<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Pharmaceutical Resources, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
PHARMACEUTICAL RESOURCES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 26, 1998
To the Shareholders:
The 1998 Annual Meeting of Shareholders of Pharmaceutical Resources, Inc.
(the "Company") will be held on June 26, 1998, at Holiday Inn-Suffern, 3
Executive Boulevard, Suffern, New York at 10:00 a.m., local time, for the
following purposes:
I. To elect seven members of the Company's Board of Directors;
II. To approve the sale of 10,400,000 shares of the Company's Common Stock
to Lipha Americas, Inc. at a price of $2.00 per share and the grant and
issuance of stock options to Merck KGaA, Darmstadt, Germany, and Genpharm
Inc. to purchase an aggregate of 1,171,040 shares of the Company's Common
Stock at an exercise price of $2.00 per share, as further described in the
accompanying Proxy Statement;
III. To approve an amendment to the Company's Certificate of Incorporation
to increase the authorized number of shares of Common Stock from 60,000,000
to 90,000,000;
IV. To approve and adopt the Company's 1997 Directors Stock Option Plan;
and
V. To transact such other business as may properly come before the meeting
and any adjournment(s) thereof.
The Board of Directors has fixed the close of business on April 30, 1998 as
the record date for the determination of shareholders entitled to notice of,
and to vote at, the 1998 Annual Meeting of Shareholders (the "Meeting"). Only
shareholders of record at the close of business on such date will be entitled
to notice of, and to vote at, the Meeting and any adjournment(s) thereof.
By Order of the Board of Directors
Dennis J. O'Connor
Secretary
May 5, 1998
YOU ARE URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND
RETURN IT PROMPTLY IN THE POSTAGE PREPAID ENVELOPE WHICH HAS BEEN
PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. THE
PROXY MAY BE REVOKED BY YOU AT ANY TIME PRIOR TO EXERCISE, AND IF YOU ARE
PRESENT AT THE MEETING YOU MAY, IF YOU WISH, REVOKE YOUR PROXY AT THAT
TIME AND EXERCISE YOUR RIGHT TO VOTE YOUR SHARES PERSONALLY.
<PAGE>
PROXY STATEMENT
PHARMACEUTICAL RESOURCES, INC.
ONE RAM RIDGE ROAD
SPRING VALLEY, NEW YORK 10977
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 26, 1998
GENERAL INFORMATION
This Proxy Statement is being furnished to shareholders of Pharmaceutical
Resources, Inc. (the "Company"), a New Jersey corporation, in connection with
the solicitation by the Company's Board of Directors (the "Board") of proxies
to be voted at the 1998 Annual Meeting of Shareholders (the "Meeting"), and at
any adjournment(s) thereof, for the purposes set forth in the accompanying
Notice of Annual Meeting of Shareholders. The Meeting is to be held on June
26, 1998, at Holiday Inn-Suffern, 3 Executive Boulevard, Suffern, New York at
10:00 a.m., local time.
The principal executive offices of the Company are located at One Ram Ridge
Road, Spring Valley, New York 10977, and its telephone number is (914) 425-
7100. The accompanying proxy card and this Proxy Statement are being
transmitted to shareholders of the Company on or about May 8, 1998.
RECENT DEVELOPMENTS
The Company has recently agreed to enter into a strategic alliance with
Merck KGaA, Darmstadt, Germany, a Kommanditgesellschaft auf Aktien organized
under the laws of Germany ("Merck KGaA"). Merck KGaA is a multi-national
pharmaceutical, laboratory and chemical company and is not affiliated with
Merck & Co., Inc., Whitehouse Station, New Jersey. Pursuant to a Stock
Purchase Agreement, dated March 25, 1998 (the "Stock Purchase Agreement"),
between the Company and Lipha Americas, Inc., a Delaware corporation and a
subsidiary of Merck ("Lipha"), the Company agreed to sell 10,400,000 shares of
the Company's common stock, par value $.01 per share ("Common Stock"), to
Lipha at $2.00 per share. Also, the Company agreed to issue options to
purchase up to an aggregate of 1,171,040 shares of Common Stock at an exercise
price of $2.00 per share to Merck KGaA and Genpharm Inc., a Canadian
corporation and a subsidiary of Merck KGaA ("Genpharm"), in exchange for
certain services to be provided to the Company. In connection with the Stock
Purchase Agreement, the Company also obtained from Genpharm exclusive
distribution rights in the United States for approximately 40 generic
pharmaceutical products currently being developed, some of which have obtained
governmental approval and others of which have been or will be submitted for
approval. Such transactions are referred to in this Proxy Statement as the
"Proposed Transaction." The completion of the transactions contemplated by the
Stock Purchase Agreement is subject to certain conditions, including approval
by the Company's shareholders at the Meeting of Proposals I, II and III as
further described in this Proxy Statement. These three Proposals relate to the
transactions contemplated by the Stock Purchase Agreement and certain related
agreements. Shareholders are urged to carefully review the description of the
transactions contemplated by the Stock Purchase Agreement in this Proxy
Statement under Proposals I, II and III below. The Board unanimously
recommends that the Company's shareholders vote in favor of such Proposals.
