIGNATURE TITLE
/s/ Martin Barkin, MD President, Chief Executive Officer,
------------------------------ Chief Operating Officer and Director
Martin Barkin (Principal Executive Officer)
/s/ James A.H. Garner Vice President-Finance and Chief
------------------------------ Financial Officer
James A.H. Garner (Principal Financial Officer)
/s/ A. Cameron Strong Controller (Principal
------------------------------ Accounting Officer)
A. Cameron Strong
-----------------------------
Brian M. King Chairman of the Board
/s/ James P. Doherty
----------------------------- Vice Chairman and Director
James P. Doherty
-----------------------------
Leslie L. Dan Director
/s/ Laszlo Kadar
----------------------------- Director
Laszlo Kadar
/s/ Samuel Sarick
----------------------------- Director
Samuel Sarick
----------------------------- Director
Stewart D. Saxe
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Exchange Agreement by and among Draxis Health Inc., Draxis
Pharmaceutica Inc. and Deprenyl Animal Health, Inc. dated as of
July 25, 1996
3.1 Articles of Incorporation of Draxis Health Inc.
3.2 By-Laws of Draxis Health Inc.
5.1 Opinion of McCarthy Tetrault regarding legality of securities
being registered
8.1 Opinion of Gardner, Carton & Douglas as to federal income tax
consequences of the Share Exchange
8.2 Opinion of Wilson, Sonsini, Goodrich & Rosati as to federal
income tax consequences of the Share Exchange
11. Statement regarding computation of per share earnings
22. Subsidiaries of Draxis Health Inc.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche
23.3 Consent of McCarthy Tetrault (contained in the opinion filed as
Exhibit 5.1)
23.4 Consent of Gardner, Carton & Douglas (contained in the opinion
filed as Exhibit 8.1)
<PAGE>
23.5 Consent of Wilson, Sonsini, Goodrich & Rosati (contained in the
opinion filed as Exhibit 8.2)
24.1 Power of Attorney (included on the signature page of this
Registration Statement)
99.1 Fairness Opinion of Hambrecht Quist LLC (attached as Appendix F
to Part I of this Registration Statement)
99.2 Valuation of KMPG
<PAGE>
EXCHANGE AGREEMENT
BY AND AMONG
DRAXIS HEALTH INC.,
DRAXIS PHARMACEUTICA INC.
AND
DEPRENYL ANIMAL HEALTH, INC.
DATED AS OF JULY 25, 1996
<PAGE>
EXCHANGE AGREEMENT
EXCHANGE AGREEMENT, dated as of July 25, 1996 (this "Agreement"), by and
among Draxis Health Inc., a corporation amalgamated under the laws of Canada
("Draxis"), Draxis Pharmaceutica Inc., a corporation amalgamated under the
laws of Canada ("DPI"), and Deprenyl Animal Health, Inc., a Missouri
corporation ("DAHI").
WHEREAS, the Boards of Directors of Draxis, DPI and DAHI deem it
advisable and in the best interests of their respective corporations that
Draxis and DPI acquire the issued and outstanding shares of DAHI pursuant to
the terms and conditions of this Agreement, and, in furtherance of such
acquisitions, such Boards of Directors have approved this Agreement and the
share exchange contemplated hereby by each of Draxis and DPI to the
shareholders of DAHI in accordance with the terms of this Agreement and
applicable corporate and securities laws; and
WHEREAS the mandatory share exchange will be made pursuant to the
mandatory share exchange provisions of section 116 of the LOUISIANA BUSINESS
CORPORATION LAW (the "Louisiana Act"), which will require the approval of
the DAHI shareholders; and
WHEREAS in order to effect the mandatory share exchange offers as
contemplated herein, the DAHI shareholders will have to approve the
reincorporation export of DAHI as a Louisiana corporation pursuant to the
LOUISIANA ACT and the MISSOURI BUSINESS CORPORATIONS ACT (the "Missouri
Act"); and
WHEREAS, it is intended that the Mandatory Share Exchange (as hereinunder
defined) shall be effected on a tax deferred basis under the U.S. Internal
Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND SHARE EXCHANGE
SECTION 1.1 DEFINITIONS. In this Agreement, unless something in the subject
matter or context is inconsistent therewith:
"1995 DAHI STATEMENTS" means the financial statements included in DAHI's
Annual Report to Stockholders for the financial year ended
December 31,1995.
"AFFILIATE LETTERS" has the meaning ascribed to it in Section 6.5(b).
"AFFILIATES" has the meaning ascribed to it in Section 6.5(a).
"ALTERNATIVE ACQUISITION" has the meaning ascribed to it in Section 6.2(a).
<PAGE>
- 2 -
"BROKER WARRANTS" has the meaning ascribed to it in Section 4.2(a).
"CANADIAN GAAP" means generally accepted accounting principals in Canada.
"CANADIAN SECURITIES LAWS" has the meaning ascribed to it in Section 3.4.
"CERTIFICATES" has the meaning ascribed to it in Section 2.1(b).
"CODE" means the U.S. Internal Revenue Code of 1986, as amended.
"CONFIDENTIALITY AGREEMENT" means that agreement dated March 28, 1996
between Draxis and DAHI.
"CONTRACT" has the meaning ascribed to it in Section 3.4.
"DAHI MATERIAL ADVERSE EFFECT" has the meaning ascribed to it in Section
3.1(d).
"DAHI PLANS" has the meaning ascribed to it in Section 3.13(a).
"DAHI SECURITIES REGULATORY REPORTS" has the meaning ascribed to it in
Section 3.5.
"DAHI STOCK OPTIONS" has the meaning ascribed to it in Section 3.2(b).
"DISSENTING SHARES" has the meaning ascribed to it in Section 1.2.
"DPI EXCHANGE" has the meaning ascribed to it in Section 1.2.
"DRAXIS EP SHARES" has the meaning ascribed to it in Section 4.2(a).
"DRAXIS MATERIAL ADVERSE EFFECT" has the meaning ascribed to it in Section
4.1(d).
"DRAXIS SECURITIES REGULATORY REPORTS" has the meaning ascribed to it in
Section 4.5.
"DRAXIS STOCK OPTIONS" has the meaning ascribed to it in Section 4.2(a).
"DRAXIS SUBSIDIARIES" has the meaning ascribed to it in Section 4.1(b).
"EFFECTIVE TIME" has the meaning ascribed to it in Section 1.3.
"ERISA AFFILIATE" has the meaning ascribed to it in Section 3.13(a).
"ERISA" means the U.S. FEDERAL EMPLOYEE RETIREMENT INCOME SECURITY ACT of
1974, as amended.
<PAGE>
- 3 -
"EXCHANGE ACT" means the U.S. SECURITIES EXCHANGE ACT of 1934, as amended.
"EXCHANGE AGENT" has the meaning ascribed to it in Section 2.1(a).
"GOVERNMENTAL ENTITY" has the meaning ascribed to it in Section 3.4.
"INTELLECTUAL PROPERTY" has the meaning ascribed to it in Section 3.11.
"LIENS" has the meaning ascribed to it in Section 3.4.
"MANDATORY SHARE EXCHANGE" has the meaning ascribed to it in Section 1.2.
"MANDATORY SHARE EXCHANGE PLAN" has the meaning ascribed to it in Section
1.2.
"NASD" means the National Associations of Securities Dealers.
"NEW OPTIONS" has the meaning ascribed to it in Section 6.7.
"NNM" means the NASDAQ National Market System.
"PERSON" shall mean and include an individual, a partnership, a joint
venture, a corporation, an association, a trust, a Government Entity or an
unincorporated organization or other entity.
"PROXY STATEMENT-PROSPECTUS" has the meaning ascribed to it in Section
3.12.
"REGISTRATION STATEMENT" has the meaning ascribed to it in Section 3.12.
"REINCORPORATION MERGER" has the meaning ascribed to it in Section 1.2.
"SEC" means the U.S. Securities and Exchange Commission.
"SECURITIES ACT" means the U.S. SECURITIES ACT of 1933, as amended.
"SERVICE" means the Internal Revenue Service.
"SHARE DELIVERY AGREEMENT" has the meaning ascribed to it in Section
2.1(a).
<PAGE>
- 4 -
"SUBJECT LITIGATION" has the meaning ascribed to it in Section 6.9(b).
"SUPERIOR PROPOSAL" has the meaning ascribed to it in Section 6.2(a).
"TAX RETURNS" has the meaning ascribed to it in Section 3.10(b)(i).
"TAXES" has the meaning ascribed to it in Section 3.10(c).
"TSE" means The Toronto Stock Exchange.
"U.S. GAAP" means generally accepted accounting principles in the United
States.
SECTION 1.2 THE MANDATORY SHARE EXCHANGE. In accordance with the
provisions of this Agreement, the MISSOURI BUSINESS CORPORATIONS ACT (the
"Missouri Act") and the LOUISIANA ACT, DAHI will seek approval of its
shareholders in accordance with applicable laws to (i) merge with a
newly-formed Louisiana corporation on a share for share basis, with the
Louisiana corporation to be the surviving corporation in the merger (the
"Reincorporation Merger"); and (ii), subject to approval of and consummation
of the Reincorporation Merger, approve and adopt, in accordance with Section
116 of the LOUISIANA ACT, the Plan of Share Exchange to be entered into by
DAHI and DPI in substantially the form attached hereto as Exhibit A1 (the
"Mandatory Share Exchange Plan"), pursuant to which each issued and
outstanding share of Common Stock of DAHI, other than shares as to which
dissenters rights shall have been properly demanded pursuant to the
LOUISIANA ACT, if any, or the MISSOURI ACT, if any ("Dissenting Shares") and
shares held by Draxis or its affiliates, will be mandatorily exchanged for
1.35 shares of Draxis Common Stock delivered by DPI (the "Mandatory Share
Exchange"). For purposes of this Agreement, the "Exchange Ratio" shall mean
the ratio of 1.35 shares of Draxis Common Stock to one share of DAHI Common
Stock.
SECTION 1.3 CLOSING OF THE MANDATORY SHARE EXCHANGE. The closing of
the Mandatory Share Exchange shall take place at 10:00 a.m. (Toronto time)
on the second business day following the date on which the conditions set
forth in Article VII are satisfied or waived or on such other date and time
as may be agreed by the parties or may be mandated by the LOUISIANA ACT (the
"Effective Time").
SECTION 1.4 OPTIONS AND WARRANTS. As part of the Mandatory Share
Exchange, Draxis and DPI will exchange options or warrants to acquire Draxis
Common Stock for each outstanding option or warrant, as the case may be, to
purchase DAHI Common Stock on the basis of the Exchange Ratio, as more
specifically provided in Section 6.7; provided, however, that such DAHI
options or warrants 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 transactions
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contemplated herein shall be accelerated so that they vest immediately upon
the mailing of the Proxy Statement-Prospectus.
SECTION 1.5 DISSENTING SHARES. The holders of Dissenting Shares, if
any, shall be entitled to payment by DAHI of the fair cash value of such
shares to the extent permitted by and in accordance with the provisions of
(i) Sections 351.455 and 351.458 of the MISSOURI ACT with respect to the
Reincorporation Merger, and (ii) Section 131 of the LOUISIANA ACT with
respect to the Mandatory Share Exchange Plan; provided, however, that (x) if
any holder of Dissenting Shares shall deliver a written withdrawal of such
holder's demand for fair cash value of such shares, or (y) if any holder
fails to establish such holder's entitlement to payment as provided in the
MISSOURI ACT or the LOUISIANA ACT, as the case may be, such holder or
holders (as the case may be) shall forfeit such right to payment for such
shares and such shares shall thereupon be deemed to have been exchanged for
shares of Draxis Common Stock pursuant to Section 1.2 as of the Effective
Time. DAHI shall be solely responsible for, and shall pay out of its own
funds, any amounts which become due and payable to holders of Dissenting
Shares, and such amounts shall not be paid directly or indirectly by Draxis.
DAHI shall notify Draxis and DPI of each demand for dissenters rights under
the MISSOURI ACT or the LOUISIANA ACT, as the case may be, promptly after
such demand is received by DAHI.
ARTICLE II
EXCHANGE PROCEDURES
SECTION 2.1 MANDATORY EXCHANGE OF DAHI COMMON STOCK; PROCEDURES.
(a) Prior to the Effective Time, Draxis shall designate Montreal Trust
Company of Canada, Draxis' duly appointed transfer agent for its common
shares, to act as Exchange Agent hereunder (the "Exchange Agent"). As soon
as practicable after the Effective Time, Draxis shall deposit, on behalf of
DPI with respect to shares issuable to DAHI shareholders in the DPI Exchange
(which share delivery on behalf of DPI will take place pursuant to an
agreement to be dated prior to the date of the Proxy Statement-Prospectus
between DPI and Draxis (the "Share Delivery Agreement"), with or for the
account of the Exchange Agent, stock certificates representing the number of
shares of Draxis Common Stock issuable pursuant to Section 2.1(b) in
exchange for outstanding shares of DAHI Common Stock, which shares of Draxis
Common Stock shall be deemed to have been issued at the Effective Time.
(b) As soon as practicable after the Effective Time, Draxis shall cause
the Exchange Agent to mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of DAHI Common Stock (the "Certificates") that will be
exchanged pursuant to this Section 2.1(b) into Draxis Common Stock (i) a form
of letter of transmittal specifying how delivery shall be effected, and
stating that risk of loss and title to the Certificates shall pass only
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upon proper delivery of the Certificates to the Exchange Agent and (ii)
instructions for use in surrendering such Certificates in exchange for
certificates representing shares of Draxis Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor (x) a certificate representing
that number of whole shares of Draxis Common Stock which such holder has the
right to receive pursuant to the provisions of this Article II, (y) cash in
lieu of any fractional shares of Draxis Common Stock to which such holder is
entitled pursuant to Section 2.3, and the Certificate so surrendered shall
forthwith be cancelled and (z) any dividends or distributions to which such
holder may be entitled pursuant to Section 2.2. In the event of a transfer
of ownership of DAHI Common Stock which is not registered in the transfer
records of DAHI, a certificate representing the proper number of shares of
Draxis Common Stock may be issued to a transferee if the Certificate
representing such DAHI Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer,
and by evidence that any applicable stock transfer taxes have been paid.
Until surrendered as contemplated by this Section 2.1(b), each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender a certificate representing shares of
Draxis Common Stock, cash in lieu of any fractional shares of Draxis Common
Stock and any dividends or distributions, which may be payable pursuant to
Section 2.2 hereof.
SECTION 2.2 DIVIDENDS; ESCHEAT. No dividends or distributions that
are declared and unpaid on shares of Draxis Common Stock as of the Effective
Time will be paid to persons entitled to receive certificates representing
shares of Draxis Common Stock until such persons surrender their Certificates
pursuant to Section 2.1(b). Upon such surrender, there shall be paid to the
person in whose name the certificates representing such shares of Draxis
Common Stock shall be issued, any unpaid dividends or distributions with
respect to such shares of Draxis Common Stock which have a record date on or
after the Effective Time and shall have become payable between the Effective
Time and the time of such surrender. In no event shall the person entitled
to receive such dividends or distributions be entitled to receive interest
thereon. On the date which is 180 days after the Effective Time, the
Exchange Agent shall deliver to Draxis all cash, certificates and other
documents in its possession relating to the transactions described in this
Agreement, and any holders of DAHI Common Stock who have not theretofore
complied with this Article II shall look thereafter only to Draxis for the
shares of Draxis Common Stock, any dividends or distributions thereon, and
any cash in lieu of fractional shares thereof to which they are entitled
pursuant to this Article II. Notwithstanding the foregoing, neither the
Exchange Agent nor any party hereto shall be liable to a holder of DAHI
Common Stock for any shares of Draxis Common Stock, any dividends or
distributions thereon or any cash in lieu of fractional shares thereof
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
SECTION 2.3 NO FRACTIONAL SECURITIES. No certificates or scrip
representing fractional shares of Draxis Common Stock shall be issued upon
the surrender for
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exchange of Certificates, and such fractional interests shall not entitle the
owner thereof to vote or to any rights of a security holder. In lieu of any
such fractional securities, each holder of DAHI Common Stock who would
otherwise have been entitled to a fraction of a share of Draxis Common Stock
upon surrender of such holder's Certificates 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 (after taking into
account all shares of DAHI Common Stock then held of record by such holder)
and (ii) the average of the per share closing prices for Draxis Common Stock
on the NNM for the five trading days immediately preceding the Effective Time.
SECTION 2.4 CLOSING OF DAHI TRANSFER BOOKS. At the Effective Time,
the stock transfer books of DAHI shall be closed and no transfer of shares of
DAHI Common Stock shall thereafter be made. If, after the Effective Time,
Certificates are presented to Draxis or DPI, they shall be cancelled and
exchanged as provided in this Article II.
SECTION 2.5 FURTHER ASSURANCES. If, at any time after the Effective
Time, Draxis or DPI shall consider or be advised that any document, action or
thing is necessary or desirable to carry out this Agreement, the officers of
Draxis or DPI, as the case may be, shall be authorized to execute and
deliver, in the name and on behalf of each other and DAHI, all such documents
and to take and do, in such names and in such capacities or otherwise, all
such actions and things as may be necessary or desirable to carry out the
purposes of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DAHI
DAHI represents and warrants to each of Draxis and DPI as follows:
SECTION 3.1 CORPORATE ORGANIZATION; RELATED ENTITIES.
(a) DAHI is a corporation duly organized, validly existing and in good
standing under the laws of the State of Missouri and has the corporate power
and authority to own or lease its properties and to carry on its business as
it is presently being conducted. DAHI is duly qualified or licensed as a
foreign corporation to do business and is in good standing in, every
jurisdiction where the character of DAHI's properties (owned or leased) or
the nature of its activities makes such qualification or licensure necessary,
except for failures, if any, to be so qualified or licensed which would not
in the aggregate have a DAHI Material Adverse Effect (as hereinafter defined).
(b) Except as set forth on Schedule 3.1(b), DAHI does not own, directly
or indirectly, any capital stock of any corporation or have any direct or
indirect equity or ownership interest of any kind in any business, joint
venture, partnership or other entity.
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(c) The copies of the Articles of Incorporation and By-Laws of DAHI
heretofore delivered to Draxis are complete and correct copies of such
instruments as presently in effect.
(d) As used in this Agreement, any reference to any event, change or
effect having a "DAHI Material Adverse Effect" shall mean that such event,
change or effect is, individually or in the aggregate, materially adverse to
the business, operations, prospects, properties, assets (including intangible
assets), liabilities (including contingent liabilities), condition (financial
or other) or results of operations of DAHI or to the ability of DAHI to
consummate the Mandatory Share Exchange and the other transactions
contemplated by this Agreement.
SECTION 3.2 CAPITALIZATION.
(a) As of the date of this Agreement, the authorized capital stock of
DAHI consists of 20,000,000 shares of DAHI Common Stock, 7,554,698 of which
are issued and outstanding as fully paid and non-assessable shares of DAHI.
All of the issued and outstanding shares of DAHI Common Stock are validly
issued, fully paid and non-assessable.
(b) As of the date of this Agreement, options and warrants to acquire
1,426,976 shares of DAHI Common Stock ("DAHI Stock Options") are outstanding
under employee stock option plans and other benefit plans of DAHI; except as
disclosed in this Section 3.2 or in DAHI Securities Regulatory Reports (as
defined in Section 3.5),(i) there is no outstanding right, subscription,
warrant, call, unsatisfied preemptive right, option or other agreement or
arrangement of any kind to purchase or otherwise to receive from DAHI any of
the outstanding authorized but unissued or treasury shares of the capital
stock or any other security of DAHI, (ii) there is no outstanding security of
any kind convertible into or exchangeable for such capital stock, and (iii)
there is no voting trust or other agreement or understanding to which DAHI is
a party or is bound with respect to the voting of the capital stock of DAHI.
(c) Except as set forth on Schedule 3.2(c), none of the awards, grants
or other agreements pursuant to which DAHI Stock Options were issued have
provisions which accelerate the vesting or right to exercise such options
upon the execution of this Agreement (including the documents attached as
Exhibits hereto), the consummation of the transactions contemplated hereby
(or thereby) or any other "change of control" or similar events.
SECTION 3.3 AUTHORITY RELATIVE TO THIS AGREEMENT. DAHI has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by DAHI and the consummation by DAHI of the
transactions contemplated on its part hereby have been duly authorized by
DAHI's Board of Directors. This Agreement has
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been duly and validly executed and delivered by DAHI and constitutes a valid
and binding agreement of DAHI, enforceable against DAHI in accordance with
its terms.
SECTION 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Neither the
execution, delivery or performance of this Agreement by DAHI, nor, assuming
approval by the DAHI stockholders pursuant to Section 6.4, the consummation
by DAHI of the transactions contemplated hereby, will (i) conflict with or
result in any breach of any provisions of the charter, by-laws or other
organizational documents of DAHI,(ii) require a filing with, or a permit,
authorization, consent or approval of, any U.S. federal or state court,
Canadian federal or provincial court, local or foreign court, arbitral
tribunal, administrative agency or commission or other governmental or other
regulatory authority or administrative agency or commission (a "Governmental
Entity"), except the filing of a registration statement on Form F-4 under the
SECURITIES ACT with respect to Draxis Common Stock to be exchanged for shares
of DAHI Common Stock pursuant to the Mandatory Share Exchange Plan, including
the Proxy Statement-Prospectus included as a part thereof filed under the
EXCHANGE ACT, filings or approvals required under U.S. state securities or
"blue sky" laws, filings or approvals required under Canadian securities
laws, regulations or rules, or the policy statements, orders, rulings or
notice of Canadian securities regulators (collectively, "Canadian Securities
Laws"), or the By-Laws of the NASD or the TSE (iii) except as set forth on
Schedule 3.4 hereto, result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration) under, or result in
the creation of any mortgage, pledge, security interest, encumbrance, lien,
claim or charge of any kind or right of others of whatever nature ("Liens"),
on any property or asset of DAHI pursuant to, any of the terms, conditions or
provisions of any material note, bond, mortgage, indenture, lease, license,
contract, agreement or other instrument or obligation (each, a "Contract") to
which DAHI is a party or by which it or any of its properties or assets may
be bound or (iv) violate any law, order, writ, injunction, decree, statute,
rule or regulation of any Governmental Entity applicable to DAHI or any of
its properties or assets, except, in the case of clauses (ii), (iii) and
(iv), where failures to make such filing or obtain such authorization,
consent or approval would not have, or where such violations, breaches or
defaults or Liens would not have, in the aggregate, a DAHI Material Adverse
Effect.
SECTION 3.5 REPORTS AND FINANCIAL STATEMENTS. DAHI has timely filed all
reports required to be filed with the SEC pursuant to the EXCHANGE ACT, the
SECURITIES ACT or with Canadian securities regulators pursuant to applicable
Canadian Securities Laws since December 31, 1995 (collectively, the "DAHI
Securities Regulatory Reports"), and has previously made available to Draxis
true and complete copies of all such DAHI Securities Regulatory Reports. Such
DAHI Securities Regulatory Reports, as of their respective dates, complied in
all material respects with the applicable requirements of the SECURITIES ACT and
the EXCHANGE ACT, and the applicable Canadian Securities Laws, as the case may
be, and none of such DAHI Securities Regulatory Reports, as of their respective
dates, contained any untrue statement of a material fact or omitted to state a
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material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of DAHI included in DAHI Securities
Regulatory Reports have been prepared in accordance with U.S. GAAP
consistently applied throughout the periods indicated (except as otherwise
noted therein or, in the case of unaudited statements, as permitted by Form
10-Q of the SEC) and fairly present (subject, in the case of unaudited
statements, to normal recurring year-end adjustments and any other
adjustments described therein) the financial position of DAHI as at the
dates thereof and the results of operations and cash flows of DAHI for the
periods then ended. Since December 31, 1995, there has been no change in
any of the significant accounting (including tax accounting) policies,
practices or procedures of DAHI.
SECTION 3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth
on Schedule 3.6 or in DAHI Securities Regulatory Reports filed before the
date of this Agreement, since December 31, 1995,(i) DAHI has not conducted
its business and operations other than in the ordinary course of its
business and consistent with its past practices or taken any actions that,
if it had been in effect, would have violated or been inconsistent with its
past practices or taken any actions that, if it had been in effect, would
have violated or been inconsistent with the provisions of Section 5.1,(ii)
DAHI has not entered into any Agreement to dispose of any of its assets or
incurred any indebtedness which, either individually or in the aggregate, is
material to DAHI, and (iii) to the best of DAHI's knowledge, there has not
been any fact, event, circumstance or change affecting or relating to DAHI
which has had or is reasonably likely to have a DAHI Material Adverse Effect
except with respect to the expenses incurred in the completion of the
transactions contemplated herein and any liabilities which might be incurred
by the assertion of Dissenters Rights. Except as set forth on Schedule 3.6
or as would not represent a DAHI Material Adverse Effect, the transactions
contemplated by this Agreement will not require the consent from or the
giving of notice to a third party pursuant to the terms, conditions or
provisions of any Contract to which DAHI is a party.
SECTION 3.7 LITIGATION. Except as disclosed on Schedule 3.7 and
except for litigation disclosed in the notes to the 1995 DAHI Statements or
in DAHI Securities Regulatory Reports filed subsequent thereto, as of the
date hereof, there is no suit, action, proceeding or investigation pending
or, to the best knowledge of DAHI, threatened against DAHI or with respect
to which DAHI could be required to provide indemnification or otherwise to
contribute to liabilities or damages relating thereto, the outcome of which
could reasonably be expected to have a DAHI Material Adverse Effect; nor is
there any judgment, decree, injunction, rule or order of any Governmental
Entity outstanding against DAHI having, or which, insofar as can reasonably
be foreseen, in the future may have a DAHI Material Adverse Effect.
SECTION 3.8 ABSENCE OF UNDISCLOSED LIABILITIES. Except for
liabilities or obligations which are accrued or reserved against in the 1995
DAHI Statements or which were incurred after December 31, 1995 in the
ordinary course of business and consistent
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with past practice, and except as set forth on Schedule 3.8 and as discussed
in paragraph 3.6 hereof, DAHI has no liabilities or obligations (whether
absolute, accrued, contingent or otherwise) of a nature required by U.S. GAAP
to be reflected in a balance sheet (or reflected in the notes thereto) or
which could reasonably be expected to have a DAHI Material Adverse Effect.
SECTION 3.9 NO DEFAULT. Except as set forth in Schedule 3.9, DAHI is
not in breach or violation of, or in default under (and no event has occurred
which with notice or lapse of time or both would constitute such a breach,
violation or default), any term, condition or provision of (i) DAHI's
Articles of Incorporation or By-Laws, or (ii) (a) any order, writ, decree,
statute, rule or regulation of any Governmental Entity applicable to DAHI or
any of its properties or assets or (b) any Contract to which DAHI is a party
or by which DAHI or any of its properties or assets may be bound, except in
the case of this clause (ii), which breaches, violations or defaults,
individually or in the aggregate, would not have a DAHI Material Adverse
Effect. DAHI has, and is in compliance with, all licenses, permits,
variances, exemptions, orders, approvals and other authorizations of all
Governmental Entities as are necessary in order to enable it to own its
business and conduct its business as currently conducted and to enter into
the transactions contemplated hereby, the lack of which, under applicable
law, rule or regulation, (i) would render legally impermissible the
transactions contemplated hereby or (ii) could reasonably be expected to
result in the material impairment of the continued use or exercise by DAHI
after the date hereof of any material right used or exercised (or reasonably
expected to be used or exercised) by DAHI, in the conduct of DAHI's business
as currently conducted and as currently proposed to be conducted by DAHI or
(iii) could reasonably be expected to have a DAHI Material Adverse Effect.
SECTION 3.10 TAXES.
(a) DAHI will make available to Draxis true, correct and complete copies
of the federal, state, local and foreign income, franchise sales and other
Tax Returns (as hereinafter defined) filed by DAHI for each of DAHI's years
ended December 31, 1992, 1993, 1994 and 1995, and, to the extent applicable,
for months or quarters in 1996 through June 30, 1996.
(b) Except as disclosed in Schedule 3.10(b):
(i) All returns, declarations, reports, estimates, statements,
schedules or other information or document with respect to Taxes (as
hereinafter defined) (collectively, "Tax Returns") required to be filed by
DAHI have been timely filed (giving effect to extensions granted with
respect thereto), and all such Tax Returns are true, correct and complete
in all material respects. DAHI is not required to file any state Tax
Returns other than in the State of Kansas.
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(ii) DAHI has timely paid all Taxes due or claimed to be due from it
by any federal, state, local, foreign or other taxing authority.
iii) There are no liens for Taxes upon the assets of DAHI.
(iv) No Tax Returns of DAHI have been examined by the Service. No
deficiency for any Taxes has been proposed, asserted or assessed against
DAHI which has not been resolved and paid in full.There are no
outstanding waivers, extensions or comparable consents regarding the
application of the statute of limitations with respect to any Taxes or Tax
Returns that have been given by DAHI (including the time for filing of Tax
Returns or paying Taxes).
(v) Since the date of the 1995 DAHI Statements, DAHI has not made any
change in accounting methods, received a ruling from any taxing authority
or signed an agreement with any taxing authority which could reasonably be
expected to have a DAHI Material Adverse Effect.
(vi) DAHI has complied in all material respects with all applicable
laws, rules and regulations relating to the payment and withholding of
Taxes (including, without limitation, withholding of Taxes pursuant to
Sections 1441 and 1442 of the Code or similar provisions under any foreign
laws) and has, within the time and the manner prescribed by law, withheld
from employee wages and paid over to the proper governmental authorities
all amounts required to be so withheld and paid over under applicable laws.
(vii) Except as set forth on Schedule 3.10(b)(vii), no audit or
other proceeding by a federal, state, local or foreign court, governmental,
regulatory, administrative or similar authority is presently pending with
respect to any Taxes or Tax Return of DAHI, and DAHI has not received a
written notice of any pending audits or proceedings. Schedule
3.10(b)(vii), shall set forth the nature of any such audit or proceeding,
the type of Tax Return, any deficiencies proposed, asserted or assessed and
the amount thereof and the tax year in question.
(viii) DAHI is not a party to, nor bound by nor has any obligation
under, any Tax sharing, allocation or indemnity agreement or similar
contract or arrangement.
(ix) No power of attorney granted by DAHI with respect to any Taxes is
currently in force.
(x) DAHI has not, with regard to any assets or property held,
acquired or to be acquired by any of them, filed a consent to the
application of Section 341(f) of the Code, or agreed to have Section
341(f)(2) of the Code apply to any
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disposition of a subsection (f) asset (as such term is defined in
Section 341(f)(4) of the Code) owned by DAHI.
(xi) There are no agreements, contracts or arrangements to which DAHI
is a party or of which DAHI has knowledge which will cause any employee,
officer or shareholder to receive any "excess parachute payment" (within
the meaning of Section 280G of the Code) relating to the change of control
of DAHI resulting from the transactions contemplated by this Agreement.
(xii) DAHI is not and has not been during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code a "United States real
property holding company" (as defined in Section 897(c)(2) of the Code).
(xiii) DAHI has not participated in, or cooperated with, an
"international boycott" within the meaning of Section 999 of the Code.
(xiv) The charges, accruals and reserves for Taxes reflected on
the books of DAHI are adequate under U.S. GAAP to cover the Tax liabilities
accruing or payable by DAHI in respect of periods prior to the date hereof.
(xv) DAHI is not subject to any joint venture, partnership or other
arrangement or contract that is treated as a partnership for U.S. federal
income tax purposes.
(xvi) DAHI is not subject to liability for Taxes of any person
(other than with respect to DAHI), including, without limitation, liability
arising from the application of U.S. Treasury Regulation Section 1.1502-6
or any analogous provision of Tax law.
(c) For purposes of this Agreement, "Taxes" (including, with correlative
meaning, the term "Tax") shall include all taxes, charges, fees, levies or
other assessments, including, without limitation, all net income, gross
income, gross receipts, sales, use, service, service use, goods and
services, AD VALOREM, transfer, franchise, profits, license, withholding,
social security, payroll, employment, excise, estimated, severance, stamp,
recording, occupation, property or other taxes, customs duties, fees,
assessments or charges of any kind whatsoever, whether computed on a
separate consolidated, unitary, combined or other basis, together with any
interest, fines, penalties, additions to tax or other additional amounts
imposed thereon or with respect thereto imposed by any taxing authority
(domestic or foreign).
SECTION 3.11 INTELLECTUAL PROPERTY. DAHI owns, licenses or otherwise
has such rights to use, sell, license or dispose of all industrial and
intellectual property rights, including without limitation all patents,
patent applications, patent rights, trademarks,
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trademark applications, trade names, service marks, service mark
applications, technology, know-how, trade secrets, proprietary processes and
formulae (collectively, "Intellectual Property") as are material to the
conduct of the business of DAHI as currently conducted. Set forth on
Schedule 3.11 is a true and complete listing of (i) all of DAHI's registered
trademarks and pending applications for trademark registrations in all
jurisdictions, and (ii) DAHI's patents issued and pending patent applications
in all jurisdictions. The rights of DAHI to all such Intellectual Property
are in full force. Except as set forth on Schedule 3.11:
(a) DAHI has the right to bring actions for the infringement of its
rights to the Intellectual Property necessary to protect such rights in the
Intellectual Property, with such exceptions as could not reasonably be
expected to have in the aggregate a DAHI Material Adverse Effect; and the
consummation of the transactions contemplated hereby will not (i) give rise
to any right of termination, amendment, renegotiation, cancellation or
acceleration with respect to any license or other agreement to use, sell,
license or dispose of such Intellectual Property which could reasonably be
expected to have in the aggregate a DAHI Material Adverse Effect or (ii) in
any way impair any currently existing right of DAHI to use, sell, license or
dispose of or to bring any action for the infringement of any of the rights
of DAHI to the Intellectual Property or any portion thereof;
(b) none of the former or present employees, officers or directors of
DAHI holds any right, title or interest, directly or indirectly, in whole or
in part, in or to any Intellectual Property owned by DAHI; DAHI does not
license from any present or, to DAHI's knowledge, former employees, officers
or directors of DAHI any Intellectual Property which is necessary for the
business of DAHI as presently conducted; DAHI is not a party to any
employment contract, patent disclosure agreement or any other contract or
agreement with any employee of DAHI relating to any Intellectual Property.
(c) each license and other agreement with respect to the use of any
Intellectual Property currently used in DAHI's business is a valid, legally
binding obligation of DAHI and, to the best knowledge of DAHI, all other
parties thereto, enforceable in accordance with its terms, with such
exceptions as could not reasonably be expected to have in the aggregate a
DAHI Material Adverse Effect and except as enforcement may be limited by
general principles of equity whether applied in a court of law or a court of
equity and by bankruptcy, insolvency and similar laws affecting creditors'
rights and remedies generally, and DAHI is not in breach, violation or
default thereof (and no event has occurred which with the giving of notice or
the passage of time or both would constitute such a breach, violation or
default or give rise to any right of termination, amendment, renegotiation,
cancellation or acceleration under any such license or agreement), and DAHI
has no reason to believe that any other party to any such license or other
agreement is in breach, violation or default thereof, other than, in each
case, such breaches, violations and defaults as could not reasonably be
expected to have in the aggregate a DAHI Material Adverse Effect; and
(d) the manufacture, marketing, use, sale, licensure or disposition of any
Intellectual Property in the manner proposed to be or currently used, sold,
licensed or disposed of by DAHI does not and will not violate any license or
agreement between DAHI
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and any third party or to the knowledge of DAHI based on representations and
warranties from third parties from whom Intellectual Property is licensed by
DAHI, infringe on the rights of any person, nor has such infringement been
alleged within three years preceding the date of this Agreement (other than
such as have been resolved); there is no pending or threatened claim or
litigation challenging or questioning the validity, ownership or right to
use, sell, license or dispose of any Intellectual Property in the manner in
which any Intellectual Property is currently used, sold, licensed or disposed
of by DAHI, nor is there a valid basis for any such claim or litigation, nor
has DAHI received any notice asserting that the proposed use, sale, license
or disposition by DAHI of any of the Intellectual Property of DAHI conflicts
or will conflict with the rights of any other party, nor is there a valid
basis for any such assertion in each case, with such exceptions as could not
reasonably be expected in the aggregate to have a DAHI Material Adverse
Effect; and DAHI has not asserted any claim of infringement, misappropriation
or misuse within the past three years.
SECTION 3.12 INFORMATION IN DISCLOSURE DOCUMENTS AND REGISTRATION
STATEMENT. None of the information to be supplied by DAHI for inclusion in
(i) the Registration Statement to be filed with the SEC by Draxis on Form F-4
under the SECURITIES ACT for the purpose of registering the shares of Draxis
Common Stock to be issued in connection with the Mandatory Share Exchange
(the "Registration Statement") or (ii) the joint proxy statement-prospectus
to be distributed in connection with Draxis' and DAHI's meetings of
stockholders (the "Proxy Statement-Prospectus") will, in the case of the
Registration Statement, at the time it becomes effective and at the Effective
Time, or, in the case of the Proxy Statement-Prospectus or any amendments
thereof or supplements thereto, at the time of the mailing of the Proxy
Statement-Prospectus and any amendments or supplements thereto, and at the
time of the meeting of stockholders of DAHI to be held in connection with the
Mandatory Share Exchange, contain any untrue statements of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they are made, not misleading. The Proxy Statement-Prospectus will
comply as to form in all material respects with the applicable provisions of
the LOUISIANA ACT, Canadian Securities Laws, the EXCHANGE ACT, and the rules
and regulations promulgated thereunder, except that no representation is made
by DAHI with respect to statements made therein based on information supplied
by Draxis or its representatives for inclusion in the Proxy
Statement-Prospectus or with respect to information concerning Draxis or any
of the Draxis Subsidiaries incorporated by reference in the Proxy
Statement-Prospectus.
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SECTION 3.13 EMPLOYEE BENEFIT PLANS; ERISA.
(a) Schedule 4.13 hereto sets forth a true and complete list of each
employee benefit plan, arrangement or agreement that is maintained, or was
maintained or contributed to at any time during the six (6) calendar years
preceding the date of this Agreement (the "DAHI Plans"), by DAHI or by any
trade or business, whether or not incorporated (an "ERISA Affiliate"), which
together with DAHI would be deemed a "single employer" within the meaning of
Section 4001 of ERISA. Neither DAHI nor any ERISA Affiliate has any formal
plan or commitment to create any additional plan or modify any existing DAHI
Plan.
(b) Each of DAHI Plans that is subject to ERISA is in compliance with
ERISA in all material respects; each of DAHI Plans intended to be "qualified"
within the meaning of Section 401(a) of the Code is so qualified, no event
has occurred which may affect such qualification and the trusts maintained
thereunder are exempt from taxation under Section 501(a) of the Code; no DAHI
Plan has an accumulated or waived funding deficiency within the meaning of
Section 412 of the Code; neither DAHI nor an ERISA Affiliate has incurred,
directly or indirectly, any material liability (including any material
contingent liability) to or on account of a DAHI Plan pursuant to Title IV of
ERISA; no proceedings have been instituted to terminate any DAHI Plan that is
subject to Title IV of ERISA; no "reportable event," as such term is defined
in Section 4043(b) of ERISA, has occurred with respect to any DAHI Plan; and
no condition exists that presents a material risk to DAHI or an ERISA
Affiliate of incurring a liability to or on account of a DAHI Plan pursuant
to Title IV of ERISA.
(c) The current value of the assets of each of DAHI Plans that are
subject to Title IV of ERISA, based upon the actuarial assumptions (to the
extent reasonable) presently used by DAHI Plans, exceeds the present value of
the accrued benefits under each such DAHI Plan; no DAHI Plan is a
multiemployer plan (within the meaning of Section 4001(a)(3) of ERISA) and no
DAHI Plan is a plan subject to Section 413 of the Code; and all
contributions, reserves, premiums or other amounts payable by DAHI as of the
Effective Time with respect to each DAHI Plan in respect of current or prior
plan years have been either paid or accrued on the balance sheet of DAHI.
There are no pending, threatened or anticipated claims (other than routine
claims for benefits) against or otherwise involving any of DAHI Plans and no
suit, action or other litigation has been brought against or with respect to
any of DAHI Plans or any trusts related thereto.
(d) Neither DAHI nor any ERISA Affiliate, nor any DAHI Plan, nor any
trust created thereunder, nor any trustee or administrator thereof has
engaged in a transaction in connection with which DAHI or any ERISA
Affiliate, any DAHI Plan, any such trust, or any trustee or administrator
thereof, or any party dealing with any DAHI Plan or any such trust could be
subject to either a material civil penalty assessed pursuant to Section 409
or 502(i) of ERISA or a material tax imposed pursuant to Section 4975 or 4976
of the Code. No amounts payable under DAHI Plans will, individually or in
the aggregate, fail to be deductible for federal income tax purposes by
virtue of Section 280G of the Code. No DAHI Plan provides death or medical
benefits (whether or not insured), with
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respect to current or former employees of DAHI or any ERISA Affiliate beyond
their retirement or other termination of service other than (i) coverage
mandated by applicable law or (ii) death benefits under any "employee pension
plan," as that term is defined in section 3(2) of ERISA. The consummation of
the transactions contemplated by this Agreement will not (i) entitle any
current or former employee or officer of DAHI or any ERISA Affiliate to
severance pay, unemployment compensation or any other payment, except as
expressly provided in this Agreement or (ii) accelerate the time of payments
or vesting, or increase the amount of compensation due any such employee or
officer.
SECTION 3.14 VOTE REQUIRED. The affirmative vote of holders of
two-thirds of the outstanding shares of DAHI Common Stock represented in
person or by proxy at a duly called meeting of DAHI shareholders, and the
affirmative vote of holders of a majority of the outstanding shares of DAHI
Common Stock represented in person or by proxy at a duly called meeting of
DAHI shareholders (other than shares held by Draxis or DPI, any of their
affiliates or related parties), are the only votes of the holders of any
class or series of DAHI's capital stock necessary to approve the (i) the
Reincorporation Merger and (ii) the Mandatory Share Exchange under the
LOUISIANA ACT. The Board of Directors of DAHI (at a meeting duly called and
held) has unanimously (i) approved this Agreement, (ii) determined that the
transactions contemplated hereby are in the best interests of DAHI, and (iii)
determined to recommend this Agreement, the approval of the Mandatory Share
Exchange and the Mandatory Share Exchange Plan and the other transactions
contemplated hereby to such holders for approval and adoption.
SECTION 3.15 AFFILIATE TRANSACTIONS. Except as disclosed in DAHI
Securities Regulatory Reports, there are no material Contracts or other
transactions between DAHI, on the one hand, and any (i) officer or director
of DAHI, (ii) record or beneficial owner of five percent or more of the
voting securities of DAHI or (iii) affiliate (as such term is defined in
Regulation 12b-2 promulgated under the EXCHANGE ACT of any such officer,
director or beneficial owner, on the other hand.
SECTION 3.16 BROKERS. Except for DAHI's financial advisor, Hambrecht &
Quist, no broker, finder or financial advisor is entitled to any brokerage,
finder's or other fee or commission in connection with the Mandatory Share
Exchange or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of DAHI.
SECTION 3.17 OPINION OF FINANCIAL ADVISOR. DAHI has received the
opinion of Hambrecht & Quist dated July 24, 1996, substantially to the effect
that the consideration to be received in the Mandatory Share Exchange by the
holders of DAHI Common Stock is fair to such holders from a financial point
of view, a copy of which opinion has been delivered to Draxis and DPI.
SECTION 3.18 VALUATION. DAHI will have received the valuation prepared
by KPMG Peat Marwick with respect to the current fair market values of DAHI
Common
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Stock and Draxis Common Stock, respectively, a copy of which valuation has
been delivered to Draxis and DPI prior to filing the Proxy
Statement-Prospectus.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DRAXIS AND DPI
DRAXIS MAKES THE REPRESENTATIONS AND PROVIDES THE WARRANTIES TO DAHI AS
SET OUT BELOW IN SECTIONS 4.1 TO SECTIONS 4.11 INCLUSIVE:
SECTION 4.1 ORGANIZATION.
(a) Draxis is a corporation duly organized, validly existing and in good
standing under the laws of Canada and has the corporate power to carry on its
business as it is now being conducted or presently proposed to be conducted.
Draxis is qualified to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified will not have a Draxis Material Adverse Effect (as
hereinafter defined).
(b) Schedule 4.1(b) lists all of the subsidiaries of Draxis which would be
required to be set forth as an exhibit to Draxis' Annual Report on Form 20-F
pursuant to the rules and regulations under the EXCHANGE ACT (the "Draxis
Subsidiaries"). Each of the Draxis Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization or incorporation and has the corporate power and
authority to own or lease its properties and to carry on its business as it is
presently being conducted, except for failures, if any, to be so organized,
validly existing or in good standing or to have such corporate power and
authority which would not in the aggregate have a Draxis Material Adverse
Effect.
(c) The copies of the Articles of Amalgamation, as amended, and By-Laws of
Draxis heretofore delivered to DAHI are complete and correct copies of such
instruments as presently in effect.
(d) As used in this Agreement, any reference to any event, change or
effect having a "Draxis Material Adverse Effect" shall mean that such event,
change or effect is, individually or in the aggregate, materially adverse to the
business, operations, prospects, properties, assets (including intangible
assets), liabilities (including contingent liabilities), condition (financial or
other) or results of operations of Draxis and the Draxis Subsidiaries taken as a
whole or to the ability of Draxis to consummate the Mandatory Share Exchange and
the other transactions contemplated by this Agreement.
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SECTION 4.2 CAPITALIZATION.
(a) As of the date of this Agreement, the authorized capital stock of
Draxis consists of an unlimited number of shares of Draxis Common Stock, of
which 23,420,165 shares are issued and outstanding, an unlimited number of
Employee Participation Shares ("Draxis EP Shares"), issuable in series, of
which 1,520,500 are issued and outstanding and an unlimited number of
Preferred Shares, none of which are issued and outstanding. The Draxis EP
Shares do not entitle the holders thereof to vote at meetings of the Draxis'
shareholders, except where such right is conferred by the CANADA BUSINESS
CORPORATIONS ACT. Holders of Draxis Common Stock are entitled to receive
notice of and attend all meetings of shareholders and to one vote in respect
of each share of Draxis Common Stock held at such meetings. The Board of
Directors is authorized to fix by resolution, before issuance, the terms and
conditions attaching to the shares of each series of Preferred Shares,
including any right of holders of such shares to vote at meetings of Draxis'
shareholders. In addition, Draxis has issued 300,000 common share purchase
warrants (the "Broker Warrants") entitling the holders thereof to receive one
share of Draxis Common Stock for each Broker Warrant provided that such
holder exercises that right prior to 5:00 p.m. (Toronto time) on April 22,
1998. Each Broker Warrant entitles the holder, upon exercise, to receive one
share of Draxis Common Stock at Cdn.$4.25 per share. As of the date of this
Agreement, options to acquire 1,449,274 shares of Draxis Common Stock (the
"Draxis Stock Options") are outstanding under all employee stock option plans
of Draxis; 1,520,500 shares of Draxis Common Stock are reserved for issuance
upon conversion of the Draxis EP Shares, 300,000 shares of Draxis Common
Stock are reserved for issuance upon the exercise of the Broker Warrants, and
additional shares of Draxis Common Stock are reserved for issuance in the
circumstances set out in Schedule 4.2. All of the shares of Draxis Common
Stock issuable in exchange for shares of DAHI Common Stock at the Effective
Time in accordance with this Agreement will be, when so issued, duly
authorized, validly issued, fully paid and non-assessable.
(b) Except as disclosed in this Section 4.2 or in the Draxis Securities
Regulatory Reports (as hereinafter defined), (i) there is no outstanding right,
subscription, warrant, call, unsatisfied preemptive right, option or other
agreement or arrangement of any kind to purchase or otherwise to receive from
Draxis any of the outstanding authorized but unissued or treasury shares of the
capital stock or any other security of Draxis and (ii) there is no outstanding
security of any kind convertible into or exchangeable for such capital stock,
and (iii) there is no voting trust or other agreement or understanding to which
Draxis is a party or is bound with respect to the voting of the capital stock or
Draxis, except for an agreement to be dated as of July 25, 1996 pursuant to
which Draxis is acquiring all of the outstanding shares of Tican Pharmaceuticals
Ltd. which provides for the issuance by Draxis, as part of the purchase price,
of common shares of Draxis having a value of CDN$200,000 based on the closing
price of such shares on the TSE on July 24, 1996.
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(c) All of the issued and outstanding capital stock of each of the Draxis
Subsidiaries has been validly issued, is fully paid and non-assessable and is
owned beneficially, directly or indirectly, by Draxis, free of any Liens,
preemptive rights or other restrictions with respect thereto.
SECTION 4.3 AUTHORITY RELATIVE TO THIS AGREEMENT. Draxis has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by Draxis and the consummation by Draxis of the
transactions contemplated on its part hereby have been duly authorized by its
Board of Directors, and, except for the approval of Draxis' stockholders to
be sought at the stockholders' meeting contemplated by Section 6.4(b), no
other corporate proceedings on the part of Draxis are necessary to authorize
this Agreement. This Agreement has been duly and validly executed and
delivered by Draxis and constitutes a valid and binding agreement of Draxis,
enforceable against Draxis in accordance with its terms.
SECTION 4.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Neither the
execution, delivery and performance of this Agreement by Draxis, nor the
consummation by Draxis of the transactions contemplated hereby will (i)
conflict with or result in any breach of any provision of (x) the Articles of
Amalgamation or the By-Laws of Draxis or (y) the organizational documents of
the Draxis Subsidiaries, (ii) require a filing with, or a permit,
authorization, consent or approval of, any Governmental Entity except the
filing of the Proxy Statement-Prospectus under the EXCHANGE ACT, filings or
approvals required under U.S. or Canadian laws relating to takeovers, if
applicable, U.S. state securities or "blue sky" laws, Canadian Securities
Laws, the By-Laws of the NASD or the TSE, and any filings necessary to comply
with dissenters' rights pursuant to the MISSOURI ACT or the LOUISIANA ACT,
(iii) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation or acceleration) under, or result in the creation
of a Lien on any property or asset of Draxis or any Draxis Subsidiaries
pursuant to, any of the terms, conditions or provisions of any material
Contract to which Draxis or any Draxis Subsidiary is a party or by which any
of them or any of their properties or assets may be bound or (iv) violate any
law, order, writ, injunction, decree, statute, rule or regulation of any
Governmental Entity applicable to Draxis or any Draxis Subsidiary or any of
their properties or assets, except, in the case of clauses (ii), (iii) and
(iv), where the failure to make such filing or obtain such authorization,
consent or approval would not have, or where such violations, breaches or
defaults or Liens would not have, in any such case, a Draxis Material Adverse
Effect.
SECTION 4.5 REPORTS AND FINANCIAL STATEMENTS. Draxis has timely filed
all reports required to be filed with the SEC pursuant to the EXCHANGE ACT or
the SECURITIES ACT or with Canadian securities regulators pursuant to applicable
Canadian Securities Laws since December 31, 1995 (collectively, the "Draxis
Securities Regulatory Reports"), and has previously made available to DAHI true
and complete copies of all
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such Draxis Securities Regulatory Reports. Such Draxis Securities Regulatory
Reports, as of their respective dates, complied in all materials respects
with the applicable requirements of the SECURITIES ACT and the EXCHANGE ACT
and the applicable Canadian Securities Laws, as the case may be, and none of
such Draxis Securities Regulatory Reports contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of Draxis included in the Draxis Securities Regulatory Reports
have been prepared in accordance with Canadian GAAP consistently applied
throughout the periods indicated (except as otherwise noted therein or, in
the case of unaudited statements, as permitted by Form 20-F of the SEC) and
fairly present (subject, in the case of unaudited statements, to normal,
recurring year-end adjustments and any other adjustments described therein)
the consolidated financial position of Draxis and its consolidated
Subsidiaries as at the dates thereof and the consolidated results of
operations and cash flows of Draxis and its consolidated Subsidiaries for the
periods then ended. Since December 31, 1995, there has been no change in any
of the significant accounting (including tax accounting) policies, practices
or procedures of Draxis of any of its consolidated Subsidiaries.
SECTION 4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS; MATERIAL AGREEMENTS.
Except as set forth in the Draxis Securities Regulatory Reports filed before
the date of this Agreement, since December 31, 1995, (i) neither Draxis nor
the Draxis Subsidiaries has conducted its business and operations other than
in the ordinary course of business and consistent with past practices, and
(ii) there has not been any fact, event, circumstance or change affecting or
relating to Draxis and the Draxis Subsidiaries which has had or is reasonably
likely to have a Draxis Material Adverse Effect.
SECTION 4.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except for
liabilities or obligations which are accrued or reserved against in Draxis'
financial statements (or reflected in the notes thereto) included in the
Draxis Securities Regulatory Reports filed as of the date of this Agrement or
which were incurred after December 31, 1995 in the ordinary course of
business and consistent with past practice, or which have been publicly
announced, none of Draxis and the Draxis Subsidiaries has any liabilities or
obligations (whether absolute, accrued, contingent or otherwise) of a nature
required by Canadian GAAP to be reflected in a consolidated balance sheet (or
reflected in the notes thereto) or which could reasonably be expected to have
a Draxis Material Adverse Effect.
SECTION 4.8 NO DEFAULT. Neither Draxis nor any Draxis Subsidiary is
in breach or violation, or in default under (and no event has occurred which
with notice or the lapse of time or both would constitute such a breach,
default or violation) of any term, condition or provision of (i) Draxis'
Certificate of Amalgamation or By-Laws, or (ii) (a) any order, writ, decree,
statute, rule or regulation of any Governmental Entity applicable to Draxis
or any Draxis Subsidiary or any of their properties or assets or (b) any
Contract to which Draxis or any Draxis Subsidiary is a party or by which
Draxis or any Draxis Subsidiary or any of their properties or assets may be
bound except in the case of
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this clause (ii), which breaches, violations or defaults, individually or in
the aggregate, would not have a Draxis Material Adverse Effect.
SECTION 4.9 INFORMATION IN DISCLOSURE DOCUMENTS AND REGISTRATION
STATEMENT. None of the information to be supplied by Draxis for inclusion in
(i) the Registration Statement or (ii) the Proxy Statement-Prospectus will in
the case of the Registration Statement, at the time it becomes effective and
at the Effective Time, or, in the case of the Proxy Statement-Prospectus or
any amendments thereof or supplements thereto, at the time of the mailing of
the Proxy Statement-Prospectus and any amendments or supplements thereto, and
at the time of the meeting of stockholders of Draxis to be held in connection
with the Mandatory Share Exchange, contains any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Registration
Statement and the Proxy Statement-Prospectus will comply as to form in all
material respects with the applicable provisions of the CANADA BUSINESS
CORPORATIONS ACT, the SECURITIES ACT and the EXCHANGE ACT and the rules and
regulations promulgated thereunder, and the Canadian Securities Laws, except
that no representation is made by Draxis with resect to statements made
therein based on information supplied by DAHI or its representatives for
inclusion in the Registration Statement or the Proxy Statement-Prospectus or
with respect to information concerning DAHI incorporated by reference in the
Registration Statement or the Proxy Statement-Prospectus.
SECTION 4.10 VOTE REQUIRED. The affirmative vote of the holders of a
majority of the shares of Draxis Common Stock present in person or
represented by proxy at the stockholders meeting of Draxis contemplated by
Section 6.4(b) is the only vote of the holders of any class or series of
Draxis capital stock necessary to approve the issuance of shares of Draxis
Common Stock pursuant to the Mandatory Share Exchange Plan. The affirmative
vote of Draxis, as the sole stockholder of all outstanding shares of DPI
Common Stock, is the only vote of the holders of any class or series of DPI's
capital stock necessary to approve the DPI Exchange. The Board of Directors
of Draxis (at a meeting duly called and held) has unanimously (i) approved
this Agreement, (ii) determined that the transactions contemplated hereby are
fair to and in the best interests of Draxis and the holders of Draxis Common
Stock, and (iii) determined to cause Draxis, as the sole stockholder of DPI,
to approve and adopt this Agreement.
SECTION 4.11 EMPLOYEE BENEFIT PLANS.
(a) Schedule 4.11(a) hereto sets forth a true and complete list of each
employee benefit plan, arrangement or agreement that is maintained, or was
maintained or contributed to at any time during the six (6) calendar years
preceding the date of this Agreement (the "Draxis Plans"), by Draxis or any
of the Draxis Subsidiaries. Neither Draxis nor any Draxis Subsidiary has any
formal plan or commitment to create any additional plan or modify any
existing Draxis Plan.
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(b) No Draxis Plan is subject to Title IV of ERISA or Section 412 of the
Code. Each Draxis Plan has been maintained and administered in material
compliance with its terms and with the requirements prescribed by any and all
applicable statutes, orders, rules and regulations, and is, to the extent
required by applicable law or contract, fully funded without having any
deficit or unfunded actuarial liability.
DPI MAKES THE REPRESENTATIONS AND PROVIDES THE WARRANTIES TO DAHI SET OUT
BELOW IN SECTION 4.12 TO SECTION 4.17 INCLUSIVE:
SECTION 4.12 ORGANIZATION. DPI is a corporation duly organized,
validly existing and in good standing under the laws of Canada and has the
corporate power to carry on its business as it is now being conducted or
presently proposed to be conducted. DPI is qualified to do business, and is
in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities make such
qualification necessary, except where the failure to be so qualified will not
have a Draxis Material Adverse Effect.
SECTION 4.13 CAPITALIZATION.
(a) As of the date of this Agreement, the authorized capital stock of
DPI consists of an unlimited number of common shares, all of the outstanding
shares of which are beneficially owned by Draxis.
(b) There is no outstanding right, subscription, warrant, call,
unsatisfied preemptive right, option or other agreement or arrangement of any
kind to purchase or otherwise to receive from DPI any of the outstanding
authorized but unissued or treasury shares of the capital stock or any other
security of DPI and (ii) there is no outstanding security of any kind
convertible into or exchangeable for such capital stock, and (iii) there is
no voting trust or other agreement or understanding to which DPI is a party
or is bound with respect to the voting of the capital stock or DPI.
SECTION 4.14 AUTHORITY RELATIVE TO THIS AGREEMENT. DPI has the requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by DPI and the consummation by DPI of the transactions
contemplated on its part hereby have been duly authorized by its Board of
Directors, and by Draxis as the sole stockholder of DPI, and no other corporate
proceedings on the part of DPI are necessary to authorize this Agreement or for
DPI to consummate the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by DPI and constitutes a valid and
binding agreement of DPI, enforceable against DPI in accordance with its terms.
SECTION 4.15 CONSENTS AND APPROVALS; NO VIOLATIONS. Neither the
execution, delivery and performance of this Agreement by DPI, nor the
consummation by DPI of
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the transactions contemplated hereby will (i) conflict with or result in any
breach of any provision of the Articles of Incorporation or the By-Laws of
DPI, (ii) require a filing with, or a permit, authorization, consent or
approval of, any Governmental Entity except in connection with or in order
to comply with the filing of the Proxy Statement-Prospectus by Draxis under
the EXCHANGE ACT, filings or approvals required under U.S. or Canadian laws
relating to takeovers, if applicable, U.S. state securities or "blue sky"
laws, Canadian Securities Laws, the By-Laws of the NASD or the TSE, and any
filings necessary to comply with dissenters' rights pursuant to the
LOUISIANA ACT, (iii) result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration) under, or result in
the creation of a Lien on any property or asset of DPI pursuant to, any of
the terms, conditions or provisions of any material Contract to which DPI is
a party or by which it or any of its properties or assets may be bound or
(iv) violate any law, order, writ, injunction, decree, statute, rule or
regulation of any Governmental Entity applicable to DPI or any of its
properties or assets, except, in the case of clauses (ii), (iii) and (iv),
where the failure to make such filing or obtain such authorization, consent
or approval would not have, or where such violations, breaches or defaults
or Liens would not have, in any such case, a Draxis Material Adverse Effect.
SECTION 4.16 NO DEFAULT. DPI is not in breach or violation, or in
default under (and no event has occurred which with notice or the lapse of
time or both would constitute such a breach, default or violation) of any
term, condition or provision of (i) its Certificate of Incorporation or
By-Laws, or (ii) (a) any order, writ, decree, statute, rule or regulation of
any Governmental Entity applicable to DPI or any of its properties or assets
or (b) any Contract to which DPI is a party or by which DPI or any of its
properties or assets may be bound except in the case of this clause (ii),
which breaches, violations or defaults, individually or in the aggregate,
would not have a Draxis Material Adverse Effect.
SECTION 4.17 INFORMATION IN DISCLOSURE DOCUMENTS AND REGISTRATION
STATEMENT. None of the information to be supplied by DPI for inclusion in (i)
the Registration Statement or (ii) the Proxy Statement-Prospectus will in the
case of the Registration Statement, at the time it becomes effective and at the
Effective Time, or, in the case of the Proxy Statement-Prospectus or any
amendments thereof or supplements thereto, at the time of the mailing of the
Proxy Statement-Prospectus and any amendments or supplements thereto, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Registration Statement and the Proxy Statement-Prospectus will
comply as to form in all material respects with the applicable provisions of the
CANADA BUSINESS CORPORATIONS ACT, the SECURITIES ACT and the EXCHANGE ACT and
the rules and regulations promulgated thereunder, and the Canadian Securities
Laws, except that no representation is made by DPI with resect to statements
made therein based on information supplied by DAHI or its representatives for
inclusion in the Registration Statement or the Proxy
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Statement-Prospectus or with respect to information concerning DAHI incorporated
by reference in the Registration Statement or the Proxy Statement-Prospectus.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MANDATORY SHARE EXCHANGE
SECTION 5.1 CONDUCT OF BUSINESS BY DAHI PENDING THE MANDATORY SHARE
EXCHANGE. Prior to the Effective Time, unless Draxis shall otherwise agree
in writing, or as otherwise expressly contemplated by this Agreement:
(a) DAHI shall conduct its business only in the ordinary and usual
course consistent with its past practice, and DAHI shall use its reasonable
best efforts to preserve intact the present business organization, keep
available the services of its present officers and key employees, and
preserve the goodwill of those having business relationships with it; DAHI
shall not hire any person to any position within DAHI or as a consultant to
DAHI where the total annual compensation payable to such person, whether
payable in cash or otherwise, would exceed U.S.$100,000;
(b) DAHI shall not (i) amend its charter, by-laws or other
organizational documents, (ii) split, combine or reclassify any shares of its
outstanding capital stock, (iii) declare, set aside or pay any dividend or
other distribution payable in cash, stock or property, or (iv) directly or
indirectly redeem or otherwise acquire any shares of its capital stock;
(c) DAHI shall not (i) authorize for issuance, issue or sell or agree to
issue or sell any shares of, or rights of securities of any kind to acquire,
rights or securities convertible into any shares of, its capital stock
(whether through the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), except for the issuance of
shares of DAHI Common Stock upon the exercise of DAHI Stock Options
outstanding on the date of this Agreement; (ii) merge or consolidate with
another entity (other than transactions pending as of the date hereof that
have been disclosed to Draxis); (iii) acquire or purchase an equity interest
in or a substantial portion of the assets of another corporation, partnership
or other business organization or otherwise acquire any assets outside the
ordinary and usual course of business and consistent with past practice or
otherwise enter into any material contract, commitment or transaction outside
the ordinary and usual course of business consistent with past practice; (iv)
sell, lease, license, waive, release, transfer, encumber or otherwise dispose
of any of its assets outside the ordinary and usual course of business and
consistent with past practice; (v) incur, assume or prepay any material
indebtedness or any other material liabilities other than in the ordinary
course of business and consistent with past practice; (vi) assume, guarantee,
endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person in the
ordinary course of business and consistent with past practice; (vii) make any
loans, advances or
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capital contributions to, or investments in, any other person; (viii)
authorize or make capital expenditures materially in excess of the amounts
currently budgeted therefor; (ix) permit any insurance policy naming DAHI as
a beneficiary or a loss payee to be cancelled or terminated other than in the
ordinary course of business; (x) settle or compromise any litigation; or (xi)
enter into any contract, agreement, commitment or arrangement with respect to
any of the foregoing;
(d) DAHI shall not take any action with respect to, or make any material
change in, its accounting policies or procedures;
(e) DAHI shall not knowingly take any action which would jeopardize
qualification of the Mandatory Share Exchange as a reorganization within the
meaning of Section 368(a) of the Code or which would result in the transfer
of DAHI Common Stock in the Mandatory Share Exchange being treated as a
disposition by Draxis or any of its Affiliates under the INCOME TAX ACT
(CANADA);
(f) DAHI shall not make any Tax election or settle or compromise any
income Tax liability or file any income tax return prior to the last day
(including extensions) prescribed by law, in the case of any of the
foregoing, material to the business, financial condition or results of
operations of DAHI;
(g) DAHI shall not propose, adopt, approve or implement any stockholder
rights plan which could have the effect of restricting, prohibiting, impeding
or otherwise affecting the consummation of the transactions contemplated by
this Agreement by the parties hereto; and
(h) Subject to the provisions of Sections 3.6 and 3.8, DAHI shall not
allow its current assets to diminish, or its current liabilities to increase,
if the effect of such change in assets or liabilities would result in DAHI
not being able to make the required payment to shareholders exercising
dissenters rights out of DAHI's own resources or on its own credit.
SECTION 5.2 CONDUCT OF BUSINESS BY DRAXIS PENDING THE MANDATORY SHARE
EXCHANGE. Prior to the Effective time, unless DAHI shall otherwise agree in
writing, or as otherwise expressly contemplated by this Agreement:
(a) the business of Draxis and the Draxis Subsidiaries shall be conducted
only in the ordinary and usual course consistent with past practice, including
acquisitions and dispositions of products and companies in Draxis' current line
of business, and Draxis shall use its reasonable best efforts to preserve intact
the present business organization, to keep available the services of its present
officers and key employees, and preserve the goodwill of those having business
relationships with it;
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(b) Draxis shall not declare, set aside or pay any dividend or other
distribution payable in cash, stock or property;
(c) Draxis shall not split, combine or reclassify the outstanding Draxis
Common Stock;
(d) neither Draxis nor DPI shall take any action with respect to, or make
any material change in, its accounting policies or procedures; and
(e) neither Draxis nor DPI shall knowingly take any action which would
jeopardize qualification of the Mandatory 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 Mandatory Share Exchange being
treated as a disposition by Draxis or any of its Affiliates under the INCOME
TAX ACT (Canada).
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 ACCESS AND INFORMATION. Each of DAHI and Draxis shall
(and shall cause its Subsidiaries and its and their respective officers,
directors, employees, auditors and agents to) afford to the other and to the
other's officers, employees, financial advisors, legal counsel, accountants,
consultants and other representatives reasonable access during normal
business hours throughout the period prior to the Effective Time to all of
its books and records (other than privileged documents and subject to any
confidentiality provisions applicable to communications between any party and
its counsel) and its properties, plants and personnel and, during such
period, each of DAHI and Draxis shall furnish promptly to the other a copy of
each report, schedule and other document filed or received by it pursuant to
the requirements of the LOUISIANA ACT, the SECURITIES ACT, the EXCHANGE ACT
and the applicable Canadian Securities Laws, provided that no investigation
pursuant to this Section 6.1 shall affect any representations or warranties
made herein or the conditions to the obligations of the respective parties to
consummate the Mandatory Share Exchange. Unless otherwise required by law,
each party agrees that it (and its Subsidiaries and its and their respective
representatives) shall hold in confidence all non-public information so
acquired in accordance with the terms of the Confidentiality Agreement.
SECTION 6.2 NO OTHER NEGOTIATIONS.
(a) Upon execution of this Agreement, DAHI is not engaged in, or shall
immediately terminate, any discussions with any third party concerning an
Alternative Acquisition (as defined below). From and after the date of this
Agreement until the earlier of the Effective Time or the termination of this
Agreement in accordance with its terms, DAHI shall not, directly or indirectly,
(a) solicit, engage in discussions or
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negotiate with any person (whether such discussions or negotiations are
initiated by DAHI or otherwise) or take any other action intended or designed
to facilitate the efforts of any person, other than Draxis, relating to the
possible acquisition of DAHI (whether by way of merger, purchase of capital
stock, purchase of assets or otherwise) or any material portion of its
capital stock or assets including by way of a distribution or marketing
agreement (other than a disposition of inventory in the ordinary course of
business) (with any such efforts by any such person, including a firm
proposal to make such an acquisition, to be referred to as an "Alternative
Acquisition"), (b) provide information with respect to DAHI to any person,
other than Draxis, relating to a possible Alternative Acquisition by any
person, other than Draxis, (c) enter into an agreement with any person, other
than Draxis, providing for a possible Alternative Acquisition, or (d) 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 restrictions set forth in this
Agreement shall not prevent the Board of Directors of DAHI (or its agents
pursuant to its instructions) from taking any of the following actions: (a)
furnishing information concerning DAHI and its business, properties and
assets to any third party or (b) negotiating with such third party concerning
an Alternative Acquisition provided that all of the following events shall
have occurred: (1) such third party has made a written proposal to the Board
of Directors of DAHI (which proposal may be conditional) to consummate an
Alternative Acquisition which proposal identifies a price or range of values
to be paid for the outstanding securities or substantially all of the assets
of DAHI, and if consummated, based on the advice of DAHI's investment
bankers, the Board of Directors of DAHI has determined is financially more
favourable to the stockholders of DAHI than the terms of the Mandatory Share
Exchange (a "Superior Proposal"); (2) DAHI's 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; (3) the
Board of Directors of DAHI shall have determined, after consultation with its
outside legal counsel, that the fiduciary duties of the Board of Directors of
DAHI require DAHI to furnish information to and negotiate with such third
party; and (4) Draxis shall have been notified in 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 shall not
provide any non-public information to such third party unless (1) DAHI has
prior to the date hereof provided such information to Draxis' representative;
(2) 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 (3) DAHI provides such non-public
information pursuant to a nondisclosure agreement with terms which are at
least as restrictive as the Confidentiality Agreement.
In addition to the foregoing, DAHI 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. Upon compliance with the foregoing, DAHI shall be entitled (1)
not to recommend or change its
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recommendation concerning the Mandatory Share Exchange; and (2) 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 as defined in Section 8.2(b) below.
(b) If DAHI receives any unsolicited offer or proposal to enter into
discussions or negotiations relating to an Alternative Acquisition, DAHI
shall notify Draxis thereof within 24 hours of DAHI's receipt thereof,
including information as to the identity of the party making any such offer
or proposal and the specific terms of such offer or proposal, as the case may
be.
(c) DAHI shall be entitled to provide copies of this Section 6.2 to
third parties who on an entirely unsolicited basis after the date hereof,
contact DAHI concerning an Alternative Acquisition; provided that Draxis
shall concurrently be notified of such contact and the delivery of such copy.
SECTION 6.3 REGISTRATION STATEMENT. As promptly as practicable Draxis
and DAHI will prepare and, following it being declared effective by the SEC,
distribute to their respective shareholders and file with the SEC, and with
the securities administrators in the applicable provinces of Canada, the
Proxy Statement-Prospectus and Draxis, in consultation with DAHI shall
prepare and file with the SEC or with the securities administrators in the
applicable provinces of Canada pursuant to the Canadian Securities Laws the
Registration Statement. Each of Draxis and DAHI shall use its reasonable
best efforts to have the Registration Statement declared effective as soon as
practicable. Draxis shall also use its reasonable best efforts to take any
action required to be taken under U.S. state securities or blue sky laws or
Canadian Securities Laws in connection with the issuance of the shares of
Draxis Common Stock pursuant to this Agreement in connection with the
Mandatory Share Exchange. DAHI shall furnish Draxis with all information
concerning DAHI and the holders of its capital stock and shall take such
other action as Draxis may reasonably request in connection with the
Registration Statement and the issuance of shares of Draxis Common Stock. If
at any time prior to the Effective Time, any event or circumstance relating
to Draxis, any Subsidiary of Draxis, DAHI, or their respective officers or
directors, should be discovered by such party which should be set forth in
an amendment or a supplement to the Registration Statement or the Proxy
Statement-Prospectus, such party shall promptly inform the other thereof and
take appropriate action in respect thereof.
SECTION 6.4 PROXY STATEMENT-PROSPECTUS; STOCKHOLDER APPROVALS
(a) DAHI, acting through its Board of Directors, shall, subject to and in
accordance with applicable law and its Articles of Incorporation and By-Laws,
promptly and duly call, give notice of, convene and hold as soon as practicable
following the date upon which the Registration Statement becomes effective a
meeting of the holders of DAHI Common Stock for the purpose of voting to approve
the Reincorporation Merger,
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the Mandatory Share Exchange and the Mandatory Share Exchange Plan and the
transactions contemplated in connection therewith, and subject to the fiduciary
duties of the Board of Directors of DAHI under applicable law after consultation
with outside legal counsel, (i) recommend approval by the stockholders of DAHI
of the Reincorporation Merger, the Mandatory Share Exchange and the Mandatory
Share Exchange Plan and include in the Proxy Statement-Prospectus such
recommendation, and (ii) take all reasonable and lawful action to solicit and
obtain such approvals.
(b) Draxis, acting through its Board of Directors, shall, subject to and
in accordance with applicable law and its Articles of Amalgamation and By-Laws,
promptly and duly call, give notice of, convene and hold as soon as practicable
following the date upon which the Registration Statement becomes effective a
meeting of the holders of Draxis Common Stock for the purpose of voting to
approve (i) the issuance of shares of Draxis Common Stock to be issued in
connection with the Mandatory Share Exchange and (ii) the Mandatory Share
Exchange Plan, and subject to the fiduciary duties of the Board of Directors of
Draxis under applicable law as advised by outside counsel, (i) recommend
approval of such issuance by the stockholders of Draxis and include in the Proxy
Statement-Prospectus such recommendation, and (ii) take all reasonable and
lawful action to solicit and obtain such approvals.
(c) Draxis and DAHI, as promptly as practicable (or with such other timing
as Draxis and DAHI mutually agree), shall cause the definitive Proxy
Statement-Prospectus to be mailed to DAHI's and Draxis' stockholders.
(d) At or prior to the Effective Time, each of Draxis and DAHI shall
deliver to the other a certificate of its corporate secretary setting forth the
voting results from its stockholder meeting.
SECTION 6.5 COMPLIANCE WITH THE SECURITIES ACT.
(a) At least 30 days prior to the Effective Time, DAHI shall cause to be
delivered to Draxis a list identifying all persons who were, in its reasonable
judgment, at the record date for DAHI's stockholders' meeting convened in
accordance with Section 6.4(a) hereof, "affiliates" of DAHI as that term is used
in paragraphs (c) and (d) of Rule 145 under the SECURITIES ACT (the
"Affiliates").
(b) DAHI shall use its reasonable best efforts to cause each person who is
identified as one of its Affiliates in its list referred to in Section 6.5(a)
above to deliver to Draxis (with a copy to DAHI), at or prior to the Effective
Time, a written agreement, in the form attached hereto as Exhibit B (the
"Affiliate Letters").
(c) If any Affiliate of DAHI refuses to provide an Affiliate Letter,
Draxis may place appropriate legends on the certificates evidencing the shares
of Draxis Common Stock to be received by such Affiliate pursuant to the terms of
this Agreement and to
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issue appropriate stop transfer instructions to the transfer agent for shares of
Draxis Common Stock to the effect that the shares of Draxis Common Stock
received by such Affiliate pursuant to this Agreement may only be sold,
transferred or otherwise conveyed (i) pursuant to an effective registration
statement under the SECURITIES ACT, (ii) in compliance with Rule 145 promulgated
under the SECURITIES ACT, or (iii) pursuant to another exemption under the
SECURITIES ACT.
SECTION 6.6 BEST EFFORTS. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its reasonable best efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, the obtaining of all necessary waivers, consents
and approvals and the effecting of all necessary registrations and filings.
Without limiting the generality of the foregoing, as promptly as practicable,
DAHI, Draxis and DPI shall make all filings and submissions under the HSR ACT as
may be reasonably required to be made in connection with this Agreement and the
transactions contemplated hereby. Subject to the Confidentiality Agreement,
DAHI will furnish to Draxis and DPI, and Draxis and DPI will furnish to DAHI,
such information and assistance as the other may reasonably request in
connection with the preparation of any such filings or submissions. Subject to
the Confidentiality Agreement, DAHI will provide Draxis and DPI, and Draxis and
DPI will provide DAHI, with copies of all material written correspondence,
filings and communications (or memoranda setting forth the substance thereof)
between such party or any of its representatives and any Governmental Entity,
with respect to the obtaining of any waivers, consent or approvals and the
making of any registrations or filings, in each case that is necessary to
consummate the Reincorporation Merger, the Mandatory Share Exchange and the
other transactions contemplated hereby. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement, the proper officers or directors of Draxis, DPI and DAHI shall
take all such necessary action. Each of the parties will use its reasonable
efforts to ensure that the tax opinions to be delivered by its counsel pursuant
to Section 7.2(d) or 7.3(c), as the case may be, be delivered and not withdrawn
or modified in any material respect.
SECTION 6.7 DAHI STOCK OPTIONS AND WARRANTS. Each of Draxis and DPI
will exchange options and warrants to purchase shares of Draxis Common Stock for
all outstanding DAHI Stock Options (the "New Options"). At the Effective Time,
each DAHI Stock Option which is outstanding immediately prior to the Effective
Time shall be exchanged for the right to receive Draxis Common Stock on the
following basis:
(a) The aggregate number of shares of Draxis Common Stock to be subject to
the New Options shall be equal to the product of the number of shares of DAHI
Common Stock remaining subject (as of immediately prior to the Effective Time)
to the original option or warrant and the Exchange Ratio, provided that any
fractional shares of Draxis
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Common Stock resulting from such multiplication shall be dealt with in
accordance with the provisions of Section 2.3 hereof.
(b) The exercise price per share of Draxis Common Stock under the New
Option shall be equal to the exercise price per share of DAHI Common Stock under
the original option or warrant divided by the Exchange Ratio, provided that such
exercise price shall be rounded up to the nearest cent.
The adjustment provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be and is intended
to be effected in a manner which is consistent with Section 424(a) of the Code.
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 DAHI Stock
Option immediately prior to the Effective Time, except that (i) all references
to DAHI shall be deemed to be references to Draxis and (ii) all DAHI Stock
Options held by directors of DAHI who are neither directors of Draxis nor
employees of DAHI or Draxis shall vest fully as of the date of mailing of the
Joint Proxy Statement-Prospectus. All other terms of DAHI Stock Options shall
remain the same and Draxis shall be deemed to be the grantor of the New
Options. Draxis shall file with the SEC a registration statement on Form S-8
(or other appropriate form) for purposes of registering all shares of Draxis
Common Stock issuable after the Effective Time upon exercise of the New
Options, and use all reasonable efforts to have such registration statement
become effective with respect thereto as promptly as practicable after the
Effective Time. Draxis shall obtain all necessary approvals of the TSE and
NASDAQ to ensure that the New Options are in compliance with applicable
regulatory requirements.
SECTION 6.8 PUBLIC ANNOUNCEMENTS. Each of Draxis, DPI, and DAHI agrees
that it will not issue any press release or otherwise make any public statement
with respect to this Agreement (including the Exhibits hereto) or the
transactions contemplated hereby or thereby without the prior consent of the
other party, which consent shall not be unreasonably withheld or delayed;
provided, however, that such disclosure can be made without obtaining such prior
consent if (i) the disclosure is required by law or by obligations imposed
pursuant to any listing agreement with the TSE, the NNM or any national
securities exchange and (ii) the party making such disclosure has first used its
best efforts to consult with the other party about the form and substance of
such disclosure.
SECTION 6.9 DIRECTORS' AND OFFICERS' INDEMNIFICATION.
(a) All rights to indemnification, advancement of litigation expenses and
limitation of personal liability existing in favour of the existing directors
and officers of DAHI as of the date hereof under the provisions existing on the
date hereof in DAHI's Articles of Incorporation or By-Laws shall, with respect
to any matter existing or occurring at or prior to the Effective Time (including
the transactions contemplated by
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this Agreement), survive the Effective Time, and, as of the Effective Time,
Draxis shall assume all obligations of DAHI in respect thereof as to any claim
or claims asserted prior to or within a six-year period immediately after the
Effective Time.
(b) Following consummation of the Mandatory Share Exchange, Draxis agrees
to indemnify the existing officers and directors of DAHI as of the date hereof
for all claims brought against them or expenses incurred by them in the 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. Such indemnification shall continue for a period of six
years following consummation of the Mandatory Share Exchange. In furtherance of
and not in limitation of the foregoing to the extent indemnification is provided
by the foregoing, Draxis agrees that subsequent to the Effective Time the
officers and directors of DAHI that are defendants in all litigation commenced
prior to the Effective Time by stockholders of DAHI with respect to (x) the
performance of their duties as such officer and/or directors under federal or
state law (including litigation under federal and state securities laws) and (y)
Draxis' offer or proposal to acquire DAHI (the "Subject Litigation") shall be
entitled to be represented at the reasonable expense of Draxis (subject to the
terms of the indemnification provisions referred to in Section 6.9(a) and this
Section 6.9(b) above) in the Subject Litigation by one counsel (and one local
counsel in each jurisdiction in which a case is or shall be pending) each of
which counsel shall be selected by a plurality of such director and officer
defendants; provided that neither Draxis nor DAHI shall be liable for any
settlement effected without its prior written consent (which consent shall not
be unreasonably withheld) and that a condition to any indemnification payments
provided in this Section 6.9 shall be that such officer/director defendant not
have settled any Subject Litigation without the consent of Draxis or DAHI; and
provided further that DAHI and Draxis shall have no obligation hereunder to any
officer/director defendant to the extent a court of competent jurisdiction shall
ultimately determine, and such determination shall have become final and
non-appealable, that indemnification of such officer/director defendant in the
manner contemplated hereby is prohibited by applicable law.
(c) DAHI or, at Draxis' discretion, Draxis shall maintain in effect for
six years from the Effective Time, policies of directors' and officers'
liability insurance which cover individuals who at the Effective Time were
directors or officers of DAHI containing terms and conditions which are not less
advantageous than those policies maintained by DAHI at the date hereof, with
respect to matters occurring prior to the Effective Time, to the extent
available, and having the maximum available coverage under DAHI's current
policies of directors' and officers' liability insurance. Notwithstanding the
preceding sentence, DAHI or Draxis, as the case may be, shall not be required to
spend, in any year, in excess of the annual premium therefor currently being
paid by DAHI.
SECTION 6.10 EXPENSES. Except as otherwise set forth in Section 8.2(b),
whether or not the Mandatory Share Exchange is consummated, all costs and
expenses incurred in
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connection with this Agreement (including the Exhibits hereto) and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, except that fifty percent (50%) of the following expenses shall be
borne by each of Draxis and DAHI, respectively: (i) the expenses incurred in
connection with printing the Registration Statement and the Proxy
Statement-Prospectus, (ii) the filing fee with the SEC relating to the
Registration Statement and the Proxy Statement-Prospectus, and (iii) fees
paid to Canadian securities administrators in connection with the Mandatory
Share Exchange.
SECTION 6.11 LISTING APPLICATION. Draxis will use its reasonable best
efforts to cause the shares of Draxis Common Stock to be issued pursuant to the
Mandatory Share Exchange Plan to be listed for quotation on the NNM and listed
and posted for trading on the TSE.
SECTION 6.12 SUPPLEMENTAL DISCLOSURE. DAHI shall give prompt notice to
Draxis and DPI, and Draxis and DPI shall give prompt notice to DAHI, of (i) the
occurrence, or non-occurrence, of any event the occurrence or non-occurrence, of
which would be likely to cause (x) any representation or warranty contained in
this Agreement to be untrue or inaccurate or (y) any covenant, condition or
agreement contained in this Agreement not to be complied with or satisfied and
(ii) any failure of DAHI, or Draxis or DPI, as the case may be, to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 6.12 shall not have any effect for the purpose of determining the
satisfaction of the conditions set forth in Article VII of this Agreement or
otherwise limit or affect the remedies available hereunder to any party.
SECTION 6.13 LETTERS OF AUDITORS.
(a) Draxis shall use all reasonable efforts to cause to be delivered to
DAHI's Board of Directors a letter of Deloitte & Touche, Draxis' independent
auditors, dated a date within two business days before the date on which the
Registration Statement shall become effective and addressed to DAHI, in form and
substance reasonably satisfactory to DAHI and customary in scope and substance
for letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement, which letter
shall be brought down to the Effective Time.
(b) DAHI shall use all reasonable best efforts to cause to be delivered to
Draxis' Board of Directors a letter of Arthur Andersen, DAHI's independent
auditors, dated a date within two business days before the date on which the
Registration Statement shall become effective and addressed to Draxis, in form
and substance reasonably satisfactory to Draxis and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement, which letter
shall be brought down to the Effective Time.
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SECTION 6.14 CONVEYANCE TAXES. Draxis and DAHI shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications,
or other documents regarding (i) without limitation any real property transfer
gains, sales, use, transfer, value-added, stock transfer, and stamp taxes, (ii)
any recording, registration and other fees, and (iii) any similar taxes or fees
that become payable in connection with the transactions contemplated hereby that
are required or permitted to be filed on or before the Effective Time.
SECTION 6.15 NON-SOLICITATION OF EMPLOYEES. Each of Draxis and DAHI
agree, should the Mandatory Share Exchange not be consummated, that for a period
of one year from the date hereof, not to directly or indirectly solicit any
employee of the other or to induce or encourage any employee of the other to
terminate such employee's employment.
SECTION 6.16 SUBSCRIPTION. DAHI will issue, and DPI shall have 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
Mandatory Share Exchange, it will hold 80% of the issued and outstanding DAHI
Common Stock immediately following the Mandatory Share Exchange.
SECTION 6.17 BOARD REPRESENTATION. The Board of Directors of Draxis
shall have taken appropriate action to appoint, prior to the Effective Time, a
designee of DAHI who is acceptable to Draxis, acting reasonably, to the Draxis
Board of Directors, effective the Effective Time. That director shall serve
until the next annual meeting of Draxis. At the that meeting, the Draxis
shareholders will be asked to elect a designee of DAHI who is acceptable to
Draxis, acting reasonably, to the Board of Directors of Draxis and such
director, if elected, will serve until the next annual meeting of shareholders
of Draxis.
SECTION 6.18 RESERVATION OF OPTIONS. Draxis agrees to reserve 150,000
Draxis Stock Options or Draxis EP Shares for issuance to new employees of DAHI,
as appropriate.
SECTION 6.19 FUTURE DAHI FUNDING. Subject to the Mandatory Share
Exchange, and subject to good business judgement, Draxis intends to commit,
approximately U.S.$10,000,000 to DAHI to complete the process of obtaining
approval from the United States Food & 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.
SECTION 6.20 DAHI OPERATIONS. Subject to the Mandatory Share Exchange
becoming effective and subject to good business judgement, Draxis intends to
delegate to DAHI 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
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including the U.S. launch and subsequent marketing, sales and distribution of
ANIPRYL-Registered Trademark- or any other veterinary product.
SECTION 6.21 FILING OF ARTICLES OF SHARE EXCHANGE. Once all conditions
to this Agreement have been satisfied, DAHI will execute the Articles of Share
Exchange, substantially in the form annexed hereto as Appendix A2 or in such
other form acceptable to Draxis and DPI, and will co-operate with DPI to file
such Articles with the proper regulatory authorities in the applicable
jurisdictions.
SECTION 6.22 TAX FILINGS. The parties shall cooperate, as necessary, to
comply with reporting requirements specified in U.S. Treasury Regulation
Section 1.367(a)-T7(c).
SECTION 6.23 DELIVERY OF SCHEDULES. To the extent that any Schedules
contemplated by this Agreement have not been delivered prior to the execution
hereof, they shall be delivered by the party responsible for their preparation
no later than August 15, 1996, failing which delivery any such Schedule shall be
deemed to be a nil Schedule for the purposes of this Agreement.
ARTICLE VII
CONDITIONS TO CONSUMMATION OF
THE MANDATORY SHARE EXCHANGE
SECTION 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MANDATORY SHARE EXCHANGE. The respective obligations of each party to implement
the Mandatory Share Exchange by filing Articles of Share Exchange substantially
in the form annexed hereto as Exhibit A2, shall be subject to the satisfaction
at or prior to the Effective Time of the following conditions:
(a) STOCKHOLDER APPROVAL. The Reincorporation Merger, the Mandatory Share
Exchange and the Mandatory Share Exchange Plan and this Agreement and the
transactions contemplated hereby shall have been approved and adopted by the
requisite vote (as described in Section 3.14) of the stockholders of DAHI in
accordance with applicable law and the issuance of the shares of Draxis Common
Stock to be issued in connection with the Mandatory Share Exchange and pursuant
to the Mandatory Share Exchange Plan shall have been approved by the requisite
vote (as described in Section 4.10) of the stockholders of Draxis in accordance
with the requirements of the rules of the NNM and the TSE and the MISSOURI AND
LOUISIANA ACTS.
(b) CONSUMMATION OF REINCORPORATION MERGER. The Reincorporation Merger
shall have been effective in accordance with Missouri and Louisiana law.
<PAGE>
- 37 -
(c) NASDAQ AND TSE LISTING FOR QUOTATION. The shares of Draxis Common
Stock issuable to the holders of DAHI Common Stock pursuant to this Agreement in
connection with the Mandatory Share Exchange shall have been authorized for
listing on the NNM and the TSE, upon official notice of issuance and subject to
the usual conditions.
(d) U.S. REGISTRATION STATEMENT AND EXEMPTIONS FROM CANADIAN PROSPECTUS
REQUIREMENTS. The 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. All necessary exemptions will be available or
will have been obtained pursuant to Canadian Securities Laws to permit the
distribution in Canada 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.
(e) NO ORDER. No Governmental Entity (including a federal or state court)
of competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is in effect and
which materially restricts, prevents or prohibits consummation of the Mandatory
Share Exchange or any transaction contemplated by this Agreement; provided,
however, that the parties shall use their reasonable best efforts to cause any
such decree, judgment, injunction or other order to be vacated or lifted.
(f) APPROVALS. Other than the filing of the Articles of Share Exchange
and the Mandatory Share Exchange Plan in accordance with the LOUISIANA ACT, all
authorizations, consents, waivers, orders or approvals of, or declarations or
filings with, or expirations of waiting periods imposed by, any Governmental
Entity that are listed on Schedule 7.1(f), or the failure of which to obtain,
make or occur would have a material adverse effect at or after the Effective
Time on Draxis or DAHI shall have been obtained, been filed or have occurred.
Draxis shall have received all state securities or "blue sky" permits and other
authorizations necessary to issue the shares of Draxis Common Stock pursuant to
this Agreement in connection with the Mandatory Share Exchange.
(g) MANDATORY SHARE EXCHANGE PLAN. The Mandatory Share Exchange Plan, in
substantially the form annexed hereto as Exhibit A1, will be signed by DAHI and
DPI.
(h) SHAREHOLDING BY DPI IN DAHI. DPI will, as of the Effective Date, have
acquired, pursuant to the Mandatory Share Exchange and/or share subscription
right set out in section 6.16 hereof, at least 80% of the DAHI Common Stock
issued and outstanding immediately following the Mandatory Share Exchange.
SECTION 7.2 CONDITIONS TO OBLIGATIONS OF DRAXIS AND DPI TO EFFECT THE
MANDATORY SHARE EXCHANGE. The obligations of Draxis and DPI to effect the
<PAGE>
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Mandatory Share Exchange shall be subject to the satisfaction at or prior to the
Effective Time of the following additional conditions, unless waived in writing
by Draxis:
(a) REPRESENTATIONS AND WARRANTIES. (i) The aggregate effect of all
inaccuracies in the representations and warranties of DAHI set forth in
this Agreement does not and will not have a material adverse effect on the
business, operations, prospects, properties, assets (including intangible
assets), liabilities (including contingent liabilities) condition
(financial or other) or results of operations of DAHI and (ii) the
representations and warranties of DAHI that are qualified with reference to
a DAHI Material Adverse Effect or materiality shall be true and correct and
the representations and warranties that are not so qualified shall be true
and correct in all material respects, in each case as of the date hereof,
and, except to the extent such representations and warranties speak as of
an earlier date, as of the Effective Time as though made at and as of the
Effective Time (but in each case excluding inaccuracies attributable to the
transactions contemplated by this Agreement), and Draxis shall have
received a certificate signed on behalf of DAHI by the chief executive
officer or the chief financial officer of DAHI to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF DAHI. DAHI shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and Draxis shall have received
a certificate signed on behalf of DAHI by the chief executive officer or
the chief financial officer of DAHI to such effect.
(c) AFFILIATE LETTERS. Draxis shall have received the Affiliate Letters
from each of the Affiliates of DAHI, as contemplated in Section 6.5.
(d) TAX OPINION OF U.S COUNSEL. Draxis shall have received an opinion
from Gardner, Carton & Douglas on or about the date that is two business
days prior to the date the Proxy Statement-Prospectus is first mailed to
stockholders of DAHI to the effect that the Mandatory Share Exchange should
constitute a "reorganization" within the meaning of Section 368(a)(1)(B) of
the Code for U.S federal income tax purposes, which opinion shall not have
been withdrawn or modified in any material respect. In rendering such
opinions, such counsel may require and rely upon representations contained
in certificates of officers of Draxis, DPI and DAHI, certain stockholders
and others dated on or before the date of such opinion and shall not have
been withdrawn or modified in any material respect; provided, however, that
the condition set forth in this Section 7.2(d) shall be deemed to be
satisfied if such counsel is unable to render such opinion solely by reason
of Draxis or DPI refusing or failing to provide such counsel with requested
representations. The specific provisions of each such certificate and
representation shall be in form and substance satisfactory to such counsel.
<PAGE>
- 39 -
SECTION 7.3 CONDITIONS TO OBLIGATION OF DAHI TO EFFECT THE MANDATORY
SHARE EXCHANGE. The obligation of DAHI to effect the Mandatory Share Exchange
shall be subject to the satisfaction at or prior to the Effective Time of the
following additional conditions:
(a) REPRESENTATIONS AND WARRANTIES. (i) The aggregate effect of all
inaccuracies in the representations and warranties of Draxis and DPI set
forth in this Agreement does not and will not have a material adverse
effect on the business, operations, prospects, properties, assets
(including intangible assets), liabilities (including contingent
liabilities), condition (financial or other) or results of operations of
Draxis and (ii) the representations and warranties of Draxis and DPI
contained in this Agreement that are qualified with reference to a Draxis
Material Adverse Effect or materiality shall be true and correct and the
representations and warranties that are not so qualified shall be true and
correct in all material respects as of the date hereof, and, except to the
extent such representations and warranties speak as of an earlier date, as
of the Effective Time as though made on and as of the Effective Time (but
in each case excluding inaccuracies attributable to the transactions
contemplated by this Agreement), and DAHI shall have received a certificate
signed on behalf of Draxis by the chief executive officer or the chief
operating officer of Draxis to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF DRAXIS AND DPI. Each of Draxis and DPI
shall have performed in all material respects all obligations required to
be performed by it under this Agreement at or prior to the Effective Time,
and DAHI shall have received a certificate signed on behalf of Draxis by
the chief executive officer or the chief operating officer of Draxis to
such effect.
(c) TAX OPINION OF U.S. COUNSEL. DAHI shall have received an opinion of
Wilson Sonsini on or about the date that is two business days prior to the
date the Proxy Statement-Prospectus is first mailed to stockholders of DAHI
to the effect that the Mandatory Share Exchange should constitute a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code for
U.S. federal income tax purposes, which opinion shall not have been
withdrawn or modified in any material respect. In rendering such opinions,
such counsel may require and rely upon representations contained in
certificates of officers of Draxis, DPI and DAHI, certain stockholders and
others dated on or before the date of such opinion and shall not have been
withdrawn or modified in any material respect; provided, however, that the
condition set forth in this Section 7.3(c) shall be deemed to be satisfied
if such counsel is unable to render such opinion solely by reason of DAHI
or any of the holders of DAHI Common Stock refusing or failing to provide
such counsel with requested representations. The specific provisions of
each such certificate and representation shall be in form and substance
satisfactory to such counsel.
<PAGE>
- 40 -
ARTICLE VIII
TERMINATION
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the
stockholders of Draxis or DAHI:
(a) by mutual consent of Draxis, DPI and DAHI;
(b) by any of Draxis, DPI or DAHI, if the Mandatory Share Exchange shall
not have been consummated before January 31, 1997 (unless the failure to
consummate the Mandatory Share Exchange by such date shall be due to the action
or failure to act of the party (or its Subsidiaries, if any) seeking to
terminate this Agreement, which action or failure to act constitutes a breach of
this Agreement);
(c) by any of Draxis, DPI or DAHI, if any permanent injunction or action
by any Governmental Entity of competent jurisdiction preventing the consummation
of the Mandatory Share Exchange shall have become final and nonappealable;
(d) by Draxis or DPI, if (i) there has been a breach of any
representations or warranties of DAHI set forth herein the effect of which is a
DAHI Material Adverse Effect, (ii) there has been a breach in any material
respect of any of the covenants or agreements set forth in this Agreement on the
part of DAHI, which breach is not curable or, if curable, is not cured within 30
days after written notice of such breach is given by Draxis to DAHI, (iii) any
Schedule hereto required to be delivered by DAHI pursuant to Section 6.23 hereof
is not satisfactory to Draxis and DPI, acting reasonably, or (iv) the Board of
Directors of DAHI (x) fails to recommend approval and adoption of this
Agreement, the Reincorporation Merger, the Mandatory Share Exchange or the
Mandatory Share Exchange Plan by the stockholders of DAHI or withdraws or amends
or modifies in a manner adverse to Draxis and DPI its recommendation or approval
in respect of this Agreement, the Reincorporation Merger, the Mandatory Share
Exchange or the Mandatory Share Exchange Plan, (y) makes any recommendation with
respect to an Alternative Acquisition other than a recommendation to reject such
Alternative Acquisition, or takes any action prohibited by Section 6.2;
(e) by DAHI, if (i) there has been a breach of any representations or
warranties of Draxis or DPI set forth herein the effect of which is a Draxis
Material Adverse Effect, (ii) there has been a breach in any material respect of
any of the covenants or agreements set forth in this Agreement on the part of
Draxis or DPI, which breach is not curable or, if curable, is not cured within
30 days after written notice of such breach is given by DAHI to Draxis or DPI,
as the case may be, (iii) such termination is necessary to allow DAHI to enter
into an agreement with respect to a Superior Proposal (provided that the
termination described in this clause (iii) shall not be effective unless and
until DAHI shall have paid to Draxis in full the termination fee and
<PAGE>
- 41 -
expense reimbursement described in Section 8.2(b)), or (iv) the Board of
Directors of Draxis fails to recommend approval and adoption of this Agreement,
the Mandatory Share Exchange or the Mandatory Share Exchange Plan by the
stockholders of Draxis or withdraws or amends or modifies in a manner adverse to
DAHI its recommendation or approval in respect of this Agreement, the Mandatory
Share Exchange or the Mandatory Share Exchange Plan.
SECTION 8.2 EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement pursuant to this Article
VIII, the Mandatory Share Exchange shall be deemed abandoned and this Agreement
shall forthwith become void, without liability on the part of any party hereto,
except as provided in this Section 8.2, Section 6.1 and Section 6.10, and except
that nothing herein shall relieve any party from liability for any breach of
this Agreement, except that Draxis, DPI and DAHI shall have no rights with
respect to the recovery of expenses, except as provided for in this Section 8.2.
(b) (i) If Draxis or DPI shall have terminated this Agreement pursuant to
Section 8.1(d)(i), (ii) or (iii), then DAHI shall promptly reimburse Draxis
and DPI for all out-of-pocket expenses, up to an aggregate amount of U.S.$
750,000.00, incurred in connection with the transactions contemplated
hereby.
(ii) If DAHI shall have terminated this Agreement pursuant to Section
8.1(e)(i) or (ii), then Draxis shall, on its behalf and on behalf of DPI,
promptly reimburse DAHI for all out-of-pocket expenses, up to an amount of
U.S.$750,000, incurred in connection with the transactions contemplated
hereby.
(iii) If Draxis or DPI shall have terminated this Agreement
pursuant to Section 8.1(d)(iv) or DAHI shall have terminated this Agreement
pursuant to Section 8.1(e)(iii), then in any such case DAHI shall promptly,
but in no event later than two business days after the date of such
termination, pay Draxis a termination fee of $U.S.1,000,000 and DAHI shall
promptly 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 hereby.
(iv) If DAHI shall have terminated this Agreement pursuant to Section
8.1(e)(iv), then in such case Draxis shall, on its behalf and on behalf of
DPI, promptly, but in no event later than two business days after the date
of such termination, pay DAHI a termination fee of $U.S.1,000,000 and
Draxis shall, on its behalf and on behalf of DPI, promptly reimburse DAHI
for all out-of-pocket expenses, up to an aggregate amount of U.S. $750,000,
incurred in connection with the transactions contemplated hereby.
<PAGE>
- 42 -
(v) Notwithstanding any other provision hereof, no fee or expense
reimbursement shall be paid pursuant to this Section 8.2(b) to any party
who shall be in material breach of its obligations hereunder.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 AMENDMENT AND MODIFICATION. At any time prior to the
Effective Time, this Agreement may be amended, modified or supplemented only by
written agreement (referring specifically to this Agreement) of Draxis, DPI and
DAHI with respect to any of the terms contained herein; provided, however, that
after any approval and adoption of this Agreement by the stockholders of DAHI,
no such amendment, modification or supplementation shall be made which under
applicable law requires the approval of such stockholders, without the further
approval of such stockholders.
SECTION 9.2 WAIVER. At any time prior to the Effective Time, Draxis and
DPI, on the one hand, and DAHI, on the other hand, may (i) extend the time for
the performance of any of the obligations or other acts of the other, (ii) waive
any inaccuracies in the representations and warranties of the other contained
herein or in any documents delivered pursuant hereto and (iii) waive compliance
by the other with any of the agreements or conditions contained herein which may
legally be waived. Any such extension or waiver shall be valid only if set
forth in an instrument in writing specifically referring to this Agreement and
signed on behalf of such party.
SECTION 9.3 SURVIVABILITY; INVESTIGATIONS. The respective
representations and warranties of Draxis, DPI and DAHI contained herein or in
any certificates or other documents delivered prior to or as of the Effective
Time (i) shall not be deemed waived or otherwise affected by any investigation
made by any party hereto and (ii) shall not survive beyond the Effective Time.
SECTION 9.4 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or by
next-day courier or telecopied with confirmation of receipt, to the parties at
the addresses specified below (or at such other address for a party as shall be
specified by like notice; provided that notices of a change of address shall be
effective only upon receipt thereof). Any such notice shall be effective upon
receipt, if personally delivered or telecopied, or one day after delivery to a
courier for next-day delivery.
<PAGE>
- 43 -
(a) If to Draxis or DPI, to:
Draxis Health Inc.
6870 Goreway Drive
Mississauga, Ontario
L4V 1P1
Attention: Vice-President, Corporate Development
and Secretary
Facsimile: (905) 677-5494
with copies to:
McCarthy Tetrault
Suite 4700
Toronto Dominion Bank Tower
Toronto-Dominion Centre
Toronto, Ontario
M5K 1E6
Attention: David B. Tennant, Esq.
Facsimile: 416-868-1863
and
Gardner, Carton & Douglas
Suite 3400 - Quaker Tower
321 North Clark Street
Chicago, Illinois 60610-4795
Attention: Glenn W. Reed, Esq.
Facsimile: (312) 644-3361
(b) if to DAHI, to:
Deprenyl Animal Health, Inc.
10955 Lowell Avenue
Suite 710
Overland Park, Kansas 66210
Attention: President and Chief
Executive Officer
Facsimile: (913) 338-3804
<PAGE>
- 44 -
with a copy to:
Fillmore & Holmes, L.C.
911 Main Street, Suite 1930
Kansas City, Missouri 64105
Attention: Arthur E. Fillmore, II, Esq.
Facsimile: (816) 474-8980
SECTION 9.5 DESCRIPTIVE HEADINGS; INTERPRETATION. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. References in this
Agreement to Sections, Schedules, Exhibits or Articles mean a Section, Schedule,
Exhibit or Article of this Agreement unless otherwise indicated. Reference to
this Agreement shall be deemed to include the Exhibits and Schedules hereto,
unless the context otherwise requires. The term "person" shall mean and include
an individual, a partnership, a joint venture, a corporation, an association, a
trust, a Governmental Entity or an unincorporated organization or other entity.
SECTION 9.6 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including the
Schedules and other documents and instruments referred to herein), together with
the Confidentiality Agreement, constitute the entire agreement and supersede all
other agreements and understandings, both written and oral, among the parties or
any of them, with respect to the subject matter hereof. This Agreement is not
intended to confer upon any person not a party hereto any rights or remedies
hereunder; provided, however, that (i) the holders of DAHI Stock Options are
intended beneficiaries of the covenants and agreements contained in Section 6.7
and (ii) the officers and directors of DAHI are intended beneficiaries of the
covenants and agreements contained in Section 6.9. This Agreement shall not be
assigned by operation of law or otherwise; provided that Draxis or DPI may
assign its rights and obligations hereunder to a direct or indirect subsidiary
of Draxis, but no such assignment shall relieve Draxis or DPI, as the case may
be, of its obligations hereunder.
SECTION 9.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Missouri without giving
effect to the provisions thereof relating to conflicts of law.
SECTION 9.8 SEVERABILITY. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired thereby
and such invalidity, illegality or unenforceability shall not apply as to such
party in the specific jurisdictions where such judgment shall be made.
<PAGE>
- 45 -
SECTION 9.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
IN WITNESS WHEREFORE, each of Draxis, DPI and DAHI has caused this
Agreement to be executed under seal on its behalf by its officers thereunto duly
authorized, all as of the date first above written.
DRAXIS HEALTH INC.
By: /s/ Jacqueline H. R. Le Saux
Name: Jacqueline H.R. Le Saux
Title: VICE-PRESIDENT, CORPORATE
DEVELOPMENT AND SECRETARY
DRAXIS PHARMACEUTICA INC.
By: /s/ Martin Barkin
Name: Martin Barkin
Title: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
DEPRENYL ANIMAL HEALTH, INC.
By: /s/ David Stevens
Name: David Stevens
Title: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
<PAGE>
EXHIBIT A1
PLAN OF SHARE EXCHANGE
This Plan of Share Exchange, dated as of -, 1996, is by and between
Deprenyl Animal Health, Inc., a Louisiana corporation ("DAHI"), and Draxis
Pharmaceutica Inc., a corporation incorporated under the laws of Canada ("DPI");
WHEREAS, pursuant to the terms of the Exchange Agreement, dated as of July
- - , 1996, by and among DPI, DAHI and Draxis Health Inc., a corporation
amalgamated under the laws of Canada ("Draxis"), each of DPI and DAHI desire to
adopt a plan of share exchange (the "Exchange Plan") in accordance with the
provisions of Section 116 of the Louisiana Business Corporation Law (the
"Louisiana Act");
WHEREAS, this Exchange Plan has been approved by the boards of directors of
each of DAHI and DPI; and
WHEREAS, in accordance with the provisions and procedures set forth in
Section 116 of the LOUISIANA ACT, at a special meeting of the shareholders of
DAHI to be held on -, 1996 this Exchange Plan will be submitted for approval by
a vote of holders of at least two-thirds of all outstanding shares of DAHI
Common Stock (as such term is hereinafter defined) and at least a majority of
outstanding shares of DAHI Common Stock not held by DPI or its Affiliates.
NOW THEREFORE, the parties hereto agree as follows:
1. On the Effective Date (as such term is hereinafter defined), each
share of Common Stock, $- par value per share, of DAHI ("DAHI Common Stock")
then issued and outstanding, other than any shares of DAHI Common Stock then
held by DPI and its Affiliates (as such term is hereinafter defined), shall be
exchanged for - shares of Common Stock, no par value per share, of Draxis
("Draxis Common Stock"). To the extent such exchange would result in a
fractional share of Draxis Common Stock being issued, each holder of DAHI Common
Stock who would otherwise have been entitled to a fraction of a share of Draxis
Common Stock will receive a cash payment (without interest) determined by
multiplying (1) the fractional interest to which such holder would otherwise be
entitled (after taking into account all shares of DAHI Common Stock then held of
record by such holder) and (2) 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. This Exchange Plan is subject to approval by a vote of holders of at
least two-thirds of all outstanding shares of DAHI Common Stock and at least a
majority of outstanding shares of DAHI Common Stock not held by DPI or its
Affiliates.
<PAGE>
- 2 -
3. This Exchange Plan shall take effect and the exchange contemplated
hereby shall become effective on the later of (i) the date of filing of Articles
of Share Exchange with the Louisiana Secretary of State or (ii) -, 1996 (the
"Effective Date").
4. Upon the Effective Date, all of the DAHI Common Stock not then held by
DPI or its Affiliates shall become the property of DPI. Share certificates
which formerly evidenced the acquired shares of DAHI shall only evidence the
right of the holder thereof to receive the consideration provided for in this
Exchange Plan.
5. In accordance with the provisions of Subsection E of Section 116 of
the LOUISIANA ACT, dissenting shareholders of DAHI who comply with the
procedural requirements of the LOUISIANA ACT will be entitled to receive payment
of the fair cash value of their shares of DAHI Common Stock if the Exchange Plan
is effected upon approval by less than eighty percent (80%) of DAHI's total
voting power.
6. 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 a
corporation, partnership or limited liability company.
IN WITNESS WHEREOF, this Plan of Share Exchange is executed as of the date
first set forth above.
DEPRENYL ANIMAL HEALTH, INC.
By:
------------------------------------
President
DRAXIS PHARMACEUTICA INC.