SOLICITATION AND REVOCATION
The accompanying proxy card is being solicited by and on behalf of the
Board. The solicitation of proxies will be made principally by mail and, in
addition, may be made by directors, officers and employees of the Company
personally, or by telephone or telegraph, without extra compensation. The
Company has also retained Georgeson & Company Inc. to assist it in the
solicitation of proxies. Brokers, nominees and fiduciaries will be reimbursed
for their out-of-pocket and clerical expenses in transmitting proxies and
related material to beneficial owners. The costs of soliciting proxies will be
borne by the Company. It is estimated that such costs will be approximately
$8,000.
<PAGE>
The presence at the Meeting, in person or by proxy, of the holders of a
majority of the outstanding shares of Common Stock will constitute a quorum.
The accompanying proxy card is intended to permit a shareholder of record on
April 30, 1998 to vote at the Meeting on the Proposals described in this Proxy
Statement, whether or not the shareholder attends the Meeting in person.
Persons who acquire shares of record after the close of business on April 30,
1998 will not be entitled to vote such shares at the Meeting by proxy or by
voting at the Meeting in person unless properly authorized by the record
holder of such shares as of such date.
The persons named in the accompanying proxy card have been designated as
proxies by the Board. Shares represented by properly executed proxies received
by the Company will be voted at the Meeting in the manner specified therein
or, if no specification is made, will be voted (i) "FOR" the election of the
seven nominees for director named herein, (ii) "FOR" the sale of 10,400,000
shares of the Common Stock to Lipha at a price of $2.00 per share and the
grant and issuance of stock options to Merck KGaA and Genpharm to purchase an
aggregate of 1,171,040 shares of Common Stock at an exercise price of $2.00
per share, as further described in this Proxy Statement, (iii) "FOR" the
approval of an amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 60,000,000 to
90,000,000, (iv) "FOR" the approval and adoption of the 1997 Directors Stock
Option Plan, and (v) at the discretion of the proxy holders in respect of such
other business, if any, as may properly be brought before the Meeting.
Directors will be elected by a plurality of the votes cast, approval of
Proposals II and III will require the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock and approval of any other
proposal (including Proposal IV) at the Meeting will, subject to applicable
law, require the affirmative vote of a majority of the votes cast in person or
by proxy at the Meeting. Abstentions and shares of record held by a broker or
nominee ("Broker Shares") that are voted on any matter will be included in
determining the existence of a quorum. Broker Shares that are not voted on any
matter will not be included in determining the existence of a quorum.
Abstentions and Broker Shares that are not voted in respect of Proposals I
and/or IV will not be counted in determining the votes cast in respect of the
respective Proposal. Thus, neither abstentions nor non-voted Broker Shares
will have an effect on the outcome of the election of the seven nominees for
directors, which requires only that a plurality of the votes cast be in favor
of each nominee, or the adoption of the 1997 Directors Stock Option Plan,
which requires only the affirmative vote of a majority of the votes cast in
person or by proxy at the Meeting. However, abstentions and non-voted Broker
Shares will have the effect of a vote against approval of Proposals II and
III, each of which requires the affirmative vote of the holders of a majority
of the outstanding shares of Common Stock.
Any proxy conferred by a shareholder pursuant to this solicitation may be
revoked by such shareholder at any time before it is exercised by written
notification delivered to the Secretary of the Company, by voting in person at
the Meeting, or by duly executing and delivering another proxy bearing a later
date. Attendance by a shareholder at the Meeting does not alone serve to
revoke the proxy.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
OUTSTANDING SHARES
The Board has fixed the close of business on April 30, 1998 as the record
date (the "Record Date") for the determination of shareholders of the Company
who are entitled to receive notice of, and to vote at, the Meeting. An
aggregate of 18,890,153 shares of Common Stock were outstanding at the close
of business on the Record Date. Each share of Common Stock outstanding on the
Record Date is entitled to one vote on each matter to be voted upon at the
Meeting. The Company has no other class of voting securities entitled to vote
at the Meeting, and the Company's shareholders do not have cumulative voting
rights.
OWNERSHIP OF VOTING SECURITIES
The following table sets forth, as of the close of business on the Record
Date, the beneficial ownership of the Common Stock by (i) each person known
(based solely upon a review of Schedule 13Ds) to the Company to
2
<PAGE>
be the beneficial owner of more than 5% of the Common Stock, (ii) each current
director and nominee for election as a director of the Company, (iii) the
Named Executives, as defined in the "--Executive Compensation" section of this
Proxy Statement, and (iv) all directors and current executive officers of the
Company, as a group (based solely in respect of clauses (ii), (iii) and (iv)
upon information furnished by such persons). Under the rules of the Securities
and Exchange Commission, a person is deemed to be a beneficial owner of an
equity security if such person has or shares the power to vote or direct the
voting of such security or the power to dispose of or to direct the
disposition of such security. In general, a person is also deemed to be a
beneficial owner of any equity securities of which that person has the right
to acquire beneficial ownership within 60 days. Accordingly, more than one
person may be deemed to be a beneficial owner of the same securities.