By:
------------------------------------
President
<PAGE>
EXHIBIT A2
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"), 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, pursuant to the terms of the Exchange Agreement, dated as of July
- - ,1996, by and among DAHI, DPI and Draxis Health Inc., a corporation
incorporated under the laws of Canada ("Draxis"), each of DPI and DAHI adopted a
plan of share exchange (the "Exchange Plan") in accordance with the provisions
of Section 116 of the LOUISIANA ACT;
WHEREAS, this Exchange Plan has been approved by the boards of directors of
each of DAHI and DPI; and
WHEREAS, in accordance with the provisions and procedures set forth in
Section 116 of the LOUISIANA ACT, at a special meeting of the shareholders of
DAHI held on -, 1996 the Exchange Plan was submitted for approval and so
approved by a vote of holders of at least two-thirds of all outstanding shares
of DAHI and at least a majority of outstanding shares of DAHI not held by DPI or
its Affiliates.
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 and DAHI and approved by the holders of the requisite number
of shares of DAHI 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, $- par value per share, of DAHI; - shares outstanding
Common Stock, no par value per share, of Draxis; - shares outstanding
C. Number of votes entitled to be cast by each class included in the
exchange:
Holders of Common Stock, $- par value per share, of DAHI:
Votes entitled to be cast by all holders: -
Votes entitled to be cast by holders other than DPI
and its Affiliates: -
<PAGE>
- 2 -
Holders of Common Stock, no par value per share, of Draxis: 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 HOLDERS:
Number of votes by holders of Common Stock, $- par value per share, of
DAHI cast for the Exchange Plan: - votes
Number of votes by holders of Common Stock, $- par value per share, of
DAHI cast against the Exchange Plan: - votes;
HOLDERS OTHER THAN DPI AND ITS AFFILIATES:
Number of votes cast for the Exchange Plan: - votes
Number of votes entitled to be cast by holders other than DPI and its
affiliates: -
IN WITNESS WHEREOF, these Articles of Share Exchange are executed this -
day of - , 1996.
DEPRENYL ANIMAL HEALTH, INC.
By:
-------------------------------
President
DRAXIS PHARMACEUTICA INC.
By:
-------------------------------
President
<PAGE>
ACKNOWLEDGMENT
STATE OF -
COUNTY OF -
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 County aforesaid, personally came and appeared -, to me known to be the
President of Deprenyl Animal Health, Inc., a Louisiana corporation, and the
person who executed the foregoing Articles of Share Exchange in such capacity,
and who declared and acknowledged to me, Notary, in the presence of the
undersigned competent witnesses, that he was authorized to and did execute the
foregoing Articles of Share Exchange in such capacity for the said corporation,
as its and his free act and deed.
WITNESSES:
- -------------------------------- -----------------------------------
- -------------------------------- --------------------, President
----------------------------------
NOTARY PUBLIC
ACKNOWLEDGMENT
STATE OF -
COUNTY OF -
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 County aforesaid, personally came and appeared -, to me known to be the
President of Draxis Pharmaceutica Inc., a corporation incorporated under the
laws of Canada, and the person who executed the foregoing Articles of Share
Exchange in such capacity, and who declared and acknowledged to me, Notary, in
the presence of the undersigned competent witnesses, that he was authorized to
and did execute the foregoing Articles of Share Exchange in such capacity for
the said corporation, as its and his free act and deed.
WITNESSES:
- -------------------------------- -----------------------------------
- -------------------------------- --------------------, President
----------------------------------
NOTARY PUBLIC
<PAGE>
EXHIBIT B
FORM OF AFFILIATE LETTER
], 1996
-
Draxis Health Inc.
6870 Goreway Drive
Mississauga, Ontario
L4V 1P1
ATTENTION: Vice-President, Corporate Development,
General Counsel and Secretary
Dear Sir:
RE: DEPRENYL ANIMAL HEALTH, INC.
I have been advised that as of the date of this letter I may be
deemed to be an "affiliate" of Deprenyl Animal Health, Inc. ("DAHI"), a
Missouri corporation ("DAHI"), as the term "affiliate" is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commissions (the
"Commission") under the SECURITIES ACT of 1933, as amended (the "Act").
Pursuant to the terms of the Exchange Agreement dated as of - , 1996 (the
"Exchange Agreement"), by and among Draxis Health Inc., a Canadian
corporation amalgamated under the laws of Canada ("Draxis"), Draxis
Pharmaceutica Inc., a Canadian corporation amalgamated under the laws of
Canada and a wholly-owned subsidiary of Draxis ("DPI"), and DAHI, DPI will
acquire all of the issued and outstanding shares of common stock of DAHI
("DAHI Common Stock") not already held by Draxis or any of its affiliates
(the "Share Exchange").
As a result of the Mandatory Share Exchange, I may receive shares of
Common Stock of Draxis ("Draxis Common Stock"). I would receive Draxis
Common Stock in exchange for shares (or options for shares) owned by me of
DAHI Common Stock.
1. REPRESENTATIONS, WARRANTIES AND COVENANTS OF AFFILIATE. I
represent, warrant and covenant to Draxis that in the event I receive Draxis
Common Stock as a result of the Mandatory Share Exchange.
A. I shall not make any sale, transfer or other disposition of
Draxis Common Stock in violation of the Act or the Rules and
Regulations.
B. I have been advised that the issuance of Draxis Common Stock
to me pursuant to the Mandatory Share Exchange has been registered
with the Commission under the Act on a Registration Statement Form F-4.
However, I have also been advised that, because at the time the
Mandatory Share
<PAGE>
- 2 -
Exchange is submitted for a vote of stockholders of DAHI, (a) I may be
deemed to be an affiliate of DAHI and (b) the resale by me of Draxis
Common Stock has not been registered under the Act, I may not sell,
transfer or otherwise dispose of Draxis Common Stock issued to me in
the Mandatory Share Exchange unless (i) such sale, transfer or other
disposition is made in conformity with the volume and other limitations
of Rule 145 promulgated by the Commission under the Act, (ii) such
resale, transfer or other disposition has been registered under the
Act or (iii) in the opinion of counsel reasonably acceptable to Draxis,
such sale, transfer or other disposition is otherwise exempt from
registration under the Act.
C. I also understand that there will be placed on the certificates
for Draxis Common Stock issued to me, or any substitutions therefor, a
legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES
ACT OF 1993 APPLIES. THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH THE
TERMS OF AN AGREEMENT DATED - , 1996 BETWEEN THE REGISTERED
HOLDER HEREOF AND DRAXIS HEALTH INC., A COPY OF WHICH AGREEMENT
IS ON FILE AT THE PRINCIPAL OFFICES OF DRAXIS HEALTH INC."
D. I also understand that unless a sale or transfer is made in
conformity with the provisions of Rule 145, or pursuant to a
registration statement, Draxis reserves the right to put the
following legend on the certificates issued to any transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND WERE
ACQUIRED FROM A PERSON WHO RECEIVED SUCH SHARES IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN
ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN
CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING
OF THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs
C and D above shall be removed by delivery of substitute certificates without
such legend upon (i) the transfer of the Draxis Common Stock represented by
such certificate pursuant to a registration statement under the Act or in
accordance with the applicable provisions of Rule 145 under the Act
(including, without limitation, paragraph (d) thereof, (ii) the expiration of
the restrictive period set forth in Rule 145(d), or (iii) the delivery by
Affiliate to Draxis of a copy of a letter from the staff of the Commission,
or an opinion of counsel reasonably satisfactory to Draxis in form and
substance reasonably satisfactory to Draxis, to the effect that such legend
is not required for purposes of the Act.
2. RULE 145. From and after the Effective Time of the Share
Exchange and for so long as is necessary in order to permit Affiliate to sell
the Draxis Common Stock held by Affiliate pursuant to Rule 145 under the Act,
Draxis will use its reasonable best efforts to file on a timely basis all
reports required to be filed by it pursuant to the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder, as the same shall
be in effect at the time, referred to in paragraph (c) of Rule 144 under
<PAGE>
- 3 -
the Act, in order to permit Affiliate to sell, transfer or otherwise dispose
of the Draxis Common Stock held by it pursuant to the terms and conditions of
Rule 145.
3. LIMITED RESALES. Draxis acknowledges that the provisions of
Section 1.A. of this Agreement will be satisfied as to any sale by the
undersigned of the Draxis Common Stock Affiliate may acquire pursuant to the
Share Exchange pursuant to Rule 145(d) under the Act, by a broker's letter
and a letter from the undersigned with respect to that sale stating that the
applicable requirements of Rule 145(d)(1) have been met or are inapplicable
by virtue of Rule 145(d)(2) or Rule 145(d)(3); provided, however, that Draxis
has no reasonable basis to believe that such sales were not made in
compliance with such provisions of Rule 145(d) and subject to any changes in
Rule 145 after the date of this Agreement.
4. TERMINATION. This Agreement shall be terminated and shall be
of no further force and effect upon the termination of the Exchange Agreement
pursuant to Article VIII of the Exchange Agreement.
Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of DAHI as described in the first paragraph of
this letter, as or a waiver of any rights I may have to object to any claim
that I am such an affiliate or on after the date of this letter.
Yours truly,
-------------------------------------------
Name:
Accepted this day of , 1996, by
DRAXIS HEALTH INC.
By --------------------------------------
Name:
Title:
<PAGE>
SCHEDULE 3.1(b)
None.
<PAGE>
SCHEDULE 3.2 (c)
None.
<PAGE>
SCHEDULE 3.4
The Office Building Lease (the "Lease") by and between The Aetna Life
Insurance Company and Deprenyl Health, Inc. ("Tenant"), dated February 11,
1994, relating to the lease by Tenant of Suite 710 of Building #20 located at
10955 Lowell, Overland Park, Kansas 66210 provides, in part that Tenant shall
not transfer the Lease by operation of law without the prior written consent
of Landlord. Section 10 also provides that any such transfer may be deemed to
be void and shall, at the option of the Landlord, constitute a default under
the Lease.
Although not a transfer by operation of law, the following agreements require
notice or consent in connection with an assignment of DAHI's rights and
obligations:
1. License and Supply Agreement with Hoechst Veterinar GmbH,
dated May 4, 1995
2. Supply Agreement Chinoin Pharmaceutical and Chemical Works
Co. Ltd., dated October 1, 1990
3. Manufacturing Agreement with Fermenta Animal Health Company,
dated September 1, 1994
<PAGE>
SCHEDULE 3.6
Stock options for a total of 305,000 shares of DAHI common stock were granted
to employees, directors and consultants of DAHI between January 1, 1996 and
July 25, 1996.
An employment agreement with David R. Stevens, dated as of June 1, 1996,
providing for annual compensation in excess of $100,000 was approved by the
Board of Directors on July 2, 1996.
Notice and/or consent may be required under the following agreements upon the
assignment of DAHI's rights and obligations under the agreement:
1. License and Supply Agreement with Hoechst Veterinar GmbH,
dated May 4, 1995
2. Supply Agreement Chinoin Pharmaceutical and Chemical Works
Co. Ltd., dated October 1, 1990
3. Office Building Lease with The Aetna Life Insurance Company,
dated February 11, 1994
4. Manufacturing Agreement with Fermenta Animal Health Company,
dated September 1, 1994
<PAGE>
SCHEDULE 3.7
None.
<PAGE>
SCHEDULE 3.8
None.
<PAGE>
SCHEDULE 3.9
Section 1.2 of Article I of the By-Laws require that the annual meeting of
shareholders be held on the first Monday of May of each year. The 1996
annual meeting was not held on May 1 and annual meetings in prior years have
been held on dates other than May 1.
<PAGE>
SCHEDULE 3.10(b)
AND
SCHEDULE 3.10(b)(vii)
None.
<PAGE>
SCHEDULE 3.11
List of registered trademarks attached as Exhibit A to Schedule 3.11.
List of trademark registration applications pending and allowed awaiting
issuance attached as Exhibit B to Schedule 3.11.
List of issued patents attached as Exhibit C to Schedule 3.11.
List of patent applications pending and allowed awaiting issuance attached as
Exhibit D to Schedule 3.11.
DAHI key employees/scientists are required under the terms of their
employment agreements with DAHI to disclose in a timely manner any inventions
made while in DAHI's employ and to assign all rights to such inventions to
DAHI.
Management of DAHI has received, but has been unable to verify, a verbal
report that a European manufacturer already has, or will have in the near
future, patents for the veterinary use of selegiline in the United States.
The same manufacturer is known to have filed applications for patents for the
veterinary use of selegiline in France and in the European Patent Office. If
and when issued, any such patents may conflict with DAHI's rights under its
patents.
Claims of Infringement asserted by DAHI within the past three years:
On January 1, 1994 DAHI sued Orion Farmos for infringement of U.S.
patent 5,151,449.
The case was settled.
Under a License Agreement ("Patent License Agreement") with the University of
Toronto Innovations Foundation ("IF") entered into in 1992 and amended in
1995, DAHI has certain rights with respect to the use of inventions for which
IF has patents issued or patent applications pending. Only one U.S. patent
has been issued to date which is covered by the terms of the Patent License
Agreement, although other patent applications are pending in the U.S. and
various foreign countries. The issued patent is U.S. No. 5,444,095, issued
on August 22, 1995 [Use of deprenyl to rescue damaged nerve cells].
<PAGE>
EXHIBIT A TO SCHEDULE 3.11
SUMMARY OF ISSUED TRADEMARKS
ANIPRYL:
Country Reg. No. Issue Date
------- -------- ----------
United States 1,666,409 12/3/91
Australia A623359 3/14/95
Austria 153,384 7/1/94
Benelux 544538 10/3/94
Canada 443,186 5/26/95
Denmark 4163/94 6/24/94
Finland 135621 12/20/94
France 94507408 8/5/94
Germany 2.087.441 12/15/94
Iceland 668/1994 8/26/94
Ireland 159250 8/17/95
Mexico 494303 6/12/95
Norway 169,868 11/30/95
Sweden 303,512 7/21/95
Switzerland 420936 2/29/96
United Kingdom 1563682 3/10/95
LIFE TABS:
Country Reg. No. Issue Date
------- -------- ----------
United States 1,669,106 12/24/91
Canada TMA 454,491 2/23/96
LIFE TREATS:
Country Reg. No. Issue Date
------- -------- ----------
United States 1,677,323 3/3/92
Canada 444,862 7/7/95
<PAGE>
EXHIBIT B TO SCHEDULE 3.11
U.S. trademark applications pending and allowed awaiting issuance:
"MEDCEN" (Intent-to-Use)
Serial No. 74/333,282 Allowed 1/25/94.
Foreign trademark applications pending and allowed awaiting issuance:
"ANIPRYL"
Greece
------
Application No. 118506 Pending.
Italy
-----
Application No. RM94C000732 Pending.
Japan
-----
Application No. 17841/94 Allowed 6/17/96. Awaiting issuance.
New Zealand
-----------
Application No. 234452 Awaiting receipt of acceptance.
Portugal
--------
Application No. 298.794 Granted and awaiting receipt of
official registration.
<PAGE>
EXHIBIT C TO SCHEDULE 3.11
SUMMARY OF ISSUED PATENTS
COGNITIVE DISEASE PATENT (BASED ON 07/576,011 & 07/643,452):
Country: Patent No. Issue Date
-------- ---------- ----------
U.S. (07/576,011 only) 5,151,449 9/29/92
Australia 633714 5/28/93
New Zealand 238277 5/27/91
Taiwan (07/643,452 only) 54258 5/20/92
CUSHING'S DISEASE PATENT (BASED ON 07/858,702):
Country: Patent No. Issue Date
-------- ---------- ----------
United States 5,129,808 3/9/93
EPO 0562705 10/11/95
WEIGHT LOSS PATENT (BASED ON 07/913,298):
Country: Patent No. Issue Date
-------- ---------- ----------
United States 5,225,446 7/6/93
IMMUNOLOGY PATENT (BASED ON 07/975,284):
Country: Patent No. Issue Date
-------- ---------- ----------
United States 5,276,057 1/4/94
IMMUNOLOGY PATENT (BASED ON 07/113,608):
Country: Patent No. Issue Date
-------- ---------- ----------
United States 5,387,615 2/7/95
<PAGE>
EXHIBIT D TO SCHEDULE 3.11
U.S. patent applications pending and allowed awaiting issuance:
Serial No. 08/300,962 [Survival Curve Shifting]. Allowed 2/8/96.
Awaiting issuance.
Serial No. 08/475,186 [Hearing Loss] Allowed 6/3/96.
Awaiting issuance.
Foreign patent applications pending and allowed awaiting issuance:
BRAZIL Application No. PI 9103506 Pending.
CANADA Application No. 2,039,194-4 Pending.
EPO Application No. 91302820.5 Cognitive allowed 4/23/96.
Awaiting issuance. Immune
system claims pending.
INDONESIA Application No. P-000759 Pending.
JAPAN Application No. 3-116589 Pending.
MALAYSIA Application No. PI 9100785 Pending.
MEXICO Application No. 91-00067 Pending.
TAIWAN Application No. 80104695 Cognitive pending.
THAILAND Application No. 013532 Approved pending receipt
of EPO patent certificate.
VENEZUELA Application No. 01304 Pending.
PCT Application No. PCT/US95/11176 Pending.
(Based on USSN 08/300,962)
PCT Application No. N/A Pending. Filed 6/3/96.
(Based on USSN 08/475,186)
<PAGE>
SCHEDULE 3.13
List of DAHI Employee Benefit Plans, Arrangements and Agreements:
401(k) Plan
Vacation Pay and Other Paid Leaves and Unpaid Leaves of Absence
Group Term Life Insurance
Accidental Death & Dismemberment Insurance
Major Medical and Surgical Insurance
Health Insurance
Incentive Stock Option Plan
1994 Non-Qualified Stock Option Plan
Disability Insurance (Selected employees only.)
Incentive Bonus Plans (Selected employees only.)
Employment agreements with individual employees contain in some instances not
only compensation arrangements but a description of other benefits to be
provided.
<PAGE>
SCHEDULE 4.1 (b)
Jurisdiction of
Incorporation
---------------
DAHI Animal Health (Ontario) Inc. Canada
DAHI Animal Health Inc. Canada
Draxis Pharmaceutica Inc. Canada
Draxis LLC Delaware
Draxis U.S. Inc. Delaware
Deprenyl Animal Health, Inc. Missouri
New IHS LLC Delaware
<PAGE>
SCHEDULE 4.2
5. Common Shares are issuable to certain parties if gross revenues of the
former Lipopharm Inc., now a division of the Company, ("Lipopharm") in
any fiscal year ending December 31, 1992 through 1997 shall exceed
$2,000,000. Common Shares are also issuable to the same parties if
gross revenues of Lipopharm in any fiscal year ending December 31,
1992 through 1997 shall exceed $4,000,000. The maximum number of
Common Shares issuable under each of these two warrants is equal to
that number obtained by dividing the average closing price of the
Common Shares on The Toronto Stock Exchange for the 15 trading days
immediately prior to the end of the month during which the gross
revenue target was exceeded into $393,221.
6. Common Shares are also issuable on the exercise of stock options, an
aggregate of 1,501,440 of which are issued and outstanding on the date
hereof.
7. Novopharm Limited holds a warrant to purchase, prior to April 19, 2000,
500,000 Common Shares for $2.09 per Common Share. It also holds
warrants to purchase, prior to December 11, 1997, 1,176.470 Common
Shares for the following prices:
- if exercised after December 10, 1995 and before December 10,
1996 $2.97
- if exercised thereafter $3.27.
8. Innovative Health Systems, Inc. holds a warrant to purchase, prior to
April 1, 2000, 1,000,000 Common Shares for $2.25 per Common Share.
Vesting of this warrant is dependent upon Innovative Health Systems,
LLC achieving certain levels of net profit after tax. The Company may
call the Warrant once vested for no consideration upon giving 30 days
notice and if the average closing price per share as quoted on NASDAQ
for the immediately preceding 65 trading days has exceeded 200% of the
exercise price. A portion of the warrant may also be cancelled should
certain individuals associated with Innovative Health Systems, LLC not
devote substantially all their time to the affairs of that company.
<PAGE>
SCHEDULE 4.11 (a)
Stock Purchase and Bonus Plan
Stock Option Plan
Employee Participation Share Purchase Plan
Canada Life Group Life and Health Insurance Policy
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS AND SHARE EXCHANGE
Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 The Mandatory Share Exchange . . . . . . . . . . . . 4
Section 1.3 Closing of the Mandatory Share Exchange . . . . . . . 4
Section 1.4 Options and Warrants. . . . . . . . . . . . . . . . . 4
Section 1.5 Dissenting Shares . . . . . . . . . . . . . . . . . . 5
ARTICLE II
EXCHANGE PROCEDURES
Section 2.1 Mandatory Exchange of DAHI Common Stock; Procedures . 5
Section 2.2 Dividends; Escheat. . . . . . . . . . . . . . . . . . 6
Section 2.3 No Fractional Securities. . . . . . . . . . . . . . . 6
Section 2.4 Closing of DAHI Transfer Books. . . . . . . . . . . . 7
Section 2.5 Further Assurances. . . . . . . . . . . . . . . . . . 7
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DAHI
Section 3.1 Corporate Organization; Related Entities. . . . . . . 7
Section 3.2 Capitalization. . . . . . . . . . . . . . . . . . . . 8
Section 3.3 Authority Relative to this Agreement. . . . . . . . . 8
Section 3.4 Consents and Approvals; No Violations . . . . . . . . 9
Section 3.5 Reports and Financial Statements. . . . . . . . . . . 9
Section 3.6 Absence of Certain Changes or Events. . . . . . . . . 10
Section 3.7 Litigation. . . . . . . . . . . . . . . . . . . . . . 10
Section 3.8 Absence of Undisclosed Liabilities. . . . . . . . . . 10
Section 3.9 No Default. . . . . . . . . . . . . . . . . . . . . . 11
Section 3.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.11 Intellectual Property . . . . . . . . . . . . . . . . 13
Section 3.12 Information in Disclosure Documents and Registration
Statement . . . . . . . . . . . . . . . . . . . . . . 15
Section 3.13 Employee Benefit Plans; ERISA.. . . . . . . . . . . . 16
Section 3.14 Vote Required.. . . . . . . . . . . . . . . . . . . . 17
Section 3.15 Affiliate Transactions. . . . . . . . . . . . . . . . 17
Section 3.16 Brokers . . . . . . . . . . . . . . . . . . . . . . . 17
Section 3.17 Opinion of Financial Advisor. . . . . . . . . . . . . 17
Section 3.18 Valuation . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DRAXIS AND DPI
Section 4.1 Organization. . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
- ii -
Section 4.2 Capitalization. . . . . . . . . . . . . . . . . . . . 19
Section 4.3 Authority Relative to this Agreement. . . . . . . . . 20
Section 4.4 Consents and Approvals; No Violations.. . . . . . . . 20
Section 4.5 Reports and Financial Statements. . . . . . . . . . . 20
Section 4.6 Absence of Certain Changes or Events; Material
Agreements. . . . . . . . . . . . . . . . . . . . . . 21
Section 4.7 Absence of Undisclosed Liabilities. . . . . . . . . . 21
Section 4.8 No Default. . . . . . . . . . . . . . . . . . . . . . 21
Section 4.9 Information in Disclosure Documents and Registration
Statement.. . . . . . . . . . . . . . . . . . . . . . 22
Section 4.10 Vote Required.. . . . . . . . . . . . . . . . . . . . 22
Section 4.11 Employee Benefit Plans. . . . . . . . . . . . . . . . 22
Section 4.12 Organization. . . . . . . . . . . . . . . . . . . . . 23
Section 4.13 Capitalization. . . . . . . . . . . . . . . . . . . . 23
Section 4.14 Authority Relative to This Agreement. . . . . . . . . 23
Section 4.15 Consents and Approvals; No Violations.. . . . . . . . 23
Section 4.16 No Default. . . . . . . . . . . . . . . . . . . . . . 24
Section 4.17 Information in Disclosure Documents and Registration
Statement.. . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MANDATORY SHARE EXCHANGE
Section 5.1 Conduct of Business by DAHI Pending the Mandatory
Share Exchange. . . . . . . . . . . . . . . . . . . . 25
Section 5.2 Conduct of Business by Draxis Pending the Mandatory
Share Exchange. . . . . . . . . . . . . . . . . . . . 26
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 Access and Information. . . . . . . . . . . . . . . . 27
Section 6.2 No Other Negotiations.. . . . . . . . . . . . . . . . 27
Section 6.3 Registration Statement. . . . . . . . . . . . . . . . 29
Section 6.4 Proxy Statement-Prospectus; Stockholder Approvals . . 29
Section 6.5 Compliance with the Securities Act. . . . . . . . . . 30
Section 6.6 Best Efforts. . . . . . . . . . . . . . . . . . . . . 31
Section 6.7 DAHI Stock Options and Warrants.. . . . . . . . . . . 31
Section 6.8 Public Announcements. . . . . . . . . . . . . . . . . 32
Section 6.9 Directors' and Officers' Indemnification. . . . . . . 32
Section 6.10 Expenses. . . . . . . . . . . . . . . . . . . . . . . 33
Section 6.11 Listing Application.. . . . . . . . . . . . . . . . . 34
Section 6.12 Supplemental Disclosure.. . . . . . . . . . . . . . . 34
Section 6.13 Letters of Auditors.. . . . . . . . . . . . . . . . . 34
Section 6.14 Conveyance Taxes. . . . . . . . . . . . . . . . . . . 35
Section 6.15 Non-solicitation of Employees.. . . . . . . . . . . . 35
<PAGE>
- iii -
Section 6.16 Subscription. . . . . . . . . . . . . . . . . . . . . 35
Section 6.17 Board Representation. . . . . . . . . . . . . . . . . 35
Section 6.18 Reservation of Options. . . . . . . . . . . . . . . . 35
Section 6.19 Future DAHI Funding.. . . . . . . . . . . . . . . . . 35
Section 6.20 DAHI Operations.. . . . . . . . . . . . . . . . . . . 35
Section 6.21 Filing of Articles of Share Exchange. . . . . . . . . 36
Section 6.22 Tax Filings.. . . . . . . . . . . . . . . . . . . . . 36
Section 6.23 Delivery of Schedules.. . . . . . . . . . . . . . . . 36
ARTICLE VII
CONDITIONS TO CONSUMMATION OF
THE MANDATORY SHARE EXCHANGE
Section 7.1 Conditions to Each Party's Obligation to Effect the
Mandatory Share Exchange. . . . . . . . . . . . . . . 36
Section 7.2 Conditions to Obligations of Draxis and DPI to Effect
the Mandatory Share Exchange. . . . . . . . . . . . . 37
Section 7.3 Conditions to Obligation of DAHI to Effect the
Mandatory Share Exchange. . . . . . . . . . . . . . . 39
ARTICLE VIII
TERMINATION
Section 8.1 Termination.. . . . . . . . . . . . . . . . . . . . . 40
Section 8.2 Effect of Termination.. . . . . . . . . . . . . . . . 41
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Amendment and Modification. . . . . . . . . . . . . . 42
Section 9.2 Waiver. . . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.3 Survivability; Investigations . . . . . . . . . . . . 42
Section 9.4 Notices . . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.5 Descriptive Headings; Interpretation. . . . . . . . . 44
Section 9.6 Entire Agreement; Assignment. . . . . . . . . . . . . 44
Section 9.7 Governing Law . . . . . . . . . . . . . . . . . . . . 44
Section 9.8 Severability. . . . . . . . . . . . . . . . . . . . . 44
Section 9.9 Counterparts. . . . . . . . . . . . . . . . . . . . . 45
EXHIBIT A1
EXHIBIT A2
ACKNOWLEDGMENT
EXHIBIT B
<PAGE>
[LOGO] Industry Canada Industrie Canada
CORPORATIONS CORPORATIONS
Phase II, 4th floor Phase II, 4e etage
Place du Portage Place du Portage
Ottawa-Hull Ottawa-Hull
K1A 0C9 K1A 0C9
Your file - Votre reference
MAY 30, 1994/LE 30 MAI 1994
Our file - Notre reference
MCCARTHY TETRAULT 293391-8
Re-Objet
DRAXIS HEALTH INC.
SANTE DRAXIS INC.
Enclosed herewith is the document issued in the above matter.
A notice of issuance of CBCA documents will be published in the Canada
Corporations Bulletin. A notice of issuance of CCA documents will be published
in the Canada Corporations Bulletin and the Canada Gazette.
IF A NAME OR CHANGE OF NAME IS INVOLVED, THE FOLLOWING CAUTION SHOULD BE
OBSERVED:
This name is available for use as a corporate name subject to and
conditional upon the applicants assuming full responsibility for any risk
of confusion with existing business names and trade marks (including those
set out in the relevant NUANS search report(s)). Acceptance of such
responsibility will comprise an obligation to change the name to a
dissimilar one in the event that representations are made and established
that confusion is likely to occur. The use of any name granted is subject
to the laws of the jurisdiction where the company carries on business.
For the Director General, Corporations Directorate
Vous trouverez ci-inclus le document emis dans l'affaire precitee.
Un avis de l'emission de documents en vertu de la LSARF sera publie dans le
Bulletin des societes canadiennes. Un avis de l'emission de documents en vertu
de la LCC sera publie dans le Bulletin des societes canadiennes et dans la
Gazette du Canada.
S'IL EST QUESTION D'UNE DENOMINATION SOCIALE OU D'UN CHANGEMENT DE DENOMINATION
SOCIALE,L'AVERTISSEMENT SUIVANT DOIT ETRE RESPECTE:
Cette denomination sociale est disponible en autant que les requerants
assument toute responsabilite de risque de confusion avec toutes
denominations commerciales et toutes marques de commerce existantes (y
compris celles qui sont citees dans le(s) rapport(s) de recherches de NUANS
pertinent(s)). Cette acceptation de responsabilite comprend l'obligation
de changer la denomination de la societe en une denomination differente
advenant le cas ou des representations sont faites etablissant qu'il y a
une probabilite de confusion. L'utilisation de tout nom octroye est
sujette a toute loi de la juridiction ou la societe exploite son
entreprise.
pour le Directeur general, Direction generale des Corporations
CANADA [LOGO]
<PAGE>
[LOGO] Industry Canada Industrie Canada
<TABLE>
<CAPTION>
CERTIFICATE CERTIFICAT
OF AMENDMENT DE MODIFICATION
CANADA BUSINESS LOI REGISSANT LES SOCIETES
CORPORATIONS ACT PAR ACTIONS DE REGIME FEDERAL
- ------------------------------------------------------------------------------------------------------------------------------------
DRAXIS HEALTH INC. 293391-8
SANTE DRAXIS INC.
- ---------------------------------------------- ---------------------------------------------
<S> <C>
Name of corporation-Denomination de la societe Corporation number-Numero de la societe
I hereby certify that the articles of the Je certifie que les statuts de la societe susmentionnee ont ete
above-named corporation were amended modifies:
(a) under section 13 of the CANADA BUSINESS / / a) en vertu de l'article 13 de la LOI REGISSANT LES SOCIEITES PAR
CORPORATIONS ACT in accordance with the ACTIONS DE REGIME FEDERAL, conformement a l'avis ci-joint;
attached notice;
(b) under section 27 of the CANADA BUSINESS / / b) en vertu de l'article 27 de la LOI REGISSANT LES SOCIEITES PAR
CORPORATIONS ACT as set out in the attached ACTIONS DE REGIME FEDERAL, tel qu'il est indique dans les clauses
articles of amendment designating a series modificatrices ci-jointes designant une serie d'actions;
of shares;
(c) under section 179 of the CANADA BUSINESS /X/ c) en vertu de l'article 179 de la LOI REGISSANT LES SOCIETES PAR
CORPORATIONS ACT as set out in the attached ACTIONS DE REGIME FEDERAL, tel qu'il est indique dans les clauses
articles of amendment; modificatrices ci-jointes;
(d) under section 191 of the CANADA BUSINESS / / d) en vertu de l'article 191 de la LOI REGISSANT LES SOCIETES PAR
CORPORATIONS ACT as set out in the attached ACTIONS DE REGIME FEDERAL, tel qu'il est indique dans les clauses
articles of reorganization; de reorganisation ci-jointes;
(e) under section 192 of the CANADA BUSINESS / / e) en vertu de l'article 192 de la LOI REGISSANT LES SOCIETES PAR
CORPORATIONS ACT as set out in the attached ACTIONS DE REGIME FEDERAL, tel qu'il est indique dans les clauses
articles of arrangement. d'arrangement ci-jointes.
/s/ Illegible MAY 30, 1994/LE 30 MAI 1994
Director - Directeur Date of Amendment - Date de modification
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CANADA [LOGO]
<PAGE>
[LOGO]
<TABLE>
<CAPTION>
<S> <C>
Consumer and Consommation et
Corporate Affairs Canada Affaires commerciales Canada
FORM 4 FORMULE 4
Canada Business Loi regissant les societes ARTICLES OF AMENDMENT CLAUSES MODIFICATRICES
Corporations Act par actions de regime federal (SECTION 27 OR 177) (ARTICLES 27 OU 177)
- ----------------------------------------------------------------------------------------------------------------------------------
1 - Name of corporation - Denomination de la societe 2 - Corporation No. - No. deg. de la societe
DEPRENYL RESEARCH LIMITED 293391-8
- ----------------------------------------------------------------------------------------------------------------------------------
3 - The articles of the above-named corporation are amended as follows: Les statuts de la societe mentionnee ci-dessus sont
modifies de la facon suivante:
1. THE NAME OF THE CORPORATION BE CHANGED FROM DEPRENYL RESEARCH LIMITED/RECHERCHE DEPRENYL LIMITEE TO DRAXIS HEALTH INC.
AND ITS FRENCH VERSION SANTE DRAXIS INC.
- ------------------------------------------------------------------------------------------------------------------------------------
Date Signature Title - Titre
MAY 27, 1994 /s/ Illegible VICE PRESIDENT,
CORPORATE DEVELOPMENT, GENERAL
COUNSEL AND SECRETARY
- ------------------------------------------------------------------------------------------------------------------------------------
FOR DEPARTMENTAL USE ONLY - A L'USAGE DU MINISTERE SEULS
Filed - Deposee
MAY 30 1994
MAI
</TABLE>
<PAGE>
[Logo] Industry Canada Industrie Canada
CORPORATIONS CORPORATIONS
Phase II, 4th Floor Phase II, 4e etage
Place du Portage Place du Portage
Ottawa-Hull Ottawa-Hull
K1A 0C9 K1A 0C9
Your file - Votre reference
June 30, 1994/le 30 juin 1994
Our file - Notre reference
McCARTHY TETRAULT 304758-0 (New File)
ATTN: SANDRA McCOY 293391-8 (Old File)
275 SPARKS STREET 281929-5 (Old File)
SUITE 1000
OTTAWA, ONT
K1R 7X9
Re - Objet
DRAXIS HEALTH INC.
BONE HEALTH INC.
Enclosed herewith is the document issued in the above matter.
A notice of issuance of CBCA documents will be published in the Canada
Corporations Bulletin. A notice of issuance of CCA documents will be published
in the Canada Corporations Bulletin and the Canada Gazette.
IF A NAME OR CHANGE OF NAME IS INVOLVED, THE FOLLOWING CAUTION SHOULD BE
OBSERVED:
This name is available for use as a corporate name subject to and
conditional upon the applicants assuming full responsibility for any
risk of confusion with existing business names and trade marks
(including those set out in the relevant NUANS search report(s)).
Acceptance of such responsibility will comprise an obligation to
change the name to a dissimilar one in the event that representations
are made and established that confusion is likely to occur. The use
of any name granted is subject to the laws of the jurisdiction where
the company carries on business.
Vous trouverez ci-inclus le document emis dans l'affaire precitee.
Un avis de l'emission de documents en vertu de la LSARF sera publie dans le
Bulletin des societes canadiennes. Un avis de l'emission de documents en vertu
de la LCC sera publie dans le Bulletin des societes canadiennes et dans la
Gazette du Canada.
S'IL EST QUESTION D'UNE DENOMINATION SOCIALE OU D'UN CHANGEMENT DE DENOMINATION
SOCIALE, L'AVERTISSEMENT SUIVANT DOIT ETRE RESPECTE:
Cette denomination sociale est disponible en autant que les requerants
assument toute responsabilite de risque de confusion avec toutes
denominations commerciales et toutes marques de commerce existantes (y
compris celles qui sont citees dans le(s) rapport(s) de recherches de
NUANS pertinent(s)). Cette acceptation de responsabilite comprend
l'obligation de changer la denomination de la societe en une
denomination differente advenant le cas ou des representations sont
faites etablissant qu'il y a une probabilite de confusion.
L'utilisation de tout nom octroye est sujette a toute loi de la
juridiction ou la societe exploite son entreprise.
/s/ Illegible
For the Director General, Corporations Directorate
pour le Directeur general, Direction generale des Corporations
CANADA [Logo]
<PAGE>
[Logo] Industry Canada Industrie Canada
<TABLE>
<CAPTION>
CERTIFICATE CERTIFICAT
OF AMENDMENT DE MODIFICATION
CANADA BUSINESS LOI REGISSANT LES SOCIETES
CORPORATIONS ACT PAR ACTIONS DE REGIME FEDERAL
DRAXIS HEALTH INC.
SANTE DRAXIS INC. 293391-8
BONE HEALTH INC. 281929-5
- ---------------------------------------------- ---------------------------------------
Name of corporation-Denomination de la Societe Corporation number-Numero de la Societe
<S> <C>
I hereby certify that the articles of the Je certifie que les statuts de la societe susmentionnee ont ete
above-named corporation were amended modifies:
(a) under section 13 of the CANADA BUSINESS / / a) en vertu de l'article 13 de la LOI REGISSANT LES SOCIETES PAR
CORPORATIONS ACT in accordance with the ACTIONS DE REGIME FEDERAL, conformement a l'avis ci-joint;
attached notice;
(b) under section 27 of the CANADA BUSINESS / / b) en vertu de l'article 27 de la LOI REGISSANT LES SOCIETES PAR
CORPORATIONS ACT as set out in the attached ACTIONS DE REGIME FEDERAL, tel qu'il est indique dans les clauses
articles of amendment designating a series modificatrices ci-jointes designant une serie d'actions;
of shares;
(c) under section 179 of the CANADA BUSINESS / / c) en vertu de l'article 179 de la LOI REGISSANT LES SOCIETES PAR
CORPORATIONS ACT as set out in the attached ACTIONS DE REGIME FEDERAL, tel qu'il est indique dans les clauses
articles of amendment; modificatrices ci-jointes;
(d) under section 191 of the CANADA BUSINESS / / d) en vertu de l'article 191 de la LOI REGISSANT LES SOCIETES PAR
CORPORATIONS ACT as set out in the attached ACTIONS DE REGIME FEDERAL, tel qu'il est indique dans les clauses
articles of reorganization; de reorganisation ci-jointes;
(e) under section 192 of the CANADA BUSINESS /X/ e) en vertu de l'article 192 de la LOI REGISSANT LES SOCIETES PAR
CORPORATIONS ACT as set out in the attached ACTIONS DE REGIME FEDERAL, tel qu'il est indique dans les clauses
articles of arrangement. d'arrangement ci-jointes.
</TABLE>
/s/ illegible July 1, 1994/le 1 juillet 1994
DIRECTOR - DIRECTEUR DATE OF AMENDMENT - DATE DE MODIFICATION
CANADA [Logo]
<PAGE>
<TABLE>
<CAPTION>
[Logo] Consumer and Consommation et
Corporate Affairs Canada Affaires commerciales Canada
FORM 14.1 FORMULE 14.1
Canada Business Loi regissant les societes ARTICLES OF ARRANGEMENT CLAUSES D'ARRANGEMENT
Corporations Act par actions de regime federal (SECTION 192) (ARTICLE 192)
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
1 -- Name of applicant corporation(s) -- Denomination de la(des) 2 -- Corporation No(s). --
requerante(s) N(s) de la(des) societe(s)
DRAXIS HEALTH INC. 293391-8
BONE HEALTH INC. 281929-5
- -----------------------------------------------------------------------------------------------------------------------------------
3 -- Name of the corporation(s) the articles of which are amended, if 4 -- Corporation No(s). --
applicable Denomination de la(des) societe(s) dont les status N(s) de la(des) societe(s)
sont modifies, le cas echeant
- ------------------------------------------------------------------------------------------------------------------------------------
5 -- Name of the corporation(s) created by amalgamation, if applicable 6 -- Corporation No(s). --
Denomination de la(des) societe(s) issue(s) de la(des) fusion(s), N(s) de la(des) societe(s)
le cas echeant
DRAXIS HEALTH INC. 304758-0
- ------------------------------------------------------------------------------------------------------------------------------------
7 -- Name of the dissolved corporation(s), if applicable 8 -- Corporation No(s). --
Denomination de la(des) societe(s) dissoute(s), le cas echeant N(s) de la(des) societe(s)
- ------------------------------------------------------------------------------------------------------------------------------------
9 -- Name of other bodies corporate involved, if applicable 10 -- Corporation No(s). or jurisdiction of
Denomination des autres personnes morales en cause, le cas echeant incorporation -- N(s) de la(des)
societe(s)/ou loi sous le regime de laquelle elle
est constituee
- ------------------------------------------------------------------------------------------------------------------------------------
11 -- In accordance with the order approving the arrangement, Conformement aux termes de l'ordonnance approuvant l'arrangement,
(a) the articles of the above-named corporation(s) are / / les statuts de la(des) societe(s) susmentionnee(s) sont
amended in accordance with the attached plan of modifies en conformite avec le plan d'arrangement ci-joint:
arrangement
(b) the following bodies corporate are amalgamated in /X/ les personnes morales suivantes sont fusionnees conformement
accordance with the attached plan of arrangement au plan d'arrangement ci-joint:
DRAXIS HEALTH INC. Refer to the Plan of Arrangement attached for charter information
BONE HEALTH INC. of the amalgamated corporations. There are no restrictions on the
transfer of shares.
(c) the above-named corporation(s) is(are) liquidated and / / la(les) societe(s) susmentionnee(s) est(sont) liquidee(s)
dissolved in accordance with the attached plan of et dissoute(s) conformement au plan d'arrangement ci-joint
arrangement
(d) the plan of arrangement attached hereto, involving the / / le plan d'arrangement ci-joint portant sur la(les) personne(s)
above-named body(ies), corporate is hereby effected morale(s) susmentionnee(s) prend effet
- ------------------------------------------------------------------------------------------------------------------------------------
Date Signature Title -- Titre
June 8, 1994 /s/ Illegible Vice President, Corporate Development
General Counsel and Secretary
- ------------------------------------------------------------------------------------------------------------------------------------
7530-21-936-1780 (01-93) 46 FOR DEPARTMENTAL USE ONLY -- A L'USAGE DU MINISTERE SEULEMENT
Field -- Deposee
June 30, 1994
</TABLE>
<PAGE>
ARRANGEMENT AGREEMENT
THIS ARRANGEMENT AGREEMENT dated as of the 8th day of April, 1994.
A M O N G:
DEPRENYL RESEARCH LIMITED, a corporation incorporated pursuant to
the provisions of the Canada Business Corporations Act
(hereinafter referred to as "Deprenyl")
OF THE FIRST PART
- and -
BONE HEALTH INC., a corporation incorporated pursuant to the
provisions of the Canada Business Corporations Act
(hereinafter referred to as "Bone Health")
OF THE SECOND PART
WITNESSES THAT:
WHEREAS each of Deprenyl and Bone Health proposes to convene a meeting
of its shareholders to approve the Arrangement in accordance with the provisions
of the CBCA;
AND WHEREAS, upon the Arrangement becoming effective, the shares of
Bone Health will be exchanged for securities of Deprenyl or cancelled in
accordance with the provisions of this Agreement and the Plan of Arrangement;
NOW THEREFORE, in consideration of the premises and the respective
covenants and agreements herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
each of the parties hereto, the parties hereby covenant and agree as follows:
<PAGE>
-2-
ARTICLE ONE
DEFINITIONS AND INTERPRETATION
Section 1.01 DEFINITIONS: In this Agreement, unless there is something in the
subject matter or context inconsistent therewith, the following capitalized
words and terms shall have the following meanings:
(a) "Agreement" means this arrangement agreement including the
exhibits hereto as the same may be supplemented or amended from
time to time;
(b) "Amalco" means corporation continuing from the amalgamation of
the Amalgamating Corporations upon the Arrangement becoming
effective;
(c) "Amalgamating Corporations" means Deprenyl and Bone Health,
collectively;
(d) "Arrangement" means the amalgamation by way of arrangement of the
Amalgamating Corporations pursuant to Section 192 of the CBCA as
contemplated by the provisions of this Agreement and the Plan of
Arrangement;
(e) "Business Day" means a day which is not a Saturday, Sunday or
statutory holiday;
(f) "Charter Documents" means articles and by-laws;
(g) "Court" means the Ontario Court of Justice (General Division);
(h) "Effective Date" means the date set forth in the certificate of
arrangement issued by the Director to the Amalgamating
Corporations under the provisions of the CBCA giving effect to
the Arrangement;
(i) "Bone Health Common Shares" means the common shares which Bone
Health is authorized to issue, as the same are constituted on the
date hereof;
(j) "Deprenyl Common Shares" means the common shares which Deprenyl
is authorized to issue, as the same are constituted on the date
hereof;
(k) "Final Order" means the final order of the Court approving the
Arrangement;
(l) "Interlocutory Order" means the interlocutory order of the Court
dated April 8, 1994 providing advice and directions in connection
with the Arrangement;
(m) "Meeting" means the special meetings of the shareholders of
Deprenyl and Bone Health to be held, to consider and, if deemed
advisable, to approve the Arrangement;
(n) "CBCA" means the Canada Business Corporations Act, as amended;
(o) "Person" means and includes an individual, sole proprietorship,
partnership, unincorporated association, unincorporated
syndicate, unincorporated organization, trust, body corporate, a
trustee, executor, administrator or other legal representative
and the Crown or any agency or instrumentality thereof;
<PAGE>
-3-
(p) "Plan of Arrangement" means the plan of arrangement attached to
this Agreement as Exhibit 1, as amended from time to time; and
(q) "Proxy Circular" means the joint management proxy circular of
Deprenyl and Bone Health to be sent to the shareholders of
Deprenyl and Bone Health in connection with the Meeting,
including the schedules thereto.
Section 1.02 CURRENTLY: All amounts of money which are referred to in this
Agreement are expressed in lawful money of Canada unless otherwise specified.
Section 1.03 INTERPRETATION NOT AFFECTED HEADING: The division of this
Agreement into articles, sections, subsections, paragraphs and subparagraphs and
the insertion of headings are for convenience of reference only and shall not
affect the construction or interpretation of the provisions of this Agreement.
The terms "this Agreement", "hereof", "herein", "hereunder" and similar
expressions refer to this Agreement and the exhibit hereto as a whole and not to
any particular articles, section, subsection, paragraph or subparagraph hereof
and include and agreement or instrument supplementary or ancillary hereto.
Section 1.04 NUMBER AND GENDER: Unless the context otherwise requires, words
importing the singular number only shall include the plural and vice versa and
words importing the use of either gender shall include both genders and neuter.
Section 1.05 DATE FOR ANY ACTION: In the event that any date on which any
action is required to be taken hereunder by any of the Amalgamating Corporations
is not a Business Day in the place where the action is required to be taken,
such action shall be required to be taken on the next succeeding day which is a
Business Day in such place.
Section 1.06 MEANING: Words and phrases used herein and defined in the CBCA
shall have the same meaning herein as in the CBCA unless the context otherwise
requires.
ARTICLE TWO
ARRANGEMENT
Section 2.01 ARRANGEMENT: The Amalgamating Corporations agree to amalgamate
by way of arrangement pursuant to the provisions of Section 192 of the CBCA on
the terms and subject to the conditions contained in this Agreement and the Plan
of Arrangement.
Section 2.02 EFFECTIVE DATE OF ARRANGEMENT: The Arrangement shall become
effective at 12:01 a.m. on the Effective Date and at such time the Amalgamating
Corporations shall amalgamate and continue as one corporation on the terms and
subject to the conditions contained in this Agreement and the Plan of
Arrangement.
Section 2.03 FILING OF ARTICLES OF ARRANGEMENT: Subject to the rights of
termination contained in Article Five hereof, upon the shareholders of each of
the Amalgamating Corporations approving the Arrangement by special resolution in
accordance with the provisions of the CBCA and the Amalgamating Corporations
obtaining the Final Order, the Amalgamating Corporations shall jointly file with
the Director under the CBCA articles of arrangement, in duplicate, together with
such other documents as may be required in order to effect the Arrangement.
<PAGE>
-4-
ARTICLES THREE
COVENANTS
Section 3.01 COVENANTS OF DEPRENYL: Deprenyl hereby covenants and agrees with
Bone Health as follows:
(a) Deprenyl will carry on business in the ordinary course and
will not enter into any transaction or incur any obligation
or liability out of the ordinary course of business, except
as contemplated in this Agreement or in the Proxy Circular;
(b) Deprenyl will use all reasonable efforts to cause each of
the conditions precedent set forth in Article Four hereof to
be complied with on or before the Effective Date.
Section 3.02 COVENANTS OF BONE HEALTH: Bone Health hereby covenants and
agrees with Deprenyl as follows:
(a) Bone Health will carry on business in the ordinary course
and will not enter into any transaction or incur any
obligation or liability out of the ordinary course of
business, except as contemplated in this Agreement or in the
Proxy Circular; and
(b) Bone Health will use all reasonable efforts to cause each of
the conditions precedent set forth in Article Five hereof to
be complied with on or before the Effective Date.
Section 3.04 INTERLOCUTORY ORDER AND FINAL ORDER: The Amalgamating
Corporation acknowledge that they have applied to and obtained from the Court
pursuant to Section 192 of the CBCA the Interlocutory Order providing for, among
other things, the calling and holding of the Meeting for the purpose of
considering and, if deemed advisable, approving the Arrangement. The
Amalgamating Corporations covenant and agree that, if the approval of the
Arrangement as set forth in the Interlocutory Order is obtained, they will
thereafter jointly take the necessary steps to submit the Arrangement to the
Court and apply for the Final Order in such fashion as the Court may direct and,
as soon as practicable thereafter, and subject to compliance with any of the
other conditions provided for in Article Four hereof and to the rights of
termination in Article Five hereof, file, pursuant to Subsection 192 of the
CBCA, articles of arrangement to give effect to the Arrangement.
ARTICLE FOUR
CONDITIONS
Section 4.01 MUTUAL CONDITIONS PRECEDENT: The respective obligations of the
Amalgamating Corporations to complete the transactions contemplated by this
Agreement and to file articles of arrangement pursuant to Subsection 192 of the
CBCA to give effect to the Arrangement shall be subject to the satisfaction of
the following conditions:
(a) the Arrangement, with or without amendment, shall have been
approved at the Meeting in accordance with the Interlocutory
Interim Order and the Arrangement shall have otherwise been
approved by the requisite majorities of the shares entitled
or required to vote thereon as determined by the Court;
(b) the opinion of Yorkton Securities Inc. as to the fairness of
the Arrangement, from a financial point of view, to the
shareholders of Bone Health, excluding Deprenyl, and to the
shareholders of Deprenyl shall have been delivered prior to
the date of mailing of the Proxy Circular and such opinion
shall not have been withdrawn as of the Effective Date;
<PAGE>
-5-
(c) the Final Order shall have been obtained in form and
substance satisfactory to each of the Amalgamating
Corporations;
(d) The Toronto Stock Exchange shall have conditionally approved
the listing thereon of the additional Amalco Shares to be
issued pursuant to the Arrangement as of the Effective Date,
or as soon as practicable thereafter, subject to compliance
with the usual requirements of such exchange and the
National Association of Securities Dealers shall have
conditionally approved the listing on The NASDAQ Stock
Market of the additional Amalco Shares to be issued pursuant
to the Arrangement;
(e) all other consents, orders, regulations and approvals,
including regulatory and judicial approvals and orders
(including, without limitation, the consent of the Quebec
Securities Commission), required or necessary or desirable
for the completion of the transactions provided for in this
Agreement and the Arrangement shall have been obtained or
received from the persons, authorities or bodies having
jurisdiction in the circumstances;
(f) there shall not be in force any order or decree restraining
or enjoining the consummation of the transactions
contemplated by this Agreement and the Arrangement;
(g) none of the consents, orders, regulations or approvals
contemplated herein shall contain terms of conditions or
require undertakings or security deemed unsatisfactory or
unacceptable by any of the parties hereto; and
(h) this Agreement shall not have been terminated under Article
Five.
Section 4.02 CONDITIONS TO OBLIGATIONS OF EACH PARTY: The obligation of each
of the Amalgamating Corporations to complete the transactions contemplated by
this Agreement is further subject to the condition, which may be waived by each
of such Amalgamating Corporation without prejudice to its right to rely on any
other condition in favour of such Amalgamating Corporation, that the covenants
of the other Amalgamating Corporation be performed on or before the Effective
Date pursuant to the provisions of this Agreement.
Section 4.03 MERGER OF CONDITIONS: The conditions set out in Section 4.01 and
4.02 shall be conclusively deemed to have been satisfied, waived or released on
the filing by the Amalgamating Corporations of articles of arrangement under
Subsection 192 of the CBCA.
ARTICLES FIVE
AMENDMENT AND TERMINATION
Section 5.01 AMENDMENT: This Agreement may, at any time and from time to time
before and after the holding of the Meeting, but not later than the Effective
Date, be amended by written agreement of the Amalgamating Corporations without,
subject to applicable law, further notice to or authorization on the part of the
shareholders of the Amalgamating Corporations. Without limiting the generality
of the foregoing, any such amendment may:
(a) change the time for the performance of any of the
obligations or acts of the Amalgamating Corporations;
(b) waive any inaccuracies contained herein or in any document
to be delivered pursuant hereto; or
<PAGE>
-6-
(c) waive compliance with or modify any of the covenants
contained herein or waive or modify the performance of any
of the obligations of the Amalgamating Corporations;
provided that, notwithstanding the foregoing, the terms of Articles Three and
Four of the Plan of Arrangement and Subsection 4.01(a) of this Agreement shall
not be amended without the approval of the shareholders of the Amalgamating
Corporations given in the same manner as required for the approval of the
Arrangement or as may be ordered by the Court. This Agreement and the Plan of
Arrangement may be amended in accordance with the Final Order, but in the event
that the terms of the Final Order require any such amendment, the rights of the
Amalgamating Corporations under Sections 4.01, 4.02 and 5.02 hereof shall remain
unaffected.
Section 5.02 RIGHTS OF TERMINATION: If any of the conditions contained in
Section 4.01 or 4.02 shall not be fulfilled or performed on or before the
Effective Date, either of the Amalgamating Corporations may terminate this
Agreement by notice to the parties hereto and in such event such Amalgamating
Corporation shall be released from all obligations under this Agreement, all
rights of specified performance by the Amalgamating Corporations shall terminate
and, unless such party can show that the condition or conditions the
non-performance of which has caused such party to terminate this Agreement were
reasonably capable of being performed by one or more of the other parties, then
the other party shall also be released from all obligations hereunder; provided
that if such party can show that the other party could reasonably have performed
such condition or conditions then that party shall not be released from its
obligations hereunder and further provided that any of such conditions may be
waived in full or in part by the other without prejudice to its rights of
termination in the event of the non-fulfilment or non-performance of any other
condition.