<TABLE>
<CAPTION>
WITHOUT GIVING EFFECT
TO THE PROPOSED IF PROPOSED TRANSACTION
TRANSACTION IS APPROVED
----------------------- ------------------------
AMOUNT OF PERCENTAGE OF AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL COMMON COMMON COMMON PERCENTAGE OF
OWNER(7) STOCK STOCK STOCK COMMON STOCK
- ------------------------------ --------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Merck KGaA(1)................. 249,700 1.30 12,462,972 42.19
Clal Pharmaceutical Industries
Ltd.(2)...................... 2,313,272 12.25 500,000 1.71
Kenneth I. Sawyer(3)(4)(5).... 154,400 * 154,400 *
Melvin H. Van Woert,
M.D.(3)(4)................... 71,650 * 71,650 *
Andrew Maguire, Ph.D.(3)(4)... 38,800 * 38,800 *
H. Spencer Matthews(3)(4)..... 38,500 * 38,500 *
Mark Auerbach(3)(4)(5)........ 49,500 * 49,500 *
Robin O. Motz, M.D.,
Ph.D.(3)(4).................. 44,500 * 44,500 *
Dennis J. O'Connor(3)......... 6,619 * 6,619 *
Stephen A. Ollendorff(5)...... 2,975 * 2,975 *
Bernhard Scheuble(1)(5)....... 0 * 0 *
Klaus H. Jander(5)............ 0 * 0 *
Anthony S. Tabatznik(5)(6).... 0 * 0 *
J. Neil Tabatznik(5).......... 0 * 0 *
All directors and current ex-
ecutive officers
as a group (seven persons)
(3).......................... 406,469 2.13 406,469 1.38
</TABLE>
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* Less than 1%.
(1) The business address of Merck KGaA is Frankfurter Strasse 250, 64271,
Darmstadt, Germany. Includes 249,700 shares of Common Stock which may be
acquired by Genpharm, a subsidiary of Merck KGaA, upon exercise of
warrants exercisable on or prior to June 29, 1998. Warrants for 99,700 of
such shares have an exercise price of $6.00 per share and warrants for
150,000 of such shares have an exercise price of $10.00 per share. Amount
under "If Proposed Transaction is Approved" column also includes
10,400,000 shares of Common Stock, beneficial ownership of which is to be
acquired by Lipha, a subsidiary of Merck KGaA, if the Proposed
Transaction is consummated and 1,813,272 shares of Common Stock to be
sold by Clal Pharmaceutical Industries Ltd. ("Clal") to Merck KGaA (or
its designee) at the time of such consummation. Does not include an
additional 1,171,040 shares which may be acquired upon exercise of
options to be granted to Merck KGaA and Genpharm at the time of
consummation of the Stock Purchase Agreement. Such options are not
exercisable on or prior to June 29, 1998. See "Proposal II--Approval of
Stock Sale and Option Issuance." Dr. Scheuble is Deputy Member of the
Executive Board of Merck KGaA.
(2) The business address of Clal is Clal House, 5 Druyanov Street, Tel Aviv
63143, Israel. Amount under "If Proposed Transaction is Approved" column
gives effect to sale of 1,813,272 shares of Common Stock by Clal to Merck
KGaA at the time of consummation of the Stock Purchase Agreement.
Includes 500,000 shares of Common Stock which, under certain
circumstances, may be acquired by Merck KGaA after June 29, 1998. See
"Proposal II--Approval of Stock Sale and Option Issuance."
(3) Includes 235,000 shares of Common Stock which may be acquired upon the
exercise of options which are exercisable on or prior to June 29, 1998
under the Company's stock option plans as follows: Dr. Van Woert, 69,000
shares; Mr. Maguire, 36,000 shares; Mr. Matthews, 36,000 shares; Mr.
Auerbach, 47,000 shares;
3
<PAGE>
Dr. Motz, 42,000 shares; and Mr. O'Connor, 5,000 shares. Does not reflect
options covered by agreements of the current executive officers and
directors of the Company in connection with the Proposed Transaction not to
exercise such stock options for certain periods of time. See "Proposal II--
Approval of Stock Sale and Option Issuance." Does not include options to be
granted to current directors under the 1997 Directors Stock Option Plan if
Proposal IV is approved by the shareholders at the Meeting. See "Proposal
IV--Approval and Adoption of 1997 Directors Stock Option Plan."
(4) A current director of the Company.
(5) A nominee for election as a director of the Company. See "Proposal I--
Election of Directors."
(6) Does not include 501,400 shares of Common Stock held by a family trust,
the corporate trustee of which has the power to direct the disposition
and voting of such shares. Mr. Tabatznik disclaims beneficial ownership
of the aforesaid shares of Common Stock.
(7) The business address of each director, Named Executive and nominee for
election as a director of the Company, for the purposes hereof, is in
care of Pharmaceutical Resources, Inc., One Ram Ridge Road, Spring
Valley, New York 10977.
VOTING ARRANGEMENTS
The Company and Clal entered into a Stock Purchase Agreement, dated March
25, 1995, as amended (the "Clal Stock Purchase Agreement"), pursuant to which
Clal, on May 1, 1995, purchased 2,027,272 shares of Common Stock. Clal
acquired 100,000 additional shares of Common Stock in June 1996 from Mr.
Sawyer and acquired an additional 186,000 shares of Common Stock from the
Company in July 1997 in connection with an amendment of the Clal Stock
Purchase Agreement. Clal has certain rights under the Clal Stock Purchase
Agreement to nominate a director to the Company's Board and committees
thereof. See "Proposal I--Election of Directors--Certain Relationships and
Related Transactions." Pursuant to an agreement among the Company, Merck KGaA
and Clal, dated March 25, 1998 (the "Clal Sale Agreement"), Clal agreed to
vote all of its shares of Common Stock for the election of the seven nominees
for director set forth in Proposal I and for the approval of Proposals II and
III at the Meeting. Upon the consummation of the Stock Purchase Agreement, the
Clal Stock Purchase Agreement will terminate. See "Proposal II--Approval of
Stock Sale and Option Issuance."
In accordance with the Stock Purchase Agreement, Mr. Sawyer has agreed to
vote all of his shares of Common Stock for the election of the seven nominees
for director set forth in Proposal I and for the approval of Proposals II and
III at the Meeting. Pursuant to the Stock Purchase Agreement, Lipha has agreed
with the Company to vote, and to cause its affiliates to vote, any shares of
Common Stock that they may own in favor of such Proposals at the Meeting. See
"Proposal II--Approval of Stock Sale and Option Issuance."
4
<PAGE>
PROPOSAL I
ELECTION OF DIRECTORS
DIRECTORS
The Company's Certificate of Incorporation provides that the Board will be
divided into three classes, with the term of office of one class expiring each
year. The maximum number of directors is set by the Company's By-laws at 15,
and the number of directors is presently set, by Board resolution, at six. The
Class I and Class III directors of the Company have terms which expire in the
years 2000 and 1999, respectively. The Class II directors have terms which
expire this year. The current Class I directors are Mark Auerbach and H.
Spencer Matthews, the current Class II directors are Andrew Maguire and Melvin
H. Van Woert, and the current Class III directors are Kenneth I. Sawyer and
Robin O. Motz.
In connection with the Proposed Transaction, all current directors will
resign as directors in their current Class, subject to and effective upon the
consummation of the Stock Purchase Agreement. The Board has, in connection
with the Proposed Transaction, voted to increase the size of the Board from
six to seven, subject to and effective upon the consummation of the Stock
Purchase Agreement. The following persons have been nominated to become,
subject to consummation of the Stock Purchase Agreement, directors in the
following Classes: Class I directors having terms which expire in 2000 and
until their successors have been duly elected and qualified--Anthony S.
Tabatznik and J. Neil Tabatznik; Class II directors having terms which expire
in 2001 and until their successors have been duly elected and qualified--
Kenneth I. Sawyer, Mark Auerbach and Stephen A. Ollendorff; and Class III
directors having terms which expire in 1999 and until their successors have
been duly elected and qualified--Bernhard Scheuble and Klaus H. Jander.
Pursuant to the terms of the Stock Purchase Agreement, Lipha designated the
Class I and III nominees and the Company's current Board designated the Class
II nominees (the "Company's Designees"). Messrs. Sawyer and Auerbach are
currently members of the Board, and are being nominated to become directors of
a different Class than they currently are in. The Nominating Committee of the
Board has nominated, pursuant to the Company's By-Laws and Certificate of
Incorporation, each of the persons designated by Lipha and the current Board.
In addition, the Company's Designees and Lipha have agreed to jointly
designate two of the directors to comprise the Audit Committee. See "Proposal
II--Approval of Stock Sale and Option Issuance--Stock Purchase Agreement."
Clal presently has the right to designate a director of the Board and its
committees. However, Clal has elected not to designate any nominees for
director. See "--Certain Relationships and Related Transactions." Upon the
consummation of the Stock Purchase Agreement, Clal's right to designate
directors will terminate. See "Proposal II--Approval of Stock Sale and Option
Issuance."
Proxies will be voted at the Meeting in favor of the election of each of the
nominees listed on the accompanying form of proxy card, unless authority to do
so is withheld as to a specified nominee or nominees or all nominees as a
group. Proxies cannot be voted for a greater number of persons than the number
of nominees named herein. It is expected that each of the nominees will be
able to serve, but if before the election it develops that any one or more of
the nominees will be unable to serve or for good cause will not serve, the
proxyholders reserve the discretion to vote or refrain from voting for a
substitute nominee or nominees. Each of the nominees has consented to serve as
a director of the Company and to be named herein. Directors will be elected by
a plurality of the votes cast by the holders of shares who are present at the
Meeting in person or by proxy.