Section 5.04 MUTUAL TERMINATION: This Agreement may, at any time before or
after the holding of the Meeting, but no later than the Effective Date, be
terminated by unanimous agreement of the boards of directors of the Amalgamating
Corporations without further action on the part of the shareholders of the
Amalgamating Corporations and if the Effective Date does not occur on or before
December 31, 1994 each of the Amalgamating Corporations may unilaterally
terminate this Agreement without further action on the part of its shareholders,
which termination will be effective upon a resolution to that effect being
passed by the applicable board of directors and notice thereof being given to
the other parties.
ARTICLE SIX
GENERAL
Section 6.02 ASSETS AND LIABILITIES: Each of the Amalgamating Corporations
shall contribute to Amalco all of the assets, subject to its liabilities, as
they exist immediately before the Effective Date. Amalco shall possess all of
the property, rights, privileges and franchises, as they exist immediately
before the Effective Date, and shall be subject to all of the liabilities,
contracts, disabilities and debts of each of the Amalgamating Corporations, as
they exist immediately before the Effective Date. All rights of creditors
against the properties, assets, rights, privileges and franchises of the
Amalgamating Corporations and all liens upon their properties, rights and assets
shall be unimpaired by the Arrangement and all debts, contracts, liabilities and
duties of the Amalgamating Corporations shall thenceforth attach to and may be
enforced against Amalco. No action or proceeding by or against any of the
Amalgamating Corporations shall abate or be affected by the Arrangement but, for
all purposes of such action or proceeding, the name of Amalco shall be
substituted in such action or proceeding in place of the name of the applicable
Amalgamating Corporation.
Section 6.03 ASSIGNMENT: Neither of the Amalgamating Corporation may assign
its rights or obligations under this Agreement or the Arrangement without the
prior written consent of the other Amalgamating Corporation.
<PAGE>
-7-
Section 6.04 BINDING EFFECT: This Agreement and the Arrangement shall be
binding upon and shall enure to the benefit of the Amalgamating Corporations and
their respective successors and permitted assigns.
Section 6.05 WAIVER: Any waiver or release of any of the provisions of this
Agreement, to be effective, must be in writing and executed by the Amalgamating
Corporations granting such waiver or release. Waivers may only be granted upon
compliance with the terms governing amendments set forth in Section 5.01 hereof.
Section 6.06 GOVERNING LAW: This Agreement shall be governed by and be
construed in accordance with the laws of the Province of Ontario and the laws of
Canada applicable therein and shall be treated in all respects as an Ontario
contract.
Section 6.07 COUNTERPARTS: This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
Section 6.08 ENTIRE AGREEMENT: This Agreement, together with the agreements
and other documents herein or therein referred to, constitutes the entire
agreement among the Amalgamating Corporations pertaining to the subject matter
thereof and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, between the Amalgamating Corporations with
respect to the subject matter hereof.
Section 6.09 TIME OF ESSENCE. Time is of the essence of this Agreement.
WITNESS WHEREOF the parties hereto have executed this
Agreement as of the date hereinbefore written.
DEPRENYL RESEARCH LIMITED
Per: /s/ Illegible
-------------------------------
BONE HEALTH INC.
Per: /s/ Illegible
-------------------------------
<PAGE>
EXHIBIT I
TO THE ARRANGEMENT AGREEMENT
DATED AS OF THE DAY OF APRIL, 1994
BETWEEN DEPRENYL RESEARCH LIMITED
AND
BONE HEALTH INC.
PLAN OF ARRANGEMENT UNDER SECTION 192
OF THE CANADA BUSINESS CORPORATIONS ACT
ARTICLE ONE
DEFINITIONS AND INTERPRETATION
Section 1.01 DEFINITIONS: In this Plan of Arrangement, unless there is
something in the subject matter or context inconsistent therewith, the
following capitalized words and terms shall have the following meanings:
(a) "Amalgamating Corporations" means Deprenyl Research
Limited and Bone Health Inc. collectively;
(b) "Arrangement" means the amalgamation by way of
arrangement of the Amalgamating Corporations pursuant to
Section 192 of the CBCA on the terms and conditions set
forth in this Plan of Arrangement;
(c) "Arrangement Agreement" means the arrangement agreement
dated as of the 8th day of April, 1994 between the
Amalgamating Corporations to which this Plan of
Arrangement is attached as Exhibit 1;
(d) "Bone Health" means Bone Health Inc.;
(e) "Bone Health Common Shares" means the common shares of
Bone Health;
(f) "Common shares" means the Common shares which the
Corporation is authorized to issue;
(g) "Corporation" means the corporation continuing from the
amalgamation of the Amalgamating Corporations upon the
Arrangement becoming effective;
(h) "Court" means the Ontario Court of Justice (General
Division);
(i) "Depositary" means Montreal Trust Company of Canada at
its principal office in Toronto;
(j) "Effective Date" means the date set forth in the
certificate of arrangement issued by the Director to each
of the Amalgamating Corporations under the provisions of
the CBCA giving effect to the Arrangement;
(k) "Deprenyl" means Deprenyl Research Limited;
(l) "Deprenyl Common Shares" means the common shares of
Deprenyl;
(m) "CBCA" means the Business Corporations Act, or its
successor as amended from time to time.
<PAGE>
-2-
Section 1.02 INTERPRETATION NOT AFFECTED BY HEADINGS: The division of this
Plan of Arrangement into articles, sections, subsections, paragraphs and
subparagraphs and the insertion of headings are for convenience of reference
only and shall not affect the construction or interpretation of this Plan of
Arrangement. Unless otherwise specifically indicated, the terms "this Plan of
Arrangement", "hereof", "herein", "hereunder" and similar expressions refer
to this Plan of Arrangement as a whole and not to any particular article,
section, subsection, paragraph or subparagraph and include any agreement or
instrument supplementary or ancillary hereto.
Section 1.03 NUMBER AND GENDER: Unless the context otherwise requires,
words importing the singular number only shall include the plural and vice
versa, words importing the use of either gender shall include both genders
and neuter and words importing persons shall include firms and corporations.
Section 1.04 MEANING: Words and phrases used herein and defined in the
CBCA shall have the same meaning herein as in the CBCA unless the context
otherwise requires.
ARTICLE TWO
ARRANGEMENT AGREEMENT
Section 2.01 ARRANGEMENT AGREEMENT: This Plan of Arrangement is made
pursuant and subject to the provisions of the Arrangement Agreement.
ARTICLE THREE
AMALGAMATED CORPORATION
Section 3.01 NAME: The name of the Corporation shall be DRAXIS HEALTH
INC./SANTE DRAXIS INC. subject to the approval of a name change by
shareholders of Deprenyl or DEPRENYL RESEARCH LIMITED/DEPRENYL RECHERCHE
LIMITEE in the event such name change is not approved.
Section 3.02 REGISTERED OFFICE: The registered office of the Corporation
shall be in the City if Mississauga in the Province of Ontario.
Section 3.03 BUSINESS: There shall be no restriction on the business which
the Corporation is authorized to carry on or on the powers which the
Corporation may exercise.
Section 3.04 DIRECTORS:
(a) MINIMUM AND MAXIMUM. The minimum number of directors
of the Corporation shall be one and the maximum number
of directors of the Corporation shall be twelve.
(b) FIRST DIRECTORS: On the Effective Date the number of
directors of the Corporation shall be eight. The first
directors of the Corporation shall be the directors of
Deprenyl. They shall hold office until the first
annual meeting of the shareholders of the Corporation
or until their successors are duly elected or
appointed.
<PAGE>
-3-
Section 3.06 OFFICERS: The officers of the Corporation shall, until
changed by the directors of the Corporation, be as follows:
NAME OFFICE
- ---- ------
Martin Barkin President and Chief Executive Officer
James P. Doherty Vice Chairman
Edward L. Foster Vice President and Chief Financial Officer
Jacqueline H.R. Le Saux Director Corporate Development,
General Counsel and Secretary
Roger Mailhot Vice President, Scientific and
Regulatory Affairs
Roger H. Odette Executive Vice President
Pharmaceutical Operations
D. Geoffrey Shulman Chairman
Section 3.07 AUDITORS: The auditors of the Corporation, until the first
annual meeting of the shareholders of the Corporation, shall be Deloitte &
Touche, Chartered Accountants, unless such Chartered Accountants resign or
are removed in accordance with the provisions of the CBCA.
Section 3.08 BY-LAWS: The by-laws of the Corporation shall, until
repealed, amended or altered, be the by-laws of Deprenyl.
Section 3.09 QUEBEC CHARGING POWER: Without restricting any of the powers
and capacities of the Corporation, whether derived from the CBCA or
otherwise, the Corporation may mortgage, hypothecate, pledge or otherwise
create a security interest in all or any present or future, real or personal,
movable or immovable, legal or equitable, property of the Corporation
including, without limitation, its book debts, rights, powers, franchises and
undertaking, for any purpose whatsoever.
ARTICLE FOUR
AUTHORIZED CAPITAL AND RIGHTS AND PRIVILEGES
Section 4.01 AUTHORIZED CAPITAL: The Corporation is authorized to issue an
unlimited number of Common Shares and an unlimited number of Preferred Shares.
Section 4.02 RIGHTS AND PRIVILEGES: The rights, privileges, restrictions
and conditions attaching to the Common Shares are as follows:
(a) PAYMENT OF DIVIDENDS: The holders of the Common
Shares shall be entitled to receive dividends if, as
and when declared by the board of directors of the
Corporation out of the assets of the Corporation
properly applicable to the payment of dividends in
such amounts and payable in such manner as the board
of directors may from time to time determine. Subject
to the rights of the holders of any other class of
shares of the Corporation entitled to receive
dividends in priority to or rateably with the holders
of the Common Shares, the board of directors may in
their sole discretion declare dividends on the Common
Shares to the exclusion of any other class of shares
of the Corporation.
<PAGE>
-4-
(b) PARTICIPATION UPON LIQUIDATION, DISSOLUTION OR
WINDING-UP: In the event of the liquidation,
dissolution or winding-up of the Corporation or other
distribution of assets of the Corporation among its
shareholders for the purpose of winding-up its
affairs, the holders of the Common Shares shall,
subject to the rights of the holders of any other
class of shares of the Corporation entitled to receive
the assets of the Corporation upon such distribution
in priority to or rateably with the holders of the
Common Shares, be entitled to participate rateably in
any distribution of the assets of the Corporation.
(c) VOTING RIGHTS. The holders of the Common Shares shall
be entitled to receive notice of and to attend all
annual and special meetings of the shareholders of the
Corporation and to 1 vote in respect of each Common
Share held at all such meetings.
Section 4.03 RIGHTS AND PRIVILEGES: The rights, privileges and
restrictions and conditions attaching to the Preferred Shares are as follows:
(a) SERIES: The Preferred Shares may at any time or from
time to time be issued in one or more series. Subject
to the following provisions the board of directors of
the Corporation (the "Board") may by resolution fix
from time to time, before the issue thereof, the
number of shares in, and determine the designation,
rights, privileges, restrictions and conditions
attaching to the shares of, each series of Preferred
Shares including, without limiting the generality of
the foregoing, any preferential dividends and the
dates and places of payment thereof, any redemption
and/or purchase prices and the terms and conditions of
any redemption and/or purchase, any conversion rights,
any purchase fund, any right to receive notice of,
attend and vote at meetings or shareholders or other
provisions.
(b) PREFERENCE: The Preferred Shares shall be entitled to
a preference over the Common Shares and any other
shares of the Corporation ranking junior to the
Preferred Shares in the distribution of assets in the
event of any liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary, or
other distribution of the assets of the Corporation
among its shareholders for the purpose of winding-up
its affairs.
(c) NO PRIORITY: The Preferred Shares of each series
shall rank on a parity with the Preferred Shares of
every other series with respect to priority in the
payment of dividends and in the distribution of assets
in the event of liquidation, dissolution or winding-up
of the Corporation, whether voluntary or involuntary,
or other distribution of the assets of the Corporation
among its shareholders for the purpose of winding-up
its affairs.
(d) REDEMPTION: Subject to the provisions relating to any
particular series, the Corporation may redeem the
whole or any part of the Preferred Shares of any one
or more series outstanding from time to time at such
price or prices as may be applicable to such series by
giving at least thirty (30) days prior notice in
writing to each person who at the date of giving such
notice is the registered holder of Preferred Shares to
be redeemed, of the intention of the Corporation to
redeem such shares. Such notice shall be given by
posting the same in a postage paid letter addressed to
each such holder of Preferred Shares to be redeemed at
the last address of such holder as it appears on the
books of the Corporation or, in the event of the
address of any holder not so appearing, then to the
address of such holder last known to the Corporation;
provided that the accidental failure or omission to
give any such notice as aforesaid to one or more of
such holders shall not affect the validity of the
redemption of the Preferred Shares to be redeemed.
Such notice shall set out the redemption price and the
date on which the redemption is to take place and,
<PAGE>
-5-
unless all the Preferred Shares held by the holder to
whom it is addressed are to be redeemed, shall also
set out the number of shares to be redeemed. On and
after the date specified for redemption the
Corporation shall pay or cause to be paid to the
holders of Preferred Shares to be redeemed the
redemption price on presentation and surrender at the
registered office of the Corporation, or at any other
place or places within Canada or the United States
designated by such notice, of the certificate or
certificates for Preferred Shares called for
redemption. Such payment shall be made by cheque
payable at par at any branch in Canada or the United
States of the Corporation's bankers and any such other
places as may be designated by the Corporation.
Preferred Shares in respect of which the redemption
price has been paid as aforesaid shall thereupon be
redeemed. In case a part only of the Preferred Shares
of any particular series is at any time to be
redeemed, the shares to be redeemed shall be selected
by lot in such manner as the board shall determine. If
a part only of such Preferred Shares represented by
any certificate shall be redeemed, a new certificate
for the balance shall be issued at the expense of the
Corporation. From and after the date specified for
redemption in any such notice, the Preferred Shares
called for redemption shall cease to be entitled to
exercise any of the rights of shareholders in respect
thereof except to receive the redemption price
therefor, unless payment of the redemption price shall
not be duly made by the Corporation upon presentation
of certificates in accordance with the foregoing
provisions, in which case the rights of such holders
shall remain unaffected. At any time after notice or
redemption is given as aforesaid, the Corporation
shall have the right to deposit the redemption price
of any or all Preferred Shares called for redemption
with any chartered bank or banks or with any trust
company or trust companies in Canada or the United
States named for such purpose in the notice of
redemption to the credit of a special account or
accounts in trust for the respective holders of such
shares, to be paid to them respectively without
interest upon surrender to such bank or banks or trust
company or trust companies of the certificate or
certificates representing the same. Upon such deposit
being made or upon the date specified for redemption
in such notice, whichever is the later, the Preferred
Shares in respect whereof such deposit shall have been
made shall be and be deemed to be redeemed and the
rights of the holders thereof shall be limited to
receiving without interest their proportionate part of
the total redemption price so deposited against
surrender of the said certificates held by them
respectively. Any interest allowed on any such deposit
shall belong to the Corporation.
(e) PARTICIPATION UPON LIQUIDATION, DISSOLUTION OR
WINDING-UP: In the event of the liquidation,
dissolution or winding-up of the Corporation or any
other distribution of assets of the Corporation among
its shareholders for the purpose of winding-up its
affairs, the holders of the Preferred Shares shall be
entitled to payment of an amount equal to the amount
paid up on such shares, in the case of any
liquidation, dissolution, winding-up or other
distribution which is involuntary, and to payment of
an amount equal to the amount paid up thereon plus the
premium on redemption applicable at the date thereof,
if any, if the same is voluntary, together, in all
cases, with all unpaid dividends accrued thereon
(which shall for such purpose be treated as accruing
up to the date of distribution), the whole before any
amount shall be paid or any assets of the Corporation
distributed to the holders of any Common Shares or
shares of any other class ranking junior to the
Preferred Shares. Upon payment to the holders of the
Preferred Shares of the amount payable to them, they
shall not be entitled to share in any further
distribution of assets of the Corporation.
<PAGE>
-6-
ARTICLE FIVE
MANNER OF EXCHANGE OF SECURITIES
Section 5.01 ISSUE OF SECURITIES: The issued and outstanding shares of the
Amalgamating corporations immediately prior to the Effective Date shall, to
the extent that they are not cancelled pursuant to Subparagraphs 5.01(c)
hereof, be exchanged as follows:
(a) each issued and outstanding Bone Health Common Shares,
other than those held by Deprenyl, shall be exchanged
for 0.166 Common Shares of the Corporation which shall
amount to six Bone Health Shares for one Deprenyl
Share;
(b) all of the issued and outstanding Bone Health Common
Shares, held by Deprenyl shall be cancelled without
repayment of capital; and
(c) each Deprenyl Common share will be exchanged for one
Common Share.
ARTICLE SIX
SECURITY CERTIFICATES AND FRACTIONAL SHARES
Section 6.01 SECURITY CERTIFICATES: Following the Effective Date,
certificates for the appropriate number of Common Shares will be issued to
former holders of Bone Health Common Shares in accordance with the provisions
of Section 5.01 hereof against deposit of the certificates representing the
Bone Health Shares with the Depositary. No fractional Common Shares will be
issued.
ARTICLE SEVEN
ARRANGEMENT AND EFFECT OF ARRANGEMENT
Section 7.01 ARRANGEMENT. The Amalgamating Corporations hereby agree to
amalgamate by way of arrangement as of the Effective Date pursuant to Section
192 of the CBCA and to continue as one corporation on the terms set forth in
this Plan of Arrangement.
Section 7.02 EFFECT OF ARRANGEMENT: As at and from 12:01 a.m. on the
Effective Date:
(a) the Amalgamating Corporations shall be amalgamated and
continue as one corporation under the terms described
in this Plan of Arrangement;
(b) the Corporation shall possess all of the properties,
rights, privileges and franchises and shall be subject
to all of the liabilities, including civil, criminal
and quasi-criminal, and all contracts, disabilities
and debts of each of the Amalgamation Corporations;
(c) a conviction against, or ruling, order or judgment in
favour or against an Amalgamating Corporation may be
enforced by or against the Corporation;
(d) the articles of arrangement shall be deemed to be the
articles of incorporation of the Corporation and the
certificate of arrangement shall be deemed to be the
certificate of incorporation of the Corporation; and
<PAGE>
-7-
(e) the Corporation shall be deemed to be the party
plaintiff or the party defendant, as the case may be,
in any civil action commenced by or against an
Amalgamating Corporation before the Arrangement has
become effective.
ARTICLE EIGHT
RIGHTS OF DISSENT
Section 8.01 RIGHTS OF DISSENT: Holders of Deprenyl Common Shares and Bone
Health Common Shares may exercise rights of dissent pursuant to and in the
manner set forth in Section 190 of the CBCA.
<PAGE>
[LOGO]
Industry Canada Industrie Canada
CORPORATIONS DIRECTORATE DIRECTION GENERALE DES CORPORATIONS
9th floor, Journal Tower S. 9 DEG. etage, Edifice Journal, Tour sud
365 Laurier Avenue West 965, avenue Laurier ouest
Ottawa, Ontario Ottawa (Ontario)
K1A 0C8 K1A 0C8
Your file - Votre reference
July 14, 1995/le 14 juillet 1995
Our file - Notre reference
MCCARTHY TETRAULT 304758-0
Re-Objet
DRAXIS HEALTH INC./
SANTE DRAXIS INC.
Enclosed herewith is the document issued in the above matter.
A notice of issuance of CBCA documents will be published in the Canada
Corporations Bulletin. A notice of issuance of CCA documents will be
published in the Canada Corporations Bulletin and the Canada Gazette.
IF A NAME OR CHANGE OF NAME IS INVOLVED, THE FOLLOWING CAUTION SHOULD BE
OBSERVED:
This name is available for use as a corporate name subject to and
conditional upon the applicants assuming full responsibility for any risk
of confusion with existing business names and trade marks (including those
set out in the relevant NUANS search report(s)). Acceptance of such
responsibility will comprise an obligation to change the name to a
dissimilar one in the event that representations are made and established
that confusion is likely to occur. The use of any name granted is subject
to the laws of the jurisdiction where the company carries on business.
/s/ [ILLEGIBLE]
For the Director General, Corporations Directorate
Vous trouverez ci-inclus le document emis dans l'affaire precitee.
Un avis de l'emission de documents en vertu de la LCSA sera publie dans le
Bulletin des societes canadiennes. Un avis de l'emission de documents en
vertu de la LCC sera publie dans le Bulletin des societes canadiennes et dans
la Gazette du Canada.
S'IL EST QUESTION D'UNE DENOMINATION SOCIALE OU D'UN CHANGEMENT DE
DENOMINATION SOCIALE, L'AVERTISSEMENT SUIVANT DOIT ETRE RESPECTE:
Cette denomination sociale est disponible en autant que les requerants
assument toute responsabilite de risque de confusion avec toutes
denominations commerciales et toutes marques de commerce existantes (y
compris celles qui sont citees dans le(s) rapport(s) de recherches de NUANS
pertinent(s)). Cette acceptation de responsabilite comprend l'obligation
de changer la denomination de la societe en une denomination differente
advenant le cas ou des representations sont faites etablissant qu'il y a
une probabilite de confusion. L'utilisation de tout nom octroye est
sujette a toute loi de la juridiction ou la societe exploite son
entreprise.
/s/ [ILLEGIBLE]
pour le Directeur general, Direction generale des Corporations
CANADA [LOGO]
<PAGE>
[LOGO] Industry Canada Industrie Canada
<TABLE>
<CAPTION>
<S> <C> <C>
CERTIFICATE CERTIFICAT
OF AMENDMENT DE MODIFICATION
CANADA BUSINESS LOI CANADIENNE SUR
CORPORATIONS ACT LES SOCIETES PAR ACTIONS
- ------------------------------------------------------------------------------------------------------------------------------------
DRAXIS HEALTH INC./ 304758-0
SANTE DRAXIS INC.
- ---------------------------------------------- ---------------------------------------------
Name of corporation-Denomination de la societe Corporation number-Numero de la societe
I hereby certify that the articles of the Je certifie que les statuts de la societe susmentionnee ont ete
above-named corporation were amended modifies:
(a) under section 13 of the CANADA BUSINESS / / a) en vertu de l'article 13 de la LOI CANADIENNE SUR LES SOCIETES
CORPORATIONS ACT in accordance with the PAR ACTIONS, conformement a l'avis ci-joint;
attached notice;
(b) under section 27 of the CANADA BUSINESS / / b) en vertu de l'article 27 de la LOI CANADIENNE SUR LES SOCIETES
CORPORATIONS ACT as set out in the attached PAR ACTIONS, tel qu'il est indique dans les clauses modificatrices
articles of amendment designating a series ci-jointes designant une serie d'actions;
of shares;
(c) under section 179 of the CANADA BUSINESS /X/ c) en vertu de l'article 179 de la LOI CANADIENNE SUR LES SOCIETES
CORPORATIONS ACT as set out in the attached PAR ACTIONS, tel qu'il est indique dans les clauses modificatrices
articles of amendment; ci-jointes;
(d) under section 191 of the CANADA BUSINESS / / d) en vertu de l'article 191 de la LOI CANADIENNE SUR LES SOCIETES
CORPORATIONS ACT as set out in the attached PAR ACTIONS, tel qu'il est indique dans les clauses de
articles of reorganization; reorganisation ci-jointes;
/s/ [ILLEGIBLE] JULY 14, 1995/LE 14 JUILLET 1995
Director - Directeur Date of Amendment - Date de modification
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CANADA [LOGO]
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
[LOGO]
CONSUMER AND CONSOMMATION ET
CORPORATE AFFAIRS CANADA AFFAIRES COMMERCIALES CANADA
FORM 4 FORMULE 4
CANADA BUSINESS LOI REGISSANT LES SOCIETES ARTICLES OF AMENDMENT CLAUSES MODIFICATRICES
CORPORATIONS ACT PAR ACTIONS DE REGIME FEDERAL (SECTION 27 OR 177) (ARTICLES 27 OU 177)
- ------------------------------------------------------------------------------------------------------------------------------------
1 - Name of corporation - Denomination de la societe 2 - Corporation No. - N DEG. de la societe
DRAXIS HEALTH INC. 304758-0
SANTE DRAXIS INC.
- ------------------------------------------------------------------------------------------------------------------------------------
3 - The articles of the above-named corporation are amended as follows: Les statuts de la societe mentionnee ci-dessus sont
modifies de la facon suivante:
(a) to create an unlimited number of employee participation shares ("EP Shares")
(b) to declare that the capital of the Corporation after giving effect to the foregoing consists of an unlimited number of
common shares, an unlimited number of preferred shares and an unlimited number of EP Shares; and
(c) to provide that the rights, privileges, restrictions and conditions attaching to the EP Shares are set out in the annexed
Exhibit I.
- ------------------------------------------------------------------------------------------------------------------------------------
DATE SIGNATURE TITLE - TITRE
VICE PRESIDENT, CORPORATE
July 4, 1995 DEVELOPMENT, GENERAL COUNSEL
AND SECRETARY
- ------------------------------------------------------------------------------------------------------------------------------------
7530-21-936-1387(01-93)46 FOR DEPARTMENTAL USE ONLY-A L'USAGE DU MINISTERE SEULEMENT
FILED - DEPOSEE
JUL 14 1995
--------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT I
The rights, privileges, restrictions and conditions attaching to the 1995 EP
Shares Series A are as follows:
(a) DIVIDENDS: Each 1995 EP Share Series A entitles the holder to receive
cash dividends, if any, as may from time to time be declared
payable thereon, at the same time as dividends, if any, are
paid on Common Shares of the Corporation, in an amount for
each 1995 EP Share Series A which is equal to the proportion
of the amount of the dividend declared on each Common Share
that the subscription price of such 1995 EP Shares Series A
is of the Fair Market Value of the Common Shares at the date
of issuance of such 1995 EP Shares Series A.
For the purpose hereof, the Fair Market Value of a Common
Share at a particular time means the average of the daily
high and low board lot trading prices on the Toronto Stock
Exchange ("TSE") on each of the five trading days
immediately preceding the date on which such value is to be
determined.
(b) CONVERSION: In the event of a proposal, order or resolution for the
liquidation, dissolution or winding-up of the Corporation,
whether voluntary or involuntary; 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 1995 EP Shares Series A
will become Common Shares, and the number of Common Shares a
holder receives on conversion is the number of Common Shares
which is determined by multiplying the number of 1995 EP
Shares Series A held, or in the case of conversion on a
Conversion Date other than the Automatic Conversion Date,
the number of 1995 EP Shares Series A 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 a 1995
EP Share Series A 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 Common Share as at the earlier of the two dates
described in (i);
provided that no fractional Common Shares will be issued and
no payment will be made in respect of fractional Common
Shares.
<PAGE>
- 2 -
For the purposes hereof, the Automatic Conversion Date means
and refers to the date that is the fifth anniversary date of
the date of issue of the 1995 EP Share Series A and is the
date on which all 1995 EP Shares Series A will, to the extent
not theretofore redeemed, be converted into Common Share.
Conversion Date means any Business Day following the date on
which the 1995 EP Shares Series A 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 Common Shares on the issue date
of the 1995 EP Shares Series A. Business Day means a day
other than a Saturday, Sunday and statutory holiday in the
Province of Ontario, provided that the principal offices of
the Corporation in Mississauga, Ontario are open for
business on the particular day. Minimum Vesting Period
means, except as otherwise mutually agreed upon by the
holder and the Corporation, the period of time commencing at
the time of issuance of the 1995 EP Shares Series A 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 in respect of a 1995 EP
Share Series A at a particular time means the greater of
(i) the amount, if any, by which the Fair Market Value of a
Common Share as at that time exceeds the Fair Market Value
of a Common Share as at the date on which the first 1995 EP
Share Series A was issued; and (ii) the issue price.
Any right to conversion of 1995 EP Shares Series A into a
Common Share on a Conversion Date other than the Automatic
Conversion Date shall be exercised by notice in writing
given by the holder to the Corporation.
(c) NO VOTE: No 1995 EP Share Series A shall entitle the holder to vote
at meetings of shareholders of the Corporation except in
special circumstances prescribed under the CANADA BUSINESS
CORPORATIONS ACT as now enacted or as the same may from time
to time be amended, re-enacted or replaced.
<PAGE>
- 3 -
(d) TRANSFERABILITY: No 1995 EP Share Series A is transferable except to a
holder's registered retirement savings plan (as defined
pursuant to the INCOME TAX ACT (Canada) or by reason of
testate of intestate succession.
(e) CANCELLATION: The Corporation may purchase a 1995 EP Share Series A at any
time for cancellation at its issue price with no notice.
<PAGE>
[LOGO]
Industry Canada Industrie Canada
CORPORATIONS DIRECTORATE DIRECTION GENERALE DE CORPORATIONS
9th floor, Journal Tower S. 9 etage, Edifice Journal, Tour sud
365 Laurier Avenue West 965, avenue Laurier ouest
Ottawa, Ontario Ottawa (Ontario)
K1A 0C8 K1A 0C8
Your file - Votre reference
July 14, 1995/le 14 julliet 1995
Our file - Notre reference
MCCARTHY TETRAULT 304758-0
Re-Objet
DRAXIS HEALTH INC./
SANTE DRAXIS INC.
Enclosed herewith is the document issued in the above matter.
A notice of issuance of CBCA documents will be published in the Canada
Corporations Bulletin. A notice of issuance of CCA documents will be
published in the Canada Corporations Bulletin and the Canada Gazette.
IF A NAME OR CHANGE OF NAME IS INVOLVED, THE FOLLOWING CAUTION SHOULD BE
OBSERVED:
This name is available for use as a corporate name subject to and
conditional upon the applicants assuming full responsibility for any risk
of confusion with existing business names and trade marks (including those
set out in the relevant NUANS search report(s)). Acceptance of such
responsibility will comprise an obligation to change the name to a
dissimilar one in the event that representations are made and established
that confusion is likely to occur. The use of any name granted is subject
to the laws of the jurisdiction where the company carries on business.
For the Director General, Corporations Directorate
Vous trouverez ci-inclus le
document emis dans l'affaire precitee.
Un avis de l'emission de documents en vertu de la LSARF sera publie dans le
Bulletin des societes canadiennes. Un avis de l'emission de documents en
vertu de la LCC sera publie dans le Bulletin des societes canadiennes et dans
la Gazette du Canada.
S'IL EST QUESTION D'UNE DENOMINATION SOCIALE OU D'UN CHANGEMENT DE
DENOMINATION SOCIALE,L'AVERTISSEMENT SUIVANT DOIT ETRE RESPECTE:
Cette denomination sociale est disponible en autant que les requerants
assument toute responsabilite de risque de confusion avec toutes
denominations commerciales et toutes marques de commerce existantes (y
compris celles qui sont citees dans le(s) rapport(s) de recherches de NUANS
pertinent(s)). Cette acceptation de responsabilite comprend l'obligation
de changer la denomination de la societe en une denomination differente
advenant le cas our des representations sont faites etablissant qu'il y a
une probabilite de confusion. L'utilisation de tout nom octroye est
sujette a toute loi de la juridiction ou la societe exploite son
entreprise.
pour le Directeur general, Direction generale des Corporations
CANADA [LOGO]
<PAGE>
[LOGO] Industry Canada Industrie Canada
Corporations Directorate DIRECTION GENERALE DES CORPORATIONS
9th floor, Journal Tower S. 9 etage, Edifice Journal, Tour sud
365 Laurier Avenue West 365, avenue Laurier ouest
Ottawa, Ontario Ottawa (Ontario)
K1A 0C8 K1A 0C8
Your file - Votre reference
July 15, 1996/le 15 juillet 1996
Our file - Notre reference
Mccarthy Tetrault 304758-0
Re-Objet
DRAXIS HEALTH INC./
SANTE DRAXIS INC.
Enclosed herewith is the document issued in the above matter.
A notice of issuance of CBCA documents will be published in the Canada
Corporations Bulletin. A notice of issuance of CCA documents will be
published in the Canada Corporations Bulletin and the Canada Gazette.
IF A NAME OR CHANGE OF NAME IS INVOLVED, THE FOLLOWING CAUTION SHOULD BE
OBSERVED:
This name is available for use as a corporate name subject to and
conditional upon the applicants assuming full responsibility for any risk
of confusion with existing business names and trade marks (including those
set out in the relevant NUANS search report(s)). Acceptance of such
responsibility will comprise an obligation to change the name to a
dissimilar one in the event that representations are made and established
that confusion is likely to occur. The use of any name granted is subject
to the laws of the jurisdiction where the company carries on business.
NICOLE LAMARCHE
For the Director General, Corporations Directorate
Vous trouverez ci-inclus le
document emis dans l'affaire precitee.
Un avis de l'emission de documents en vertu de la LCSA sera publie dans le
Bulletin des societes canadiennes. Un avis de l'emission de documents en
vertu de la LCC sera publie dans le Bulletin des societes canadiennes et dans
la Gazette du Canada.
S'IL EST QUESTION D'UNE DENOMINATION SOCIALE OU D'UN CHANGEMENT DE
DENOMINATION SOCIALE, L'AVERTISSEMENT SUIVANT DOIT ETRE RESPECTE:
Cette denomination sociale est disponible en autant que les requerants
assument toute responsabilite de risque de confusion avec toutes
denominations commerciales et toutes marques de commerce existantes (y
compris celles qui sont citees dans le(s) rapport(s) de recherches de NUANS
pertinent(s)). Cette acceptation de responsabilite comprend l'obligation
de changer la denomination de la societe en une denomination differente
advenant le cas ou des representations sont faites etablissant qu'il y a
une probabilite de confusion. L'utilisation de tout nom octroye est
sujette a toute loi de la juridiction ou la societe exploite son
entreprise.
NICOLE LAMARCHE
pour le Directeur general, Direction generale des Corporations
CANADA [LOGO]
<PAGE>
[LOGO]
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CONSUMER AND CONSOMMATION ET
CORPORATE AFFAIRS CANADA AFFAIRES COMMERCIALES CANADA
FORM 4 FORMULE 4
CANADA BUSINESS LOI REGISSANT LES SOCIETES ARTICLES OF AMENDMENT CLAUSES MODIFICATRICES
CORPORATIONS ACT PAR ACTIONS DE REGIME FEDERAL (SECTION 27 OR 177) (ARTICLES 27 OU 177)
- ------------------------------------------------------------------------------------------------------------------------------------
1 - Name of corporation - Denomination de la societe 2 - Corporation No. - N DEG. de la societe
DRAXIS HEALTH INC.
SANTE DRAXIS INC. 304758-0
- ------------------------------------------------------------------------------------------------------------------------------------
3 - THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDED AS FOLLOWS: LES STATUTS DE LA SOCIETE MENTIONNEE CI-DESSUS SONT
MODIFIES DE LA FACON SUIVANTE:
1. To create an unlimited number of 1995 Employee Participation Shares Series A to be designated as 1995 EP Shares Series A;
2. To provide that the rights, privileges, restrictions and conditions attaching to the 1995 EP Shares Series A are set out
in the annexed Exhibit 1.
- ------------------------------------------------------------------------------------------------------------------------------------
DATE SIGNATURE TITLE - TITRE VICE PRESIDENT, CORPORATE
July 4, 1995 /s/ [ILLEGIBLE] DEVELOPMENT, GENERAL COUNSEL AND SECRETARY
- ------------------------------------------------------------------------------------------------------------------------------------
7530-21-936-1387 (01-93) 46 FOR DEPARTMENTAL USE ONLY-A L'USAGE DU MINISTERE SEULEME
FILED - DEPOSEE
JUL 14 1995
JUIL 14 1995
--------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT I
The rights, privileges, restrictions and conditions attaching to the EP
Shares are as follows:
(a) SERIES: The EP Shares may at any time or from time to time be issued
in one or more series. Subject to the following provisions, the board of
directors of the Corporation (the "Board") may be resolution fix from time
to time, before the issue thereof, the number of shares in, and determine
the designation, rights, privileges, restrictions and conditions attaching
to the shares of, each series of EP Shares.
(b) DIVIDENDS: Each EP Share entitles the holder to receive cash dividends,
if any, as may from time to time be declared payable
thereon, at the same time as dividends, if any, are paid on
Common Shares of the Corporation, in an amount for each EP
Share of a particular series which is equal to the
proportion of the amount of the dividend declared on each
Common Share that the subscription price of such EP Share is
of the Fair Market Value of the Common Shares at the date of
issuance of such EP Share.
For the purpose hereof, the Fair Market Value of a Common
Share at a particular time means the average of the daily
high and low board lot trading prices on the Toronto Stock
Exchange ("TSE") on each of the five trading days
immediately preceding the date on which such value is to be
determined.
(c) CONVERSION: In the event of a proposal, order or resolution for the
liquidation, dissolution or winding-up of the Corporation,
whether voluntary or involuntary; 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
Common Shares, and the number of Common Shares a holder
receives on conversion is the number of Common Shares 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
<PAGE>
- 2 -
(ii) the denominator of which shall be the Fair Market Value
of a Common Share as at the earlier of the two dates
described in (i);
provided that no fractional Common Shares will be issued and
no payment will be made in respect of fractional Common
Shares.
For the purposes hereof, the Automatic Conversion Date means
and refers to the date that is the fifth anniversary date of
the date of issue of the EP Shares and is the date on which
all EP Shares of such series will, to the extent not
theretofore redeemed, be converted into Common Shares.
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 Common Shares on
the issue date of the EP Shares of such series. Business Day
means a day other than a Saturday, Sunday and statutory
holiday in the Province of Ontario, provided that the
principal offices of the Corporation in Mississauga, Ontario
are open for business on the particular day. Minimum Vesting
Period means, except as otherwise mutually agreed upon by the
holder and the Corporation, 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 in respect of an EP Share
of a particular series at a particular time means the
greater of (i) the amount, if any, by which the Fair Market
Value of a Common Share as at that time exceeds the Fair
Market Value of a Common Share as at the date on which the
first EP Share of a particular series was issued; and (ii)
the issue price.
Any right to conversion of an EP Share into a Common Share
on a Conversion Date other than the Automatic Conversion
Date shall be exercised by notice in writing given by the
holder to the Corporation.
<PAGE>
- 3 -
(d) NO VOTE: No EP Share shall entitle the holder to vote at meetings of
shareholders of the Corporation except in special
circumstances prescribed under the CANADA BUSINESS
CORPORATIONS ACT as now enacted or as the same may from time
to time be amended, re-enacted or replaced.
(e) TRANSFERABILITY: No EP Share is transferable except to a holder's
registered retirement savings plan (as defined pursuant
to the INCOME TAX ACT (Canada) or by reason of testate
of intestate succession.
(f) CANCELLATION: The Corporation may purchase an EP Share at any time for
cancellation at its issue price with no notice.
<PAGE>
[LOGO] Industry Canada Industrie Canada
<TABLE>
<CAPTION>
CERTIFICATE CERTIFICAT
OF AMENDMENT DE MODIFICATION
CANADA BUSINESS LOI CANADIENNE SUR
CORPORATIONS ACT LES SOCIETES PAR ACTIONS
- ------------------------------------------------------------------------------------------------------------------------------------
DRAXIS HEALTH INC./ 304758-0
SANTE DRAXIS INC.
- ---------------------------------------------- ---------------------------------------------
<S> <C>
Name of corporation-Denomination de la societe Corporation number-Numero de la societe
I hereby certify that the articles of the Je certifie que les statuts de la societe
above-named corporation were amended susmentionnee ont ete modifies:
(a) under section 13 of the CANADA BUSINESS / / a) en vertu de l'article 13 de la LOI CANADIENNE
CORPORATIONS ACT in accordance with the SUR LES SOCIETES PAR ACTIONS, conformement a
attached notice; l'avis ci-joint;
(b) under section 27 of the CANADA BUSINESS / / b) en vertu de l'article 27 de la LOI CANADIENNE SUR
CORPORATIONS ACT as set out in the attached LES SOCIETES PAR ACTIONS, tel qu'il est indique dans
articles of amendment designating a series les clauses modificatrices ci-jointes designant une
of shares; serie d'actions;
(c) under section 179 of the CANADA BUSINESS /X/ c) en vertu de l'article 179 de la LOI CANADIENNE SUR
CORPORATIONS ACT as set out in the attached LES SOCIETES PAR ACTIONS, tel qu'il est indique dans
articles of amendment; les clauses modificatrices ci-jointes;
(d) under section 191 of the CANADA BUSINESS / / d) en vertu de l'article 191 de la LOI CANADIENNE SUR
CORPORATIONS ACT as set out in the attached LES SOCIETES PAR ACTIONS, tel qu'il est indique dans
articles of reorganization; les clauses de reorganisation ci-jointes.
March 7, 1996/le 7 mars 1996
Director - Directeur Date of Amendment - Date de modification
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CANADA [LOGO]
<PAGE>
<TABLE>
<CAPTION>
[LOGO] Consumer and Consommation et
Corporate Affairs Canada Affaires commerciales Canada
FORM 4 FORMULE 4
Canada Business Loi regissant les societes ARTICLES OF AMENDMENT CLAUSES MODIFICATRICES
Corporations Act par actions de regime federal (SECTION 27 OR 177) (ARTICLES 27 OU 177)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
1 -- Name of corporation -- Denomination de la societe 2 -- Corporation No. -- No de la societe
DRAXIS HEALTH INC.
SANTE DRAXIS INC. 304758-0
- ----------------------------------------------------------------------------------------------------------------------------------
3 -- The articles of the above-named corporation are amended as follows: Les statuts de la societe mentionnee ci-dessus sont
modifies de la facon suivante:
To create an unlimited number of 1995 Employee Participation Shares Series B
to be designated as 1995 EP Shares Series B:
- ----------------------------------------------------------------------------------------------------------------------------------
Date Signature Title -- Titre
March 7, 1996 /s/ Jacqueline Le Saux VICE PRESIDENT, CORPORATE DEVELOPMENT,
GENERAL COUNSEL AND SECRETARY
- ----------------------------------------------------------------------------------------------------------------------------------
7530-21-936-1387 (01-93) 46 FOR DEPARTMENTAL USE ONLY -- A L'USAGE DU MINISTERE SEULEME
Filed -- Deposee
MAR -- 7 1996
-----------------------------------------------------------------------
</TABLE>
<PAGE>
[LOGO] Industry Canada Industrie Canada
Corporations Directorate DIRECTION GENERALE DES CORPORATIONS
9th floor, Journal Tower S. 9 etage, Edifice Journal, Tour sud
365 Laurier Avenue West 365, avenue Laurier ouest
Ottawa, Ontario Ottawa (Ontario)
K1A 0C8 K1A 0C8
Your file - Votre reference
July 15, 1996/le 15 juillet 1996
Our file - Notre reference
Mccarthy Tetrault 304758-0
Re-Objet
DRAXIS HEALTH INC./
SANTE DRAXIS INC.
Enclosed herewith is the document issued in the above matter.
A notice of issuance of CBCA documents will be published in the Canada
Corporations Bulletin. A notice of issuance of CCA documents will be
published in the Canada Corporations Bulletin and the Canada Gazette.
IF A NAME OR CHANGE OF NAME IS INVOLVED, THE FOLLOWING CAUTION SHOULD BE
OBSERVED:
This name is available for use as a corporate name subject to and
conditional upon the applicants assuming full responsibility for any risk
of confusion with existing business names and trade marks (including those
set out in the relevant NUANS search report(s)). Acceptance of such
responsibility will comprise an obligation to change the name to a
dissimilar one in the event that representations are made and established
that confusion is likely to occur. The use of any name granted is subject
to the laws of the jurisdiction where the company carries on business.
NICOLE LAMARCHE
For the Director General, Corporations Directorate
Vous trouverez ci-inclus le
document emis dans l'affaire precitee.
Un avis de l'emission de documents en vertu de la LCSA sera publie dans le
Bulletin des societes canadiennes. Un avis de l'emission de documents en
vertu de la LCC sera publie dans le Bulletin des societes canadiennes et dans
la Gazette du Canada.
S'IL EST QUESTION D'UNE DENOMINATION SOCIALE OU D'UN CHANGEMENT DE
DENOMINATION SOCIALE, L'AVERTISSEMENT SUIVANT DOIT ETRE RESPECTE:
Cette denomination sociale est disponible en autant que les requerants
assument toute responsabilite de risque de confusion avec toutes
denominations commerciales et toutes marques de commerce existantes (y
compris celles qui sont citees dans le(s) rapport(s) de recherches de NUANS
pertinent(s)). Cette acceptation de responsabilite comprend l'obligation
de changer la denomination de la societe en une denomination differente
advenant le cas ou des representations sont faites etablissant qu'il y a
une probabilite de confusion. L'utilisation de tout nom octroye est
sujette a toute loi de la juridiction ou la societe exploite son
entreprise.
NICOLE LAMARCHE
pour le Directeur general, Direction generale des Corporations
CANADA [LOGO]
<PAGE>
[LOGO] Industry Canada Industrie Canada
<TABLE>
<CAPTION>
<S> <C> <C>
CERTIFICATE CERTIFICAT
OF AMENDMENT DE MODIFICATION
CANADA BUSINESS LOI CANADIENNE SUR
CORPORATIONS ACT LES SOCIETES PAR ACTIONS
- ------------------------------------------------------------------------------------------------------------------------------------
DRAXIS HEALTH INC./ 304758-0
SANTE DRAXIS INC.
- ---------------------------------------------- ---------------------------------------------
Name of corporation-Denomination de la societe Corporation number-Numero de la societe
I hereby certify that the articles of the Je certifie que les statuts de la societe susmentionnee ont ete
above-named corporation were amended modifies:
(a) under section 13 of the CANADA BUSINESS / / a) en vertu de l'article 13 de la LOI CANADIENNE SUR LES SOCIETES
CORPORATIONS ACT in accordance with the PAR ACTIONS, conformement a l'avis ci-joint;
attached notice;
(b) under section 27 of the CANADA BUSINESS / / b) en vertu de l'article 27 de la LOI CANADIENNE SUR LES SOCIETES
CORPORATIONS ACT as set out in the attached PAR ACTIONS, tel qu'il est indique dans les clauses modificatrices
articles of amendment designating a series ci-jointes designant une serie d'actions;
of shares;
(c) under section 179 of the CANADA BUSINESS /X/ c) en vertu de l'article 179 de la LOI CANADIENNE SUR LES SOCIETES
CORPORATIONS ACT as set out in the attached PAR ACTIONS, tel qu'il est indique dans les clauses modificatrices
articles of amendment; ci-jointes;
(d) under section 191 of the CANADA BUSINESS / / d) en vertu de l'article 191 de la LOI CANADIENNE SUR LES SOCIETES
CORPORATIONS ACT as set out in the attached PAR ACTIONS, tel qu'il est indique dans les clauses de
articles of reorganization; reorganisation ci-jointes;
/s/ [ILLEGIBLE] JULY 14, 1995/LE 14 JUILLET 1995
Director - Directeur Date of Amendment - Date de modification
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CANADA [LOGO]
<PAGE>
<TABLE>
<CAPTION>
[LOGO] CONSUMER AND CONSOMMATION ET
CORPORATE AFFAIRS CANADA AFFAIRES COMMERCIALES CANADA
FORM 4 FORMULE 4
CANADA BUSINESS LOI REGISSANT LES SOCIETES ARTICLES OF AMENDMENT CLAUSES MODIFICATRICES
CORPORATIONS ACT PAR ACTIONS DE REGIME FEDERAL (SECTION 27 OR 177) (ARTICLES 27 OU 177)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
1 -- Name of corporation -- Denomination de la societe 2 -- Corporation No. -- N DEG. de las societe
DRASIX HEALTH INC.
SANTE DRAXIS INC. 304758-0
- ----------------------------------------------------------------------------------------------------------------------------------
3 -- The articles of the above-named corporation are amended as follows: Les statuts de la societe mentionnee ci-dessus sont
modifies de la facon suivante:
THE RIGHTS, PRIVILEGES, RESTRICTIONS AND CONDITIONS ATTACHING TO THE EMPLOYEE
PARTICIPATION SHARES (""EP SHARES'') BE AMENDED TO (i) ADD AFTER THE FIRST SENTENCE IN
PARAGRAPH (a) THE FOLLOWING SENTENCE: "THERE SHALL BE ONLY ONE ISSUANCE OF EACH
SERIES OF EP SHARES." AND (ii) DELETE PARAGRAPH (e) IN ITS ENTIRETY.
- ----------------------------------------------------------------------------------------------------------------------------------
DATE SIGNATURE TITLE -- TITRE
July 11, 1996 /s/ Jacqueline Le Saux VICE PRESIDENT, CORPORATE
DEVELOPMENT AND SECRETARY
- ----------------------------------------------------------------------------------------------------------------------------------
7530-21-936-1387 (01-93) 46 FOR DEPARTMENTAL USE ONLY -- A L'USAGE DU MINISTERE SEULEME
FILED -- DEPOSEE
JUL -- 15 1996
-----------------------------------------------------------------------
</TABLE>
<PAGE>
BY-LAW NO. 1
A by-law relating generally to
the transaction of the business
and affairs of
DEPRENYL RESEARCH LIMITED
(hereinafter referred to as the "Corporation")
DIRECTORS
1. CALLING OF AND NOTICE OF MEETINGS - Meetings of the board shall be held at
such place and time and on such day as the Secretary may determine. Notice of
meetings of the board shall be given to each director not less than 48 hours
before the time when the meeting is to be held. Each newly elected board may
without notice hold its first meeting for the purposes of organization and
the appointment of officers immediately following the meeting of
shareholders at which such board was elected.
2. VOTES TO GOVERN - At all meetings of the board every question shall be
decided by a majority of the votes cast on the question; and in case of an
equality of votes the chairman of the meeting shall be entitled to a second
or casting vote.
3. INTEREST OF DIRECTORS AND OFFICERS GENERALLY IN CONTRACTS - No director or
officer shall be disqualified by his office from contracting with the
Corporation nor shall any contract or arrangement entered into by or on
behalf of the Corporation with any director or officer or in which any
director or officer is in any way interested be liable to be voided nor shall
any director or officer so contracting or being so interested be liable to
account to the Corporation for any profit realized by any such contract or
arrangement by reason of such director or officer holding that office or of
the fiduciary relationship thereby established; provided that the director or
officer shall have complied with the provisions of the Canada Business
Corporations Act.
SHAREHOLDERS' MEETINGS
4. QUORUM - At any meeting of shareholders, a quorum shall be two persons
present in person and each entitled to vote thereat and holding or
representing by proxy not less than twenty-five per cent of the votes
entitled to be cast thereat.
<PAGE>
- 2 -
INDEMNIFICATION
5. INDEMNIFICATION OF DIRECTORS AND OFFICERS - The Corporation shall
indemnify a director or officer of the Corporation, a former director or
officer of the Corporation 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 heirs and legal representatives
to the extent permitted by the Canada Business Corporations Act.
6. INDEMNITY OF OTHERS - Except as otherwise required by the Canada Business
Corporations Act and subject to paragraph 5, the Corporation may from time to
time indemnify and save harmless any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was an employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee,
agent of or participant in another body corporate, partnership, joint
venture, trust or other enterprise, against expenses (including legal fees),
judgments, fines and any amount actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted honestly and in
good faith with a view to the best interests of the Corporation and, with
respect to any criminal or administrative action or proceeding that is
enforced by a monetary penalty, had reasonable grounds for believing that his
conduct was lawful. The termination of any action, suit or proceeding by
judgment, order, settlement or conviction shall not, of itself, create a
presumption that the person did not act honestly and in good faith with a
view to the best interests of the Corporation and, with respect to any
criminal or administrative action or proceeding that is enforced by a
monetary penalty, had no reasonable grounds for believing that his conduct
was lawful.
7. RIGHT OF INDEMNITY NOT EXCLUSIVE - The provisions for indemnification
contained in the by-laws of the Corporation shall not be deemed exclusive of
any other rights to which any person seeking indemnification may be entitled
under any agreement, vote of shareholders or directors or otherwise, both as
to action in his official capacity and as to action in another capacity, and
shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs and legal
representatives of such a person.
8. NO LIABILITY OF DIRECTORS OR OFFICERS FOR CERTAIN MATTERS - To the extent
permitted by law, no director or officer for the time being of the
Corporation shall be liable for the acts, receipts, neglects or defaults of
any other director or officer
<PAGE>
- 3 -
or employee or for joining in any receipt or act for conformity or for any
loss, damage or expense happening to the Corporation through the
insufficiency or deficiency of title to any property acquired by the
Corporation or for or on behalf of the Corporation or for the insufficiency
or deficiency of any security in or upon which any of the moneys of or
belonging to the Corporation shall be placed out or invested or for any loss
or damage arising from the bankruptcy, insolvency or tortious act of any
person, firm or body corporate with whom or which any moneys, securities or
other assets belonging to the Corporation shall be lodged or deposited or for
any loss, conversion, misapplication or misappropriation of or any damage
resulting from any dealings with any moneys, securities or other assets
belonging to the Corporation or for any other loss, damage or misfortune
whatever which may happen in the execution of the duties of his respective
office or trust or in relation thereto unless the same shall happen by or
through his failure to act honestly and in good faith with a view to the best
interests of the Corporation and in connection therewith to exercise the
care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances. If any director or officer of the Corporation shall
be employed by or shall perform services for the Corporation otherwise than
as a director or officer or shall be a member of a firm or a shareholder,
director or officer of a body corporate which is employed by or performs
services for the Corporation, the fact of his being a director or officer of
the Corporation, shall not disentitle such director or officer or such firm
or body corporate, as the case may be, from receiving proper remuneration for
such services.
BANKING ARRANGEMENTS, CONTRACTS, ETC.
9. BANKING ARRANGEMENTS - The banking business of the Corporation, or any
part thereof, shall be transacted with such banks, trust companies or other
financial institutions as the board may designate, appoint or authorize from
time to time by resolution and all such banking business, or any part
thereof, shall be transacted on the Corporation's behalf by such one or more
officers and/or other persons as the board may designate, direct or
authorize from time to time by resolution and to the extent therein provided.
10. EXECUTION OF INSTRUMENTS - Contracts, documents or instruments in writing
requiring execution by the Corporation may be signed by any one of the
Chairman, President or Secretary together with any other director or officer,
and all contracts, documents or instruments in writing so signed shall be
binding upon the Corporation without any further authorization or formality.
The board is authorized from time to time by resolution to appoint any
officer or officers or any other person
<PAGE>
- 4 -
or persons on behalf of the Corporation to sign and deliver either contracts,
documents or instruments in writing generally or to sign either manually or
by facsimile signature and deliver specific contracts, documents or
instruments in writing. The term "contracts, documents or instruments in
writing" as used in this by-law shall include deeds, mortgages, charges,
conveyances, powers of attorney, transfers and assignments of property of all
kinds including specifically but without limitation transfers and assignments
of shares, warrants, bonds, debentures or other securities and all paper
writings.
MISCELLANEOUS
11. INVALIDITY OF ANY PROVISIONS OF THIS BY-LAW - The invalidity or
unenforceability of any provision of this by-law shall not affect the
validity or enforceability of the remaining provisions of this by-law.
12. OMISSIONS AND ERRORS - The accidental omission to give any notice to any
shareholder, director, officer or auditor or the non-receipt of any notice by
any shareholder, director, officer or auditor or any error in any notice not
affecting the substance thereof shall not invalidate any action taken at any
meeting held pursuant to such notice or otherwise founded thereon.