5
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The following table sets forth certain information with respect to each
nominee for election as a Class I, Class II and Class III director of the
Company at the Meeting and, for those nominees who are currently directors,
the year each was first elected as a director:
<TABLE>
<CAPTION>
YEAR
OF FIRST
NAME AGE ELECTION
- ---- --- --------
<S> <C> <C>
CLASS I
Anthony S. Tabatznik.............................................. 50 --
Since 1983, Chairman and Chief Executive Officer of The Generics
Group Ltd., now known as The Merck Generics Group Ltd., a
manufacturer and distributor of generic pharmaceutical products.
Since 1996, Board Member of Merck Pharma, which controls the
pharmaceutical operations of Merck KGaA. Founder of The Generics
Group Ltd. and brother of J. Neil Tabatznik.
J. Neil Tabatznik................................................. 48 --
Since July 1993, Chairman of Genpharm, a Canadian manufacturer
and distributor of generic pharmaceutical products. Prior to
July 1993, an attorney in private practice. Brother of Anthony
S. Tabatznik.
CLASS II
Kenneth I. Sawyer(1)(2)(3)........................................ 52 1989
Since October 1990, Chairman of the Board of the Company. Since
October 1989, President and Chief Executive Officer of the
Company. From September 1989 to October 1989, Interim President
and Chief Executive Officer of the Company. From August 1989 to
September 1989, counsel to the Company. From May 1989 to August
1989, an attorney in private practice. From prior to 1987 to May
1989, Vice President and General Counsel of Orlove Enterprises,
Inc., a company engaged in the manufacture and distribution of
pharmaceutical and other products. Director of Acorn Venture
Capital Corporation, a publicly-traded holding company. Mr.
Sawyer is presently a Class III director.
Mark Auerbach(4)(5)............................................... 60 1990
Since June 1993, the Senior Vice President and Chief Financial
Officer of Central Lewmar L.P., a distributor of fine papers.
From August 1992 to June 1993, a partner of Marron Capital L.P.,
an investment banking firm. Since December 1995, Chief Financial
Officer of Oakhurst Company, Inc., and Steel City Products,
Inc., each a publicly-traded distributor of automotive products,
and Chief Executive Officer of Oakhurst Company, Inc. from
December 1995 to May 1997. Mr. Auerbach is presently a Class I
director.
Stephen A. Ollendorff............................................. 59 --
Practicing attorney for more than the past five years. Since
December 1990, of counsel to Hertzog, Calamari & Gleason, a law
firm. Chief Executive Officer and director of Acorn Venture
Capital Corporation for more than the past five years. Director
of Computer Products, Inc., a publicly-traded designer,
manufacturer and seller of power supplies.
CLASS III
Bernhard Scheuble................................................. 44 --
Since 1998, Deputy Member of the Executive Board of Merck KGaA,
Darmstadt, Germany. From 1996 to 1998, Head of Pharma Ethicals,
Merck KGaA, from 1994 to 1995, Head of Pharma International, E.
Merck, Darmstadt, Germany, and from 1992 to 1994, General
Manager, Liquid Crystals Unit, E. Merck.
Klaus H. Jander................................................... 57 --
Since 1990, a partner of Rogers & Wells LLP, a law firm. Since
1997, a member of the Executive Committee of Rogers & Wells LLP.
</TABLE>
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(1) A member of the Strategic Planning Committee of the Board.
(2) A member of the Nominating Committee of the Board.
(3) A member of the Executive Committee of the Board.
(4) A member of the Audit Committee of the Board.
(5) A member of the Compensation and Stock Option Committee of the Board.
6
<PAGE>
IT IS A CONDITION TO THE CONSUMMATION OF THE STOCK PURCHASE AGREEMENT THAT
ALL NOMINEES BE ELECTED BY THE SHAREHOLDERS AT THE MEETING. IF ALL NOMINEES
ARE NOT ELECTED, IF PROPOSAL II AND/OR PROPOSAL III ARE NOT APPROVED BY THE
SHAREHOLDERS AT THE MEETING, OR IF THE STOCK PURCHASE AGREEMENT IS TERMINATED,
NONE OF THE NOMINEES WILL BE ELECTED, THE CURRENT DIRECTORS WILL NOT RESIGN
AND THE COMPANY WILL CALL A SPECIAL MEETING OF SHAREHOLDERS AS SOON AS
PRACTICABLE IN ORDER TO ELECT TWO CLASS II DIRECTORS WHOSE TERMS OF OFFICE
OTHERWISE EXPIRE THIS YEAR. If all of the nominees are not elected at the
Meeting, each of Lipha and the Company have the right to terminate the Stock
Purchase Agreement. In such event, it is the present intention of the Company
to discuss with Merck KGaA and its affiliates entering into alternative
transactions, subject to applicable laws and regulations. No specific
alternative transactions are currently contemplated.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF
ALL SEVEN OF THE NOMINEES NAMED ABOVE AS DIRECTORS OF THE COMPANY.
BOARD AND COMMITTEE MEETINGS
The Board met 10 times during fiscal year 1997 which ended September 30,
1997. The Audit Committee met once during fiscal year 1997. The primary
function of the Audit Committee is to review the Company's financial
statements with its auditors. The Compensation and Stock Option Committee held
two meetings during fiscal year 1997. The functions of the Compensation and
Stock Option Committee are to set and approve salary and bonus levels of
corporate officers and to administer the Company's 1990 Stock Incentive Plan,
including primary responsibility for the granting of options and other awards
thereunder. The Nominating Committee did not meet during fiscal year 1997, but
acted in fiscal year 1998 to review and approve the nominees for election as
directors at the Meeting. The primary function of the Nominating Committee is
to make recommendations to the Board concerning the selection of nominees for
election as directors. The Nominating Committee will consider candidates
suggested by directors or shareholders. Nominations for shareholders, properly
submitted in writing to the Secretary of the Company, will be referred to the
Nominating Committee for consideration. No nominees other than those set forth
in this Proxy Statement have been properly submitted for consideration.
Neither the Executive Committee nor the Strategic Planning Committee had any
official meetings during fiscal year 1997. The function of the Executive
Committee is to exercise the powers of the Board in the management of the
business and affairs of the Company, subject to limits imposed by applicable
law, and the function of the Strategic Planning Committee is to review certain
potential material transactions involving the Company and to communicate with
and make recommendations to the Board in respect of such transactions. There
is no current director who attended fewer than 75% of the meetings of the
Board and of its committees of which he was a member during fiscal year 1997.
COMPENSATION OF DIRECTORS
For service on the Board in fiscal year 1997, directors who were not
employees of the Company or any of its subsidiaries received an annual
retainer of $12,000, a fee of $1,000 for each meeting of the Board attended,
in person or by telephone conference, and a fee of $750 for each committee
meeting attended in person or by telephone conference, subject to a maximum of
$1,750 per day. Chairmen of committees receive an additional annual retainer
of $5,000 per committee. No stock options were granted to any directors for or
during fiscal year 1997.
Directors who are employees of the Company or any of its subsidiaries
receive no remuneration for serving as directors or as members of committees
of the Board. All directors are entitled to reimbursement for out-of-pocket
expenses incurred in connection with their attendance at Board and committee
meetings.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Clal Agreements. On May 1, 1995, the Company consummated several
transactions with Clal consisting principally of (i) the sale by the Company
of 2,027,272 shares of the Common Stock for $20,000,000, or $9.87 per share,
(ii) the issuance by the Company of warrants to purchase 2,005,107 shares of
Common Stock (the
7
<PAGE>
"Warrants") and (iii) the formation of a joint venture to research and develop
generic pharmaceutical products. The Clal Stock Purchase Agreement sets forth
terms of the Company's and Clal's business relationship, including the
issuance to Clal of the aforementioned 2,027,272 shares of Common Stock,
rights to nominate Board members, rights of first refusal, voting agreements,
rights to invest in others, standstill agreements and agreements with respect
to the issuance of the Warrants.
In accordance with the terms of the Clal Stock Purchase Agreement, Clal has
the right to designate one-seventh of the members of the Board as long as Clal
owns 8% of the issued and outstanding Common Stock, and a total of two-
sevenths of the members of the Board if Clal owns at least 16% of the issued
and outstanding Common Stock. The Company has the right to reject a designee
of Clal if such person is not satisfactory to the Company for good faith
reasons. The Company also agreed to elect Clal's designee(s), if any, to the
Audit Committee, Compensation and Stock Option Committee and Strategic
Planning Committee of the Board. Additionally, if Clal's appointment of a
director to the Audit Committee is prohibited by the rules and regulations of
The New York Stock Exchange, the Company will provide Clal materials which are
provided to committee members, the appointment of the Company's auditors will
be approved by the entire Board, the Company will consult with directors
nominated by Clal with respect to Audit Committee actions and any director(s)
nominated by Clal will have the right to consent to certain changes in the
Company's accounting principles. In the event that Clal does not nominate
directors to the Board or its committees or if Clal's designees are not
elected to the Board or its committees, Clal is permitted, under the Clal
Stock Purchase Agreement, to designate representatives who may attend meetings
of the Board and its committees. Clal also has the right to designate a member
of the Company's management. Pursuant to the Clal Stock Purchase Agreement,
Clal has designated an observer to meetings of the Board and its committees,
but has not designated any director, nominee for director or member of
management of the Company. Clal has the right to acquire up to 20% of any
equity securities issued by the Company in an underwritten public offering so
long as Clal, at the time, owns 10% of the issued and outstanding Common
Stock.
In consideration of the rights and benefits obtained by the Company under
the Clal Stock Purchase Agreement, the Company also granted to Clal certain
registration rights under a registration rights agreement. In general, Clal is
not able to sell freely the shares of Common Stock purchased by Clal without
registration under applicable securities laws or unless an exemption from
registration is available. Clal is entitled to two demand registrations. In
addition, the Company granted to Clal the right to register shares of Common
Stock owned by Clal on each occasion that the Company registers shares of
Common Stock, subject to certain limitations and exceptions.