INTERPRETATION
13. INTERPRETATION - In this by-law and all other by-laws of the Corporation
words importing the singular number only shall include the plural and vice
versa; words importing the masculine gender shall include the feminine and
neuter genders; words importing persons shall include an individual,
partnership, association, body corporate, executor, administrator or legal
representative and any number or aggregate of persons; "articles" include the
original or restated articles of incorporation, articles of amendment,
articles of amalgamation, articles of continuance, articles of
reorganization, articles of arrangement and articles of revival; "board"
shall mean the board of directors of the Corporation; "Canada Business
Corporations Act" shall mean Canada Business Corporations Act, S.C. 1974-75,
Chapter 33 as amended from time to time or any Act that may hereafter be
substituted therefor; and "meeting of shareholders" shall mean and include an
annual meeting of shareholders and a special meeting of shareholders.
<PAGE>
- 5 -
RESOLVED that the foregoing By-law No. 1 is made a by-law of the
Corporation.
The undersigned, being the sole director of DEPRENYL RESEARCH LIMITED,
hereby signs the foregoing resolution.
DATED the 23rd day of October, 1987.
/s/ Dr. Morton Shulman
-----------------------------------
Dr. Morton Shulman
RESOLVED that the foregoing By-law No. 1 of the by-laws of the
Corporation is hereby confirmed.
The undersigned, being the sole shareholder of DEPRENYL RESEARCH
LIMITED, hereby signs the foregoing resolution.
Dated the 23rd day of October, 1987.
/s/ Dr. Morton Shulman
-----------------------------------
Dr. Morton Shulman
<PAGE>
EXHIBIT 5.1
<PAGE>
MCCARTHY TETRAULT
Suite 4700
Toronto Dominion Bank Tower
Toronto-Dominion Centre
Toronto, Ontario
M5K 1E6
October 22, 1996
DELIVERED
DRAXIS HEALTH INC.
6870 Goreway Drive
Mississauga, Ontario
L4V 1P1
RE: DRAXIS HEALTH INC. - REGISTRATION STATEMENT ON FORM F-4
------------------------------------------------------------
We are Canadian legal counsel to Draxis Health Inc., a Canada corporation
(the "Company"). We are issuing this opinion in connection with the
Registration Statement on Form F-4 being filed by the Company with the
Securities and Exchange Commission (the "Commission") on the date hereof (the
"Registration Statement") for the purpose of registering with the Commission
under the SECURITIES ACT OF 1933, as amended (the "1933 Act"), up to 5,725,188
shares (the "Shares") of no par value common stock of the Company, issuable
pursuant to the Exchange Agreement by and among the Company, its wholly-owned
subsidiary Draxis Pharmaceutica Inc. ("DPI") and Deprenyl Animal Health, Inc., a
Missouri corporation ("DAHI") dated as of July 25, 1996 (the "Exchange
Agreement").
In this connection, we have examined and are familiar with originals or
copies, certified or otherwise identified to our satisfaction, of (i) the
Registration Statement, (ii) the Exchange Agreement, (iii) the Certificate of
Amalgamation and the By-laws of the Company, as amended, each as currently in
effect, and (iv) certain resolutions adopted by the Board of Directors of the
Company relating to the issuance of the Shares and certain related matters. We
have also examined originals or copies, certified or otherwise identified to our
satisfaction, of such records of the Company and such agreements, certificates
of public officials, certificates of others of the Company and others, and such
<PAGE>
-2-
Draxis Health Inc. October 22, 1996
other documents, certificates and records as we have deemed necessary or
appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to me as originals, the conformity to original documents of all documents
submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such copies. In making our examination of
documents executed or to be executed by parties other than the Company, we have
assumed that such parties had or will have the power, corporate or other, to
enter into and perform all obligations thereunder and have also assumed the due
authorization by all requisite action, corporate or other, and execution and
delivery by such parties and the validity and binding effect thereof. As to any
facts material to the opinions expressed herein which we have not independently
established or verified, we have relied upon statements and representations of
other officers and representatives of the Company and others.
We express no opinion concerning any law other than the substantive law of
the Province of Ontario and the laws of Canada applicable therein.
We are assuming that the Company will receive, prior to the issuance by it
of the Shares, in consideration of issuing such Shares, validly issued shares of
DPI or other property (the "Share Consideration") that has a value determined by
the board of directors of the Company to not be less than the fair equivalent of
the money the Company would have received if it had issued the Shares for money.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized for issuance and, upon consummation of the
exchange of shares in the common stock of DAHI for the Shares pursuant to the
Exchange Agreement, the receipt by the Company of the Share Consideration, and
the issuance of the Shares and delivery of proper stock certificates therefor in
the manner contemplated in the Exchange Agreement, the Shares will be validly
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the caption "Legal
Matters" in the Joint Management Proxy Statement-Prospectus included therein.
In giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the 1933 Act or the rules
and regulations of the Commission promulgated thereunder.
This opinion is furnished by us, as counsel to the Company in Canada, in
accordance with the requirements of Item 601(b)(5) of Regulation S-K under the
1933
<PAGE>
-3-
Draxis Health Inc. October 22, 1996
Act and, except as provided in the immediately preceding paragraph, is not to be
used, circulated or quoted for any other purpose or otherwise referred to or
relied upon by any other person without the express written permission of the
Company.
Very truly yours,
/s/ McCarthy Tetrault
MCCARTHY TETRAULT
<PAGE>
EXHIBIT 8.1
<PAGE>
GARDNER, CARTON & DOUGLAS
SUITE 3400 - QUAKER TOWER
321 NORTH CLARK STREET
CHICAGO, ILLINOIS 60610-4795WASHINGTON, D.C.
(312) 644-3000
TELEX: 25-3628
TELECOPIER: (312) 644-3381
October 23, 1996
Draxis Health, Inc.
6870 Goreway Drive
Mississauga, Ontario L4V 1P1
Canada
RE: TAX TREATMENT OF REINCORPORATION MERGER AND MANDATORY SHARE EXCHANGE
--------------------------------------------------------------------
Gentlemen:
This opinion is being delivered to you pursuant to Section 7.2(d) of the
Exchange Agreement, dated as of July 25, 1996 (the "Agreement"), by and among
Draxis Health Inc. ("Draxis"), Draxis Pharmaceutica Inc., a Canadian
corporation and a wholly-owned subsidiary of Draxis ("DPI") and Deprenyl
Animal Health, Inc., a Missouri corporation ("Old DAHI").
Pursuant to the terms of the Agreement, Old DAHI will merge with and into
Deprenyl Animal Health, Inc., a Louisiana corporation ("New DAHI") newly
formed by Old DAHI for purposes of the merger (the "Reincorporation Merger").
In the Reincorporation Merger, each shareholder of Old DAHI will receive one
share of New DAHI stock for each share of Old DAHI stock surrendered. All
outstanding shares of New DAHI stock owned by Old DAHI prior to the
Reincorporation Merger will be canceled pursuant to the Reincorporation
Merger. To the extent any shareholder of Old DAHI dissents to the
Reincorporation Merger, any consideration received by such shareholder
pursuant to such dissent will be paid by Old DAHI or New DAHI, and not
directly or indirectly by Draxis, DPI or any other affiliate of Draxis.
Except for any such dissenters, the ownership of New DAHI immediately
following the Reincorporation Merger will be identical to the ownership of
Old DAHI immediately prior to the Reincorporation Merger.
Following consummation of the Reincorporation Merger, pursuant to the
Agreement, all of the shares of stock of New DAHI other than those shares owned
by Draxis L.L.C. and DPI will be transferred to DPI in exchange for newly issued
Draxis Common Stock at a ratio of 1.35 shares of Draxis Common Stock for each
share of Old DAHI stock (the "Exchange"). The Exchange is intended to
constitute a Mandatory Share Exchange under Louisiana law, as a result of which
the Exchange will be effective as of the Effective Time as to all New DAHI
<PAGE>
October 23, 1996
Page 2
shareholders, including those, if any, who vote against the Exchange or
refuse to physically tender their Old DAHI or New DAHI share certificates.
No New DAHI shareholder will receive any consideration for his or her shares
of New DAHI stock in the Exchange other than Draxis Common Stock, except for
cash paid in lieu of fractional shares. Under Louisiana law, no New DAHI
shareholder will have the right to perfect dissenters' rights to the Exchange.
Except as otherwise provided, capitalized terms referred to herein have
the meanings set forth in the Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
<PAGE>
October 23, 1996
Page 3
In our capacity as special United States tax counsel to Draxis in
connection with the negotiation and execution of the Agreement, for the
purpose of rendering this opinion, we have examined (or will examine on or
prior to the Effective Time of the Exchange) and are relying (or will rely)
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, opinions,
representations and warranties contained in the following documents
(including all schedules and exhibits thereto):
1. The Agreement (including Exhibits);
2. Representations made to us by Draxis and DPI in a letter of even
date herewith;
3. Representations made to us by Old DAHI and New DAHI in a letter of
even date herewith;
4. "Continuity of Interest" letters delivered by certain shareholders
of Old DAHI and New DAHI;
5. The Registration Statement on Form F-4 filed with the Securities and
Exchange Commission (which contains a joint management proxy
statement-prospectus of Old DAHI, New DAHI, and Draxis) (the "Registration
Statement");
6. Such other instruments and documents related to the formation,
organization and operation of Draxis, DPI, Old DAHI and New DAHI or to the
consummation of the Reincorporation Merger, the Exchange, and the
transactions contemplated thereby as we have deemed necessary or appropriate;
and
7. An opinion addressed to this firm and Wilson, Sonsini, Goodrich &
Rosati from Jacqueline H.R. Le Saux of Draxis.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent
investigation of review thereof) that:
<PAGE>
October 23, 1996
Page 4
1. Original documents (including signatures) are authentic documents
submitted to us as copies conform to the original, and there has been (or
will be by the Effective Time of the Exchange) due execution and delivery of
all documents where due execution and delivery are prerequisites to
effectiveness thereof;
2. The Reincorporation Merger will be consummated pursuant to the
Agreement and will be effective under the laws of the states of Louisiana and
Missouri;
3. The Exchange will be consummated pursuant to the Agreement and will
be effective under the laws of the state of Louisiana;
4. Any statement made in any of the documents referred to herein "to
the best of the knowledge" or "to the knowledge" of any person or party is
correct without such qualification;
5. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us are true and correct
in all material respects and no actions have been (or will be) taken which
are inconsistent with such representations;
6. The shareholders of Old DAHI do not, and will not on or before the
Effective Time, have an existing plan or intent to dispose of an amount of
Draxis stock to be received in the Reincorporation Merger or the Exchange (or
to dispose of Old DAHI capital stock in anticipation of the Reincorporation
Merger or the Exchange) such that the shareholders of Old DAHI will not
receive and retain a meaningful continuing equity ownership in Draxis that is
sufficient to satisfy the continuity of interest requirement as specified in
United States Treasury Regulation Section 1.368-1(b) and as interpreted in
certain Internal Revenue Service rulings and federal judicial decisions;
7. New DAHI will comply with the reporting requirements set forth in
United States Treasury Regulation Section 1.367-3T(c)(4).
8. The ownership of shares of Old DAHI by Draxis and entities
affiliated with Draxis for United States income tax purposes is in fact as
stated in representation number 16 of the representations made to us by
Draxis and DPI in a letter of even date herewith;
9. Any and all acquisitions and transfers of shares of Old DAHI and
debt convertible into shares of Old DAHI by and among Draxis and entities
affiliated with Draxis, for United States income tax purposes, were not in
contemplation of and were separate and apart from and unrelated to the
Exchange and at the time of any such acquisitions or transfers none of Draxis
or any of its Affiliates had any plan or had undertaken any negotiations to
acquire 80% or more of the outstanding stock of DAHI.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we
are of the opinion that for United States federal income tax purposes, the
Reincorporation Merger and the Exchange will qualify as "reorganizations" as
defined in Section 368(a) of the Code.
<PAGE>
October 23, 1996
Page 5
This opinion represents and is based upon our best judgment regarding
the application of federal income tax laws arising under the Code, existing
judicial decisions, administrative regulations and published rulings and
procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will
not successfully assert a contrary position. Furthermore, no assurance can be
given that future legislative, judicial or administrative changes, on either
a prospective or retroactive basis, would not adversely affect the accuracy of
the conclusions stated herein. Nevertheless, we undertake no responsibility
to advise you of any new developments in the application or interpretation
of the federal income tax laws.
This opinion addresses only the classification of the Reincorporation
Merger and the Exchange as a reorganization under Section 368(a) of the Code,
and does not address any other federal, state, local or foreign tax
consequences that may result from the Reincorporation Merger, the Exchange,
or any other transaction (including any transaction undertaken in connection
with the Reincorporation Merger or the Exchange).
No opinion is expressed as to any transaction other than the
Reincorporation Merger and the Exchange as described in the Agreement or to
any transaction whatsoever, including the Reincorporation Merger and the
Exchange, if all the transactions described in the Agreement are not
consummated in accordance with the terms of such Agreement and without waiver
or breach of any material provision thereof or if all of the representations,
warranties, statements and assumptions upon which we relied are not true and
accurate at all relevant times. In the event any one of the statements,
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may
not be relied upon.
This opinion has been delivered to you for the purpose of being included
as an exhibit to the Registration Statement and satisfying the conditions set
forth in Section 7.2(d) of the Agreement. It may not be relied upon for any
other purpose or by any other person or entity, and may not be made available
to any other person or entity without our prior written consent. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "U.S. Federal Income
Tax Consequences of the Share Exchange Plan." In giving such consent, we do
not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Gardner, Carton & Douglas
GARDNER, CARTON & DOUGLAS
<PAGE>
EXHIBIT 8.2
<PAGE>
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California
94304-1050
October 23, 1996
Deprenyl Animal Health, Inc.
10955 Lowell Avenue
Suite 710
Overland Park, Kansas 66210
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 7.3(c) of the
Exchange Agreement dated as of July 25, 1996 (the "Agreement"), by and among
Draxis Health, Inc., a Canadian corporation ("Draxis"), Draxis Pharmaceutica
Inc., a Canadian corporation and a wholly-owned subsidiary of Draxis ("DPI"),
and Deprenyl Animal Health, Inc., a Missouri corporation ("Old DAHI").
Pursuant to the terms of the Agreement, Old DAHI will merge with and into
Deprenyl Animal Health, Inc., a Louisiana corporation ("New DAHI") newly formed
by Old DAHI for purposes of the merger (the "Reincorporation Merger"). In the
Reincorporation Merger, each shareholder of Old DAHI will received one share of
New DAHI stock for each share of Old DAHI stock surrendered. All outstanding
shares of New DAHI stock owned by Old DAHI prior to the Reincorporation Merger
will be cancelled pursuant to the Reincorporation Merger. To the extent any
shareholder of Old DAHI dissents to the Reincorporation Merger, any
consideration received by such shareholder pursuant to such dissent will be paid
by Old DAHI or New DAHI, and not directly or indirectly by Draxis, DPI, or any
other affiliate of Draxis. Except for any such dissenters, the ownership of New
DAHI immediately following the Reincorporation Merger will be identical to the
ownership of Old DAHI immediately prior to the Reincorporation Merger.
Following consummation of the Reincorporation Merger, pursuant to the
Agreement, all of the shares of stock of New DAHI other than those shares owned
by Draxis LLC and DPI will be transferred to DPI in exchange for newly issued
Draxis Common Stock at a ratio of 1.35 shares of Draxis Common Stock for each
share of Old DAHI stock (the "Exchange"). The Exchange is intended to
constitute a Mandatory Share Exchange under Louisiana law, as a result of which
the exchange will be effective as of the Effective Time as to all New DAHI
shareholders, including those, if any, who vote against the Exchange or refuse
to physically tender their Old DAHI or New DAHI share certificates. No New DAHI
shareholder will receive any consideration for his or her shares of New DAHI
stock in the Exchange other than Draxis Common Stock, except for cash paid in
lieu of fractional shares. Under Louisiana law, no New DAHI shareholder will
have the right to perfect dissenters rights to the Exchange.
<PAGE>
Deprenyl Animal Health, Inc.
October 23, 1996
Page 2
Except as otherwise provided, capitalized terms referred to herein have the
meanings set forth in the Agreement. All section references, unless otherwise
indicated, are to the Internal Revenue Code of 1986, as amended (the "Code").
In our capacity as special United States tax counsel to Old DAHI in
connection with the negotiation and execution of the Agreement for the purpose
of rendering this opinion, we have examined (or will examine on or prior to the
Effective Time of the Exchange) and are relying (or will rely) upon (without any
independent investigation or review thereof) the truth and accuracy, at all
relevant times, of the statements, covenants, representations and warranties
contained in the following documents (including all schedules and exhibits
thereto):
1. The Agreement (including Exhibits);
2. Representations made to us by Draxis and DPI in a letter of
even date herewith;
3. Representations made to us by Old DAHI and New DAHI in a letter
of even date herewith;
4. "Continuity of Interest" letters delivered by certain
shareholders of Old DAHI and New DAHI;
5. The Registration Statement on Form F-4 filed with the Securities
and Exchange Commission (which contains a joint management proxy statement-
prospectus of Old DAHI, New DAHI, and Draxis) (the "Registration Statement");
6. Such other instruments and documents related to the formation,
organization and operation of Draxis, DPI, Old DAHI and New DAHI or to the
consummation of the Reincorporation Merger, the Exchange, and the transactions
contemplated thereby as we have deemed necessary or appropriate; and
7. An opinion addressed to this firm and Gardner, Carton & Douglas
from Jacqueline H.R. Le Saux of Draxis.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. Original documents (including signatures) are authentic,
documents submitted to us as copies conform to the original documents, and there
has been (or will be by the Effective Time of the Exchange) due execution and
delivery of all documents where due execution and delivery are prerequisites to
effectiveness thereof;
2. The Reincorporation Merger will be consummated pursuant to the
Agreement and will be effective under the laws of the states of Louisiana and
Missouri;
<PAGE>
Deprenyl Animal Health, Inc.
October 23, 1996
Page 3
3. The Exchange will be consummated pursuant to the Agreement and
will be effective under the laws of the state of Louisiana;
4. Any statement made in any of the documents referred to herein,"to
the best of the knowledge" or "to the knowledge" of any person or party is
correct without such qualification;
5. All statements, descriptions and representations contained in any
of the documents referred to herein or otherwise made to us are true and correct
in all material respects and no actions have been (or will be) taken which are
inconsistent with such representations;
6. The shareholders of Old DAHI do not, and will not on or before
the Effective Time, have an existing plan or intent to dispose of an amount of
Draxis stock to be received in the Reincorporation Merger or the Exchange (or to
dispose of Old DAHI capital stock in anticipation of the Reincorporation Merger
or the Exchange) such that the shareholders of Old DAHI will not receive and
retain a meaningful continuing equity ownership in Draxis that is sufficient to
satisfy the continuity of interest requirement as specified in United States
Treasury Regulation Section 1.368-1(b) and as interpreted in certain Internal
Revenue Service rulings and federal judicial decisions;
7. New DAHI will comply with the reporting requirements set forth in
United States Treasury Regulation Section 1.367-3T(c)(4);
8. That the ownership of shares of Old DAHI by Draxis and
entities affiliated with Draxis, for United States income tax purposes,
is in fact as stated in representation number 16 of the representations made
to us by Draxis and DPI in a letter of even date herewith; and
9. Any and all acquisitions and transfers of shares of Old DAHI
and debt convertible into shares of Old DAHI by and among Draxis and entities
affiliated with Draxis, for United States income tax purposes, were not in
contemplation of and were separate and apart from and unrelated to the
Exchange and at the time of any such acquisitions or transfers none of Draxis
or any of its Affiliates had any plan or had undertaken any negotiations to
acquire 80% or more of the outstanding stock of DAHI.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that for United States federal income tax purposes, the
Reincorporation Merger and Exchange will qualify as "reorganizations" as defined
in Section 368(a) of the Code.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and
there is no assurance that the Internal Revenue Service will not successfully
assert a contrary position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, we undertake no responsibility to advise you of
any new developments in the application or interpretation of the federal income
tax laws.
This opinion addresses only the classification of the Reincorporation
Merger and the Exchange as a reorganization under Section 368(a) of the Code,
and does not address any other federal, state, local or foreign tax consequences
that may result from the Reincorporation Merger, the Exchange, or any other
transaction (including any transaction undertaken in connection with the
Reincorporation Merger or the Exchange).
<PAGE>
Deprenyl Animal Health, Inc.
October 23, 1996
Page 4
No opinion is expressed as to any transaction other than the
Reincorporation Merger and the Exchange as described in the Agreement or to any
transaction whatsoever, including the Reincorporation Merger and the Exchange,
if all the transactions described in the Agreement are not consummated in
accordance with the terms of such Agreement and without waiver or breach of any
material provision thereof or if all of the representations, warranties,
statements and assumptions upon which we relied are not true and accurate at all
relevant times. In the event any one of the statements, representations,
warranties or assumptions upon which we have relied to issue this opinion is
incorrect, our opinion might be adversely affected and may not be relied upon.
This opinion has been delivered to you for the purpose of being included as
an exhibit to the Registration Statement and satisfying the conditions set forth
in Section 7.3(c) of the Agreement. It may not be relied upon for any other
purpose or by any other person or entity, and may not be made available to any
other person or entity without our prior written consent. We hereby consent to
the filing of this opinion as an exhibit to the Registration Statement and to
the use of our name under the heading "U.S. Federal Income Tax Consequences of
the Share Exchange Plan." In giving such consent, we do not thereby admit that
we are in the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended.
Very truly yours,
/s/ Wilson, Sonsini, Goodrich & Rosati
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 11
<PAGE>
DRAXIS HEALTH INC.
U.S. GAAP
CALCULATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31 JUNE 30
1995 1994 1993 1996 1995
-------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net income (loss) under U.S. GAAP $ (1,029) $ 1,020 $ (2,216) $ 4,451 $ 49
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Weighted average common shares
outstanding 20,058 19,927 18,217 20,499 20,019
Common share equivalents related to
options and warrants 1,212 -- 8 2,597 94
-------- ------- -------- ------- -------
Common share and common share
equivalents 21,270 19,927 18,225 23,096 20,113
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Common stock price used under
treasury stock method $ 2.47 $ 1.99 $ 3.00 $ 4.45 $ 2.34
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Net income (loss) per common share $ (0.05) $ 0.05 $ (0.12) $ 0.19 $ 0.00
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
</TABLE>
For U.S. GAAP, the net income (loss) per share is based on the weighted average
number of shares of Common Stock outstanding during the period, adjusted as
follows:
- - For the Common Stock, warrants and options which were issued during the
year, have been included in the calculation of common stock equivalent
shares outstanding (using the treasury stock method for options and
warrants) as if they were outstanding at the beginning of the year, in
accordance with U.S. GAAP.
<PAGE>
DRAXIS HEALTH INC.
CANADIAN GAAP
CALCULATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31 JUNE 30
1995 1994 1993 1996 1995
-------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (2,417) $ 1,099 $ (2,079) $ 1,885 $ 16
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Weighted average common shares
outstanding 20,058 19,927 18,217 20,499 20,019
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Net income (loss) per common share $ (0.12) $ 0.06 $ (0.11) $ 0.09 $ 0.00
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
</TABLE>
For Canadian GAAP, the net income (loss) per share is based on the weighted
average number of shares of Common Stock outstanding during the period.
<PAGE>
EXHIBIT 22
<PAGE>
SUBSIDIARIES OF DRAXIS HEALTH INC.
Draxis Pharmaceutica Inc. (100%)
DAHI Animal Health Inc. (100%)
DAHI Animal Health (Ontario) Inc. (100%)
Tican Pharmaceuticals Ltd. (100%)
Draxis U.S. Inc. (100%)
Draxis LLC (90% direct, 10% indirect)
Deprenyl Animal Health, Inc. (44% indirect)
Stef International Corp. (30% indirect)
<PAGE>
EXHIBIT 23.1
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this prospectus of our report dated January 12, 1996 included in
Deprenyl Animal Health, Inc.'s Form 10-K for the year ended December 31, 1995
and to all references to our Firm included in or made a part of this prospectus.
/s/ Arthur Andersen LLP
October 15, 1996
Kansas City, Missouri
<PAGE>
EXHIBIT 23.2
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Draxis Health Inc. on
Form F-4 of our report dated February 7, 1996 except for Note 17, which is as of
August 13, 1996, appearing in the Prospectus, which is part of this Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such prospectus.
/s/ Deloitte & Touche
Deloitte & Touche
Chartered Accountants
Toronto, Ontario
October 15, 1996
<PAGE>
[LOGO]
DRAXIS HEALTH INC.
AND
DEPRENYL ANIMAL HEALTH, INC.
FORMAL VALUATION
KPMG
July 26, 1996
<PAGE>
[Letterhead]
Deprenyl Animal Health, Inc.
Represented by The Special Committee
of the Board of Directors
10955 Lowell Avenue Suite 701
Overland Park Kansas 66210
Dear Sirs
We enclose our completed formal valuation as at June 30, 1996 of, (i) all of the
issued and outstanding common shares of Deprenyl Animal Health, Inc. ("DAHI")
which are the subject of a share exchange transaction (the "Share Exchange")
contemplated by the Share Exchange Agreement dated July 25, 1996 among Draxis
Health Inc., Draxis Pharmaceutica Inc. and DAHI, and, (ii) the common shares of
Draxis to be issued to holders of DAHI common shares in the Share Exchange.
Yours very truly
/s/ KPMG
July 26, 1996
<PAGE>
TABLE OF CONTENTS
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I VALUATION ENGAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . .1
PURPOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CREDENTIALS OF KPMG. . . . . . . . . . . . . . . . . . . . . . . . . . .2
RELATIONSHIPS WITH INTERESTED PARTIES. . . . . . . . . . . . . . . . . .2
DEFINITION OF FAIR MARKET VALUE. . . . . . . . . . . . . . . . . . . . .3
SUMMARY OF FORMAL VALUATION. . . . . . . . . . . . . . . . . . . . . . .4
RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
ASSUMPTIONS - ECONOMIC OUTLOOK . . . . . . . . . . . . . . . . . . . . .5
CANADA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
UNITED STATES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
CONTENT OF REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
II DAHI SCOPE OF REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . .8
III DAHI CORPORATE OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . 14
HISTORY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
OWNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
STOCK OPTIONS, WARRANTS AND CONVERTIBLE DEBT . . . . . . . . . . . . . 16
IV DAHI DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . 18
OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
THE PRODUCT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
CUSHING'S DISEASE. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
COGNITIVE DYSFUNCTION SYNDROME . . . . . . . . . . . . . . . . . . . . 19
DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
THE MARKET FOR ANIPRYL . . . . . . . . . . . . . . . . . . . . . . . . 22
DAHI PATENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
COMPETITION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SUPPLY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
DAHI PRODUCT LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . 25
DAHI FACILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
DAHI MANAGEMENT AND EMPLOYEES. . . . . . . . . . . . . . . . . . . . . 26
V DAHI FINANCIAL REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . 27
FINANCIAL POSITION . . . . . . . . . . . . . . . . . . . . . . . . . . 27
HISTORICAL RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 28
PROJECTED OPERATING RESULTS. . . . . . . . . . . . . . . . . . . . . . 28
VI ANIMAL HEALTH PHARMACEUTICAL INDUSTRY. . . . . . . . . . . . . . . . . 33
VII DAHI VALUATION APPROACH. . . . . . . . . . . . . . . . . . . . . . . . 35
VALUATION THEORY . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
REASONS FOR SELECTION / REJECTION OF VALUATION APPROACHES. . . . . . . 36
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i
<PAGE>
VIII DAHI VALUATION CALCULATIONS . . . . . . . . . . . . . . . . . . . . . 37
PROJECTED NET AFTER-TAX CASH FLOW. . . . . . . . . . . . . . . . . . . 37
DISCOUNT RATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
RESIDUAL VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
VALUATION CALCULATION. . . . . . . . . . . . . . . . . . . . . . . . . 41
IX DAHI REASONABLENESS OF VALUATION CALCULATIONS. . . . . . . . . . . . . 43
DAHI SHARE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
TANGIBLE ASSET BACKING . . . . . . . . . . . . . . . . . . . . . . . . 46
X DAHI CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ASSUMPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
XI DRAXIS SCOPE OF REVIEW . . . . . . . . . . . . . . . . . . . . . . . . 50
XII DRAXIS CORPORATE OVERVIEW . . . . . . . . . . . . . . . . . . . . . . .57
HISTORY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
STRUCTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
OWNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
STOCK OPTIONS, WARRANTS AND EMPLOYEE PARTICIPATION SHARES. . . . . . . 59
XIII DRAXIS DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . .61
OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
PRODUCTS AND PRODUCT DEVELOPMENT . . . . . . . . . . . . . . . . . . . 61
EXISTING DRUGS CURRENTLY BEING MARKETED. . . . . . . . . . . . . . . 62
DRUGS IN LATE STAGE DEVELOPMENT. . . . . . . . . . . . . . . . . . . 65
MIDDLE STAGE DEVELOPMENT PRODUCTS. . . . . . . . . . . . . . . . . . 66
OTHER DRUGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
MANAGEMENT AND EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . 68
MARKETING, SALES AND DISTRIBUTION. . . . . . . . . . . . . . . . . . . 69
XIV DRAXIS FINANCIAL REVIEW. . . . . . . . . . . . . . . . . . . . . . . . 70
FINANCIAL POSITION . . . . . . . . . . . . . . . . . . . . . . . . . . 70
HISTORICAL RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 71
PROJECTED OPERATING RESULTS. . . . . . . . . . . . . . . . . . . . . . 75
XV PHARMACEUTICAL / HEALTH CARE INDUSTRY. . . . . . . . . . . . . . . . . 77
THE GENERIC DRUG INDUSTRY. . . . . . . . . . . . . . . . . . . . . . . 78
REGULATORY ISSUES. . . . . . . . . . . . . . . . . . . . . . . . . . . 79
CLINICAL TRIALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
PRE-CLINICAL TRIALS. . . . . . . . . . . . . . . . . . . . . . . . . 79
PHASE I - CLINICAL TRIALS. . . . . . . . . . . . . . . . . . . . . . 79
PHASE II - CLINICAL TRIALS . . . . . . . . . . . . . . . . . . . . . 79
PHASE III - CLINICAL TRIALS. . . . . . . . . . . . . . . . . . . . . 79
PHASE IV - CLINICAL TRIALS AND COMMERCIALIZATION . . . . . . . . . . 80
REGULATORY APPROVAL. . . . . . . . . . . . . . . . . . . . . . . . . 80
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ii
<PAGE>
XVI DRAXIS VALUATION APPROACH . . . . . . . . . . . . . . . . . . . . . . 81
VALUATION THEORY. . . . . . . . . . . . . . . . . . . . . . . . . . . 81
REASONS FOR SELECTION/ REJECTION OF VALUATION APPROACHES. . . . . . . 82
XVII DRAXIS VALUATION CALCULATIONS. . . . . . . . . . . . . . . . . . . . .84
PHARMACEUTICAL/ HEALTH CARE BUSINESS. . . . . . . . . . . . . . . . . 84
INVESTMENTS AND OTHER ASSETS AND LIABILITIES. . . . . . . . . . . . . 91
VALUATION CALCULATION . . . . . . . . . . . . . . . . . . . . . . . . 93
XVIII DRAXIS REASONABLENESS OF VALUATION CALCULATIONS. . . . . . . . . . . 95
DRAXIS SHARE PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . 95
TANGIBLE ASSET BACKING. . . . . . . . . . . . . . . . . . . . . . . . 98
TRANSACTION MULTIPLES AND TRADING MULTIPLES . . . . . . . . . . . . . 99
XIX DRAXIS CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . .101
ASSUMPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
XX DRAXIS AND DAHI OTHER VALUATION CONSIDERATIONS . . . . . . . . . . .103
- --------------------------------------------------------------------------------
iii
<PAGE>
SCHEDULES:
1. DEPRENYL ANIMAL HEALTH INC. BALANCE SHEET - 1991 TO 1996
2. DEPRENYL ANIMAL HEALTH INC. INCOME STATEMENT - 1991 TO 1996
3. DEPRENYL ANIMAL HEALTH INC. STATEMENT OF CHANGE IN FINANCIAL POSITION -
1991 TO 1996
4. DEPRENYL ANIMAL HEALTH INC. SUMMARY OF COMMON SHARE TRADING PRICES &
VOLUMES
5. DRAXIS HEALTH INC. CONSOLIDATED BALANCE SHEET - 1991 TO 1996
6. DRAXIS HEALTH INC. CONSOLIDATED INCOME STATEMENT - 1991 TO 1996
7. DRAXIS HEALTH INC. CONSOLIDATED STATEMENT OF CHANGE OF FINANCIAL POSITION -
1991 TO 1996
8. DRAXIS HEALTH INC. CORPORATE STRUCTURE AT JUNE 30, 1996
9. DRAXIS HEALTH INC. SUMMARY OF COMMON SHARE TRADING PRICES & VOLUMES
- --------------------------------------------------------------------------------
iv
<PAGE>
1 VALUATION ENGAGEMENT
- --------------------------------------------------------------------------------
PURPOSE
- --------------------------------------------------------------------------------
We have been engaged by Deprenyl Animal Health, Inc. ("DAHI"), Draxis Health
Inc. ("Draxis") and Draxis Pharmaceutica Inc. ("DPI") to provide a formal
valuation to the Independent Committee of the Board of Directors of DAHI (the
"Committee") in connection with a transaction by which DPI will acquire each
issued and outstanding common share of DAHI not already owned by Draxis through
its subsidiaries or affiliates in exchange for 1.35 common shares of Draxis (the
"Share Exchange") as described in the share exchange agreement by and among
Draxis, DPI and DAHI dated July 25, 1996 (the "Exchange Agreement"). We are
acting as valuer to, and our engagement has been performed under the supervision
of the Committee.
Our engagement is comprised of the following two segments (collectively referred
to as the "Formal Valuation"):
- - our opinion as to the fair market value at June 30, 1996 of all the issued
and outstanding common shares of DAHI, which are the subject of the Share
Exchange, before consideration of any minority discount; and,
- - our opinion as to the fair market value at June 30, 1996 of the common
shares of Draxis to be issued to holders of DAHI common shares in the ratio
of 1.35 Draxis shares to 1 DAHI share, as provided for in the Exchange
Agreement, but after giving effect to the acquisition by Draxis of all the
DAHI shares not already owned by it and before consideration of any
minority discount.
The Formal Valuation opinion is based upon the number of issued and outstanding
common shares of DAHI and Draxis as at June 30, 1996.
KPMG was first contacted to provide the Formal Valuation on or about July 4,
1996 and was engaged to provide the Formal Valuation on July 9, 1996. KPMG is
receiving fees of $95,000 (billed on a time basis) for preparing the Formal
Valuation as well as fees for the time required to review the circular offering
documents, plus reasonable out-of-pocket expenses to complete the Formal
Valuation engagement. Draxis has agreed to pay these fees and reimburse these
expenses. To the extent that our retainer extends past September 30, 1996,
these fees will be reviewed and amended on a basis mutually satisfactory to the
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1
<PAGE>
Committee and KPMG. The fees are not contingent on any valuation outcome, or on
the success of the proposed Share Exchange.
CREDENTIALS OF KPMG
- --------------------------------------------------------------------------------
KPMG has one of Canada's largest groups of valuation professionals providing
advice in support of major business transactions. KPMG has experience in both
the pharmaceutical research and development industry and valuation engagements.
Responsibility for this valuation engagement was assigned to Mr. Stewart Scalf,
Valuations Partner in our Calgary office. Mr. Scalf is a Chartered Accountant
and a Chartered Business Valuator. He has practised in the business valuations
area since 1991 and has conducted valuations in many industries. He has been
assisted by partners, senior managers and other research staff from our
Montreal, Toronto, Mississauga and Calgary offices who are also experienced in
valuations and in the pharmaceutical industry.
RELATIONSHIPS WITH INTERESTED PARTIES
- --------------------------------------------------------------------------------
Except as disclosed herein, KPMG has not performed financial advisory services
such as an appraisal, valuation, or appraisal review of the financial status of
Draxis, DPI or DAHI during the 24 months preceding the date on which we were
first contacted with respect to this engagement (July 4, 1996).
KPMG is not an insider, associate or affiliate (as such terms are defined in the
Securities Act (Ontario)) of Draxis, DPI or DAHI and neither KPMG nor any of its
affiliates is an advisor to Draxis, DPI or DAHI in respect to the proposed Share
Exchange.
There are no understandings, commitments or agreements between KPMG and Draxis,
DPI or DAHI with respect to future business dealings, although KPMG may perform
financial advisory services for any of them in the future.
- --------------------------------------------------------------------------------
2
<PAGE>
Previous involvement of KPMG with Draxis, DPI or DAHI has been to provide
opinions on a non-public employee participation class of Draxis shares (the
"Employee Shares"). Subject to vesting provisions, these shares are convertible
into Draxis common shares based on the market price at the time of conversion
provided the market price exceeds by 25 per cent the fair market value of the
Draxis common shares at the date of issue of the Employee Shares. Accordingly,
the assignment was similar to an option valuation and we did not value the
overall operations of Draxis. Combined fees for the two opinions related to the
Employee Shares did not exceed $40,000. The last opinion was rendered in
December 1995.
DEFINITION OF FAIR MARKET VALUE
- --------------------------------------------------------------------------------
For the purpose of this report, fair market value is 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.
Many different prices may exist for a particular business, due to differing
negotiating strengths among parties to a transaction, differing perceptions of
each of the parties involved as to the current and future prospects of the
business, and other factors. Moreover, potential purchasers may enjoy certain
benefits that are peculiar to them, including cost savings, expected increases
in income and other synergies.
Our valuation approach is based on an assessment of the operations of the
business and on rates of return considered reasonable, having regard to certain
factors. These factors include external industry and economic conditions which
influence risks associated with the business and internal corporate factors
which affect the future profitability of the business.
Unless a business is exposed for sale in the open market, it is often
speculative as to whether any purchaser exists who would specifically benefit
from the acquisition or whether such a purchaser would be willing to pay for
this benefit. Accordingly, unless synergistic benefits and other factors can be
specifically identified and quantified through actively seeking a prospective
purchaser, we are of the view that these speculative aspects should not be
addressed.
We were not engaged to provide an opinion on the fairness of the transaction to
the shareholders of either DAHI or Draxis. We have considered possible
synergistic benefits between Draxis and DAHI as described in Section XX.
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3
<PAGE>
All values contained herein, except as otherwise indicated, are expressed in
Canadian dollars.
SUMMARY OF FORMAL VALUATION
- --------------------------------------------------------------------------------
Based on the scope of our review and subject to the assumptions and restrictions
included in our report, it is our opinion that the proportionate en bloc fair
market value per share of the issued and outstanding common shares of DAHI,
which are the subject of the Share Exchange, at June 30, 1996 ranges from $4.10
to $5.14, or $4.62 at the midpoint ($3.01 U.S. to $3.77 U.S., or $3.39 U.S. at
the midpoint), after dilution for issuance of common shares upon exercise of
outstanding rights as described herein, but before consideration of any minority
discount.
Based on the scope of our review and subject to the assumptions and restrictions
included in our report, it is our opinion that the proportionate en bloc fair
market value per share of the common shares of Draxis to be issued to
shareholders of DAHI, after giving effect to the acquisition of DAHI by Draxis,
at June 30, 1996 ranges from $3.79 to $4.47, or $4.13 at the midpoint ($2.78
U.S. to $3.28 U.S., or $3.03 U.S. at the midpoint), after dilution for issuance
of common shares upon exercise of outstanding rights as described herein, but
before consideration of any minority discount.
Our valuation analyses should be considered as a whole and selecting portions of
our analyses could create a misleading view of the methodologies and approaches
underlying our opinion. The preparation of our 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.
RESTRICTIONS
- --------------------------------------------------------------------------------
This Formal Valuation has been prepared for the sole purpose of assisting the
Committee and the directors of DAHI in connection with the proposed Share
Exchange by and among Draxis, DPI and DAHI It is not to be used, circulated,
quoted or otherwise referred to for any other purpose without our prior written
permission in each specific instance. We do not assume any responsibility for
losses incurred by Draxis, DPI, DAHI, the shareholders or directors of each
company, or any other parties as a result of the circulation, publication,
reproduction or use of this report in any manner contrary to the provisions of
this paragraph.
We express no opinion as to the price at which the Draxis common shares will
trade subsequent to successful completion of the Share Exchange.
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4
<PAGE>
The comments or calculations noted herein are based on information that has been
made available to us. We reserve the right, but will be under no obligation, to
review all calculations included and referred to in this report and, if we
consider it necessary, to revise our calculations and Formal Valuation i) in the
light of any information existing on the date hereof which becomes known to us
subsequent to the date of this report, or ii) if an intervening event has
occurred after the date hereof and before the completion of the Share Exchange
that materially affects the conclusions outlined herein.
We assume that all conditions precedent to the completion of the Share Exchange
as agreed in the Exchange Agreement dated July 25, 1996, or disclosed in the
draft Joint Management Proxy Statement-Prospectus ("Proxy Statement") will be
fully satisfied within the contemplated time periods and that all consents,
permissions, exemptions, approvals or orders of relevant governmental or
regulatory authorities will be obtained, without adverse condition or
qualification.
ASSUMPTIONS - ECONOMIC OUTLOOK
- --------------------------------------------------------------------------------
CANADA
Canada is in a period of moderate growth. Growth in real Gross Domestic Product
("GDP") is expected to be between 3 and 3.5 per cent for the remainder of 1996
and into the first half of 1997. After a slow start in 1996, the overall
expected growth for the year is 1.8 per cent and 3 per cent is expected for
1997. Inflation is anticipated to remain in the one to two per cent range into
1997.(1)
- -------------------------
(1)Source: Canadian Economic Monitor, June 1996 by Economics, ScotiaMcLeod Inc.,
a monthly forecast and indicator review.
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5
<PAGE>
Economic indicators expected for Canada in 1996 and in 1997 are as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 1997
- --------------------------------------------------------------------------------
Real GDP growth 1.8% 3.0%
Corporate profits growth 14.0% 25.0%
Inflation 1.4% 1.9%
Canadian treasury bill interest rate 4.9% - 5.3%* 5.75%**
- --------------------------------------------------------------------------------
* For quarters 3 and 4
** For quarters 1 and 2
UNITED STATES
The U.S. economy is also experiencing moderate growth with real GDP growth of
2.8 per cent expected for 1996 and 3 per cent in 1997. However, inflation is
expected to rise to a high of 3.5 per cent by early 1997.(2)
Economic indicators expected for the U.S. in 1996 and in 1997 are as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 1997
- --------------------------------------------------------------------------------
Real GDP growth 2.8% 3.0%
Corporate profit growth 11.0% 8.0%
Inflation 2.6% 3.2%
U.S. treasury bill interest rate 4.6% - 4.9%* 5.2%**
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* For quarters 3 and 4
** For quarter 1
Overall, both Canada and the U.S. are showing signs of a reviving economy. We
expect this to have a positive impact on Draxis, especially for its
non-prescription drugs and consumer health products, and on DAHI, since Anipryl
is a discretionary purchase and not covered by public or private health
insurance.
- ----------------------------
(2) Source: ScotiaMcLeod Strategy, The Big Picture for the Individual Investor,
Spring 1996.
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6
<PAGE>
CONTENT OF REPORT
- --------------------------------------------------------------------------------
Our report consists of a valuation of the DAHI common shares (Sections II to X)
and a valuation of the Draxis common shares (Sections XI to XIX). Other
valuation considerations arising as a result of the proposed Share Exchange
transaction are discussed in Section XX.
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7
<PAGE>
II DAHI SCOPE OF REVIEW
- --------------------------------------------------------------------------------
In arriving at our opinion of value with respect to common shares of DAHI, we
have reviewed and/or relied upon the following information relevant to DAHI (the
"Company" for purposes of Sections II to X of this report):
- - the Company's audited financial statements, annual reports and annual
information forms for each of the Company's five fiscal years preceding the
valuation date;
- - the Company's unaudited financial statements for the six months ended June
30, 1996;
- - the 1994 federal and state income tax returns for the Company;
- - Board of Directors minutes from meetings for the period January 1, 1995 to
July 26, 1996;
- - the investor package available from the Company, including press releases
issued by or with respect to DAHI and its business during 1995 and 1996;
- - various analyst summaries for, and annual reports of, public companies
involved in the pharmaceutical and animal health pharmaceutical industries
in Canada, the U.S., or abroad;
- - schedules, as prepared by management, of DAHI's share options, warrants,
and convertible debt outstanding as at the valuation date;
- - DAHI's strategic plan dated January 1996, which includes five-year
projections for the Company;
- - the Exchange Agreement among Draxis, DAHI and DPI dated July 25, 1996;
- - the draft Proxy Statement of DAHI and Draxis;
- - a license and supply agreement pertaining to selegiline for treatment of
animals, as subsequently amended, between DAHI and Chinoin Pharmaceutical
and Chemical Works Co. Ltd. ("Chinoin") dated October 1, 1990 and July 5,
1995, respectively;
- - a manufacturing agreement between the Company and Fermenta Animal Health
Company ("FAH") dated September 1994 for the manufacture by
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8
<PAGE>
FAH of Anipryl for sale in the U.S. and Canada (DAHI and FAH have mutually
agreed to terminate this agreement);
- - a distribution agreement between the Company and Draxis dated January 1996
by which exclusive rights to distribute Anipryl in Canada were granted to
Draxis for a specific period;
- - a license and supply agreement between the Company and Hoechst Vererinar
GmbH ("HVG") dated May 1994 for the registration and distribution of
Anipryl in Europe;
- - a manufacturing agreement between the Company and Mikart, Inc. dated August
1, 1995 for the supply of Anipryl in Canada;
- - various loan agreements between DAHI and Draxis;
- - certain regulatory correspondence with the Canadian Health Protection
Branch ("HPB"), HPB's Bureau of Veterinary Drugs ("BVD") and the U.S. Food
and Drug Administration ("FDA") regarding products under development or
being marketed by or on behalf of DAHI;
- - a summary of the status of the Company's patents in various jurisdictions
entitled "Summary of U.S. and Foreign Intellectual Property Matters"
prepared by DAHI's patent legal counsel dated July 1, 1996;
- - marketing studies and analyses prepared by consulting firms and/or the
Company, as well as publicly available information pertaining to the market
for Anipryl in North America for the treatment of Cushing's disease and
cognitive dysfunction syndrome in canines;
- - a copy of the Company's product liability insurance policy; and,
- - general economic indicators as at the valuation date.
In arriving at our opinion of value, we have also given consideration to our
discussions with the following individuals:
- - Dr. David Stevens, President and Chief Executive Officer, DAHI;
- - Dr. William Ruehl, Vice President of Scientific Affairs, DAHI;
- - Mr. Michael Grogan, marketing consultant to the Company;
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9
<PAGE>
- - Mr. Robert Dixon, Marketing Manager of Draxis responsible for Anipryl sales
in Canada;
- - representatives of Hambrecht & Quist LLC; and,
- - representatives of Montgomery Securities, Inc.
In the course of our engagement, with the Committee's approval, we have relied
upon certain audited and unaudited financial information, as well as other
non-financial information, including that outlined above. Although we have
considered the reasonableness of all information provided to us, we have not
conducted any audit, independent investigation or other procedures to verify the
accuracy, completeness or fair presentation of any such information.
Accordingly, we have assumed the completeness, accuracy and fair presentation of
the financial information, data, advice, opinions, representations or other
information provided to or obtained by us from DAHI, its affiliates and its
advisors, public sources, drafts of the Proxy Statement or otherwise. We have
assumed that this information is complete and accurate and does not omit to
state any material fact or any fact that was necessary to be stated to make that
information not misleading. The opinions expressed herein are conditional upon
such completeness, accuracy and fairness of that information.
With respect to financial forecasts and projections provided to us, and used in
our analysis, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgements as to the
matters covered thereby, and in rendering our opinion, we express no view as to
the reasonableness of the forecasts or projections or assumptions on which they
were based.
Our opinion is based upon the securities markets, economics and general business
and financial conditions prevailing at June 30, 1996 and the conditions and
prospects, financial and otherwise, of DAHI and its affiliates as they are
reflected in the public documents of DAHI or information provided to us. Any
changes therein may affect our opinion and, although we reserve the right to
change or withdraw our opinion in such event, we disclaim any obligation to
either advise any person of any such change that may come to our attention or to
update our opinion after today.
Senior management of DAHI has made specific representations, among others, to us
as follows:
a) the information provided by DAHI is, or in the case of historical
information was, at the date of preparation thereof, complete and accurate
in all material respects, given the context and purpose for which it was
prepared, and does
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10
<PAGE>
not or did not, as the case may be, contain any untrue statement of
material fact or omit to state any material fact necessary to make the
statements therein not misleading;
b) with respect to any portions of the DAHI information that contain
forecasts, projections or estimates and any revisions or adjustments to
such forecasts, projections or estimates, or the underlying assumptions,
including, without limitation, the projections for the fiscal years ended
December 31, 1996 through December 31, 2000 prepared by DAHI as part of its
1996 strategic plan and adjusted and revised for purposes of the Formal
Valuation by us in consultation with the current management of DAHI and the
DAHI Committee, such forecasts, projections, estimates, revisions and
adjustments:
- were reasonably prepared using the assumptions identified to us,
- are not misleading in any material respect, and
- reflect the best currently available estimates and judgements as
to the matters covered thereby and the expected future operating
results for the periods covered thereby;
c) to the extent that any of the DAHI information is historical, there have
been no material changes or changes in material facts or new material facts
of which DAHI is aware since the respective dates of the DAHI information
that have not been disclosed generally or are not disclosed in the draft
Proxy Statement or updated by more current DAHI information that has been
provided to us;
d) with respect to any portion of the DAHI information that constitutes a
written statement of opinion or belief of a third party, including the
appraisals and valuations referred to in f) below, DAHI has no reason to
believe that such opinions or beliefs were not reasonable at the date on
which they were issued;
e) the forecasted income tax rates for DAHI used by us in preparation of the
Formal Valuation are reasonable;
f) we have been provided with all information, data and other material
(financial or otherwise) relating to DAHI and its assets, liabilities,
financial prospects or condition which is known to DAHI after reasonable
inquiry and which would reasonably be expected to affect materially the
Formal Valuation, and, without limitation, except as disclosed in the draft
Proxy Statement:
- there are no existing independent appraisals or valuations or
material non-independent appraisals or valuations known to DAHI
and
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11
<PAGE>
prepared as of a date within the twenty-four months preceding the
date hereof relating to DAHI or any of its material assets,
- except as disclosed to the public by DAHI, within the twenty-four
months preceding the date hereof, there have been no material
offers or transactions developed to an advanced stage relating to
the sale of DAHI or any of its material assets,
- there are no actions, suits, proceedings or enquiries pending,
threatened against or that might reasonably be expected to
materially and adversely affect DAHI or any of its material
assets, and
- there are no contingent liabilities, unusual contractual
obligations or substantial commitments of or litigation pending
or threatened against DAHI that might reasonably be expected to
materially and adversely affect DAHI, its business, financial
position or prospects or any of the material assets of DAHI,
other than costs in the approximate amount of $300,000 U.S.
comprised primarily of adviser fees if the Share Exchange does
not proceed;
g) DAHI is not aware of any animal health product with an active ingredient
other than selegiline that is being actively developed or marketed as an
effective treatment for canine Cushing's disease other than Lysodren and
Ketoconazole;
h) to the best of its knowledge, information and belief, DAHI will not be
prohibited under any applicable rule, regulation, law, judgement, order or
decree of any government or government instrumentality or court from paying
fair value to shareholders of DAHI and its successors which exercise their
right to dissent from the Share Exchange (the "Dissenting Shareholders").
DAHI is arranging an irrevocable letter of credit in its favour in the
principal amount of $2,000,000 U.S. to fund the payment to Dissenting
Shareholders of fair value compensation in respect of their securities of
DAHI or its successor. After investigation and consideration of past
experience, $2,000,000 U.S. is a reasonable reserve for DAHI to maintain
for the payment of fair value consideration to Dissenting Shareholders;
i) the schedule prepared by DAHI as at June 30, 1996 and provided to us
discloses all outstanding options, warrants, convertible securities or
other rights or convertible obligations of any nature:
- affecting issued securities of DAHI at June 30, 1996, or
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12
<PAGE>
- providing for the purchase, subscription or issuance of any of
the unissued shares in the capital of DAHI, as at June 30, 1996;
j) as at the valuation date:
- all assets, wherever located, to which DAHI has ownership rights
of any nature have been recorded in the accounts of DAHI and
represent a continuing benefit of DAHI, and
- all liabilities of DAHI have been recorded in the accounts of
DAHI;
k) where the value of any asset of DAHI is impaired or there has been any
pledge or assignment of, or security interest granted in respect of any
asset of DAHI, this fact has been reflected in the accounts or has
otherwise been disclosed to us. Any pledge or assignment of any assets of
DAHI as security for liabilities, including, without limitation, contingent
liabilities, has been disclosed to us;
l) all accounting and financial records of DAHI and other data relating to
Draxis that is relevant to the Formal Valuation have been made available to
us;
m) no events have occurred or are pending and no facts have been discovered to
the present date which would have a material effect upon the most recently
disclosed financial statements of DAHI or which are of such significance to
the affairs of DAHI as to require disclosure in a note thereto;
n) the contents of the draft Proxy Statement and any other disclosure document
prepared by or on behalf of DAHI in connection with the Share Exchange are
true and correct in all material respects and do not contain any untrue
statement of material fact or omit to state any material fact necessary to
make the statements therein not misleading; and,
o) DAHI management and the DAHI Committee have reviewed our Formal Valuation
and are satisfied with the valuation concepts and approaches noted therein.
DAHI has confirmed that it has no information or knowledge not disclosed to
us which would reasonably be expected to affect the valuation conclusions
noted therein.
We were not denied access to any information of which we were aware and which we
considered necessary in arriving at our opinion of value. In addition, we have
not relied on the opinions of any experts external to KPMG for purposes of
expressing our opinion.
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<PAGE>
III DAHI CORPORATE OVERVIEW
HISTORY
DAHI was incorporated under the laws of the State of Missouri on July 19, 1990
under the name of DEPL Animal Food Supplements, Inc. Prior to November 29,
1990, DAHI was a wholly-owned subsidiary of Deprenyl Animal Health (Canada)
Inc., which in turn was a wholly-owned subsidiary of Deprenyl Research Limited,
now known as Draxis.
The Company was formed to develop animal health applications for selegiline
(also referred to as l-selegiline, deprenyl and l-deprenyl, and marketed by
Draxis for human use under the trade name of Eldepryl and Novo-Selegiline and by
DAHI for veterinary use under the trade name of Anipryl) in the North American
market. Draxis holds the sub-license to market and sell selegiline in Canada
for human use in the treatment of Parkinson's disease.
The Company financed its development stage operations primarily with the sale of
common stock in an initial public offering in March 1991 and in more recent
years through private placements. The Company has also received funds from
Draxis for the issuance of convertible debentures.
Pursuant to an October 1990 agreement between DAHI and Chinoin, a Hungarian
pharmaceutical manufacturer that holds process patents for manufacturing
selegiline, DAHI was granted the exclusive right under Chinoin's patent to sell
selegiline in North America for veterinary applications. In addition, the
Company has secured various patents relating to the use of selegiline in the
treatment of canines.
DAHI has identified canine Cushing's disease and canine cognitive dysfunction
syndrome ("CDS") as two treatment applications of selegiline, to be sold under
the Company's trade name Anipryl. DAHI has progressed through various stages of
clinical testing and regulatory approval for these two indications of Anipryl.
Anipryl is approved for the treatment of Cushing's disease in Canada and is
under application with the FDA for same in the U.S. DAHI has filed an
application for the use of Anipryl in the treatment of CDS in Canada and expects
phase III clinical trials to be completed for the same indication in the U.S. by
early 1997.
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14
<PAGE>
In 1996 DAHI entered into a distribution agreement with Draxis for the marketing
and distribution of Anipryl in Canada. The Company intends to market Anipryl in
the U.S. through veterinary distributors.
OWNERSHIP
The Company's management advised that, at the valuation date, they believe that
no shareholder owned, of record or beneficially, either directly or indirectly,
more than 10 per cent of any class of voting securities of the Company, with the
exception of Draxis. Draxis, through its subsidiaries or affiliates, owns
3,308,818 common shares, or approximately 44 per cent of the total issued and
outstanding. In addition, a Draxis subsidiary holds convertible debt of the
Company which, if converted, would increase Draxis' beneficial ownership of
common shares of the Company to approximately 52 per cent of the total issued
and outstanding common shares of the Company based upon the number of issued and
outstanding shares on the date of this valuation.
The Company's authorized share capital consists of 20 million common shares with
no par value, of which there were 7,544,698 common shares issued and outstanding
at June 30, 1996.
DAHI's common shares are listed on The Toronto Stock Exchange ("TSE") and quoted
on the NASDAQ OTC-Bulletin Board ("NASDAQ OTC"). Prior to May 1995, the Company
was quoted on the NASDAQ National Small Cap Market System ("NASDAQ"), but was
dropped when the Company's shareholders' equity dropped below the exchange's
minimum level.
A summary of the share trading history and volumes for DAHI's common shares is
provided in Schedule 4. From an IPO price of $3.00 U.S. per share in 1991, the
market price for DAHI's common shares declined to an approximate trading range
of $1.50 U.S. to $2.50 U.S. during the last two calendar years. Since the
beginning of 1996, however, the common share price has increased, reaching a
high of $4.88 U.S. in May 1996 before settling into an approximate trading range
of $3.50 U.S. to $4.50 U.S. for the month of June.
During 1996, average monthly trading volumes approximated 325,000 common shares,
or less than five per cent of the total issued and outstanding shares.
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15
<PAGE>
STOCK OPTIONS, WARRANTS AND CONVERTIBLE DEBT
The Company had various stock options, warrants and convertible debt in place at
the valuation date as follows:
- - stock options issued to directors, employees and consultants for 1,026,976
common shares that are exercisable at prices ranging from $0.325 U.S. to
$4.13 U.S. per share (average of $1.63 U.S.) and have expiry dates ranging
from the years 2000 to 2006;
- - warrants issued to a past consultant of the Company for 200,000 common
shares exercisable at $3.00 U.S. per share only if the Company is
profitable by March 14, 1998;
- - convertible debt in the principal amount of $1.545 million U.S. issued to
Draxis in 1994 ("1994 Financing") convertible into common shares at $2.88
U.S. per share or into a participation interest (the participation interest
alternative is described further in Section V); and,
- - convertible debt in the principal amount of $1.0 million U.S. issued to
Draxis in 1996 ("1996 Financing") convertible into common shares at
approximately $1.5544 U.S. per share.
For purposes of our valuation report, in presenting information regarding DAHI
common shares on a diluted basis, we have assumed that all rights to acquire
common shares, whether vested or not, would be exercised to the extent that the
exercise price was less than the June 30, 1996 closing share price of $4.00 U.S.
This approach ignores the effects of discounting for the time value of money
from the exercise date back to the valuation date. There is a high probability
that these rights will be exercised on vesting during the investment horizon
contemplated for purposes of this valuation (i.e. more than five years). We
have determined that the equity conversion alternative for the 1994 Financing is
more attractive to Draxis than the participation interest, as at the valuation
date, and have assumed that the conversion alternative would be exercised as
detailed above. Draxis management has advised us that this assumption is
reasonable for purposes of our valuation of DAHI.
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<PAGE>
The impact on the number of common shares outstanding and the resulting cash
proceeds with respect to stock options, warrants and convertible debt has been
determined as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Number of Cash
Conversion Common Conversion Proceeds
Assumption Shares Price ($U.S.) ($U.S.)
- --------------------------------------------------------------------------------
Director, officer and
consultant stock
options Converted 971,976 Various $ 1,406,503
Warrants Converted 200,000 $ 3.00 600,000
1994 Financing Converted 536,458 2.88 nil
1996 Financing Converted 643,344 1.55 nil
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Total 2,351,778 $ 2,006,503
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<PAGE>
IV DAHI DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
DAHI is a research and development pharmaceutical company which targets the
animal health industry. Since inception, the Company has focused on developing
and obtaining regulatory approval for selegiline under the trade name of Anipryl
for treatment of Cushing's disease and CDS in canines.
In Canada, the Company has received an indication for Cushing's disease and has
made an application for an indication for CDS. In the U.S., the Company has
made an application for Cushing's disease and expects to soon complete phase III
clinical trials for CDS.
At the valuation date, the Company had cash reserves of $1.5 million U.S. and
will require significant additional financing to successfully bring Anipryl to
the North American market. Subject to completing the Share Exchange, and
subject to good business judgement, Draxis intends to commit approximately $10
million U.S. to DAHI to complete the process of obtaining approval from the U.S.
FDA for Anipryl, to launch Anipryl in the U.S. and to acquire and develop new
veterinary products, as appropriate.
THE PRODUCT
- --------------------------------------------------------------------------------
Anipryl, with an active ingredient of selegiline, is a selective inhibitor of
monoamine oxidase Type-B ("MAOB"). MAOB is an enzyme that degrades the
structure of certain compounds, such as dopamine, which regulate physiological
functions, including certain aspects of central nervous system activity. In a
variety of animal species, including dogs and humans, MAOB levels have been
found to be higher in the aged than in the young and considerably higher in
patients with neurodegenerative disorders such as Parkinson's and Alzheimer's
disease.
The Company has postulated and conducted clinical research to support its
assertion that Anipryl is an effective treatment for two neurological diseases
in canines, Cushing's disease and CDS.
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<PAGE>
CUSHING'S DISEASE
- --------------------------------------------------------------------------------
Canine Cushing's disease is a hormonal disorder that tends to occur in elderly
dogs and leads to severe clinical symptoms and the eventual death of the dog.
Researchers with the Company postulate that Anipryl acts by correcting the
depletion of dopamine which is necessary to regulate the flow of hormones
related to Cushing's disease.
The Company completed its first clinical trial evaluating Anipryl for the
treatment of canine Cushing's disease in 1994. The Company filed for regulatory
approval in Canada with the BVD in October 1994 and received notice of
compliance ("NOC") for 2 mg., 5 mg. and 15 mg. tablets of Anipryl in 1995. DAHI
anticipates NOC for the 10 mg. and 30 mg. tablets in the future. In the U.S.,
the Company filed its first complete New Animal Drug Application with the FDA in
October 1995. Our Formal Valuation includes assumptions provided to us by DAHI
management as to the expected timing of FDA approval for the use of Anipryl in
treating canine Cushing's disease. DAHI management has represented to us that
these assumptions are reasonable.
COGNITIVE DYSFUNCTION SYNDROME
- --------------------------------------------------------------------------------
According to DAHI management, CDS in canines is not a specific disease, but
rather a cluster of clinical signs found in dogs that are similar to clinical
signs that are found in humans with dementia or other cognitive impairments,
often due to neuronal degenerative diseases such as Alzheimer's. Symptoms are
often associated with "senility" in elderly dogs and include a decreased
interest in food, confusion and disorientation, and the development of
compulsive behaviours. When these symptoms of senility include the loss of
house training, pet owners often resort to euthanization of the animals.
It has been recognized by researchers that dopamine is a factor in the brain's
intricate mechanisms. Similar to Cushing's disease, researchers with the
Company postulate that Anipryl produces positive results in the treatment of
canine CDS, in part, through the correction of dopamine levels.
The Company conducted clinical trials in 1993 in 16 veterinary clinics with 69
elderly pet dogs reportedly suffering from CDS. Overall, the three month trial
resulted in statistically significant improvements in 13 of 15 categories of
impaired behaviour. Examples of statistical improvements included a 27 to 75
per cent improvement in dogs with house training problems, a 40 per cent
improvement in dogs suffering from sleep disruptions, and a 50 per cent
improvement in dogs suffering from indifference to the environment.
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<PAGE>
In Canada, the Company has completed its phase III equivalent clinical trials
for the use of Anipryl in the treatment of canine CDS and submitted its
application to the BVD in June 1996.
In mid-1995 the Company suspended its Phase III clinical trials for the use of
Anipryl in the treatment of CDS in the U.S. in order to focus on preparing and
filing the Cushing's disease application with the FDA. In the fall of 1995 the
Company resumed CDS clinical trials with modifications made after consultation
with the FDA. The Company expects the results from this trial early in 1997.
Our Formal Valuation includes assumptions provided to us by DAHI management as
to the expected timing of BVD and FDA approval for the use of Anipryl in
treating canine CDS. DAHI management has represented to us that these
assumptions are reasonable.
DISTRIBUTION
- --------------------------------------------------------------------------------
In January 1996, the Company granted two wholly-owned subsidiaries of Draxis the
exclusive right to distribute Anipryl in Canada for an initial term of 10 years.
DAHI received payments from Draxis of $468,750 U.S. for the distribution rights,
as well as $125,000 U.S. for reimbursement of previously incurred marketing
expenses. Under the agreement, the Company is responsible for manufacturing and
for the provision of technical support. The Company retains the right to market
Anipryl in Canada if Draxis does not achieve specified sales levels. Draxis
introduced Anipryl into the Canadian market in April 1996 and, to date, market
penetration has been slower than expected.
In 1994 the Company formed a registration/distribution partnership with HVG to
obtain regulatory approval, market and distribute Anipryl in Europe. On April
26, 1996 the Company announced that it was dissatisfied with HVG's efforts in
regards to Anipryl and that management anticipated regaining the European rights
to Anipryl. Management expects that this turn of events may delay the entrance
of Anipryl into Europe, but the Company anticipates that a similar relationship
can be negotiated with another marketing partner.
In September 1995 the Company terminated negotiations with Pfizer Animal Health
Group, a unit of Pfizer, Inc., as to the collaborative marketing and
distribution of Anipryl in North America. The Company's management has had
unsuccessful preliminary discussions concerning strategic alliances with other
companies and these alliances would have reduced DAHI's financial requirement.
The proposed terms of possible strategic alliances were judged to be too onerous
by DAHI. Management anticipates that the Company will need to further
demonstrate the effectiveness and marketability of Anipryl, particularly in the
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<PAGE>
context of CDS, which may include obtaining FDA approval of its use for the
treatment of CDS, before a satisfactory partnership can be negotiated.
Alternatively, DAHI will proceed with the marketing of Anipryl on its own,
assuming that adequate financing is available from Draxis or the capital
markets. There is greater uncertainty that DAHI will be able to obtain required
financing if the proposed Share Exchange is not completed.
Consistent with the above, management has developed a marketing and distribution
plan for the introduction of Anipryl in the U.S., without the aid of a strategic
partner. Although the completion of the Share Exchange may facilitate DAHI
obtaining financing, Draxis does not offer DAHI significant marketing expertise
or capability in the U.S. DAHI's marketing and distribution plan includes the
following:
- - distribution through a large national veterinary distributor with field
sales representatives, telephone representatives, and branch centers
providing national coverage;
- - distribution through regional veterinary distributors; and,
- - marketing and technical support through Company sales managers.
DAHI has had preliminary discussions with several veterinary distributors,
including a national distributor, which have indicated strong interest in the
distribution of Anipryl. The veterinary distributors would provide DAHI with
distribution capability, but would not provide financing for the marketing costs
of the introduction of Anipryl in the U.S. Our Formal Valuation includes
assumptions provided to us by DAHI management as to estimated sales commission
rates to be paid to distributors. DAHI management has represented to us that
these assumptions are reasonable.
DAHI estimates marketing costs of $6 million U.S. to $8 million U.S. over the
next two years for the introduction of Anipryl in the U.S. These costs would be
significantly reduced under a strategic alliance with a major animal health
pharmaceutical company, although the perceived negatives with respect to profit
sharing with a strategic partner outweigh this advantage, according to DAHI.
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21
<PAGE>
THE MARKET FOR ANIPRYL
- --------------------------------------------------------------------------------
The Company has conducted the following market research with respect to Anipryl:
- - a review of industry surveys authored by organizations including the
American Animal Hospital Association (1995) ("AAHA");
- - three independent U.S. market research surveys prepared by Brakke &
Associates in 1990, 1993 and 1994 examining pet ownership, pet owner
reaction to Anipryl concepts and veterinarian awareness and attitudes;
- - a survey of the Canadian market prepared by Cooper Research Limited in
January 1996 conducted at 24 veterinarian clinics in Toronto and the
surrounding area;
- - two Company-prepared surveys conducted with veterinarians at the 1995 North
American Veterinary Conference and Western States Veterinary Conference;
and,
- - a review by management of the sales performance of small companion animal
health products available in North America.
DAHI management has advised us that their assessment of the market for Anipryl
takes into consideration the following:
- - the number of dogs in the U.S. and Canada that are aged (older than eight
years);
- - the percentage of pet dogs that received veterinary care during the last
year;
- - the fact that pet owners demonstrate a strong willingness to provide a high
level of care for their pets, with 70 per cent of pet owners in the AAHA
survey agreeing with the statement, "There is nothing I wouldn't do for my
pet";
- - the fact that geriatric care is an increasingly important aspect of small
animal medicine;
- - the sample incidence rate of Cushing's disease in North America and the
percentage of diagnosed cases treated with non-approved drugs that require
expensive veterinarian monitoring and have potentially serious
side-effects;
- - the potential for veterinarians to under-diagnose Cushing's disease;
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22
<PAGE>
- - the sample rate of incidence of dogs with CDS as a per cent of dogs
regularly seeing veterinarians in North America per year;
- - the percentage of dogs diagnosed with CDS that are euthanized shortly after
diagnosis and the percentage that are euthanized at some later point;
- - the fact that Anipryl was perceived by veterinarians surveyed by DAHI
management as an attractive alternative to euthanasia for Cushing's disease
and CDS and to other existing treatments for Cushing's disease; and,
- - the percentage of veterinarians surveyed by DAHI management in 1995 that
identified Anipryl from the description of the product profile and
recognized Anipryl when specifically queried on the product.
DAHI PATENTS
- --------------------------------------------------------------------------------
Chinoin, a Hungarian pharmaceutical manufacturer and major supplier of
selegiline, holds U.S. and Canadian process patents on the production of
selegiline which expire during the period 2003 to 2014. Pursuant to an October
1990 supply agreement and subsequent revisions to the agreement, the Company has
been granted the exclusive rights to sell selegiline for veterinary uses in
North America. Management of the Company believes, however, that generic
manufacturers have the capability to produce selegiline without violating
Chinoin's process patents and that the introduction of generic selegiline into
the North American market for human treatment is imminent.
A total of seven U.S. use patents have been issued to the Company in the context
of the veterinarian use of selegiline to treat dogs or mammals in general.
Similar patents have been issued to the Company in Taiwan, Australia, New
Zealand, and several European countries, with additional patents pending in
Canada, Japan and other jurisdictions. In our view, the legal certainty of
patent protection cannot be completely relied upon and may not provide
comprehensive protection against the use by competitors of selegiline in the
treatment of canine Cushing's disease and CDS.
The Company's U.S. patents, if successfully held and defended, extend for a
range of 15 to 20 years and possibly longer if DAHI is successful in its
application for patent rights extension for the period of delay caused by the
regulatory process.
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23
<PAGE>
COMPETITION
- --------------------------------------------------------------------------------
The animal health market place is served by veterinary, agricultural or animal
health divisions of large international pharmaceutical and chemical companies
and by smaller early phase biotechnology companies. DAHI is not aware of any
animal health product, with an active ingredient other than selegiline, that is
being actively developed or marketed as an effective treatment for Cushing's
disease or CDS in canines. DAHI is aware, however, that both Lysodren and
Ketoconazole, which are non-animal pharmaceuticals, are being used to treat
canine Cushing's disease.
DAHI management has represented to us their views as to the likelihood of an
active ingredient other than selegiline being introduced into the North American
market for the treatment of canine Cushing's disease or CDS. These views have
been considered by us in the Formal Valuation. Management is currently aware of
three dopamine agonists other than selegiline which are effective in regulating
dopamine levels in humans. All three are not appropriate for the treatment of
Cushing's disease and CDS as they cause severe side-effects in canines,
according to various scientific journals.
During 1996, DAHI became aware that Sanofi, S.A, a French subsidiary of Societe
Nationale Elfe Equitane, ("Sanofi") has filed veterinary use patent applications
in Europe disclosing uses of selegiline. The Company is of the view that the
subject matter of Sanofi's patent applications may contain claims that could
infringe upon the Company's European patents. DAHI is unable to assess the
likelihood of success of Sanofi's application or whether the application will be
dominated by the Company's patents. Sanofi does not have an animal health
division in North America at the present time.
DAHI believes that the threat of competition to Anipryl in North America from
potential generic manufacturers of selegiline is lessened by the following
factors:
- - the Company's patents in the U.S. and pending patents in Canada will deter
the direct marketing of selegiline to veterinarians and their suppliers.
DAHI intends to defend its patents vigorously, provided the financial
resources are available;
- - selegiline has HPB and FDA indications for human treatment in 5 mg. doses
only. At current prices, management believes selegiline for human treatment
is not competitive in price for treating dogs. Management believes that
the entry of a generic form of selegiline in the U.S. would not likely
reduce the current price to levels which would be competitive with the
price of Anipryl;
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<PAGE>
- - the Company believes that veterinarians would prefer to sell Anipryl
through their practices, rather than prescribing generic equivalents for
purchase at a pharmacy for which the veterinarians would receive no
monetary benefit; and,
- - the Company believes that generic manufacturers and/or distributors of
selegiline would be infringing on the Company's patents.
The threat of generic competition cannot be completely discounted, in our view,
because of the legal uncertainties and DAHI's limited cash resources to defend
its patents.
SUPPLY
- --------------------------------------------------------------------------------
Under its agreement with Chinoin, the Company has secured a supply of selegiline
until the year 2003. DAHI management has provided us with the terms of the
supply agreement and these terms have been factored into the Formal Valuation.
In 1995, DAHI indicated that both the BVD and FDA had accepted data required to
qualify an alternative source of selegiline.
The Company has a manufacturing agreement with FAH to produce Anipryl for five
years commencing on the FDA approval. We are advised by DAHI that, following
the sale of FAH in late 1995, DAHI and FAH have mutually agreed to terminate the
manufacturing agreement and thereafter DAHI will seek an alternate manufacturing
partner, pursuant to information provided to us by DAHI. According to DAHI
management, the Company has secured Mikart Inc. as an additional manufacturing
source for Canadian sales of Anipryl, if required. DAHI intends to look for and
contract for an additional alternative source of supply. The lack of its own
manufacturing facility is an increased risk to DAHI.
DAHI PRODUCT LIABILITY
- --------------------------------------------------------------------------------
DAHI management believes that the risk associated with product liability for
Anipryl is reduced by the following factors:
- - the intended patient market is aged dogs with Cushing's disease or CDS
which have only an average life of approximately 1.5 to 2 years after
diagnosis;
- - selegiline, the active ingredient in Anipryl, has been approved for use in
humans to treat Parkinson's disease; and,
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25
<PAGE>
- - Anipryl has been tested extensively on dogs with little adverse effect
noted throughout clinical testing.
The risk of product liability is a major factor for the entire industry and,
notwithstanding DAHI's comfort level with its product, the Company has product
liability insurance for a maximum claim of $2 million U.S., although no
assurance can be given that DAHI will be able to maintain insurance at a
reasonable cost or in sufficient coverage amounts.
DAHI FACILITIES
- --------------------------------------------------------------------------------
The principal operations of DAHI are conducted from leased premises located at
Suite 710, 10955 Lowell, Overland Park, Kansas. The facility has approximately
2,500 square feet of office space and is leased at approximately $40,000 per
annum until expiry in 1997. DAHI's management believes that these leased
premises are not sufficient for the foreseeable needs of DAHI and that
additional space will be required.
DAHI MANAGEMENT AND EMPLOYEES
- --------------------------------------------------------------------------------
The Company has eight employees and also utilizes the expertise of several
consultants in the animal health field.
Key members of senior management include founder Dr. David Stevens, President
and Chief Executive Officer, and Dr. William Ruehl, Vice President Scientific
Affairs.
Dr. Stevens was Director of Research and Vice President at Diamond Scientific, a
subsidiary of Agrion Corp. and held a similar position with the Hills' Pet
Products Division of Colgate Palmolive Co.
Dr. Ruehl was an Assistant Professor of Pathology at the Stanford University
School of Medicine and is a recognized expert in diseases of companion animals.
The Company also employs Mr. Michael Grogan as a marketing consultant.
Mr. Grogan was previously employed by the animal health division of Pfizer, Inc.
in various sales and marketing positions.
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26
<PAGE>
V DAHI FINANCIAL REVIEW
- --------------------------------------------------------------------------------
FINANCIAL POSITION
- --------------------------------------------------------------------------------
As at June 30, 1996, DAHI's consolidated financial position can be summarized as
follows (with comparative figures at December 31, 1995):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(U.S. $000'S)
- --------------------------------------------------------------------------------
JUNE 30, 1996 DECEMBER 31, 1995
- --------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalent $ 1,489 $ 1,055
Other current assets 182 2
Fixed assets, net 73 55
Intangibles 471 448
- --------------------------------------------------------------------------------
$ 2,215 $ 1,560
- --------------------------------------------------------------------------------
LIABILITIES:
Accounts payable $ 124 $ 136
Convertible notes payable to
Draxis 2,545 3,090
- --------------------------------------------------------------------------------
2,669 3,226
SHAREHOLDERS' DEFICIT (454) (1,666)
- --------------------------------------------------------------------------------
$ 2,215 $ 1,560
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company's financial position for the past five years as recorded in its
financial statements is provided in Schedule 1.
At June 30, 1996, the Company had $1.5 million U.S. in cash and cash equivalents
which the Company believes will fund the existing operations of the Company
until the end of 1996. Since DAHI does not anticipate material revenues from
operations until some time in 1997, the Company will require additional
financing as early as January 1, 1997.
The Company's convertible debt is comprised of financing provided by Draxis in
1994 and 1996. The remaining unpaid balance of the 1994 Financing, as at
June 30, 1996, is U.S. $1,545,000 of which 60 per cent is due in equal quarterly
payments from 1997 to 2000 and 40 per cent is due in a lump sum on January 1,
2001. The debt has interest payable of bank prime rate plus one per cent and is
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27
<PAGE>
convertible into common shares at $2.88 U.S. per share or convertible into a
participation interest. A significant feature of the participation interest is
that Draxis would be entitled to 20 to 28 per cent per annum of the converted
amount until December, 2003 and reducing to one third of the initial per annum
amount in 2005. The participation interest would be limited, however, to 50 per
cent of DAHI's pre-tax income.
The remaining unpaid balance of the 1996 Financing, as at June 30, 1996, is
$1 million U.S. and it has substantially equivalent terms to the 1994 Financing
with the exception of a conversion rate of approximately $1.5544 U.S. per share,
a repayment schedule beginning three years later, and no option to convert to a
participation interest.
Other sources of capital have not been readily available to DAHI on acceptable
terms to the Company. Management has provided us with information on actual
financing proposals and we have taken this information into account in our
Formal Valuation.
HISTORICAL RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Schedule 2 sets out the historical results of operations for the five fiscal
years preceding the valuation date. The Company has been in the development
stage since inception and revenues from historical operations have consisted
primarily of gains on disposal of non-operating investments. In our view, the
historical results of operations are not indicative of future expected results
for the Company given DAHI's anticipated transition to an operating company with
sales and expenses associated with the release of Anipryl into the U.S. and
Canadian markets. This view is consistent with that of Hambrecht & Quist LLC
and Montgomery Securities, Inc., advisers to DAHI and Draxis, respectively.
PROJECTED OPERATING RESULTS
- --------------------------------------------------------------------------------
In January 1996, DAHI management prepared a strategic analysis which included
projections for the first five years of Anipryl's commercial operations.
Management has advised us that the projections were intended to be a high-level
planning tool and did not include certain refinements which may be considered
necessary for use in a valuation. In the view of DAHI management, the variances
from these projections could range from a reduction of 50 per cent to a 100 per
cent increase in the projected revenues.
DAHI's projections included two scenarios. The first scenario reflected the
assumption that Anipryl was marketed by DAHI throughout North America and
- --------------------------------------------------------------------------------
28
<PAGE>
that sufficient financial resources would be available to accomplish this plan.
The second scenario reflected the assumption that DAHI would form a marketing
alliance with a large animal health pharmaceutical company in order to more
rapidly penetrate the North American market. In this second scenario, a royalty
would be paid to the marketing partner with a significant reduction in DAHI's
marketing and distribution expenses.
We have reviewed the projections under both scenarios and for the reasons
indicated below, have selected the projection contemplated under the first
scenario as the primary basis for our valuation:
- - as noted earlier, discussions and negotiations between DAHI and potential
strategic partners, such as Pfizer, have not been successful to date;
- - net cash flows are projected to be higher if DAHI markets Anipryl directly,
as opposed to a marketing alliance; and,
- - the first scenario is consistent with management's marketing and
distribution plan.
For purposes of our valuation analysis, we performed a review of DAHI's
five-year projection which included:
- - interviewing Dr. Stevens and Dr. Ruehl of DAHI, as well as, Mr. Robert
Dixon, Marketing Manager at Draxis;
- - reviewing ten-year projections for the Company prepared by Montgomery
Securities Inc., financial advisors to Draxis;
- - reviewing three-year projections for the Company prepared by Hambrecht &
Quist LLC, financial advisors to DAHI;
- - reviewing marketing surveys prepared for, and by, the Company with respect
to the market for Anipryl in the treatment of Cushing's disease and CDS;
- - reviewing sales of new small companion animal health products and the rate
of market penetration; and,
- - assessing the mathematical accuracy of the projections.
Our review of the projections consisted primarily of enquiry, analysis and
discussions with management and, as such, did not constitute an audit.
A summary of the significant revisions made by us to the January 1996
projections in consultation with DAHI management is provided below. DAHI
- --------------------------------------------------------------------------------
29
<PAGE>
management has represented to us that the following revisions are reasonable for
purposes of our Formal Valuation:
- - the January 1996 projections were updated for management's expectations, as
at the valuation date, of the anticipated timing of the regulatory approval
and introduction of Anipryl into the Canadian and U.S. markets;
- - the rates of market penetration by Anipryl for Cushing's disease reflected
in the January 1996 projections were adjusted by lengthening the time
required to achieve full market penetration;
- - the rates of market penetration by Anipryl for CDS reflected in the January
1996 projections were adjusted by lengthening the time required to achieve
full market penetration;
- - the percentage of dogs initially treated that will continue to be treated
for the full expected duration of treatment was reduced;
- - revenue was adjusted to reflect an increase in the estimated duration of
treatment of Cushing's disease and CDS;
- - the projected selling price of Anipryl was reduced in the third year after
introduction to the market;
- - research and development costs were reduced to reflect only those costs
related to Anipryl and to exclude costs related to new product development;
- - marketing costs and corporate and general costs were reduced to reflect the
slower rate of market penetration for Anipryl;
- - interest expense was added based on assumed debt financing of working
capital;
- - loss carry-forwards at the valuation date available to offset future income
tax expense were incorporated into the revised projection; and,
- - provision was made for the impact of estimated future inflation.
The impact of the above noted revisions was to reduce sales and net income in
the January 1996 projections by approximately 43 per cent and 50 per cent,
respectively, during the first five years of the projection period.
Features of the revised projections are as follows:
- --------------------------------------------------------------------------------
30
<PAGE>
- - revenues included in the projection will be derived from the sale of
Anipryl in Canada (through Draxis) and the U.S., commencing as approvals
are obtained from regulatory authorities for the use of Anipryl to treat
canine Cushing's disease and CDS;
- - revenues will increase during the projection period as market penetration
is achieved;
- - inflation will be three per cent and two per cent in the U.S. and Canada,
respectively, throughout the projection period;
- - the average distributor selling price will decline in year three of the
projection;
- - DAHI's marketing costs for sales in Canada will be nominal, reflecting
Draxis' responsibility for marketing Anipryl in Canada;
- - marketing costs in support of U.S. sales will be significant throughout the
projection period;
- - research and development costs will continue throughout the projection
period;
- - interest expense is estimated at current bank prime rate plus one per cent
and calculated on estimated short-term bank financing of 50 per cent of net
working capital;
- - income tax expense reflects federal and state income tax rates prevailing
at the valuation date in the state of Kansas of approximately 40 per cent
(we also considered the impact of rate variations in other jurisdictions).
Actual tax rates could vary materially depending upon the jurisdictions or
countries that DAHI operates from or sells to;
- - net operating losses of approximately $7.2 million, based on accumulated
actual losses to the valuation date, will be available to the Company for
the reduction of projected taxable income; and,
- - the financing necessary to bring Anipryl to market is available from Draxis
or the capital markets.
DAHI management has represented to us that the revised projections are
reasonable for purposes of our Formal Valuation. For strategic and competitive
reasons, at the request of DAHI we have not specifically disclosed the full
assumptions represented to us or altered by us, or the actual projections used
in the Formal Valuation. Management concedes, and we concur, that the revised
- --------------------------------------------------------------------------------
31
<PAGE>
projections are based on expectations of future events which cannot be verified.
There are no assurances that actual results will coincide with projected
results. Variances will occur and these variances will likely be significant.
- --------------------------------------------------------------------------------
32
<PAGE>
VI ANIMAL HEALTH PHARMACEUTICAL INDUSTRY
- -------------------------------------------------------------------------------
The animal pharmaceutical industry consists of pharmaceutical, biological,
medicated feed additives and chemicals focused on three broad animal categories
of production animals, performance animals and pets. The focus herein is on
pharmaceuticals for the pet industry which is the area of concentration of DAHI.
The animal health industry is dominated by the animal health divisions of large
multi-national corporations including Pfizer, Merck, Rhone Merieux, and Elanco
(Lilly). The trend in the industry has been the rapid consolidation of these
large corporations (or divisions thereof) as evidenced by the following:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DATE ACQUIRER TARGET
- --------------------------------------------------------------------------------
1994 Pfizer Smith Kline Beecham
1994 American Home Products American Cyanamid
1995 Rhone Merieux Sanofi
1995 The Upjohn Co. Pharmacia
1995 Boehringer Ingleheim Fermenta Animal Health
1995 Mallinckrodt Syntro Corp.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prior to the above transactions Glaxo, Warner-Lambert, Bristol Myers and Squibb
divested their animal health businesses. It is estimated that the top 10 animal
health companies account for 45 per cent of the global animal health
pharmaceutical market with the trend of consolidation expected to continue.
A spectacular animal health performer in recent years has been Ciba-Geigy and
its flea and tick product, Program. Ciba-Geigy introduced Program into the U.S.
market in 1995 with first year sales of $140 million U.S. which are expected to
increase substantially in 1996. Ciba-Geigy's Program results provide an
indication of the current pet owner market and their willingness to recognize
new products. However, DAHI's product, Anipryl, does not offer as broad a
market as the market for flea control. As well Cushing's disease or CDS are not
as widely understood by the pet owning public as is the area of flea control.
- --------------------------------------------------------------------------------
33
<PAGE>
Various U.S. surveys point to low or no growth scenarios for the U.S. pet
population based on projected human demographics and the decline of the
population segment most likely to own pets.
Veterinary drugs are approved in Canada by the BVD, which is a department of the
Canadian HPB. In the U.S., veterinary drugs are approved by the FDA under
legislation similar to that for the approval of drugs for the treatment of
humans.
The approval process in both Canada and the U.S. for animal health
pharmaceuticals involves clinical trials, manufacturing methods, chemical
stability, environmental safety, animal safety, and the efficacy of the drug.
The process may be generally described as similar to the approval process of
drugs for the treatment of humans, but tends to be somewhat less rigorous,
particularly for small companion animals.
There are few drugs formally approved and available for treatment of small
companion animals. Veterinarians place a high reliance on off-label drugs
available for human or feed stock animals. As an example, it is estimated that
over one million dogs in the U.S. are treated every day with insulin on an
off-label basis.
Major risks inherent in the industry would include product liability, regulatory
uncertainty, market acceptance, enforcement of patents and increasing
competition.
- --------------------------------------------------------------------------------
34
<PAGE>
VII DAHI VALUATION APPROACH
- --------------------------------------------------------------------------------
VALUATION THEORY
- --------------------------------------------------------------------------------
The two basic approaches used to determine the fair market value of a business
are the going concern approach and the liquidation approach. The liquidation
approach is used if future earnings are not expected to provide an adequate rate
of return on investment or if the nature of the business is such that its value
is closely related to the liquidation value of underlying assets. The going
concern approach is used if the business is expected to be able to operate
profitably or with a potential for future profits and positive cash flow.
Based upon our discussions with management and our review of the Company's
reported financial position, its historical operating results and its projected
operating results, we have concluded that the Company should be valued using a
going concern approach.
There are several generally accepted methods used to determine the going concern
value of a business. These include the capitalized earnings approach, the
capitalized cash flow approach, the discounted cash flow approach, the net
tangible asset approach, and the market comparable approach.
Based on our experience in business valuations, mergers, acquisitions and
divestitures, and on our understanding of the animal health pharmaceutical
industry, we have selected the discounted cash flow ("DCF") approach to
determine the fair market value of DAHI. Under the DCF approach, fair market
value is based on the present value of expected future cash flow. Specifically,
the net after-tax cash flow that the business is expected to generate is
projected over an explicit forecast period. The projected cash flow, together
with the residual value of the business at the end of the forecast period, are
discounted at an appropriate rate, resulting in the value of the business
operations. The net realizable value of any assets not required by the business
operations are added to the value of the business operations, yielding the
overall value of the company.
Pursuant to Ontario Securities Commission Policy Statement 9.1, no downward
adjustment has been made in our valuation calculations to reflect the liquidity
of the DAHI common shares, the effect of the transaction, or the fact that the
DAHI common shares which are the subject of the Share Exchange do not form part
of a controlling interest.
- --------------------------------------------------------------------------------
35
<PAGE>
REASONS FOR SELECTION / REJECTION OF VALUATION APPROACHES
- --------------------------------------------------------------------------------
We have selected the DCF approach primarily because of its focus on future, as
opposed to historical, results. As noted earlier, DAHI's historical results are
not indicative of its anticipated future performance.
The capitalized earnings approach, whereby maintainable earnings are capitalized
at an appropriate multiple to reflect the risk of the company maintaining those
earnings, as well as future growth prospects, was considered and rejected as a
primary valuation approach for DAHI. DAHI has no history of revenues or
earnings from which to assess the level of maintainable earnings. In addition,
DAHI's projected results indicate significant growth in the next five years
which does not allow for the selection of a maintainable earnings amount.
The capitalization of maintainable cash flows approach, whereby maintainable
cash flows are capitalized at a multiple to reflect the risk of the company
maintaining those cash flows, as well as future growth prospects, was considered
by us and rejected. DAHI has no history of operating cash flows from which to
assess a level of maintainable cash flows. In addition, DAHI's projected
results indicate significant growth prospects in the next five years which does
not allow for the selection of a 'maintainable' cash flow amount.
The net tangible asset approach, whereby tangible and identifiable intangible
assets and liabilities are adjusted to their market values at the valuation date
in order to determine the adjusted value of net equity, was considered and
rejected since we believe that the Company's nominal deficit position does not
reflect the potential goodwill value inherent in the expected future profits
from the anticipated sale of Anipryl.
The market comparable approach, whereby the fair market value of DAHI is
determined by reference to DAHI's traded share price and to share prices and
trading multiples for publicly traded companies comparable to DAHI, was
considered by us and rejected as a primary method for determining the value of
the Company. While no two companies are so alike that they are directly
comparable, in the animal health pharmaceutical industry every company's value
is a function of the growth and profitability of existing products and products
in various stages of development. In addition DAHI has no history of revenues
or earnings from which to make such a comparison. We believe, however, that the
market comparable approach is appropriate as a secondary approach for assessing
the reasonableness of the values determined by us through the DCF approach.
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36
<PAGE>
VIII DAHI VALUATION CALCULATIONS
- --------------------------------------------------------------------------------
As set out below, using a DCF approach, we have determined the fair market value
of DAHI to be in the range of $25.3 million U.S. to $34.5 million U.S.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
($U.S. MILLION)
RANGE
- --------------------------------------------------------------------------------
PRESENT VALUE OF NET AFTER-TAX OPERATING CASH FLOW
JULY 1, 1996 TO DECEMBER 31, 2000
Discount rate 35% 30%
Present value amount $ 8.2 $ 9.9
- --------------------------------------------------------------------------------
JANUARY 1, 2001 TO DECEMBER 31, 2005
Discount rate 40% 35%
Present value amount $ 15.4 $ 19.9
- --------------------------------------------------------------------------------
PRESENT VALUE OF RESIDUAL VALUE AS AT DECEMBER 31, 2005
Residual value $104.2 $125.1
Discount rate 40% 35%
Present value amount $ 4.2 $ 7.2
- --------------------------------------------------------------------------------
CONVERTIBLE DEBT AT JUNE 30, 1996 ($2.5) ($2.5)
- --------------------------------------------------------------------------------
TOTAL PRESENT VALUE $ 25.3 $ 34.5
- --------------------------------------------------------------------------------
Each component of the DCF calculation is discussed below.
PROJECTED NET AFTER-TAX CASH FLOW
- -------------------------------------------------------------------------------
As discussed earlier, at the request of DAHI we have not disclosed the actual
ten year projection of net after-tax cash flow for strategic and competitive
reasons. The projection used in our Formal Valuation is based on management's
January 1996 five-year projection updated to the valuation date, extended to ten
years, and revised based on our review procedures for valuation purposes.
In order to adjust projected net income to a net after-tax cash flow basis, we
have:
- - deducted an amount for additional working capital required each year to
support the projected growth in the Company's sales;
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37
<PAGE>
- - assumed that a portion of working capital requirements could be financed by
bank indebtedness with accounts receivable as collateral; and,
- - deducted an additional amount for annual fixed asset additions, net of tax
shield, required to sustain the Company's investment in equipment,
furnishings and fixtures.
For purposes of the DCF calculation, we have excluded interest on the
convertible debt and assumed that the Company's long term capital structure
would be all-equity based. Except for the use of debt to finance a portion of
working capital requirements, a company such as DAHI would be reliant on equity
capital, given the nature of, and risks inherent in, the Company's cash flows,
as well as the small amount of tangible net assets required in the business.
DISCOUNT RATE
- --------------------------------------------------------------------------------
Discount rates in the range of 30 to 35 per cent have been selected for purposes
of discounting cash flows for the first five years of the projection. As set
out below, we determined the equity rate of return on the basis of three
components, namely, the risk-free rate prevailing at the valuation date, a
market equity risk premium and a specific equity risk premium. The risk-free
rate and the market equity risk premium were determined on the basis of
objective data observed in the market place. The specific equity risk premium
was determined on the basis of a judgmental assessment of the risks associated
with an investment in the shares of the Company. Each of these three components
is discussed below.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Yield on long-term Government of Canada bonds at
June 30, 1996 8.0% 8.0%
Premium for small cap stock issues over risk-free
rate, TSE historical average 10.0 10.0
Specific risk premium 12.0 17.0
- --------------------------------------------------------------------------------
Required rate of return on equity 30.0% 35.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The risk-free rate represents the prevailing rate of return on long-term
Government of Canada bonds as at the valuation date, which was 8 per cent (10
year bond - 7.8 per cent, 30 year bond - 8.1 per cent). A long-term rate,
rather than short-term rate, was used since an investment in the Company would
represent a long-term investment.
An investor who will bear all of the risks associated with an investment in
common shares would not be content to earn a risk-free rate of return. Thus, a
- --------------------------------------------------------------------------------
38
<PAGE>
general market equity risk premium was added to the risk-free rate in order to
provide an allowance for additional risks associated with an investment in
common shares.
The general market equity risk premium was determined on the basis of the
average additional return (over and above the risk-free rate) that investors
have earned on small-cap(3) common stock investments in the past. In Canada
(measured using TSE returns), the average return on small cap common stock
investments has been approximately 10 per cent higher than the long-term
Government of Canada bond rate(4). Similar premiums over the long-term,
risk-free rate have also been earned, on average on common stock investments in
the United States (measure using NYSE returns).(5)
The specific equity risk premium represents the added return that an investor
would require for the additional risk of an investment in DAHI, relative to an
investment in the overall stock market. The specific equity risk premium was
determined on the basis of a judgmental assessment of the risks associated with
an investment in the Company. We have used a specific risk premium in the range
of 12 to 17 per cent, which reflects the following risks, among others, and/or
opportunities specific to DAHI:
- - the Company is a one product (Anipryl) company. The effect is that DAHI is
an extremely speculative stock whose price could skyrocket or plummet based
on the success or failure of this one product;
- - the uncertainty over the success and timing of regulatory approval for
Anipryl, for Cushing's disease in the U.S. and for CDS in both Canada and
the U.S.;
- - the uncertainty over the size of the market for Anipryl, as well as price
sensitivity and overall market acceptance;
- - the threat from competitive products to Anipryl. Management believes that
it has a viable defence, through patents, against the entry of other label
indications with selegiline as an active ingredient. The Company may not,
however, have the necessary financial resources to defend Anipryl against
patent infringement by major competitors which are veterinary, agricultural
or animal health divisions of large, better financed international
pharmaceutical
- -----------------------------------
(3) "Small-cap stock" refers to a company that would rank in the bottom 50% of
public companies, measured in terms of size (market value of outstanding
shares).
(4) Hatch and White, Stocks, Bonds, Bills and Inflation.
(5) Ibbotson and Associates, Stocks, Bonds, Bills and Inflation.
- --------------------------------------------------------------------------------
39
<PAGE>
and chemical companies. In addition, the patents may not afford protection from
off-label sales of the generic form of selegiline for humans;
- - DAHI may be unknowingly and/or inadvertently infringing on patents owned by
third parties, with the potential for litigation against the Company;
- - the net deficit of the Company as at the valuation date, indicating no
tangible asset support for the going concern value;
- - the Company's reliance on an external distribution network to sell Anipryl;
- - the Company's reliance on third parties to manufacture its products, since
it has no manufacturing facilities;
- - the risk that DAHI will be unable to obtain sufficient financing, from the
financial markets or from Draxis, to fund the costs to obtain regulatory
approval, market and distribute Anipryl;
- - the potential for additional cash flows from the sale of Anipryl in Europe
and other parts of the world that is not reflected in the revised financial
projections; and,
- - the potential for additional cash flow from off-label sales of Anipryl to
treat other small companion animals such as cats.
We have increased the discount rate from a range of 30 to 35 per cent for the
first five years of the projection to a range of 35 to 40 per cent for the last
five years. Over time, the amount of uncertainty with respect to future cash
flows increases and a higher risk premium is warranted. A significant risk is
that, as Anipryl becomes more profitable, there is a greater chance of
competitive reaction from alternative or generic drugs.
Based on similar reasoning, we have attached the same higher range of discount
rates, 35 to 40 per cent, in determining the present value of the terminal
value.
To assess the reasonableness of the required rates of return on equity used in
our valuation, we considered the annual reports and prospectuses of companies in
the pharmaceutical and health care industry for indications of published
required rates of return. This information, however, is not typically disclosed
by companies and generally kept confidential. We are aware that at least one
company has disclosed that it has a minimum required rate of return of 20 per
cent for the acquisition of royalty rights for products already in the market
and higher rates for products expected to be brought to market in the
medium-term (one to three years) or long-term.
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40
<PAGE>
We also compared our range of selected discount rates to the average rates of
return of 25 to 40 per cent required by venture capital funds, based on our
knowledge of them. Given the uncertainties associated with the Company as
described above and its current development stage, we believe that the required
rate of return for DAHI would be comparable to the required rate of return for
an investment by a venture capital fund.
In our view, required rates of return in the range of 30 to 40 per cent
throughout the projection period are reasonable, given that DAHI's expected cash
flows are generated by a single product and that the Company is still in a
development phase facing the substantial risks of regulatory approval, market
acceptance, competition, patent protection and product liability.
RESIDUAL VALUE
- --------------------------------------------------------------------------------
We determined the residual value of the Company as at the end of the year 2005
using a capitalized cash flow approach. Under this approach, expected
maintainable cash flow is capitalized by a factor that reflects the risk of the
investment and the Company's future growth opportunities. We calculated the
residual value of DAHI based on projected 2006 cash flow of $41.7 million U.S.
(2005 cash flow of $40.5 million U.S. plus three per cent for inflation) and a
cash flow multiple of 2.5 to 3.0 times.
A multiple of 2.5 to 3.0 times cash flow was selected based on the same factors
considered for the selection of the discount rate, as well as a consideration of
the following:
- - the length of time remaining in the product life cycle of, and time to
patent expiry for, Anipryl; and,
- - the increased probability of competition from other drugs and generic
versions of selegiline.
VALUATION CALCULATION
- --------------------------------------------------------------------------------
Based on our DCF calculation, the en bloc fair market value of DAHI at June 30,
1996 is in the range of $25.3 million U.S. to $34.5 million U.S.
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41
<PAGE>
On a diluted per share basis (with dilutive effects as described in Section
III), the proportionate en bloc fair market value of DAHI, before consideration
of any minority discount, is $3.01 U.S. to $3.77 U.S. per common share,
calculated as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
($U.S. MILLIONS)
En bloc value $ 25.3 $ 34.5
Cash proceeds on conversion of options and
warrants 2.0 2.0
Convertible debt 2.5 2.5
Cash proceeds on new equity issue 6.7 6.7
---------- ----------
Value for calculating dilution $ 36.5 $ 45.7
---------- ----------
---------- ----------
Issued and outstanding common shares 7,544,698 7,544,698
Shares issued on conversion of options and
warrants 1,171,976 1,171,976
Shares issued on conversion of debt 1,179,802 1,179,802
Shares issued on equity financing 2,215,000 2,215,000
---------- ----------
Shares for calculating dilution 12,111,476 12,111,476
---------- ----------
---------- ----------
Diluted per share values $ 3.01 $ 3.77
---------- ----------
---------- ----------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For purposes of calculating per share values on a diluted basis, we have assumed
that DAHI will require approximately $6.7 million U.S. to introduce Anipryl into
the U.S. market. This funding is assumed to be provided through a public share
offering of 2,215,000 common shares at $3.00 U.S., reflecting a 25 per cent
discount from DAHI's closing share price of $4.00 U.S. at the valuation date.
This discount reflects a recent informal proposal to underwrite such an offering
considered by DAHI's Board of Directors, and represents issue fees, brokerage
costs and an issue price below current market to attract buyers. (Upon
completion of the proposed Share Exchange, it is anticipated that funding will
originate from Draxis pursuant to the Exchange Agreement.)
- --------------------------------------------------------------------------------
42
<PAGE>
IX DAHI REASONABLENESS OF VALUATION CALCULATIONS
- --------------------------------------------------------------------------------
Where possible, a valuator will use secondary approaches to test the
reasonableness of valuation conclusions determined in a notional valuation. We
have compared our calculation of a diluted share price for DAHI to both the
share prices at which DAHI has recently traded on NASDAQ and to other publicly
traded biotechnology companies.
DAHI SHARE PRICE
- --------------------------------------------------------------------------------
During the six months prior to June 30, 1996, DAHI shares have traded between
$1.75 U.S. and $4.88 U.S. per share, as follows:
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NASDAQ PRICE ($U.S.) TSE/NASDAQ
---------------------------- -----------------
PERIOD (1996) HIGH LOW CLOSE VOLUME (000s)
- -----------------------------------------------------------------------
June 1 to 30 4.75 3.63 4.00 353
May 1 to 31 4.88 3.88 3.88 427
April 1 to 30 4.25 3.13 3.88 377
March 1 to 31 3.25 2.75 3.25 206
February 1 to 29 3.13 1.97 3.13 465
January 1 to 31 2.00 1.75 1.75 140
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
43
<PAGE>
Our calculation of the diluted share price of DAHI compares to the range of
recent market prices as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HIGH ($U.S.) LOW ($U.S.)
- --------------------------------------------------------------------------------
Valuation at June 30, 1996 $ 3.77 $ 3.01
MARKET PRICES:
April 1 to June 30, 1996 $ 4.88 $ 3.13
January 1 to March 31, 1996 $ 3.25 $ 1.75
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We believe that our valuation is reasonable, given the range of publicly traded
share prices over the last six months. At the high end of the range in May
1996, the share price reflected a positive market reaction to the biotechnology
sector as a whole. At the low end of the range, the share price had yet to
reflect favourable events announced by the Company early in the year. Each of
these points is further explained below.
The recent volatility in the DAHI share price can be partially explained by
reference to the general market reaction to the stock prices of U.S.
biotechnology companies, as follows:
- --------------------------------------------------------------------------------
44
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
NASDAQ BIOTECH INDEX DAHI ($U.S.)
---------------------------- --------------------------
% %
% CHANGE % CHANGE
CHANGE FROM CHANGE FROM
PER JUNE 30, PER JUNE 30,
PERIOD INDEX(1) PERIOD 1995 INDEX(1) PERIOD 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1995 100 100
December 31, 1995 151 51 51 92 -8 -8
March 31, 1996 151 - 51 171 86 71
May 31, 1996 163 8 63 204 19 104
June 30, 1996 146 -10 46 172 -16 72
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
(1) June 30, 1995 biotech/DAHI U.S. share price equals 100
In the past year, the share prices of companies in the NASDAQ Biotech Index
increased by 46 per cent, compared with 72 per cent for DAHI. Between
March 31 and June 30, 1996, companies in the NASDAQ Biotech Index declined by
three per cent, compared with a one per cent increase for DAHI.
A similar market reaction to the stock prices of biotechnology companies
occurred in Canada, although the increase in prices occurred throughout the
second half of 1995 and during the first five months of 1996, as opposed to
primarily the first three months of 1996 for DAHI.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
TOP 30 CDN BIOTECH CO'S DAHI ($CDN)
---------------------------- --------------------------
% %
% CHANGE % CHANGE
CHANGE FROM CHANGE FROM
PER JUNE 30, PER JUNE 30,
PERIOD INDEX(1) PERIOD 1995 INDEX(1) PERIOD 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1995 100 100
December 31, 1995 128 28 28 92 -8 -8
March 31, 1996 179 40 79 172 87 72
May 31, 1996 233 30 133 206 20 106
June 30, 1996 210 -10 110 174 -16 74
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
(1) June 30, 1995 biotech/DAHI CDN share price equals 100
- --------------------------------------------------------------------------------
45
<PAGE>
At the high end of the range, we believe that the DAHI share price included some
speculative value that resulted from the general euphoria surrounding the
biotechnology sector between March and June 1996. In addition, DAHI had
announced during this period the filing of a supplemental new drug submission
with the BVD for treating CDS.
Earlier in 1996, the increase in the DAHI share price was also a result of the
following favourable announcements by the Company:
- - January 10, 1996 - agreement with DAHI for Draxis to sell Anipryl in
Canada; and,
- - May 16, 1996 - reported one-time revenues from the sale of distribution
rights of Anipryl in Canada and a milestone payment from HVG, resulting in
positive earnings per share.
We are of the view that the recent decline in share price may reflect the recent
increase in uncertainty surrounding the value of biotechnology companies in the
market.
TANGIBLE ASSET BACKING
- --------------------------------------------------------------------------------
The table below sets out the en bloc value of DAHI in comparison to the
Company's net tangible assets at book value, as well as the implied
market-to-book multiples.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
($U.S. MILLIONS)
RANGE OF FAIR MARKET VALUES
-----------------------------
Low High
-----------------------------
DAHI
En bloc value plus convertible debt (1) $ 27.8 $ 37.0
Value of net tangible assets at book value (1) 2.1 2.1
------- -------
Implied intangible value $ 25.7 $ 34.9
------- -------
------- -------
Implied market-to-book multiple 13.2 17.6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) For purposes of calculating this multiple, we have treated the convertible
debt of DAHI as equity rather than debt and added the debt to the en bloc
value and to the net deficit.
- --------------------------------------------------------------------------------
46
<PAGE>
The amount of intangible value in the Company implied by our valuation is high
relative to the value of tangible assets , which in our view is attributable to
the fact that the value of DAHI resides in the future potential of Anipryl, the
value of which is not recorded on the Company's balance sheet, and the fact that
DAHI has a small amount of cash on hand.
The low tangible asset value of DAHI would increase the risk of an investment in
the Company. This factor was considered earlier in the selection of our
discount rate.
- --------------------------------------------------------------------------------
47
<PAGE>
X DAHI CONCLUSION
- --------------------------------------------------------------------------------
ASSUMPTIONS
---------------------------------------------------------------------------
In addition to assumptions noted elsewhere in this report, we have also
assumed the following:
- the Company had no contingent liabilities, unusual contractual
obligations or substantial commitments, or litigation pending or
threatened, that would be material to our valuation conclusions, other
than as disclosed to us and as referred to in this report;
- the June 30, 1996 financial position of the Company and its results of
operations for the six months then ended would not be materially
different were the interim financial statements to be subject to
audit;
- all of the significant tangible assets and liabilities of the Company
were recorded on its June 30, 1996 financial statements;
- federal and state income tax laws prevailing at the valuation date
will continue to prevail in the foreseeable future;
- the projections of DAHI for the fiscal years ending December 31, 1996
through 2005, as initially prepared by management for five years and
updated to ten years and revised to June 30, 1996, are considered to
be reasonable by the Committee and DAHI management;
- DAHI will be able to obtain sufficient financing to develop, market
and distribute Anipryl;
- DAHI will be able to satisfy all claims by dissenting shareholders to
pay fair value for their shares within the laws of the state of
Missouri; and,
- DAHI will be able to retain the services of senior management, in
particular Dr. Stevens and Dr. Ruehl.
- --------------------------------------------------------------------------------
48
<PAGE>
CONCLUSION
- --------------------------------------------------------------------------------
Based on the scope of our review and subject to the assumptions and restrictions
included in our report, it is our opinion that the en bloc fair market value of
all the issued and outstanding shares of DAHI at June 30, 1996 ranges from
$25.3 million U.S. to $34.5 million U.S., or $29.9 million U.S. at the midpoint
($34.5 million CDN to $47.1 million CDN, or $40.8 million CDN at the midpoint).