The rights of first refusal, voting agreements and standstill agreements of
Clal have expired in accordance with their terms and, upon consummation of the
Stock Purchase Agreement, all of Clal's other rights under the Clal Stock
Purchase Agreement will terminate. Clal has agreed with the Company and Merck
KGaA to vote all of its shares of Common Stock in favor of Proposals I, II and
III at the Meeting pursuant to the Clal Sale Agreement. See "Proposal II--
Approval of Stock Sale and Option Issuance."
In May 1995, the Company and Clal formed a joint venture in Israel now
called Israel Pharmaceutical Resources, L.P. ("IPR") to research and develop
generic pharmaceutical products. On August 14, 1997, the Company acquired
Clal's 51% ownership interest in IPR for $447,000 in cash obtained from the
sale of Fine-Tech Ltd. ("Fine-Tech") stock owned by the Company and a non-
recourse, promissory note in the principal amount of $1,500,000 (the "IPR
Note"). The IPR Note bears interest at 7% per annum, is payable in eight semi-
annual installments commencing in July 1999 and is secured by all of the
assets of IPR. The Company may prepay the IPR Note in full if it makes a
payment of $600,000 before August 13, 1998. Merck KGaA has an agreement in
principle with the Company to prepay the IPR Note on behalf of the Company
before August 13, 1998 in exchange for consideration to be agreed upon in the
future relating to IPR. Until the IPR Note is repaid in full, the Company is
obligated to invest $1,500,000 each year in IPR. In addition, the Company and
Clal agreed, in July 1997, to modify certain terms of Clal's investment in the
Company, including the surrender by Clal of the Warrants in exchange for the
issuance to Clal of 186,000 shares of the Company's Common Stock for nominal
cash consideration.
8
<PAGE>
As of April 30, 1998, Clal beneficially owned, to the Company's knowledge,
2,313,272 shares of Common Stock. Of such shares, l00,000 were purchased from
Mr. Sawyer at a price of $7.125 per share in June 1996 and an additional
186,000 shares were acquired from the Company as discussed above.
The Company reimbursed Clal $115,000 in fiscal year 1997 for the wages and
expenses of a consultant to the Company who was also an employee of Clal
during that period.
Investment in Fine-Tech. Under the Clal Stock Purchase Agreement, the
Company obtained the right to participate with Clal and certain of its
affiliates in connection with certain pharmaceutical acquisitions and
transactions. In December 1995, the Company paid $1,000,000 to purchase 10% of
the shares of Fine-Tech, an Israeli pharmaceutical research and development
company in which Clal had a significant ownership interest. In addition, the
Company obtained the exclusive right to purchase certain products not commonly
sold in North America, South America and the Caribbean. In June 1997, the
Company sold all of the shares of Fine-Tech for approximately $447,000 and
terminated its exclusive purchase rights.
Transactions involving Officers, Directors and Nominees. At various times
during fiscal years 1996 and 1997, the Company made unsecured loans to Mr.
Sawyer. Such loans are evidenced by a single promissory note, which bears
interest at the rate of 8.25% per annum. Interest and principal are due on the
earlier of August 14, 2002, or the termination of Mr. Sawyer's employment with
the Company. As of April 30, 1998, the outstanding principal balance of the
note, plus accrued interest, was approximately $382,000. The Company has
agreed to forgive the note over a three-year period, provided that Mr. Sawyer
shall remain employed by the Company. See "--Executive Compensation--
Employment Agreements and Termination Arrangements."
Stephen A. Ollendorff, a nominee for election as a director of the Company,
is of counsel to the law firm of Hertzog, Calamari & Gleason, which acts as
counsel for the Company and which received fees and expenses in fiscal years
1996 and 1997 for various legal services rendered to the Company. Hertzog,
Calamari & Gleason was the Company's counsel in the preparation and
negotiation of the Stock Purchase Agreement and the preparation of this Proxy
Statement. Mr. Ollendorff is a consultant to the Company and was paid $75,234
in fiscal year 1997. Pursuant to a renewable one-year consulting agreement,
the Company has agreed to pay Mr. Ollendorff $76,800 per year. Mr. Ollendorff
holds stock options to purchase 60,000 shares of Common Stock, none of which
are presently exercisable.
Mr. J. Neil Tabatznik, a nominee for election as a director of the Company,
is the Chairman of Genpharm, which will develop, manufacture and distribute
products to the Company pursuant to the Distribution Agreement, dated March
25, 1998, between the Company and Genpharm. Mr. Anthony S. Tabatznik, a
nominee for election as a director of the Company, is a board member of Merck
Pharma which controls the pharmaceutical operations of Merck KGaA, including
Genpharm. Dr. Bernhard Scheuble, a nominee for election as a director of the
Company, is Deputy Member of the Executive Board of Merck KGaA. See "Proposal
II--Approval of Stock Sale and Option Issuance." The Company and Genpharm and
its affiliate are presently parties to distribution agreements entered into in
1992 and 1993. Under such distribution agreements, payments by the Company to
Genpharm and an affiliate in fiscal year 1997 accounted for less than five
percent (5%) of the Company's and Genpharm's consolidated gross revenues.