This range of fair market values translates into proportionate en bloc diluted
per common share value, before consideration of any minority discount, as
follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RANGE MIDPOINT
- --------------------------------------------------------------------------------
Fair market value per diluted
common share ($U.S.) $ 3.01 $ 3.77 $ 3.39
Fair market value per diluted
common share ($CDN at 1.3639) $ 4.10 $ 5.14 $ 4.62
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
49
<PAGE>
XI DRAXIS SCOPE OF REVIEW
- --------------------------------------------------------------------------------
In arriving at our opinion of value with respect to the common shares of
Draxis, we have reviewed and/or relied upon the following information
relevant to Draxis and its subsidiaries (collectively the "Company" for
purposes of Sections XI to XIX of this report):
- the Company's audited financial statements, annual reports and annual
information forms for each of the Company's five fiscal years
preceding the valuation date;
- the Company's unaudited financial statements for the six months ended
June 30, 1996;
- the 1995 federal and provincial/state income tax returns for Draxis
and certain of its subsidiaries;
- Board of Directors minutes for the period January 1, 1995 to July 26,
1996;
- the investor package available from the Company, including press
releases issued by or with respect to Draxis and its business during
1995 and 1996;
- the Draxis prospectus dated June 12, 1996 providing for the issuance
of three million common shares at $4.25 each;
- various analyst summaries for, and annual reports of, public companies
involved in the pharmaceutical industry in Canada, the U.S., or
abroad;
- schedules, as prepared by management, of Draxis' share options,
warrants and employee participation shares outstanding as at the
valuation date;
- a ten year financial projection prepared by Draxis management in April
1996;
- the Exchange Agreement among Draxis, DAHI and DPI dated July 25, 1996;
- the draft Proxy Statement of DAHI and Draxis;
- quantitative and qualitative analyses prepared by Montgomery
Securities, Inc., adviser to Draxis;
- certain regulatory correspondence regarding the status of the
Company's existing and proposed products;
- --------------------------------------------------------------------------------
50
<PAGE>
- major agreements affecting the Company's operations, including patents
and licensing agreements;
- general economic indicators as at the valuation date; and,
- information relevant to DAHI as detailed in Section II.
- In arriving at our opinion of value, we have also given consideration
to our discussions with the following individuals:
- Dr. Martin Barkin, President, Chief Executive Officer, Chief Operating
Officer and Director, Draxis;
- Ms Jacqueline Le Saux, Vice-President, Corporate Development and
Secretary, Draxis;
- Dr. Roger Mailhot, Vice-President, Scientific and Regulatory Affairs,
Draxis;
- Mr. Bernard Marzalik, Vice-President, Marketing and Sales, Draxis;
- Mr. Cameron Strong, Acting Chief Financial Officer, Draxis;
- other members of the Company's management team; and,
- representatives of Montgomery Securities, Inc.
In the course of our engagement, with the Committee's approval, we have
relied upon certain audited and unaudited financial information, as well as
other non-financial information, including that outlined above. Although
we have considered the reasonableness of all information provided to us, we
have not conducted any audit, independent investigation or other procedures
to verify the accuracy, completeness or fair presentation of any such
information. Accordingly, we have assumed the completeness, accuracy and
fair presentation of the financial data, advice, opinions, representations
or other information provided to or obtained by us from Draxis, its
affiliates and its advisors, public sources, drafts of the Proxy Statement
or otherwise. We have assumed that this information is complete and
accurate and does not omit to state any material fact that was necessary to
be stated to make that information not misleading. The opinions expressed
herein are conditional upon such completeness, accuracy and fairness of
that information.
- --------------------------------------------------------------------------------
51
<PAGE>
With respect to financial forecasts and projections provided to us, and used in
our analysis, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgements as to the
matters covered thereby and in rendering our opinion, we express no view as to
the reasonableness of the forecasts or projections or assumptions on which they
were based.
Our opinion is based upon the securities markets, economics and general business
and financial conditions prevailing at June 30, 1996 and the conditions and
prospects, financial and otherwise, of Draxis and its affiliates as they are
reflected in the public documents of Draxis or information provided to us. Any
changes therein may affect our opinion and, although we reserve the right to
change or withdraw our opinion in such event, we disclaim any obligation to
either advise any person of any such change that may come to our attention or to
update our opinion after today.
Senior management of Draxis has made specific representations, among others, to
us as follows:
a) the information provided by Draxis is, or in the case of historical
information was, at the date of preparation thereof, complete and accurate
in all material respects, given the context and purpose for which it was
prepared, and does not or did not, as the case may be, contain any untrue
statement of material fact or omit to state any material fact necessary to
make the statements therein not misleading;
b) there is no reason to believe that the information provided with respect to
DAHI is, or in the case of historical information was, at the date of
preparation thereof, not complete and accurate in all material respects,
given the context and purpose for which it was prepared, or contains or
contained, as the case may be, any untrue statement of material fact or
omitted to state any material fact necessary to make the statements therein
not misleading;
c) with respect to any portions of the Draxis information that contain
forecasts, projections or estimates, including, without limitation, the
projections of Draxis for the fiscal years ended December 31, 1996 through
December 31, 2000 (prepared in April 1996 and updated to June 30, 1996),
such forecasts, projections and estimates:
- were reasonably prepared using the assumptions identified to us,
- are not misleading in any material respect, and
- --------------------------------------------------------------------------------
52
<PAGE>
- reflect the best currently available estimates and judgements as to
the matters covered thereby and the expected future operating results
for the periods covered thereby;
d) to the extent that any of the Draxis information is historical, there have
been no material changes or changes in material facts or new material facts
of which Draxis is aware since the respective dates of the Draxis
information that have not been disclosed generally or are not disclosed in
the draft Proxy Statement or updated by more current Draxis information
that has been provided to us;
e) with respect to any portion of the Draxis information that constitutes a
written statement of opinion or belief of a third party, including the
appraisals and valuations referred to in g) below, Draxis has no reason to
believe that such opinions or beliefs were not reasonable at the date on
which they were issued;
f) the forecasted income tax rates for DAHI and Draxis used by us in
preparation of the Formal Valuation are reasonable;
g) we have been provided with all information, data and other material
(financial or otherwise) relating to Draxis or its subsidiaries, assets,
liabilities, financial prospects or condition which is known to Draxis
after reasonable inquiry and which would reasonably be expected to affect
materially the Formal Valuation, and, without limitation, except as
disclosed in the draft Proxy Statement:
- there are no existing independent appraisals or valuations or material
non-independent appraisals or valuations known to Draxis and prepared
as of a date within the twenty-four months preceding the date hereof
relating to Draxis or its subsidiaries or any of its material assets,
- within the twenty-four months preceding the date hereof, there have
been no material offers or transactions developed to an advanced stage
relating to the sale of Draxis, any of its material subsidiaries or
any of its or their material assets,
- there are no actions, suits, proceedings or enquiries pending,
threatened against or that might reasonably be expected to materially
and adversely affect Draxis, any of its subsidiaries or any of its or
their material assets, and
- there are no contingent liabilities, unusual contractual obligations
or substantial commitments of, or litigation pending or threatened
- --------------------------------------------------------------------------------
53
<PAGE>
against, Draxis or any of its subsidiaries that might reasonably be
expected to materially and adversely affect Draxis, its business,
financial position or prospects, any subsidiary of Draxis or its
business, financial position or prospects or any of the material
assets of Draxis or its subsidiaries, other than costs in the
approximate amount of $1,000,000 comprised primarily of adviser fees
if the Share Exchange does not proceed;
h) except as disclosed in the draft Proxy Statement:
- to the knowledge of Draxis, there are no existing independent
appraisals or valuations or material non-independent appraisals or
valuations prepared as of a date within twenty-four months preceding
the date hereof relating to DAHI or any of its material assets,
- to the knowledge of Draxis, except as disclosed to the public by DAHI,
within the twenty-four months preceding the date hereof, there have
been no material offers or transactions developed to an advanced stage
relating to the sale of DAHI or any of its material assets,
- to the knowledge of Draxis, there are no actions, suits, proceedings
or enquiries pending, threatened against or that might reasonably be
expected to materially and adversely affect DAHI, any of its
subsidiaries or any of its or their material assets, and
- to the knowledge of Draxis, there are no contingent liabilities,
unusual contractual obligations or substantial commitments of, or
litigation pending or threatened against, DAHI that might reasonably
be expected to materially and adversely affect DAHI, its business,
financial position or prospects or any of the material assets of DAHI,
other than costs in the approximate amount of $300,000 U.S. comprised
primarily of adviser fees if the Share Exchange does not proceed;
i) Draxis is not aware of any animal health product with an active ingredient
other than selegiline that is being actively developed or marketed as an
effective treatment for Cushing's disease or cognitive dysfunction syndrome
in canines other than Lysodren and Ketoconazole;
j) the schedule prepared by Draxis as at June 30, 1996 and provided to us
discloses all outstanding options, warrants, convertible securities or
other rights or convertible obligations of any nature:
- --------------------------------------------------------------------------------
54
<PAGE>
- affecting issued securities of Draxis at June 30, 1996, or
- providing for the purchase, subscription or issuance of any of the
unissued shares in the capital of Draxis, as at June 30, 1996;
k) as at the valuation date:
- all assets, wherever located, to which Draxis has ownership rights of
any nature have been recorded in the accounts of Draxis and represent
a continuing benefit of Draxis, and
- all liabilities of Draxis have been recorded in the accounts of
Draxis;
l) to the knowledge of Draxis, as at the valuation date:
- all material assets, wherever located, to which DAHI has ownership
rights of any nature have been recorded in the accounts of DAHI and
represent a continuing benefit of DAHI, and
- all material liabilities of DAHI have been recorded in the accounts of
DAHI;
m) where the value of any asset of Draxis is impaired or there has been any
pledge or assignment of, or security interest granted in respect of any
asset of Draxis, this fact has been reflected in the accounts or has
otherwise been disclosed to us. Any pledge or assignment of any assets of
Draxis as security for liabilities, including, without limitation,
contingent liabilities, has been disclosed to us;
n) where, to the knowledge of Draxis, the value of any material asset of DAHI
is impaired or there has been any pledge or assignment of, or security
interest granted in respect of any asset of DAHI, this fact has been
reflected in the accounts or has otherwise been disclosed to us. To the
knowledge of Draxis, any pledge or assignment of any material assets of
DAHI as security for liabilities, including, without limitation, contingent
liabilities, has been disclosed to us;
o) all accounting and financial records of Draxis and other data relating to
Draxis that is relevant to the Formal Valuation have been made available to
us;
p) no events have occurred or are pending and no facts have been discovered to
the present date which would have a material effect upon the most recently
disclosed financial statements of Draxis or which are of such significance
to the affairs of Draxis as to require disclosure in a note thereto;
- --------------------------------------------------------------------------------
55
<PAGE>
q) to the knowledge of Draxis, no events have occurred or are pending and no
facts have been discovered to the present date which would have a material
effect upon the most recently disclosed financial statements of DAHI or
which are of such significance to the affairs of DAHI as to require
disclosure in a note thereto;
r) the contents of the draft Proxy Statement and any other disclosure document
prepared by or on behalf of Draxis or any of its subsidiaries in connection
with the Share Exchange are true and correct in all material respects and
do not contain any untrue statement of material fact or omit to state any
material fact necessary to make the statements therein not misleading; and,
s) Draxis management has reviewed our Formal Valuation and have confirmed that
they have no information or knowledge not disclosed to us which would
reasonably be expected to affect the valuation conclusions noted therein.
We were not denied access to any information of which we were aware and which we
considered necessary in arriving at our opinion of value. In addition, we have
not relied on the opinions of any experts external to KPMG for purposes of
expressing our opinion on fair market value.
- --------------------------------------------------------------------------------
56
<PAGE>
XII DRAXIS CORPORATE OVERVIEW
- --------------------------------------------------------------------------------
HISTORY
- --------------------------------------------------------------------------------
Draxis was incorporated as Deprenyl Research Limited on October 13, 1987 as a
Canadian corporation under the Canada Business Corporations Act. In May 1994,
the Company changed its name to Draxis Health Inc. On July 1, 1994, Draxis
amalgamated with its subsidiary, Bone Health Inc., under a plan of arrangement.
Draxis was founded by Dr. Morton Shulman to develop and bring to market the
pharmaceutical drug, selegiline, a selective monoamine oxidase-type B inhibitor
used in the treatment of Parkinson's disease. The Company has marketed the drug
under its brand name Eldepryl since the late 1980's. The drug was approved for
sale by the HPB on January 2, 1990 and was sold prior to this date under
compassionate drug legislation.
Until 1993, Eldepryl accounted for virtually all the Company's sales. In an
attempt to diversify its product line, Draxis has been developing and licensing
a number of other drugs and health care products since the early 1990's.
In 1994, other products besides selegiline began to have a significant impact on
revenues and in 1995 accounted for approximately 20 per cent of sales.
Threatened by the possibility of a generic version of Eldepryl, in December 1993
the Company entered into an agreement with Novopharm Ltd. ("Novopharm"), a major
Canadian generic drug manufacturer, and began marketing selegiline under the
brand name Novo-Selegiline. The agreement with Novopharm will last for five
years, during which time it is expected that sales of Novo-Selegiline will
largely displace sales of Eldepryl.
STRUCTURE
- --------------------------------------------------------------------------------
Draxis is a Canadian public company listed on the TSE and quoted on the NASDAQ
in the U.S. The Company has a number of divisions and subsidiaries through
which it carries on its business activities.
- --------------------------------------------------------------------------------
57
<PAGE>
As at June 30, 1996, the corporate structure of Draxis, its subsidiaries and
investments is depicted in Schedule 8. The principle activities of each
corporate entity and division are described below:
- - Draxis Health Inc. (Canadian company publicly traded) - sales of Eldepryl
and other neurological drugs in Ontario, Lipopharm division;
- - Lipopharm division (a division of Draxis) - research and development and
sales of dermatological products in Canada;
- - Draxis Pharmaceutica Inc. (Canadian company wholly-owned by Draxis) - sales
of Eldepryl and other neurological drugs in Canada outside of Ontario,
holds 10 per cent interest in Draxis LLC and 30 per cent interest in DAHI;
- - Draxis U.S. Inc. (Delaware company wholly-owned by Draxis) - sales of
podiatry health care products in the U.S., holds Draxis' 50 per cent
interest in New IHS LLC;
- - Draxis LLC (Delaware company 90 per cent owned by Draxis and 10 per cent
owned by DPI) - holds 14 per cent interest in DAHI;
- - DAHI Animal Health (Ontario) Inc. (Canadian company wholly-owned by Draxis)
- sales of veterinary drugs in Ontario;
- - DAHI Animal Health Inc. (Canadian company wholly-owned by Draxis) - sales
of veterinary drugs in Canada outside of Ontario;
- - Deprenyl Animal Health, Inc. (Missouri company 30 per cent owned by DPI and
14 per cent owned by Draxis LLC) - research and development of veterinary
drugs for sale in the U.S.;
- - New IHS LLC (Delaware company 50 per cent owned by Draxis U.S. Inc.) -
development and direct sales of science-based nutriceuticals in the U.S.;
and,
- - Bone Care International, Inc. ("Bone Care") (a U.S. company three per cent
owned by Draxis) - development of drugs for metabolic bone disease.
For purposes of this valuation report, we have viewed Draxis on a consolidated
basis with the exception of the Company's investments in DAHI and Bone Care.
- --------------------------------------------------------------------------------
58
<PAGE>
OWNERSHIP
- --------------------------------------------------------------------------------
As at the valuation date the Company's management believed that no shareholder
owned, of record or beneficially, either directly or indirectly, more than 10
per cent of any class of voting securities of the Company.
The Company's share capital consists of an unlimited number of common shares, an
unlimited number of preferred shares and an unlimited number of employee
participation shares issuable in series. As at June 30, 1996, there were
23,375,220 common shares, no preferred shares, 965,500 employee participation
shares, series A, and 555,000 employee participation shares, series B,
outstanding. The number of common shares outstanding includes the recent issue
of 3,000,000 special warrants sold on April 22, 1996 for $4.25 per warrant which
were converted on June 25, 1996 to common shares on the basis of one common
share per each special warrant.
A summary of Draxis' share trading history (TSE) and volumes (TSE and NASDAQ) is
provided in Schedule 9. From a high of $26.75 in mid-1991, the share price
gradually declined to a low of $1.35 in mid-1994, with significant volatility
throughout the period. From its low in mid-1994, the share price increased to
an approximate trading range of $2.00 to $3.00 by the end of 1995 and peaked at
$6.55 in June 1996. The share price then declined to close at $4.75 on June 30,
1996.
During 1996, average monthly trading volumes approximated 5.0 million common
shares, or 21 per cent of the total issued and outstanding shares.
STOCK OPTIONS, WARRANTS AND EMPLOYEE PARTICIPATION SHARES
- --------------------------------------------------------------------------------
The Company has various stock option, warrant and employee participation shares
in place, with rights outstanding at the valuation date as follows:
- - warrants issued to Novopharm for 500,000 common shares exercisable at $2.09
per share until April 18, 2000;
- - warrants issued to Novopharm for 1,176,470 common shares exercisable at
$2.97 per share up to December 10, 1996, and escalating to $3.27 thereafter
up to and including December 10, 1997;
- - warrants issued to New IHS LLC for 1,000,000 common shares exercisable at
$2.25 per share only under certain terms and conditions until March 31,
2000 (these conditions are unlikely to be met);
- --------------------------------------------------------------------------------
59
<PAGE>
- - stock options issued to directors, officers and employees for 1,449,274
common shares exercisable at prices ranging from $1.70 to $2.70 per share
until 10 years from date of issue;
- - compensation options issued to underwriters (in connection with the
3,000,000 warrants issued in April 1996) for 300,000 common shares
exercisable at $4.25 per share until April 22, 1998; and,
- - 965,500 series A and 550,000 series B employee participation shares
convertible without further payment into a certain number of common shares
depending on the prevailing share price at the time of conversion.
For purposes of our valuation report in presenting information regarding Draxis
common shares on a diluted basis, we have assumed that all rights to acquire
common shares, whether vested or not, would be exercised to the extent that the
exercise price was less than the June 30, 1996 closing share price of $4.75.
This approach ignores the effects of discounting for the time value of money
from the exercise date back to the valuation date. There is a high probability
that these rights will be exercised on vesting during the investment horizon
contemplated for purposes of this valuation (i.e. more than five years). The
impact on the number of common shares outstanding and the resulting cash
proceeds with respect to stock options, warrants and convertible debt has been
determined as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NUMBER OF
CONVERSION COMMON CONVERSION
ASSUMPTION SHARES PRICE CASH PROCEEDS
- --------------------------------------------------------------------------------
Novopharm warrants Converted 500,000 $ 2.09 $ 1,045,000
Novopharm warrants Converted 1,176,470 $ 2.97 3,494,116
New IHS LLC Not converted
Director, officer, and Converted 1,449,274 Various 3,477,213
employee stock options
Underwriter Converted 300,000 $ 4.25 1,275,000
compensation options
Employee participation Converted 473,922 N/A nil
shares, Series A
Employee participation Converted 295,492 N/A nil
shares, Series B
- --------------------------------------------------------------------------------
Total 4,195,158 $ 9,291,329
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
60
<PAGE>
XIII DRAXIS DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
Draxis is a Canadian-based pharmaceutical and health care products company. Its
principle activities are marketing and selling prescription pharmaceuticals and
consumer health care products, as well as researching and developing new
products for sale or for out-licensing to others. Its core concentration is on
neurological and dermatological (including podiatric) disorders and on
veterinary products, and it offers a number of individual products which, when
combined, are effective in providing a comprehensive treatment for certain
diseases. The Company has an established infrastructure including experienced
management, clinical research and drug development capabilities, and marketing,
sales and distribution networks. Draxis is involved in both licensing and
developing new drugs for market and is actively seeking opportunities to add to
its approved and developing product lines. The Company is not engaged in
manufacturing, preferring to contract with suppliers or licensors for producing
its products.
At the valuation date, Draxis was debt-free and had cash of $30.5 million.
Management believes that the Company is well positioned over the next five years
to be able to bring new products to the market and benefit from research and
development efforts. Management's primary focus is to profitably expand the
Company's product line in its core "franchises" (neurological pharmaceuticals
and dermatological (including podiatric) pharmaceutical and health care
products) and benefit from increased sales through its existing distribution
networks.
PRODUCTS AND PRODUCT DEVELOPMENT
- --------------------------------------------------------------------------------
Draxis' products can be categorized as existing drugs currently being marketed,
drugs in later stage development and expected to be brought to market by 1999,
and drugs in development and not expected to be brought to market before the
year 2000. The Company's products are briefly described below by category.
- --------------------------------------------------------------------------------
61
<PAGE>
EXISTING DRUGS CURRENTLY BEING MARKETED
ELDEPRYL AND NOVO-SELEGILINE
Selegiline (Eldepryl and Novo-Selegiline) is used to treat newly diagnosed
patients with Parkinson's disease and is also used as an adjunct to Levodopa.
Sales of Eldepryl and Novo-Selegiline during the past twelve months were
$3.3 million and $7.3 million respectively, or $10.6 million combined.
Draxis holds the exclusive rights to market Eldepryl in Canada under sub-license
from Somerset Pharmaceuticals Inc. ("Somerset"), which in turn holds exclusive
rights to market Eldepryl in North America and other countries from Chinoin.
The basic Canadian patent held by Chinoin covering the original process for
preparing the active ingredient in Eldepryl expired in mid-1988, but Chinoin has
also patented a further process for the efficient preparation of the active
ingredient and this patent will not expire until the end of 2003. This patent,
however, does not prevent a third party from entering the market with a
selegiline product made using a different process. Draxis is required to
purchase all of its product from Somerset at cost plus a royalty on net sales.
Eldepryl was genericized by Novopharm in December 1993 in co-operation with
Draxis under terms of a profit-sharing agreement which expires in December 1998.
There are indications that other generic versions of selegiline may soon emerge
in the market to compete with Eldepryl and Novo-Selegiline.
PERMAX
Permax is used in the treatment of Parkinson's disease when a dopamine agonist
is required as an adjunct to levedopa therapy. Sales of Permax during the last
twelve months were $2.5 million.
Draxis holds the exclusive rights to market Permax in Canada under sub-license
from Eli Lilly Canada Inc. ("Eli Lilly"), which in turn licenses the drug from
its parent which owns the patent. The agreement with Eli Lilly expires in
December 1998, but can be renewed for an additional ten years provided Draxis
has met certain sales targets and other parameters. Draxis management believes
it will be difficult to achieve the minimum sales targets. As a result, Draxis
is negotiating a renewal of its agreement with Eli Lilly.
Draxis acquired the rights to Permax for a payment of $3.5 million. Draxis is
required to purchase all of its product from Eli Lilly.
- --------------------------------------------------------------------------------
62
<PAGE>
At the moment there is one major competitor to Permax, Parlodel, which is
manufactured by Sandoz. There are indications that other competitive products
are slated to enter the market in the next two or three years and that initial
results from these products are of interest to neurologists.
OTHER NEUROLOGICAL DRUGS
Draxis sells or promotes a number of other drugs along with selegiline and
Permax that are used in the treatment of Parkinson's disease, including Prolopa,
Britaject and Tegretol. Although these products are important to the treatment
of Parkinson's disease, the combined revenue from these products during the last
twelve months was not significant and amounted to approximately $0.5 million.
Prolopa is sold by Draxis under exclusive rights licensed from Hoffmann-LaRoche
Limited under an agreement that expires in 2000. Britaject is sold under the
Canadian Emergency Drug Release Program and there are no plans to complete
clinical trials for HPB approval. Tegretol is sold in Canada by Draxis under
terms of a one year renewable agreement with Ciba-Geigy Canada Ltd.
LIPOPHARM DERMATOLOGICAL
This product line consists of over-the-counter skin care products based on
patented Lipopharm technology. Total sales of all Lipopharm dermatological
products during the last twelve months were $0.2 million.
Draxis acquired the exclusive world rights to produce, manufacture, fabricate,
assemble, sell or otherwise promote Lipopharm technology products from Mezei
Associates Limited who owned the patent for the Lipopharm technology.
Draxis is responsible for all product development and pays Mezei Associates
Limited a royalty on net sales.
KERASAL
Kerasal is a topical product with exfoliating and moisturizing properties. It
is marketed in Canada for pre-conditioning the skin prior to primary therapy for
skin conditions such as psoriasis. Draxis officially launched sales of Kerasal
in the U.S. in the first quarter of 1996, with sales to date of $0.3 million.
Kerasal is being sold to podiatrists in the U.S. by a separate company, Draxis
U.S. Inc.
Draxis acquired the exclusive rights to market Kerasal in North America in 1992
from Spirig AG of Switzerland. The initial term of the agreement expires in
2001
- --------------------------------------------------------------------------------
63
<PAGE>
and the agreement can be terminated earlier with twelve months notice or if
minimum sales targets are not met.
Draxis purchases Kerasal from Spirig AG.
There are a number of competing products in the U.S., but Kerasal is the only
product to combine salicylic acid and urea. In a clinical evaluation of
Kerasal, virtually all patients experienced moderate or complete response with
few adverse side effects.
CONSUMER HEALTH PRODUCTS
Draxis has recently established a joint venture with other investors in the U.S.
to market science-based, health-related nutritional products through an
independent distributor network. The products include O2T, an antioxidant
cocktail, O2T female formulation, BLD, a nutritional meal supplement, and A-
multi and P-multi vitamin and herbal nutritional complexes. Sales of all
consumer health products by the joint venture amounted to approximately $0.7
million during the last twelve months. Draxis entered into an operating
agreement in 1995 with the originator of the consumer health products, IHS,
whereby Draxis committed to provide the joint venture with market support,
scientific and regulatory systems, access to its consumer dermatology product
line, new product development guidance, and an initial $0.5 million working
capital loan.
ANIPRYL
Anipryl is the equivalent product to Eldepryl and is used by veterinarians to
treat dogs for canine Cushing's disease. Anipryl was approved by the BVA in
September 1995 and Draxis began marketing the product in Canada during the
second quarter of 1996. Sales to date have been approximately $0.1 million.
Draxis holds the exclusive rights to market Anipryl in Canada under license from
DAHI.
There are no known major competitors to Anipryl in the Canadian market, other
than two non-animal pharmaceuticals (see Section IV).
- --------------------------------------------------------------------------------
64
<PAGE>
DRUGS IN LATE STAGE DEVELOPMENT
MODAFINIL
Modafinil is a drug that regulates wakefulness in patients with sleeping
disorders, primarily narcolepsy. Narcolepsy is a sleep disorder characterized
by uncontrolled episodes of falling asleep at unexpected times and conditions.
There is no primary treatment for narcolepsy in Canada and therapies that are
available are often addictive and have undesirable side-effects. Modafinil is
an original new medication for narcolepsy. It is currently being sold in France
by Laboratoirel Lafon ("Lafon").
In February 1996, Draxis reported statistically significant results from its
phase III clinical study of Modafinil at the 200 mg and 400 mg doses for the
treatment of narcolepsy. The results of this study will be used by Draxis to
complete its submission for regulatory approval in Canada. Submission to the
HPB is expected in August 1996. Our Formal Valuation includes assumptions
provided to us by Draxis management as to the expected timing of HPB approval
for the use of Modafinil in treating narcolepsy. Draxis management has
represented to us that these assumptions are reasonable.
Draxis acquired the rights to market Modifinil in Canada in November 1992 from
Lafon. Lafon will manufacture the drug for Draxis in exchange for a royalty
payment. The agreement is for a period of 15 years from the date of approval by
HPB.
LIPOTECA
LipoTeca makes use of Liposome technology and is intended for use in the
treatment of Keloids, abnormal scar formations that occur following surgery,
burns, trauma, and skin infections. Draxis is currently developing other drugs
using Liposome technology, such as Lipo-FORT and Liposporin. LipoTeca is the
only drug in late stage development.
At the end of 1995 Draxis completed the first of two phase III clinical trials
with results indicating that LipoTeca demonstrated a significant effect on the
induration of Keloid scars. The second phase III clinical trial is underway and
is expected to be completed during the first half of 1997. It is too early to
predict statistical outcomes from the second trial, although an informal interim
review of the data shows an apparent impact only with respect to reducing the
redness of the Keloid scars.
- --------------------------------------------------------------------------------
65
<PAGE>
Similar to other Liposome technology products, Draxis owns world-wide rights to
any products it develops. Management has estimated that the world-wide market
for LipoTeca is approximately $300 million, based on independent industry data.
Our Formal Valuation includes assumptions provided to us by Draxis management as
to the expected timing of HPB approval for the use of LipoTeca in treating
Keloid scars. Draxis management has represented to us that these assumptions
are reasonable.
ALA PHOTODYNAMIC THERAPY
ALA Photodynamic Therapy is a diagnostic agent for pre-cancerous cells, but
potentially has many other uses such as the treatment of psoriasis, permanent
hair removal and the treatment of dysfunctional uteral bleeding. The drug is
currently in the middle of phase II clinical studies and has shown significant
promise with respect to the treatment of psoriasis. Phase III clinical studies
are not expected to be completed until the end of 1996 or 1997.
DUSA Pharmaceuticals Inc. has the world-wide rights to certain uses of ALA
Photodynamic Therapy and has assigned its rights to Draxis for sales in the
Canadian market. This agreement expires on August 27, 1996 but is renewable on
a year-to-year basis. ALA Photodynamic Therapy was developed by PARTEQ Research
and Development Innovations, the licensing arm of Queens University, Kingston,
Ontario.
Our Formal Valuation includes assumptions provided to us by Draxis management as
to the expected timing of HPB approval for the use of ALA Photodynamic Therapy
in treating psoriasis. Draxis management has represented to us that these
assumptions are reasonable.
MIDDLE STAGE DEVELOPMENT PRODUCTS
ONE-ALPHA D2
One-Alpha D2 is currently being tested for use in renal dystrophy (a condition
where the body does not adequately absorb calcium) to promote reabsorption of
calcium. One phase II clinical study has established that One-Alpha D2 increased
mineral bone density and consequently is a potential treatment for osteoporosis
(a disease characterized by thinning and weakening of the bones to the point of
spontaneous fracture). Bone Care is pursuing phase III clinical trials, after
which regulatory approval will be sought by Draxis from the HPB. No clinical
studies will be initiated in osteoporosis before the approval and marketing of
One-Alpha D2 for renal dystrophy.
- --------------------------------------------------------------------------------
66
<PAGE>
Draxis acquired the exclusive Canadian rights to One-Alpha D2 in 1990 from Bone
Care. The initial term of the license expires in March 2010 and requires that
Draxis be responsible for obtaining all HPB approvals for any indications for
the drug.
IPRIFLAVONE
Ipriflavone is a drug that aids in increasing bone density in the treatment of
osteoporosis. The drug is currently in phase II clinical trials and the overall
approval process is expected to be lengthy.
Draxis acquired the exclusive Canadian rights to market Ipriflavone from
Somerset. Somerset has licensed the rights to Ipriflavone in North America from
Chinoin. Somerset has overall responsibility for all research and development
activity through to the approval process for the drug in North America.
To date Draxis has spent $0.1 million U.S. to acquire the rights from Somerset
and is required to make an additional payment of $0.2 million U.S. once a new
drug submission is filed with the HPB and an additional $0.4 million U.S. upon
issuance of an NOC by the HPB.
Our Formal Valuation includes assumptions provided to us by Draxis management as
to the expected timing of HPB approval for the use of Ipriflavone in treating
osteoporosis. Draxis management has represented to us that these assumptions
are reasonable.
OTHER DRUGS
Draxis has a number of other drugs and other indications for existing drugs
currently in development. It is too early to determine the potential for any of
these indications.
FACILITIES
- --------------------------------------------------------------------------------
The principal operations of Draxis are conducted from leased premises located at
6870 Goreway Drive, Mississauga, Ontario, L4V 1P1. The facility has
approximately 25,000 square feet of office and warehouse space at an aggregate
rent of $141,000 per year. The lease expires in May 1999.
- --------------------------------------------------------------------------------
67
<PAGE>
The Company also leases laboratory and office space in St. Laurent, Quebec where
the Lipopharm division is located. The nutriceuticals and podiatry products
businesses operated by subsidiaries are located in leased premises in
Indianapolis, Indiana.
MANAGEMENT AND EMPLOYEES
- --------------------------------------------------------------------------------
Draxis has a senior management team experienced in the pharmaceutical and health
care industry, including:
- - Dr. Martin Barkin, MD, BScMed, MA, FRCS, President, Chief Executive
Officer, Chief Operating Officer and Director - employed by Draxis since
1992, previously national practice leader of health care at KPMG, former
Deputy Minister of Health for the Province of Ontario, former President and
CEO of Sunnybrook Health Sciences Centre and Professor at the Faculty of
Medicine at the University of Toronto in the departments of Surgery and
Health Administration;
- - Ms Jacqueline Le Saux, MBA, LLB, Vice-President, Corporate Development and
Secretary - joined Draxis in 1992, previously an Associate and Partner in
the Toronto law firm of McCarthy Tetrault, extensive experience in
sophisticated corporate transactions;
- - Dr. Roger Mailhot, PhD Pharmacology, Vice-President, Scientific and
Regulatory Affairs - joined Draxis in 1990, previously Director of
Scientific Affairs for both Dupont Pharmaceuticals and Syntex Canada;
- - Mr. Bernard Marzalik, Vice-President, Marketing and Sales - joined Draxis
in 1994, formally an independent marketing consultant to the pharmaceutical
industry, previously held positions in marketing and sales with Ciba-Geigy
and CIBA Vision; and,
- - Mr. Cameron Strong, CA, Acting Chief Financial Officer - joined Draxis in
1992, previously Vice-President, Finance at American Aftermarket,
previously subsidiary controller at Drug Trading Company.
- --------------------------------------------------------------------------------
68
<PAGE>
At the valuation date, the Company had 70 employees (approximate full-time
equivalent), including the senior management team and contract sales force, as
follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEPARTMENT NUMBER OF EMPLOYEES
- --------------------------------------------------------------------------------
Head Office 10
Research & development at head office 3
Marketing 7
Sales force (Canada) 13
Lipopharm division 7
(5 in research & development)
Consumer & health care products 11
(U.S. joint venture)
Podiatry sales - contract sales force (U.S.) 19
- --------------------------------------------------------------------------------
Total 70
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKETING, SALES AND DISTRIBUTION
- --------------------------------------------------------------------------------
Draxis markets its products in Canada using a Canadian sales force of 13 full-
time representatives. The sales force calls on neurologists and high-
prescribing general practitioners in the neurology area, as well as on targeted
dermatologists. Starting in 1996, the sales force also began calling on
veterinarians to market and distribute the drug Anipryl .
In the U.S., Draxis has contracted with a sales organization comprised of 16
dedicated representatives and 3 sales managers to call exclusively on
podiatrists for sales of Kerasal. In addition, Draxis has contracted with a
tele-marketing service to reach podiatrists located in U.S. states outside the
geographic areas covered by the representatives.
The consumer health care products joint venture markets its line of
nutriceuticals through a multi-level direct sales force.
- --------------------------------------------------------------------------------
69
<PAGE>
XIV DRAXIS FINANCIAL REVIEW
- --------------------------------------------------------------------------------
FINANCIAL POSITION
- --------------------------------------------------------------------------------
As at June 30, 1996, the Company's consolidated financial position can be
summarized as follows (with comparative figures at December 31, 1995):
(MILLIONS)
------------------------------------
JUNE 30, 1996 DECEMBER 31, 1995
- --------------------------------------------------------------------------------
NET ASSETS - OPERATIONS
Working capital $ 2.7 $ 2.9
Fixed assets 0.7 0.5
Unamortized cost of license, patents 4.2 3.7
and trademarks
------------------------------------
Total net assets - operations 7.6 7.1
------------------------------------
NET ASSETS - CORPORATE
Cash held in excess of working capital 28.4 12.7
requirements
Corporate receivables, loans and advances 1.1 1.2
Investment in DAHI 4.4 4.2
Investment in DUSA Pharmaceuticals, Inc. - 3.3
Loans to New IHS LLC joint venture 1.0 0.7
Investment in Bone Care 0.7 0.6
Unamortized goodwill 1.5 1.7
Income taxes (current and deferred) (0.8) (1.6)
------------------------------------
Total net assets - corporate 36.3 22.8
------------------------------------
TOTAL NET ASSETS $ 43.9 $ 29.9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company's financial position for the past five years and as at June 30, 1996
as recorded in its consolidated financial statements is provided in Schedule 5.
For purposes of our valuation analysis, we have segregated net assets used in
the Company's pharmaceutical/health care business from corporate net assets
which consist of cash held in excess of working capital requirements, loans
receivable, investments, goodwill, and income taxes.
- --------------------------------------------------------------------------------
70
<PAGE>
We have defined cash held in excess of working capital requirements as the total
of cash, treasury bills and marketable securities less the amount of cash
required for the Company's operations to ensure a current working capital ratio
(current assets divided by current liabilities) of two to one. Such a ratio is
justified based on the expectation of future cash flow, although many other
pharmaceutical companies maintain higher relative cash balances.
Our review and analysis of the Company's current financial position indicates
the following highlights:
- - cash has increased by approximately $14.0 million in 1996 primarily as a
result of disposing of the Company's investment in DUSA Pharmaceuticals,
Inc. and issuing 3,000,000 common shares. Major cash outlays included
providing additional loans to investees, making additional payments for
product licenses, and funding operating losses;
- - corporate receivables consist of loans to directors, officers and
employees, as well as other non-operating assets;
- - the investment in DAHI consists of 3,308,818 common shares (44 per cent of
DAHI) carried on the books at $0.9 million, as well as loans and advances
of $3.5 million ($2.5 million U.S.) convertible to 1,179,802 DAHI common
shares (which would raise Draxis' ownership interest in DAHI to 52 per
cent);
- - the investment in Bone Care consists of 118,421 common shares
(approximately three per cent of Bone Care's total issued and outstanding
shares) at a cost of $0.7 million;
- - goodwill arising on the purchase of the Lipopharm division (formerly
Lipopharm Inc.) in 1992 is being amortized over ten years to 2002; and,
- - the loans to New IHS LLC, a 50 per cent joint venture, are convertible into
equity and would give Draxis control over virtually the entire company (at
the valuation date, Draxis was in negotiations with a third party to
reorganize its interest in New IHS LLC).
HISTORICAL RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Company's historical results of operations and historical cash flows as
recorded in its consolidated financial statements are provided in Schedules 6
and 7, respectively for the years ended December 31, 1991 to 1995 (audited) and
for the six month periods January 1 to June 30, 1995 and 1996 (unaudited).
- --------------------------------------------------------------------------------
71
<PAGE>
Our review and analysis of the historical operating results indicates the
following significant highlights:
- - as indicated in the following table, sales of Eldepryl and later Novo-
Selegiline have comprised the majority of Draxis' sales since 1992, with
other products beginning to become more significant in 1994;
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
SIX
YEAR ENDED DECEMBER 31 MONTHS
- ---------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRODUCT SALES (MILLIONS)
Eldepryl $ 16.6 $ 14.6 $ 11.6 $ 6.2 $ 1.1
Novo-Selegiline - - 2.5 5.9 3.5
- ---------------------------------------------------------------------------------------------------------
Total selegiline 16.6 14.6 14.1 12.1 4.6
Permax - - 1.6 2.0 1.3
Other neurological 0.5 0.4 0.3 0.4 0.3
- ---------------------------------------------------------------------------------------------------------
Total neurological 17.1 15.0 16.0 14.5 6.2
Lipopharm division
(dermatological products) 0.3 0.1 0.3 0.3 0.1
Consumer health care
products (nutriceuticals) - - - 0.6 0.3
Podiatry (Kerasal) - - - - 0.3
Veterinary (Anipryl) - - - - 0.1
- ---------------------------------------------------------------------------------------------------------
Total product sales $ 17.4 $ 15.1 $ 16.3 $ 15.4 $ 7.0
- ---------------------------------------------------------------------------------------------------------
PERCENTAGE OF TOTAL PRODUCT SALES
Eldepryl 95% 96% 71% 40% 16%
Novo-Selegiline - - 15 38 50
- ---------------------------------------------------------------------------------------------------------
Total selegiline 95 96 86 78 66
Permax - - 10 13 19
Other neurological 3 3 2 3 4
- ---------------------------------------------------------------------------------------------------------
Total neurological 98 99 98 94 89
Lipopharm division
(dermatological products) 2 1 2 2 2
Consumer health care
products (nutriceuticals) - - - 4 4
Podiatry (Kerasal) - - - - 4
Veterinary (Anipryl) - - - - 1
- ---------------------------------------------------------------------------------------------------------
Total product sales 100% 100% 100% 100% 100%
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
72
<PAGE>
- - income from operations (defined for purposes of our valuation analysis as
income from product sales less cost of sales, selling and administration
expenses, and research and development expense, but before depreciation and
amortization, interest income, gains and losses on investments, other non-
operating income and expense, and income tax expense) has varied over the
past five years, but has declined to a loss of $2.7 million in the first
six months of 1996 from a profit of $5.0 million in 1994. The primary
factors accounting for the decline are the decrease in Eldepryl sales with
its high product contribution rate, the replacement of Eldepryl with Novo-
Selegiline and the requirement to share profits with Novopharm, the cost of
bringing new products such as Anipryl, Kerasal and consumer health care
products to market, and the additional costs of development for emerging
products such as Modafinil and LipoTeca. Partially offsetting the decline
in profits has been an effort by management to reduce selling and
administration expenses, particularly in 1994. Income from operations, as
defined, is summarized below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
(MILLIONS) SIX
YEAR ENDED DECEMBER 31 MONTHS
- -----------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Product sales $ 17.4 $ 15.1 $ 16.3 $ 15.4 $ 7.0
Cost of sales, selling and
administration expense (12.5) (12.1) (10.2) (13.2) (9.0)
Research and development
expense, net (1.5) (1.7) (1.1) (1.5) (0.7)
- -----------------------------------------------------------------------------------------------------
Income from operations, as
defined $ 3.4 $ 1.3 $ 5.0 $ 0.7 $ (2.7)
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
- - the Company's operating results are characterized by high product
contribution margins, as well as high levels of fixed costs, with the
result that a change to sales volume has a significant impact on earnings
and cash flow;
- --------------------------------------------------------------------------------
73
<PAGE>
- - other income and expenses since 1992 are summarized below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
(MILLIONS) SIX
YEAR ENDED DECEMBER 31 MONTHS
- -----------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 0.5 $ 0.3 $ 0.8 $ 1.2 $ 0.8
Gain/(loss) on sale of
marketable securities 1.3 (2.7) 0.1 0.5 0.1
Gain on investment in DUSA
Pharmaceuticals, Inc. 4.4 - 0.2 4.9 6.0
Gain/(loss) on investment in
Bone Health Inc. - 0.3 (0.1) - -
Gain on investment in Medicis
Pharmaceuticals, Inc. 1.8 - - - -
Severance costs and retiring
allowance - (0.4) (0.2) - -
Equity share of losses in
affiliates (0.9) (1.3) (2.1) (1.5) (1.2)
- -----------------------------------------------------------------------------------------------------
Total other income/(expense) $ 7.1 $ (3.8) $ (1.3) $ 5.1 $ 5.7
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
- - in the second half of fiscal 1995, Draxis discontinued equity accounting
for its investment in DAHI, but resumed equity accounting for its
investment in fiscal 1996;
- - the Company's historical operating results since 1992 can be summarized as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
(MILLIONS) SIX
YEAR ENDED DECEMBER 31 MONTHS
- -----------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from operations, as
defined $ 3.4 $ 1.3 $ 5.0 $ 0.7 $ (2.7)
Other income/(expense) 7.1 (3.8) (1.3) 5.1 5.7
- -----------------------------------------------------------------------------------------------------
Sub-total 10.5 (2.5) 3.7 5.8 3.0
Depreciation and amortization 0.4 0.6 0.9 1.3 0.8
- -----------------------------------------------------------------------------------------------------
Income/(loss) before income
taxes 10.1 (3.1) 2.8 4.5 2.2
Income taxes 4.1 (1.0) 1.7 2.1 0.4
- -----------------------------------------------------------------------------------------------------
Net income/(loss) $ 6.0 $ (2.1) $ 1.1 $ 2.4 $ 1.8
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
74
<PAGE>
PROJECTED OPERATING RESULTS
- --------------------------------------------------------------------------------
The Company's historical operating results are not indicative of future expected
results, given that:
- - sales of Eldepryl and Novo-Selegiline are declining, with sales of
Novo-Selegiline ending in 1999 with the expiration of the profit sharing
agreement between Draxis and Novopharm;
- - sales of new products recently introduced to the market by Draxis (Kerasal,
Anipryl and consumer health care products) will increase, along with
profitability once the cost of product introductions declines;
- - two new products (Modafinil and LipoTeca) are in the late stages of
development and are expected to be brought to market during the projection
period;
- - the Company expects that the first indication for ALA Photodynamic Therapy
will be approved and sales will commence during the projection period; and,
- - the Company has a number of new products, or extension of existing
products, in early to middle stage development that will potentially be
brought to market sometime after the year 2000.
In April 1996, the management of Draxis prepared a ten year projection of
operating results for the years 1996 to 2005. The projected results for the
years 1996 to 2000 have been updated for purposes of our valuation analysis
based on events to June 30, 1996. The major assumptions underlying the five year
projections used in our valuation analysis are described below:
- - sales of existing neurological drugs will gradually decline, primarily a
result of a decline in selegiline sales as the agreement with Novopharm
ends in 1999;
- - sales of other existing products recently introduced to the market
(primarily Kerasal, Anipryl and consumer health care products) will
gradually increase as market penetration is achieved;
- - sales of Modafinil for the treatment of narcolepsy will commence and
gradually increase during the projection period;
- - LipoTeca for the treatment of keloids will be introduced to the market and
sales will gradually increase during the projection period;
- --------------------------------------------------------------------------------
75
<PAGE>
- - ALA Photodynamic therapy for the treatment of actinic keratoses will be
introduced to the market, with significant sales volume not expected for
several years;
- - product sales will become profitable in 1997, after a loss in 1996 caused
by lower sales volume and the expense of promoting sales of Kerasal,
Anipryl and consumer health care products, with profit margins gradually
increasing during the projection period;
- - other income during the years 1997 to 2000 consists primarily of interest
earned on cash balances;
- - depreciation and amortization will decline in 1999 primarily as a result of
license fees for Permax being fully amortized;
- - income tax expense will average 40 per cent, which approximates the
Company's current consolidated average marginal rate (future income tax
rates may vary materially depending on the jurisdiction that Draxis
operates from or sells to); and,
- - equity earnings result from the Company's investment in DAHI (and assumes
that the proposed Share Exchange transaction has not been consummated).
Draxis management has represented to us that the projections are reasonable for
purposes of our Formal Valuation. For strategic and competitive reasons, at the
request of Draxis we have not specifically disclosed the full assumptions
represented to us, or the actual projections used in the Formal Valuation.
Management concedes, and we concur, that the projections are based on
expectations of future events which cannot be verified, including the outcome of
clinical trials. There are no assurances that actual results will coincide with
projected results. Variances will occur and these variances will likely be
significant.
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XV PHARMACEUTICAL / HEALTH CARE INDUSTRY
- --------------------------------------------------------------------------------
The pharmaceutical industry consists of companies which, directly or indirectly,
research, develop, manufacture and commercialize diagnostic and therapeutic
products and therapies for the prevention and the treatment of diseases. The
end products are prescription or over-the-counter drugs.
The industry is segmented into three kinds of companies:
i) brand name companies that develop and market the original products;
ii) generic companies that produce and market the generic versions of original
products when patents expire. This is only true in Canada since February
4, 1993 when Bill C-91 abolished compulsory licensing; and,
iii) small research and development oriented biopharmaceutical companies that
make strategic alliances with major pharmaceuticals companies.
IMS Canada, a market intelligence company, predicts that the total ethical (non-
generic) market will grow at a 3.5 per cent annual growth rate to reach a total
sales volume of $6.5 billion by the year 2000. Retail sales are expected to
grow at 3.7 per cent per year to $5.6 billion in the year 2000. Hospital sales
are expected to grow at 2.4 per cent per annum to $0.9 billion in the year 2000.
According to the Pharmaceutical Manufacturing Association of Canada ("PMAC"),
representing over 100 Canadian members, the industry is facing tremendous
challenges, including escalating research and development costs, growing
pressure to control drug costs, and increasing competition between companies.
The Canadian market is experiencing a major restructuring:
- - pharmaceutical companies are merging to ensure significant cash resources
are available to fund research and development;
- - there is a significant trend to sub-contracting portions of research,
clinical trials and manufacturing;
- - pharmaceutical companies are entering into joint ventures and/or strategic
alliances with smaller research and development oriented firms in specific
fields of research;
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- - with the passage of Bill C-91, which received royal assent in February
1993, compulsory licensing has been abolished forcing generic companies to
wait for the expiry of patents to produce and commercialize generic
versions; and,
- - there is a trend to globalization with large multi-nationals rationalizing
world-wide manufacturing operations to achieve greater economies of scale.
Continuing consolidation of the world pharmaceutical industry is expected.
THE GENERIC DRUG INDUSTRY
- --------------------------------------------------------------------------------
Generic drug companies develop and commercialize original products for both
prescription and over-the-counter markets. IMS Canada estimates the size of the
Canadian generic product market around $735 million. Apotex and Novopharm are
the largest participants in the Canadian market.
This industry segment had been strongly developed before 1987 when the
legislation forced the licensing of original products before the expiry of the
patent. The life of a patent was also shorter before this same legislation.
Generic companies are increasingly a significant factor in the pharmaceutical
industry mainly due to: i) governments, motivated by their fiscal deficits, are
more and more inclined to buy generic drugs; and, ii) benefiting from an
extensive distribution network and a low cost manufacturing process, generic
companies enter into joint ventures with pharmaceutical companies that want to
extend their profit stream on original drugs.
When a patent expires, the competition is centered on product price. While
pharmaceutical companies incur high costs because they pursue intensive research
and development costs to develop new drugs and must also be remunerated for a
relatively high risk, generic companies are specialized in low cost
manufacturing processes and distribution networks. It is not uncommon for
generic producers to gain 40 to 70 per cent of the market for a product within
two to three years of patent expiry based on pricing of approximately 60 per
cent of the price of the original drug. Consequently, generic companies have
significantly lower net profit margins.
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REGULATORY ISSUES
- --------------------------------------------------------------------------------
To launch a new drug in Canada or in the United States, pharmaceutical companies
must prove to the Canadian HPB or the U.S. FDA that the new drug is efficient
and safe. The systems may be the most demanding in the world. The United
States Congressional Office of Technology Assessment estimates that it takes 12
years on average to bring a new drug from its pre-clinical stage to the
commercialization phase.
CLINICAL TRIALS
- --------------------------------------------------------------------------------
PRE-CLINICAL TRIALS
The drug must be tested in vitro on different animal species before being tested
in humans. This stage of the development measures the therapeutic in vitro
activities of the new drug and evaluates the pharmacokinetic properties and
toxicity effects on animals. It also indicates the degree of absorption of the
drug, its transformation within other substances and its excretion within the
fluids. This period may vary, but lasts 3.5 years on average.
PHASE I - CLINICAL TRIALS
The primary goal of this phase is to collect pharmacokinetic and tolerability
data in connection with the proposed use of the drug on humans.
PHASE II - CLINICAL TRIALS
Generally, this phase may last one to two years and involves a limited number of
related patients already affected by the disease to be treated. The main
objective is to establish the optimal dosage and the efficacy of the drug. New
information on the safety of the drug is also gathered.
PHASE III - CLINICAL TRIALS
This phase may last one to three years on average and will involve the
administration of the drug to hundreds or thousands of patients. It usually
involves multi-center trials which may be conducted in many different health
centres around North American, Europe and possibly Asia.
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PHASE IV - CLINICAL TRIALS AND COMMERCIALIZATION
This phase takes place after the approval of the drug by health regulatory
authorities. This phase allows the company to gather additional information
about the long term effects of the new drug and, occasionally, to compare with
competitive products.
REGULATORY APPROVAL
The FDA and the HPB will need from one to two years to review the results of the
clinical and preclinical studies. The new drug may or may not be approved, or
additional information may be requested prior to an approval decision.
According to PMAC, there is on average a 50 per cent probability of success of
reaching the requirements at each clinical trial phase.
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XVI DRAXIS VALUATION APPROACH
- --------------------------------------------------------------------------------
Our valuation of the common shares of Draxis as at June 30, 1996 assumes that
the Share Exchange has been completed and Draxis owns, through its subsidiaries
or affiliates, 100 per cent of DAHI. In this way we are valuing the actual
consideration being received by the DAHI shareholders, i.e. at the time of the
DAHI shareholders receiving 1.35 Draxis common shares for each DAHI common
share, the fair market value of the Draxis common shares includes the value of
100 per cent of DAHI.
VALUATION THEORY
- --------------------------------------------------------------------------------
The two basic approaches used to determine the fair market value of a business
are the going concern approach and the liquidation approach. The liquidation
approach is used if future earnings are not expected to provide an adequate rate
of return on investment, or the nature of the business is such that its value is
closely related to the liquidation value of underlying assets. The going
concern approach is used if the business is expected to be able to operate
profitably or with a potential for future profits and positive cash flow.
Based upon our discussions with management of Draxis, and our review of the
Company's reported financial position, its historical operating results and its
projected operating results, we have concluded that the Company should be valued
using a going concern approach. There are several generally accepted methods to
determine the going concern value of a business. These include the capitalized
earnings approach, the capitalized cash flow approach, the discounted cash flow
approach, the net tangible asset approach, and the market comparable approach.
Based on our experience in business valuations, mergers, acquisitions and
divestitures, and on our understanding of Draxis and the pharmaceutical
industry, we have selected the discounted cash flow ("DCF") approach to
determine the fair market value of the pharmaceutical/health care business of
Draxis and the net tangible asset ("NTA") approach to determine the fair market
value of the net corporate assets of Draxis.
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Under the DCF approach, fair market value is determined as the present value of
expected future cash flow. Specifically, the net after-tax cash flow that the
business is expected to generate is projected over an explicit forecast period.
The projected cash flow, together with the residual value of the business at the
end of the forecast period, are discounted at an appropriate rate, resulting in
the value of the business operations.
In order to assess the reasonableness of the fair market value of the
pharmaceutical/health care business calculated using the DCF approach, we have
compared our value to other secondary approaches that we considered appropriate.
Under the NTA approach, fair market value is determined 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. We have deducted the recorded book value of Draxis' 44 per cent
investment in the shares of DAHI and added the fair market value of a 100 per
cent investment in the shares of DAHI. For purposes of determining the fair
market value of DAHI, we have used the en bloc fair market value as calculated
in Section VIII of this report, adjusted to reflect a reduction in inherent risk
associated with DAHI's projected financial results once DAHI is wholly-owned by
Draxis and to reflect the estimated costs, including professional and advisory
fees, to acquire 100 per cent of DAHI.
We do not consider the net corporate assets of Draxis to be redundant, even
though they are not required in the day-to-day operations of the
pharmaceutical/health care business. The cash reserves have been built up in
order for Draxis to take advantage of opportunities to acquire or invest in new
products or companies (such as DAHI), and management expects to maintain its
investment in other corporate assets. An underlying assumption is that Draxis
will be able to successfully deploy its cash resources to at least recoup the
present value of its cash.
REASONS FOR SELECTION / REJECTION OF VALUATION APPROACHES
- --------------------------------------------------------------------------------
We have selected the DCF approach primarily because of its focus on future, as
opposed to historical, results. As noted earlier, the Company's historical
results are unlikely to be indicative of future expected results.
The capitalized earnings approach, whereby maintainable earnings are capitalized
at an appropriate multiple to reflect the risk of the Company maintaining these
earnings as well as future growth prospects, was considered and rejected as an
appropriate valuation approach for Draxis. The Company's earnings have
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fluctuated widely during the past five years and past earnings are not
indicative of the future potential of the Company. In 1996, for example, Draxis
expects to sustain losses as profitability on mature products declines and new
products enter the market with associated new product launch costs.
The capitalization of maintainable cash flow approach, whereby maintainable cash
flows are capitalized at a multiple to reflect the risk of the Company
maintaining those cash flows as well as future growth prospects, was considered
by us and rejected for similar reasons to the capitalized earnings approach.
The Company's historical cash flows have fluctuated widely and the current year
negative cash flows are not indicative of expected cash flows during the next
five years.
The tangible asset approach, whereby tangible and identifiable intangible assets
and liabilities are adjusted to their respective market values at the valuation
date in order to determine the adjusted value of net equity, was considered by
us and rejected for purposes of valuing the pharmaceutical/health care business
since this approach does not contemplate potential goodwill value in the
business operations of Draxis from expected future profitability on existing
products and new products in development.
The market comparable approach, whereby the fair market value of Draxis is
determined by reference to share prices and trading multiples for publicly
traded companies comparable to Draxis, was considered by us and rejected as a
primary method for determining the value of the Company. While no two companies
are so alike that they are directly comparable, in the pharmaceutical industry
every company's value is a function of the growth and earnings prospects of
existing products and products in various stages of development. The product
profile for Draxis is not comparable to any other company in the marketplace.
We believe, however, that the market comparable approach is appropriate as a
secondary approach for assessing the reasonableness of the values determined by
us using the DCF approach.
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<PAGE>
XVII DRAXIS VALUATION CALCULATIONS
- --------------------------------------------------------------------------------
Our calculation of the fair market value of Draxis consists of two components:
- - the value of the Company's pharmaceutical/health care business, which
comprises the sale of existing products and development of new products to
be brought to market; and,
- - the value of the Company's net corporate assets, which is comprised of
investments in subsidiaries and other assets and liabilities not required
in the pharmaceutical/health care business operations.
The value of the pharmaceutical/health care business has been determined using a
DCF approach. The value of investments and other assets and liabilities has
been determined using an NTA approach. The recorded book value of assets and
liabilities at June 30, 1996 pertaining to each component are as summarized in
Section XIV of this report.
PHARMACEUTICAL / HEALTH CARE BUSINESS
- --------------------------------------------------------------------------------
As set out in the following table, using a DCF approach we have determined the
value of the pharmaceutical/health care business of the Company to be in the
range of $48.8 million to $57.9 million.
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(MILLIONS)
RANGE
- --------------------------------------------------------------------------------
PRESENT VALUE OF NET AFTER-TAX OPERATING CASH FLOW
JULY 1, 1996 TO DECEMBER 31, 2000
Discount rate 28% 23%
Present value amount $ 7.8 $ 8.9
- --------------------------------------------------------------------------------
PRESENT VALUE OF RESIDUAL VALUE AS AT DECEMBER 31, 2000
Residual value $ 124.5 $ 124.5
Discount rate 28% 23%
Present value amount $ 41.0 $ 49.0
- --------------------------------------------------------------------------------
TOTAL PRESENT VALUE $ 48.8 $ 57.9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As stated earlier, at the request of Draxis management we have not disclosed the
actual five year projection of net after-tax cash flow for strategic and
competitive reasons.
Our DCF calculation consists of the following components:
- - a review of management's projections for the period 1996 to 2000 based on
discussions and the results of other due diligence procedures that we
considered necessary;
- - an adjustment to management's projections to exclude income/losses relating
to investments and other assets and liabilities, the value of which is
considered using the NTA approach;
- - an adjustment to management's projections to calculate net after-tax cash
flow by adding back depreciation and amortization, deducting an estimated
amount for investment in working capital and fixed assets necessary to
support future pharmaceutical/health care business operations, and
deducting cash outlays required during the projection period to acquire the
rights to sell existing products and continue developing new products;
- - discount rates in the range of 23 to 28 per cent, which reflect our
estimate of the rate of return required by an investor given the risks
inherent in realizing the projected cash flows; and,
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<PAGE>
- - the residual value of the Company's pharmaceutical and health care business
at the end of the projection period, which we determined using a
capitalized earnings approach.
For purposes of the DCF calculations, we have not adjusted the Company's capital
structure from the current all-equity base. While there is potential to finance
a portion of the operating assets with debt, we believe that the amount of debt
financing and its impact on the valuation calculations would not be significant.
A company such as Draxis is reliant on equity capital, given the nature of, and
risks inherent in, the Company's cash flows, as well as the small amount of
tangible operating assets required in the business.
We have deducted interest income, net of income tax at 40 per cent, and equity
losses/earnings from the DAHI investment, since these amounts do not relate to
the Company's pharmaceutical/health care operations.
We have estimated the amount of cash flow required to increase the Company's
investment in working capital and fixed assets, as well as to acquire rights
under license, as follows:
- - since the primary component of working capital is accounts receivable, we
have estimated the increase in working capital by reference to the ratio of
sales to working capital as at the valuation date, or approximately $1.00
of working capital for every $5.00 of sales (i.e. as sales increase, so
does the amount of working capital required, in particular to fund accounts
receivable);
- - fixed assets expenditures are relatively low, given the nature of the
Company's operations, and we have estimated sustaining capital investment,
net of tax shield, of $100,000 per year beginning in 1997, based on actual
expenditures over the past five years; and,
- - additional payments, net of tax shield, to acquire licenses or other rights
to sell and develop products have been determined with reference to the
Company's existing contractual obligations.
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<PAGE>
A discount rate of 23 to 28 per cent has been selected for purposes of
discounting cash flows. As set out below, we determined the equity rate of
return on the basis of three components, namely, the risk-free rate prevailing
at the valuation date, a market equity risk premium and a specific equity risk
premium. The risk-free rate and the market equity risk premium were determined
on the basis of objective data observed in the marketplace. The specific equity
risk premium was determined on the basis of a judgmental assessment of the risks
associated with an investment in the shares of the Company. Each of these three
components is discussed below.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Yield on long-term Government of
Canada bonds at June 30, 1996 8.0% 8.0%
Premium for small cap stock issues over
the risk-free rate, TSE historical average 10.0 10.0
Specific risk premium 5.0 10.0
- --------------------------------------------------------------------------------
Required rate of return on equity 23.0% 28.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The risk-free rate represents the prevailing rate of return on long-term
Government of Canada bonds as at the valuation date, which approximated 8.0 per
cent (10 year bond - 7.8 per cent, 30 year bond - 8.1 per cent). A long-term
rate, rather than a short-term rate was used since the en bloc value of the
Company presumes a long-term investment given the nature of its operations.
An investor that will bear all the risks associated with an investment in common
shares will not be content to earn a risk-free rate of return. Thus, a general
market equity risk premium was added to the risk-free rate in order to provide
an allowance for additional risks associated with an investment in common
shares.
The general market equity risk premium was determined on the basis of the
average additional return (over and above the risk-free rate) that investors
have earned on small-cap common stock investments in the past. In Canada
(measured using TSE returns), the average return on small-cap common stock
investments has been approximately 10 per cent higher than the long-term
Government of Canada Bond rate. Similar premiums over the long-term, risk-free
rate have also been earned, on average, on common stock investments in the U.S.
(measured using NYSE returns).
The specific equity risk premium represents the added return that an investor
would require for the additional risk of an investment in Draxis, relative to an
investment in the overall stock market. The specific equity risk premium was
determined on the basis of a judgmental assessment of the risks associated with
an investment in Draxis. We have used a specific risk premium in the range of 5
to
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<PAGE>
10 per cent which reflects the following risks or opportunities specific to the
Company:
- - revenues from neurological products and the Lipopharm division are expected
to gradually decline, revenue from podiatry, veterinary and consumer health
care products, all introduced in 1996 or late 1995, will increase, and
revenues from new products (Modafinil, LipoTeca and ALA Photodynamic
Therapy) to be introduced to the market by Draxis will gradually increase
during the projection period;
- - opportunities exist for Draxis to add to its existing and developing
neurological and dermatological product lines by acquiring new product
rights and creating incremental value from the Company's strengths in
developing and obtaining approval for new products and feeding these new
products into existing marketing and distribution networks;
- - the Company holds rights to a range of products in various stages of
development, some of which will eventually contribute to earnings and allow
for continued growth and cash flows, and/or replace existing cash flows,
beyond the projection period;
- - existing financial resources provide Draxis with the ability to support
operations and new product development in the event of fluctuations in
expected future cash flows, and to take advantage of opportunities to
acquire new products or distribution networks;
- - the Company is not dependent on the success of any one particular product,
effectively spreading the risk of technological and product acceptance and
uncertainty over a number of existing and developing products and markets;
- - the possibility of alternative or generic products (in particular for
Eldepryl) entering the market during the projection period may have an
adverse effect on expected future cash flows;
- - many of Draxis' existing products are subject to government regulation,
including pricing and profitability constraints, and changes to these
regulations may adversely affect future profits;
- - there are regulatory approval risks associated with existing products and
new products not approved as at the valuation date (Modafinil, LipoTeca and
ALA Photodynamic Therapy), including the risk that existing products may be
subject to additional regulatory requirements, the risk that new products
may
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<PAGE>
not be approved and the risk that approval of new products, and hence the
product launch dates, may be delayed;
- - there is the risk of technological obsolescence for Draxis' existing and
developing products;
- - there is uncertainty whether patents affecting the Company's products will
be sufficiently broad to protect Draxis' rights thereunder, as well as
uncertainty over the potential cost to Draxis to protect its rights through
litigation;
- - Draxis may be unknowingly and/or inadvertently infringing on patents owned
by third parties, with the potential for litigation against the Company;
- - Draxis is dependent on various arm's-length parties under licensing,
manufacturing, distribution and product development agreements and any
changes to these agreements may have a significant impact on the expected
results of the Company's operations;
- - the Company is reliant on third parties to manufacture its products, since
it has no manufacturing facilities; and,
- - the sale of approved pharmaceutical products can expose a company to
liability claims from their use and even though Draxis presently has
liability insurance, such claims could have a significant adverse impact on
the Company's financial position and future profitability.
To assess the reasonableness of the required rates of return on equity used in
our DCF calculation, we reviewed the annual reports and prospectuses of
companies in the pharmaceutical and health care industry for indications of
published required rates of return. This information, however, is not typically
disclosed by companies and generally kept confidential. We are aware that at
least one company has disclosed that it has a minimum required rate of return of
20 per cent for the acquisition of royalty rights for products already in the
market and higher rates for products expected to be brought to market in the
medium-term (one to three years) or long-term.
In our view, rates of return in the range of 23 to 28 per cent are reasonable,
given that Draxis' projected cash flows result from a combination of both
existing and future products.
We determined the residual value of the Company at the end of the year 2000
using a capitalized earnings approach. Under this approach, expected
maintainable earnings (before equity earnings of DAHI) are capitalized by a
factor that reflects the risk of the investment and the Company's future growth
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opportunities. We calculated the residual value of Draxis at the end of the
year 2000 based on projected net income in the year 2000 and an earnings
multiple of 15.
A multiple of 15 times maintainable earnings was selected based on the same
factors considered for the selection of the discount rate, as well as a review
of the future potential cash flows to be earned from products currently being
developed by the Company but not expected to be brought to market before the
year 2001.
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INVESTMENTS AND OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
In order to determine the fair market value of the Company's investments in DAHI
and Bone Care and other assets and liabilities, we have adjusted their recorded
book values to fair market value in order to calculate net tangible asset value.
The recorded book values and tangible asset values are set out below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(MILLIONS)
-----------------------------------
JUNE 30,
1996
RECORDED
BOOK NET TANGIBLE ASSET
VALUE VALUE RANGE
- --------------------------------------------------------------------------------
INVESTMENT IN DAHI
Common shares $ 0.9 $ 36.9 $ 51.5
Convertible debt 3.5 3.5 3.5
- --------------------------------------------------------------------------------
Total 4.4 40.4 55.0
- --------------------------------------------------------------------------------
INVESTMENT IN BONE CARE
Common shares (118,421) 0.7 1.1 1.1
- --------------------------------------------------------------------------------
CASH HELD IN EXCESS OF WORKING CAPITAL
REQUIREMENTS 28.4 28.4 28.4
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
Corporate receivables, loans and
advances 1.1 1.1 1.1
Loans to New IHS LLC joint venture 1.0 1.0 1.0
Unamortized goodwill 1.5 - -
Income taxes (current and deferred) (0.8) (0.8) (0.8)
- --------------------------------------------------------------------------------
Total other assets and liabilities 2.8 1.3 1.3
- --------------------------------------------------------------------------------
TOTAL $ 36.3 $ 71.2 $ 85.8
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<PAGE>
For Draxis' investment in DAHI common shares, the June 30, 1996 recorded book
value of $0.9 million represents a 44 per cent investment as recorded in Draxis'
consolidated financial statements. The net tangible asset value range of $36.9
million to $51.5 million represents a 100 per cent investment in the shares of
DAHI recorded at fair market value, with fair market value determined using the
DCF approach resulting in considerable goodwill value inherent in DAHI (see
Section VIII). DAHI's range of fair market values is calculated as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(millions)
DAHI en bloc fair market value in $U.S.
(Section VIII) $ 25.3 $ 34.5
DAHI en bloc fair market value in $CDN
(1.3639 exchange rate) $ 34.5 $ 47.1
Add increase in fair market value due to a
reduction in inherent risk 5.1 7.1
Deduct estimated costs to acquire 100 per cent
of DAHI (2.7) (2.7)
- --------------------------------------------------------------------------------
Revised fair market value of 100 per cent
of DAHI owned by Draxis $ 36.9 $ 51.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The increase in fair market value due to a reduction in inherent risk results
from a decrease in the discount rates used to calculate the present value of
DAHI's projected net after-tax operating cash flow. Instead of using discount
rates of 30 to 35 per cent in years one through five and 35 to 40 per cent in
years six through ten including the residual value, we have used discount rates
of 27.5 to 32.5 per cent and 32.5 and 37.5 per cent, respectively. The 2.5 per
cent decrease in discount rates represents our assessment of the reduction in
inherent risk associated with DAHI's projected financial results once DAHI is
wholly-owned by Draxis. The risk of DAHI obtaining sufficient financing, as
identified in Section VIII, is largely eliminated with Draxis' commitment of
funds in connection with acquiring 100 per cent of DAHI.
Based on discussions with Draxis management, costs to complete the acquisition
of 100 per cent of DAHI, including professional and advisory fees, are estimated
to be $2.7 million. This amount represents costs for both Draxis and DAHI. We
have deducted this amount to reflect the impact on the value of Draxis' net
corporate assets assuming the Share Exchange has been completed.
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In calculating the en bloc fair market value of DAHI, we have deducted the
portion of value attributable to the convertible debt held by Draxis.
Therefore, there is no adjustment to the recorded book value in determining the
net tangible asset value of the convertible debt.
In order to acquire the remaining shares of DAHI not already owned, Draxis will
issue 5,718,438 common shares from treasury. Since Draxis owns a small minority
interest in Bone Care (approximately three per cent), for purposes of our
valuation, the fair market value of its investment in Bone Care is based on the
June 28, 1996 closing share price of $6.50 U.S. (Bone Care is traded on NASDAQ).
We have accepted the recorded book values of other assets and liabilities for
purposes of determining tangible asset value, although no value has been
attributed to goodwill. On a net basis, the value of the other assets and
liabilities is not significant to the overall valuation of Draxis.
VALUATION CALCULATION
- --------------------------------------------------------------------------------
The en bloc fair market value of Draxis at June 30, 1996, after giving effect to
the acquisition of DAHI by Draxis, is in the range of $120.0 million to $143.7
million, calculated as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(MILLIONS)
- --------------------------------------------------------------------------------
Value of pharmaceutical/health care business
based on the DCF approach $ 48.8 $ 57.9
Value of investments in DAHI and Bone Care,
cash held in excess of working capital
requirements and other assets and liabilities
based on the NTA approach 71.2 85.8
- --------------------------------------------------------------------------------
En bloc fair market value of Draxis $ 120.0 $ 143.7
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On a diluted per share basis, the proportionate en bloc fair market value of
Draxis is $3.79 to $4.47 per common share after giving effect to the acquisition
of DAHI by Draxis, but before consideration of any minority discount, calculated
as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(MILLIONS)
- --------------------------------------------------------------------------------
En bloc fair market value of Draxis $ 120.0 $ 143.7
CASH PROCEEDS ON CONVERSION OF OPTIONS AND WARRANTS:
Draxis (Section XII) 9.3 9.3
DAHI (Section III $2.0 million U.S., converted to
$CDN at 1.3639) 2.7 2.7
- --------------------------------------------------------------------------------
Value for calculating diluted per share value $ 132.0 $ 155.7
- --------------------------------------------------------------------------------
Draxis issued and outstanding common shares 23,375,220 23,375,220
Draxis common shares issued to acquire DAHI (1)
[(7,544,698 - 3,308,818) x 1.35] 5,718,438 5,718,438
SHARES ISSUED ON CONVERSION OF OPTIONS AND WARRANTS:
Draxis (Section XII) 4,195,158 4,195,158
DAHI (Section III excluding convertible debt
1,171,976 x 1.35) 1,582,168 1,582,168
- --------------------------------------------------------------------------------
Shares for calculating diluted per share value 34,870,984 34,870,984
- --------------------------------------------------------------------------------
Diluted per share values $ 3.79 $ 4.47
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) DAHI shares issued and outstanding at June 30, 1996 7,544,698 less shares
owned by Draxis through its subsidiaries or affiliates 3,308,818, times the
exchange ratio of 1.35.
- --------------------------------------------------------------------------------
94
<PAGE>
XVIII DRAXIS REASONABLENESS OF VALUATION CALCULATIONS
- --------------------------------------------------------------------------------
Where possible, a valuator will use secondary approaches to test the
reasonableness of valuation conclusions determined in a notional valuation. For
purposes of this section, we have excluded the impact of increasing Draxis'
investment in DAHI from 44 per cent to 100 per cent on en bloc and diluted per
share values. With DAHI at 44 per cent, Draxis' en bloc fair market value would
be in the range of $98.0 million to $111.8 million and the proportionate en bloc
diluted per common share fair market value would be in the range of $3.89 to
$4.39.
DRAXIS SHARE PRICE
- --------------------------------------------------------------------------------
We have compared our calculation of a diluted share price for Draxis to both the
share prices at which Draxis has recently traded on the TSE and to other
publicly traded biotechnology companies. During the six months prior to June
30, 1996, Draxis shares have traded between $2.15 and $6.55, as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TSE PRICE TSE/NASDAQ
------------------------- ------------
Volume
Period (1996) High Low Close (millions)
- --------------------------------------------------------------------------------
June 1 to 30 6.55 4.50 4.75 7.1
May 1 to 31 5.60 4.57 4.70 2.8
April 1 to 30 5.20 4.10 4.75 2.7
March 1 to 31 5.00 4.05 4.30 2.8
February 1 to 29 5.63 3.65 5.00 9.3
January 1 to 31 4.10 2.15 3.70 5.3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
95
<PAGE>
Our calculation of the diluted share price of Draxis compares to the range of
recent market prices as follows:
- --------------------------------------------------------------------------------
HIGH LOW
Valuation at June 30, 1996 (DAHI at 44
per cent) $ 4.39 $ 3.89
Draxis market prices:
April 1 to June 30, 1996 $ 6.55 $ 4.10
January 1 to March 31, 1996 5.63 2.15
April 22, 1996 warrant issue price $ 4.25
- --------------------------------------------------------------------------------
We believe that our valuation is reasonable, given the range of publicly traded
share prices over the last six months and the April 22, 1996 warrant issue
price. At the high end of the range in June 1996, the share price reflected a
positive market reaction to the biotechnology sector as a whole. At the low end
of the range, the share price had yet to reflect favourable events announced by
the Company early in the year. Each of these points is further explained below.
The recent volatility in the Draxis share price can be partially explained by
reference to the general market reaction to the stock prices of Canadian
biotechnology companies, as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
TOP 30 CANADIAN BIOTECH CO'S DRAXIS ($CDN)
-------------------------------------- ---------------------------------------
% %
% Change % Change
Change From Change From
per June 30, per June 30,
Period Index(1) Period 1995 Index(1) Period 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1995 100 100
December 31, 1995 128 28 28 097 -3 -3
March 31, 1996 179 40 79 195 101 95
May 31, 1996 233 30 133 213 9 113
June 30, 1996 210 -10 110 215 1 115
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) June 30, 1995 biotech/Draxis CDN share price equals 100
- --------------------------------------------------------------------------------
96
<PAGE>
In the past year, the share prices of the top 30 Canadian biotechnology
companies have increased by 110 per cent, compared with 115 per cent for Draxis.
Between March 31 and June 30, 1996, the top 30 Canadian biotechnology companies
share prices increased by 17 per cent, compared with 10 per cent for Draxis.
A similar market reaction to the stock prices of biotechnology companies
occurred in the U.S., although the increase in prices was not as significant and
occurred mostly in the second half of 1995 as opposed to primarily the first
three months of 1996 for Draxis.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
NASDAQ BIOTECH INDEX DRAXIS ($U.S.)
---------------------------------------- ---------------------------------------
% %
% Change % Change
Change From Change From
per June 30, per June 30,
Period Index(1) Period 1995 Index(1) Period 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1995 100 100
December 31, 1995 151 51 51 097 -3 -3
March 31, 1996 151 - 51 194 100 94
May 31, 1996 163 8 63 211 9 111
June 30, 1996 146 -10 46 213 1 113
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) June 30, 1995 biotech/Draxis U.S. share price equals 100
At the high end of the range, we are of the opinion that the Draxis share price
included some speculative value that resulted from the general euphoria
surrounding the biotechnology sector during the period March to June 1996.
Draxis had announced promising clinical results earlier in the year for
Modafinil and LipoTeca, the potential of which the market could only guess at.
The realization that these new drugs will take some time to come to market, as
well as the fact that some development and HPB approval risk still remains,
caused the price to retreat from its high.
Earlier in 1996, the increase in the Draxis share price from December 31, 1995
was likely a result of the following favourable announcements by the Company (as
well as the favourable announcements made by DAHI as described earlier):
- - January 10, 1996 - agreement with DAHI for Draxis to sell Anipryl in Canada;
- - January 29, 1996 - statistically significant results from the LipoTeca phase
III clinical trials;
- --------------------------------------------------------------------------------
97
<PAGE>
- - February 8, 1996 - 1995 fourth quarter/annual results (earnings per share
doubles in 1995), Modafinil NDS expected in June 1996, Kerasal launch
expected to contribute to 1996 revenues;
- - February 28, 1996 - statistically significant results from the Modafinil
phase III clinical trials; and,
- - March 11, 1996 - investment in DUSA Pharmaceuticals, Inc. sold for a gain of
$6.0 million.
TANGIBLE ASSET BACKING
- --------------------------------------------------------------------------------
The table below sets out the en bloc value of Draxis in comparison to the
Company's net tangible assets at book value, as well as the implied market-to-
book multiples (market capitalization divided by recorded net book value). We
have then compared the multiples for Draxis to the multiples observed in the top
30 Canadian biotechnology companies.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(MILLIONS)
RANGE OF FAIR MARKET VALUES
-------------------------------
LOW HIGH
-------------------------------
DRAXIS
En bloc value (DAHI at 44 per cent) $ 98.0 $ 111.8
Value of net tangible assets at book value 43.9 43.9
------ -------
Implied intangible value $ 54.1 $ 67.9
------ -------
Implied market-to-book multiple 2.2 2.5
TOP 30 CANADIAN BIOTECHNOLOGY COMPANIES
Top 30 market-to-book multiple 5.2
Bottom 20 market-to-book multiple 3.6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
98
<PAGE>
The market-to-book multiple for Draxis is significantly lower than for companies
in the Canadian biotechnology sector. This is explained by the fact that
approximately 50 per cent of the value of Draxis is attributable to both its
investment in DAHI and its considerable cash reserves. If the value of Draxis'
pharmaceuticals/health care business is compared to the net assets employed in
this business, the market-to-book multiple is more comparable to companies in
the Canadian biotechnology sector, as described below. We note, however, that
many biotechnology companies have significant cash reserves, similar to Draxis.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(000s)
RANGE OF FAIR MARKET VALUES
---------------------------
LOW HIGH
----------------------------
DRAXIS
Value of pharmaceuticals/health care business $ 48.8 $ 57.9
Value of net tangible assets at book value 7.6 7.6
------ ------
Implied intangible value $ 41.2 $ 50.3
------ ------
Implied market-to-book multiple 6.4 7.6
TOP 30 CANADIAN BIOTECHNOLOGY COMPANIES
Top 30 market-to-book multiple 5.2
Bottom 20 market-to-book multiple 3.6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The amount of intangible value in the Company's pharmaceuticals/health care
business implied by our valuation is high relative to the value of tangible
assets, which in our view is attributable to the fact that most of the value of
Draxis would reside in the product portfolio, its sales and distribution
network, and its technical expertise, the value of which is not recorded on the
Company's balance sheet. Our assessment of intangible value is confirmed by
public share prices for other Canadian biotechnology companies, based on the
high market-to-book multiples observed in the market.
TRANSACTION MULTIPLES AND TRADING MULTIPLES
- --------------------------------------------------------------------------------
We are aware of numerous transactions to acquire pharmaceutical/health care
companies over the past few years. There is a wide range of observed prices and
resultant transaction multiples (such as purchase price divided by earnings,
purchase price divided by sales, or purchase price divided by net book value),
which is primarily a function of the specific product profiles of the companies
acquired. We are of the view that there is little benefit to a comparison of
our valuation of Draxis to observed transaction multiples, since Draxis is
unique from any other company in the sector.
- --------------------------------------------------------------------------------
99
<PAGE>
Similar to transaction multiples, we reviewed and analyzed trading multiples
(such as current share price divided by earnings per share, current share price
divided by sales per share, or current share price divided by net book value per
share) for Canadian biotechnology stocks and observed a wide range. Trading
multiples for the top 30 Canadian biotechnology companies at June 30, 1996, are
summarized below, with comparative multiples for Draxis calculated using our
range of fair market values.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKET
CAP/
MARKET MARKET BOOK EX
CAP/SALES CAP/BOOK CASH
- --------------------------------------------------------------------------------
DRAXIS - RANGE OF FAIR MARKET VALUES
High 7.5 2.5 6.1
Low 6.6 2.2 5.0
TOP 30 CANADIAN BIOTECHNOLOGY COMPANIES
Top 30 24.0 5.2 10.8
Top 10 25.1 5.9 11.8
Bottom 20 20.5 3.6 8.0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Draxis trading multiples are lower than those observed for the top 30
biotechnology companies. This is expected, since many of the biotechnology
companies are in the research and development stage. In this stage, market
capitalization already reflects future potential value, but sales are minimal
and book values often reflect deficits from research and development
expenditures.
- --------------------------------------------------------------------------------
100
<PAGE>
XIX DRAXIS CONCLUSION
- --------------------------------------------------------------------------------
ASSUMPTIONS
In addition to assumptions noted elsewhere in this report, we have also assumed
the following:
- - the Company had no contingent liabilities, unusual contractual obligations or
substantial commitments, or litigation pending or threatened, that would be
material to our valuation conclusions, other than as disclosed to us and as
referred to in this report;
- - the June 30, 1996 financial position of the Company and its results of
operations for the six months then ended would not be materially different
were the interim financial statements to be subject to audit;
- - all of the significant tangible assets and liabilities of the Company were
recorded on its June 30, 1996 financial statements;
- - federal and provincial income tax laws and U.S. tax laws prevailing at the
valuation date will continue to prevail in the foreseeable future. The
jurisdiction where Draxis operates and sells to could have a material impact
on future tax rates;
- - the projections of Draxis for the fiscal years ending December 31, 1996
through 2000, as prepared by management and updated to June 30, 1996, reflect
management's best estimate as to expected future operating results subsequent
to the valuation date; and,
- - although management is currently in negotiations with a number of arm's-
length third parties to acquire rights to new products or distribution systems,
(including transactions with STEF International Corp. and Tican Pharmaceuticals,
Ltd.), the results of which will potentially change the value of Draxis, our
conclusions as to value will not be significantly affected.
- --------------------------------------------------------------------------------
101
<PAGE>
CONCLUSION
- --------------------------------------------------------------------------------
Based on the scope of our review and subject to the assumptions and restrictions
included in our report, it is our opinion that the en bloc fair market value of
all the issued and outstanding shares of Draxis at June 30, 1996, after giving
effect to the acquisition of DAHI by Draxis ranges from $120.0 million to
$143.7 million, or $131.9 million at the midpoint ($88.0 million U.S. to $105.4
million U.S., or $96.7 million U.S. at the midpoint).
This range of fair market values translates into proportionate en bloc diluted
per common share values, before consideration of any minority discount, as
follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RANGE MIDPOINT
- --------------------------------------------------------------------------------
Fair market value per diluted common
share ($CDN) $ 3.79 $ 4.47 $ 4.13
Fair market value per diluted common
share ($U.S. at 0.7332) $ 2.78 $ 3.28 $ 3.03
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
102
<PAGE>
XX DRAXIS AND DAHI OTHER VALUATION CONSIDERATIONS
There are other issues to be considered by the shareholders of DAHI and Draxis
prior to their approval of the Share Exchange. The issues which have been
considered by the directors of both companies are described in the draft Proxy
Statement. The directors have also received advice with respect to the
transaction from their respective advisors.
The contemplated transaction by Draxis to acquire the DAHI shares is more
complex than a straight 1.35 Draxis share exchanged for each DAHI share. DAHI
is presently owned 30 per cent by a Canadian subsidiary of Draxis called DPI.
Another 14 per cent is owned by Draxis LLC (Delaware) which is owned by Draxis
(90 per cent) and DPI (10 per cent). The DAHI ownership is visually displayed
below:
[GRAPH]
- --------------------------------------------------------------------------------
103
<PAGE>
The proposed transaction, as described in the Exchange Agreement dated July 25,
1996, is as follows:
- - in accordance with the Missouri Business Corporations Act and the Louisiana
Business Corporation Law, DAHI will seek approval of its shareholders to
merge with a newly formed corporation on a share for share basis with the
Louisiana corporation to be the surviving corporation in the Reincorporation
Merger; and,
- - subject to approval and confirmation of the Reincorporation Merger, in
accordance with the Louisiana Business Corporation Law each issued and
outstanding share of common stock of the newly merged DAHI, other than shares
held by holders electing to dissent from such exchange and shares held by
Draxis or its affiliates, will be mandatorily exchanged for shares of Draxis
common stock delivered by DPI. The exchange ratio will be 1.35 shares of
Draxis for each share of DAHI.
The Exchange Agreement outlines that the dissent rights of holders of dissenting
shares are entitled to payment by DAHI of the fair value of such shares in cash
to the extent permitted by and in accordance with the provisions of the
Louisiana Business Corporations Law and the Missouri Business Corporations Act.
DAHI will be solely responsible for, and shall pay out of its own funds any
amounts which become payable to holders of dissenting shares and such amounts
shall not be paid directly or indirectly by Draxis, according to the Exchange
Agreement.
Pursuant to legal advice given to DAHI and Draxis, 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.
Pursuant to legal advice given to DAHI and Draxis, the Reincorporation Merger
should not result in a taxable gain or allowable capital loss for Canadian
resident holders of DAHI common stock holding such shares as capital property.
However, the Share Exchange will result in a taxable gain or loss for Canadian
income tax purposes for Canadian resident holders of DAHI common stock.
Holders of dissenting shares will be paid fair value by DAHI, as per agreement
between DAHI and its shareholders as to fair value, or, if no such agreement can
be reached, as determined by the courts, assuming DAHI has adequate resources.
Payment will not qualify for a tax deferral. The particular income tax
consequences for each shareholder could vary from the foregoing circumstances
depending on the specific tax situation of the shareholder and the joint
management Proxy Statement encourages DAHI shareholders to seek tax advice.
- --------------------------------------------------------------------------------
104
<PAGE>
DAHI will be solely responsible for and shall pay out of its own funds any
amounts which become payable to holders of dissenting shares and such amounts
shall not be paid directly or indirectly by Draxis. The potential income tax
deferral applicable for U.S. income tax purposes could be jeopardized if Draxis
were to provide funds for this purpose.
The affirmative vote of holders of two thirds of the outstanding shares of DAHI
entitled to vote on the Reincorporation Merger is required to pass that
resolution. 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 represented in person or
by proxy not held by Draxis or its affiliates or related parties.
In order to approve and adopt the Share Exchange, the affirmative vote of two
thirds of the votes cast in person or by proxy at the meeting of the
shareholders of the merged DAHI is required under Louisiana law. In addition,
the Exchange Agreement requires that the Share Exchange plan be approved by the
affirmative vote of holders of a majority of the votes cast in person or by
proxy at the Louisiana special meeting by persons other than Draxis or its
affiliates or related parties.
If there are a large number of dissenting shares, DAHI may not have the cash
resources to purchase the shares at fair value, given their present cash balance
of approximately $1.5 million U.S. Fair value may be different than the fair
market value we have calculated herein, at the discretion of the courts.
As of the date of this report, the management of DAHI is making arrangements for
a $2 million U.S. irrevocable letter of credit in its favour to provide the cash
with which to acquire the common shares of dissenting DAHI shareholders, as
necessary. It is possible that the amount of the letter of credit may not be
sufficient to acquire all the dissenting shares. Legal counsel for DAHI has
advised us that to the best of his knowledge, payments to the dissenting
shareholders will not breach any law or regulation.
If DPI fails to acquire a minimum of 80 per cent of the merged DAHI shares upon
completion of the Share Exchange, due to dissenting shareholders pursuant to the
Exchange Agreement, DPI has the right to subscribe for a sufficient number of
authorized but unissued merged DAHI shares to ensure that DPI achieves a minimum
80 per cent ownership.
In order for Draxis shares to be issued in connection with the Share Exchange,
the affirmative vote of the holders of a majority of the outstanding common
shares of Draxis cast in person or by proxy at the Draxis special shareholders
meeting is
- --------------------------------------------------------------------------------
105
<PAGE>
required for approval under the rules of the TSE and the National Association
of Securities Dealers, Inc.
Other non-cash considerations include potential benefits to both DAHI and Draxis
by increasing the combined market capitalization of the combined entities. The
increased market capitalization and future expected acquisitions, if successful,
should allow for a wider interest level in order to allow for a larger
investment size by institutional investors. Draxis has a much greater number of
employees and infrastructure that allows it to develop and market products.
This expertise and infrastructure could be of benefit to DAHI as it brings its
Anipryl product to market.
Draxis also has a cash position of approximately $30 million at June 30, 1996
which gives it some staying power to be patient with its new product development
and take long time horizons. DAHI needs funding to bring its product to market
and for new products and Draxis has committed to invest $10 million in DAHI,
subject to good business judgement, pursuant to the Exchange Agreement.
The only synergistic effect of the acquisition by Draxis of DAHI to which we
have subscribed incremental value is the reduction of financing risk to DAHI,
since Draxis has committed to provide $10 million of funding to DAHI subject to
good business judgement. The synergistic effect was recognized by us in the
form of a reduction in the discount rate used to calculate the present value of
DAHI's projected net after-tax cash flows.
There may also be methods by which Draxis could accelerate the use of DAHI's tax
losses for its own benefit.
Any quantification of the considerations beyond the fair market value of each
entity's shares is highly speculative and we do not believe can be done with any
degree of comfort or accuracy.
We do not offer any opinion on the fairness of the transaction. The
contemplated Share Exchange may not be effected if the relationship in the stock
market prices of Draxis and DAHI does not meet shareholder expectations.
- --------------------------------------------------------------------------------
106
<PAGE>
DEPRENYL ANIMAL HEALTH INC. SCHEDULE 1
BALANCE SHEET
AS AT DECEMBER 31
(EXCEPT AS NOTED)
(US$ 000'S)
<TABLE>
<CAPTION>
AS AT JUNE 30
--------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,489 $ 1,130 $ 1,055 $ 241 $ 240 $ 300 $ 1,074
Investment securities 2,219 1,923 3,443 4,251
Other current assets 182 29 2 52 105 123 105
--------- --------- --------- --------- --------- --------- ---------
Total current assets: 1,671 1,159 1,057 2,512 2,268 3,866 5,430
Fixed assets, net 73 78 55 55 35 33 40
Other assets:
Investment in Phoenix Scientific, Inc. 1,175 1,575 1,775 1,750
Intangibles and other assets 471 503 448 504 330 332 320
--------- --------- --------- --------- --------- --------- ---------
471 1,678 448 2,079 2,105 2,082 320
--------- --------- --------- --------- --------- --------- ---------
Total Assets $ 2,215 $ 2,915 $ 1,560 $ 4,646 $ 4,408 $ 5,981 $ 5,790
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 124 $ 103 $ 136 $ 41 $ 100 $ 96 $ 111
Advances from DAH Canada 140 140
--------- --------- --------- --------- --------- --------- ---------
Total current liabilities 124 103 136 41 100 236 251
Notes payable - Draxis Health Inc. 2,545 3,090 3,090 3,090 450 450
Advances from DAH Canada 140
Obligations under contract 200 600 800 800
--------- --------- --------- --------- --------- --------- ---------
Total liabilities 2,669 3,393 3,226 3,731 1,490 1,486 251
Shareholders' equity
Common stock 10,254 8,549 8,599 8,549 8,549 8,549 8,324
Retained deficit (10,708) (9,027) (10,265) (7,634) (5,073) (3,225) (1,804)
Unearned compensation (75) (226) (377)
Unearned consideration (483) (603) (604)
--------- --------- --------- --------- --------- --------- ---------
(454) (478) (1,666) 915 2,918 4,495 5,539
--------- --------- --------- --------- --------- --------- ---------
Total Liabilities and Shareholders' Equity $ 2,215 $ 2,915 $ 1,560 $ 4,646 $ 4,408 $ 5,981 $ 5,790
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Book value per share ($0.06) ($0.07) ($0.26) $0.14 $0.45 $0.69 $0.86
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Number of shares outstanding (000's) 7,545 6,484 6,509 6,484 6,484 6,484 6,421
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DEPRENYL ANIMAL HEALTH INC. SCHEDULE 2
INCOME STATEMENT
FOR THE YEARS ENDING DECEMBER 31
(EXCEPT AS NOTED)
(US$ 000's)
SIX MONTHS ENDED JUNE 30
------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Interest and investment income $ 44 $ 52 $ 79 $ 162 $ 188 $ 297 $ 318
Sales and distribution rights 540
Gain (loss) on foreign currency exchange 1 (2) 13
Realized gain (loss) on investment securities 175 (100) (10) 9 (3)
Other 306 25 27 150 25
-------- -------- -------- -------- -------- -------- --------
890 77 281 212 204 304 328
Expenses:
Research and development 618 820 1,400 1,751 985 841 791
General and administrative 609 468 1,094 776 990 842 573
Interest 85 156 287 198 32
Depreciation and amortization 23 26 131 48 45 42 11
-------- -------- -------- -------- -------- -------- --------
1,335 1,470 2,912 2,773 2,052 1,725 1,375
-------- -------- -------- -------- -------- -------- --------
Net loss $ (445) $ (1,393) $ (2,631) $ (2,561) $ (1,848) $ (1,421) $ (1,047)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Loss per share ($0.06) ($0.21) ($0.41) ($0.39) ($0.29) ($0.22) ($0.17)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Weighted average number of shares
outstanding (000's) 7,337 6,484 6,492 6,484 6,484 6,470 6,082
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
DEPRENYL ANIMAL HEALTH INC. SCHEDULE 3
STATEMENT OF CHANGE IN FINANCIAL POSITION
FOR THE YEARS ENDING DECEMBER 31
(EXCEPT AS NOTED)
(US$ 000'S)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net loss ($443) ($1,393) ($2,631) ($2,561) ($1,848) ($1,421) ($1,047)
Depreciation and amortization 23 26 131 48 45 42 11
Amortization of debt issuance costs 12
Gain (loss) on foreign currency exchange 2 (13)
Realized gain (loss) on investment securities (175) 100 10 (9) 3
Amortization of premium on securities 3 16 21 11
Amortization of unearned amounts 50 558 272 151 151
Benefit from increase in exercise price of option (16)
Changes in net working capital (191) 87 144 (6) 23 (27) (272)
------- ------- ------- ------- ------- ------- -------
(611) (1,268) (2,481) (1,858) (1,482) (1,241) (1,172)
Investing activities
Purchase of fixed assets (28) (32) (20) (37) (14) (7) (39)
Purchase of investment securities (4,276) (6,057) (149) (9,573)
Sale of investment securities 2,219 2,220 3,876 7,551 944 5,307
Investment in Phoenix Scientific Inc. 1,150 (25) (950)
Expenditures on intangible assets (37) (30) (55) (63) (32) (44) (237)
------- ------- ------- ------- ------- ------- -------
(65) 2,157 3,295 (500) 1,423 (206) (4,542)
------- ------- ------- ------- ------- ------- -------
Financing activities:
1994 Loan from Draxis Health Inc. (955) 2,500
1996 Loan from Draxis Health Inc. 1,000
Debt issuance costs (142)
Deferred stock offering costs (1,248)
Advances to/from related parties (590) 450
Issued common stock 1,655 225 6,266
------- ------- ------- ------- ------- ------- -------
1,110 0 0 2,358 0 675 5,018
Effect of exchange rates on cash (2) 13
------- ------- ------- ------- ------- ------- -------
Increase (decrease) in cash and cash equivalents 434 889 814 0 (59) (774) (683)
Cash and cash equivalents
Beginning of period 1,055 241 241 241 300 1,074 1,757
------- ------- ------- ------- ------- ------- -------
End of period $ 1,489 $ 1,130 $ 1,055 $ 241 $ 241 $ 300 $ 1,074
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>
<PAGE>
DEPRENYL ANIMAL HEALTH INC. SCHEDULE 4
SUMMARY OF COMMON SHARE TRADING PRICES AND VOLUMES
(US$)
TSE
NASDAQ AND NASDAQ
------------------------------------ -----------------
HIGH LOW CLOSE VOLUME
-------- --------- --------- -----------------
1996
June $4.75 $3.63 $4.00 352,676
May $4.88 $3.88 $3.88 427,451
April $4.25 $3.13 $3.88 376,534
March $3.25 $2.75 $3.25 206,475
February $3.13 $1.97 $3.13 464,914
January $2.00 $1.75 $1.75 139,484
1996
Second quarter $4.88 $3.13 $4.00 1,156,661
First quarter $3.25 $1.75 $3.25 810,873
1995
Fourth quarter $2.13 $1.50 $1.75 216,577
Third quarter $2.13 $1.63 $2.13 200,678
Second quarter $2.13 $1.50 $1.90 880,319
First quarter $2.38 $1.50 $2.00 688,367
1994
Fourth quarter $2.38 $2.38 $2.00 270,432
Third quarter $2.63 $1.50 $1.63 708,746
Second quarter $2.63 $1.63 $1.81 1,081,950
First quarter $3.38 $1.81 $2.63 875,762
1995 Annual $2.38 $1.50 $1.75 1,985,941
1994 Annual $3.38 $1.50 $2.00 2,936,890
1993 Annual $3.38 $1.25 $1.88 6,112,875
1992 Annual $10.63 $1.25 $2.50 4,091,715
<PAGE>
SCHEDULE 5
DRAXIS HEALTH INC.
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31
(Except as Noted)
($000's)
<TABLE>
<CAPTION>
AS AT JUNE 30
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and treasury bills $30,454 $10,229 $16,606 $11,691 $12,205 $361 $1,130
Marketable securities 750 767 2,813 7,937 17,270
Accounts receivable 2,209 1,916 1,486 1,807 3,060 3,985 5,439
Income taxes recoverable 14 170 255 1,005
Inventory 1,167 1,146 705 1,014 601 413 165
Current portion of
long-term receivables 691 192 365 762
Prepaid expenses 1,018 1,001 796 946 641 1,335 743
-------- -------- -------- -------- -------- -------- --------
35,539 15,248 19,763 16,845 20,082 15,036 24,747
Long-term receivables 3,781 6,043 4,992 5,573 2,142 654 4,620
Long term investments 1,612 2,605 3,931 3,203 5,079 7,151 6,853
Fixed assets, net 662 512 545 453 449 605 284
Goodwill, net 1,546 1,781 1,663 1,898 2,132 1,692
Licenses and other
deferred charges 4,209 4,920 4,158 5,090 2,102 2,959 2,932
-------- -------- -------- -------- -------- -------- --------
TOTAL ASSETS $47,349 $31,109 $35,052 $33,062 $31,986 $28,097 $39,436
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable and
accrued charges $2,216 $1,816 $1,569 $1,806 $1,874 $1,319 $2,894
Royalties payable 492 663 1,335 1,527 1,592 1,800 1,485
Income taxes payable 388 1,524 7,014
Current portion of license
obligation 500 500 1,000
Other 3,670 130
-------- -------- -------- -------- -------- -------- --------
3,096 2,979 3,404 4,333 4,990 6,789 11,523
License obligation 500
Deferred income taxes 360 955 1,799 1,070 960 1,449 943
Deferred Revenue 1,849
Shareholders' equity
Common stock 30,844 18,393 18,666 18,393 18,083 13,683 12,967
Contributed surplus 9,701 9,701 9,701 9,701 9,701 5,935 9,665
Retained earnings 3,348 (919) 1,482 (935) (1,748) 241 2,489
-------- -------- -------- -------- -------- -------- --------
43,893 27,175 29,849 27,159 26,036 19,859 25,121
-------- -------- -------- -------- -------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $47,349 $31,109 $35,052 $33,062 $31,986 $28,097 $39,436
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Book value per share $1.88 $1.36 $1.48 $1.36 $1.31 $1.08 $1.36
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Number of shares
outstanding (000's) 23,375 20,019 20,127 20,019 19,836 18,418 18,535
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
US exchange rate at
balance sheet date $0.73 $0.73 $0.73 $0.71 $0.75 $0.79 $0.87
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
SCHEDULE 6
DRAXIS HEALTH INC.
CONSOLIDATED INCOME STATEMENT
FOR THE YEARS ENDING, DECEMBER 31
(Except as Noted)
($000's)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Sales $7,025 $7,510 $15,434 $16,243 $15,087 $17,424 $13,936
Interest income 771 585 1,197 843 309 455 1,299
-------- -------- -------- -------- -------- -------- --------
7,796 8,095 16,631 17,086 15,396 17,879 15,235
-------- -------- -------- -------- -------- -------- --------
Expenses
Cost of sales, selling
and administration 8,984 5,036 13,328 10,186 12,164 12,509 9,020
Research and development 700 800 2,319 2,079 2,722 2,002 1,509
Investment tax credits
on research and development (485) (457) (574) (326) (183)
Research and development
recovered from an
affiliated company (381) (533) (487) (165)
Depreciation and amortization 787 463 1,285 867 593 402 236
-------- -------- -------- -------- -------- -------- --------
10,471 6,299 16,066 12,142 14,418 14,422 10,582
-------- -------- -------- -------- -------- -------- --------
Income from operations (2,675) 1,796 565 4,944 978 3,457 4,653
Gain/(loss) on sales of
securities 109 37 549 59 (2,715) 1,360 1,637
Other income 6,001 (141) 4,901 (68) 43 6,210 4,396
-------- -------- -------- -------- -------- -------- --------
Income/(loss) before income
taxes and share of net
development stage costs
of affiliated companies 3,435 1,692 6,015 4,935 (1,694) 11,027 10,686
Income taxes (393) (650) (2,064) (1,740) 966 (4,109) (3,984)
Equity share of development
stage costs of affiliated
companies (1,177) (1,026) (1,534) (2,096) (1,351) (911) (574)
-------- -------- -------- -------- -------- -------- --------
Net income/(loss) for the period $1,865 $16 $2,417 $1,099 ($2,079) $6,007 $6,128
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) per share $0.09 $0.00 $0.12 $0.06 ($0.11) $0.35 $0.38
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Weighted average number
of shares outstanding (000's) 20,499 20,019 20,058 19,927 18,217 17,034 16,163
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Average US exchange rate $0.73 $0.73 $0.73 $0.73 $0.78 $0.83 $0.87
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
SCHEDULE 7
DRAXIS HEALTH INC.
CONSOLIDATED STATEMENT OF CHANGE OF FINANCIAL POSITION
FOR THE YEARS ENDING, DECEMBER 31
(Except as Noted)
($000's)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities: ($4,657) $671 $2,282 $6,308 $6,799 $12,498 ($5,881)
-------- -------- -------- -------- -------- -------- --------
Cash flows from (used in)
investing activities
Payments for licenses (1,140) (1,000) (1,000) (2,000)
Decrease (increase) in
other deferred charges 0 (118) 8 (5) 648 (1,213) (676)
Acquisition of fixed assets (199) (118) (219) (119) (149) (475) (131)
Acquisition of subsidiary
and affiliated companies (82) (428) (428) (298) (642) (1,765) (1,966)
Proceeds from sale of shares
in DUSA Pharmaceuticals Inc. 9,323
Proceeds from sale of option
in DUSA Pharmaceuticals Inc. 3,068
Proceeds from sale of shares
in Deprenyl Animal Health Inc. 328
Proceeds from sales of shares
in DUSA Pharmaceuticals Inc. 90 2,500
Repayment from (advance to) by
Medicis Pharmaceutical
Corporation 4,795 (4,620)
-------- -------- -------- -------- -------- -------- --------
7,902 (1,664) 1,429 (2,422) 275 1,342 (4,893)
-------- -------- -------- -------- -------- -------- --------
Cash flows from (used in)
financing activities
Long-term receivables (1,575) (469) 945 (3,035) (2,250) (654)
Exercise of stock options 616 259 128 13 604
Sale of Company shares owned
by subsidiary
Proceeds of sale 6,021 103 19,057
Income taxes paid on sale (1,663) (32) (6,735)
Special warrant offering 11,562 0
Issuance of shares for
subsidiary acquisitions 298 642 1,573
Redemption of Bone Health
Inc. warrants (2,855) (153)
Cost of dividend distribution,
net of tax (139) (405)
Unclaimed dividends of Bone
Health Inc. 230
Treasury shares issued for cash 3,000
Exercise of warrants 25 56 35
Purchase of Company shares for
cancellation (4,740) (4,125)
Dividends paid (3,355) (4,836)
Withholding taxes on Bone
Health Inc. warrants (312)
-------- -------- -------- -------- -------- -------- --------
10,603 (469) 1,204 (4,400) 4,770 (14,609) 10,735
-------- -------- -------- -------- -------- -------- --------
Increase (decrease) in cash and
cash equivalents 13,848 (1,462) 4,915 (514) 11,844 (769) (39)
Cash and cash equivalents
Beginning of period 16,606 11,691 11,691 12,205 361 1,130 1,169
-------- -------- -------- -------- -------- -------- --------
End of period $30,454 $10,229 $16,606 $11,691 $12,205 $361 $1,130
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
SCHEDULE 8
DRAXIS HEALTH INC.
CORPORATE STRUCTURE
AS AT JUNE 30, 1996
<TABLE>
<S> <C> <C> <C>
--------------- ------------------------ -- Eldepryl-Registered Trademark-
| Lipopharm | | Draxis Health Inc. | -- Permax-Registered Trademark-
| Division |----------------------| (Candada) | -- Prolopa-Registered Trademark-
--------------- ------------------------ -- Britaject-Registered Trademark-
-- Lipo-BASE-TM- | -- Tegretol-Registered Trademark-
-- Lipo-BASE-TM- | (Ontario Sales)
vitamin E |
-- Lipo-BASE-TM-, facial |
-- Kerasal-Registered Trademark- |
----------------------------------------------------------------------------------------
| | | | |
100% 100% | 100% |
| | | | |
---------------------- ---------------------- | ------------------------- |
| DAHI Animal Health | | DAHI Animal | | | Draxis | |
| (Ontario) Inc. | | Health Inc. | | | Pharmaceutica Inc.(1) | |
| (Canada) | | (Canada) | | | (Canada) | |
---------------------- ---------------------- | ------------------------- 100%
| | | |
- -- Anipryl-Registered -- Anipryl-Registered | | | |
Trademark- Trademark- | | | |
(Ontario sales) (Other Canadian 90% 10% | |
sales) | | | |
| | | |
----------------------------- | ---------------------------
| Draxis LLC | | | Draxis |
| (Delaware) | | | U.S. Inc. |
| | | | (Delaware) |
--------------------------- | -------------------------
| | -- Kerasal-Registered |
14% 30% Trademark- 50%
| | |
--------------------- -------------------------
| Deprenyl Animal | | New IHS LLC |
| Health, Inc. | | (Delaware) |
| (Missouri) | | |
--------------------- -------------------------
- Anipryl-Registered -- science-based
Trademark- nutriceuticals
</TABLE>
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-.
<PAGE>
<TABLE>
<CAPTION>
DRAXIS HEALTH INC. SCHEDULE 9
SUMMARY OF COMMON SHARE TRADING PRICES AND VOLUMES
TSE TSE AND NASDAQ
---------------------------------------- --------------
HIGH LOW CLOSE VOLUME
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
1996
June $6.55 $4.50 $4.75 7,058,768
May $5.60 $4.57 $4.70 2,806,765
April $5.20 $4.10 $4.75 2,660,708
March $5.00 $4.05 $4.30 2,819,022
February $5.63 $3.65 $5.00 9,328,839
January $4.10 $2.15 $3.70 5,254,340
1996
Second quarter $6.55 $4.10 $4.75 12,526,241
First quarter $5.63 $2.15 $4.30 17,402,201
1995
Fourth quarter $2.95 $2.03 $2.15 3,752,955
Third quarter $3.35 $2.10 $2.80 5,849,146
Second quarter $3.00 $2.00 $2.21 2,936,528
First quarter $2.80 $1.90 $2.45 7,000,590
1994
Fourth quarter $1.95 $1.50 $1.85 4,307,200
Third quarter $2.35 $1.35 $2.12 3,121,316
Second quarter $2.45 $1.59 $1.70 3,326,010
First quarter $2.90 $2.40 $2.00 4,593,797
1995 Annual $3.35 $1.90 $2.15 19,539,219
1994 Annual $2.90 $1.35 $1.85 15,348,323
1993 Annual $7.25 $2.28 $2.40 36,621,500
1992 Annual $23.50 $3.75 $7.00 97,048,300
1991 Annual $26.75 $10.38 $20.88 58,369,100
</TABLE>