However, in fiscal year 1998, it is expected that, under the March 1998
Distribution Agreement and the other distribution agreements, payments by the
Company to Genpharm and its affiliate will exceed five percent of the
Company's consolidated gross revenues.
The Company believes that all of the above transactions were on terms that
were fair and reasonable to the Company.
9
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company presently consist of Mr. Sawyer as
President, Chief Executive Officer and Chairman of the Board, and Dennis J.
O'Connor as Vice President, Chief Financial Officer and Secretary. Dr. Rudi D.
Neirinckx will become President and Chief Operating Officer of the Company and
each of its subsidiaries upon the consummation of the Stock Purchase
Agreement. The executive officers of Par Pharmaceutical, Inc., the Company's
principal subsidiary ("Par"), presently consist of Mr. Sawyer, Mr. O'Connor
and Scott Tarriff, as Executive Vice President of Business, Sales and
Marketing.
The following table sets forth certain information with respect to the
current executive officers of the Company and Par who are not directors or
nominees for election as directors:
<TABLE>
<CAPTION>
NAME AGE
- ---- ---
<S> <C>
Rudi D. Neirinckx, Ph.D.................................................... 53
Since February 1996, Head of Acquisition, Licensing and Project Manage-
ment at Merck KGaA. From April 1989 to February 1996, Head of Clinical
Research and Development for Inflamation, Bone and Allergy at Ciba-Geigy,
a manufacturer and distributor of pharmaceutical, chemicals and other
products.
Dennis J. O'Connor......................................................... 46
Since October 1996, Vice President, Chief Financial Officer and Secretary
of the Company and Par. From June 1995 to October 1996, Controller of
Par. From November 1989 to June 1995, Vice President--Controller of
Tambrands, Inc., a consumer products company.
Scott Tarriff.............................................................. 38
Since January 1998, Executive Vice President of Business, Sales and Mar-
keting of Par. Since June 1989, an employee of Bristol-Myers Squibb, a
drug manufacturer, serving as Senior Director of Marketing, Business De-
velopment and Strategic Planning from 1995 to 1997 and Director of Mar-
keting from 1992 to 1995.
</TABLE>
10
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation earned by or paid, during fiscal
years 1995 through 1997, to the Chief Executive Officer of the Company and the
one other executive officer of the Company who earned over $100,000 in salary
and bonus during fiscal year 1997 (the "Named Executives"). The Company
awarded or paid such compensation to all such persons for services rendered in
all capacities during the applicable fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- -----------------------
RESTRICTED SECURITIES ALL OTHER
NAME AND STOCK UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) OPTIONS(#) ($)(2)
- ------------------ ---- --------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth I. Sawyer....... 1997 350,000 -- -- -- 12,985
President, Chief 1996 370,692 -- -- 75,000 38,530
Executive Officer and
Chairman 1995 427,153 200,000 -- -- 49,806
Dennis J. O'Connor(3)... 1997 137,994 -- -- 30,000 2,121
Vice President, Chief
Financial Officer and
Secretary
</TABLE>
- --------
(1) The Named Executives did not hold any shares of restricted stock at the
end of fiscal year 1997.
(2) For fiscal year 1997, includes insurance premiums paid by the Company for
term life insurance for the benefit of the Named Executives as follows:
Mr. Sawyer--$74 and Mr. O'Connor--$51. The amounts for Mr. Sawyer includes
the maximum potential estimated dollar value of the Company's portion of
insurance premium payments from a split-dollar life insurance policy as if
premiums were advanced to the executive without interest until the
earliest time the premiums may be refunded by Mr. Sawyer to the Company.
Also includes the following amount contributed by the Company to the
Company's 401(k) plan on behalf of such Named Executive Officer: Mr.
O'Connor--$2,070.
(3) Mr. O'Connor did not become a Named Executive until fiscal year 1997, even
though he was employed previously by the Company.
The following table sets forth stock options granted to the Named Executives
during fiscal year 1997. No stock appreciation rights were granted in fiscal
year 1997.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(1)
------------------------------------------ ---------------------------------
% OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES
GRANTED IN FISCAL EXERCISE EXPIRATION
NAME (#) YEAR PRICE ($) DATE 0% ($) 5% ($) 10% ($)
- ---- ---------- ---------- --------- ---------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dennis J. O'Connor(2)... 20,000 6.37% $3.375 10/22/01 -- $ 86,149$ 108,709
Dennis J. O'Connor(3)... 10,000 3.19% $2.125 9/7/02 -- $ 27,121$ 34,223
</TABLE>
- --------
(1) Potential realizable value is based upon the assumption that the Common
Stock appreciates at the annual rates shown (compounded annually) from the
date of grant until the expiration of the option term. These numbers are
calculated based upon the requirements promulgated by the Securities and
Exchange Commission and do not reflect any estimate or prediction by the
Company of future Common Stock price increases, if any.
(2) Represents options granted pursuant to the Company's 1990 Incentive Option
Plan on October 23, 1996, of which 10,000 became exercisable on October
23, 1997 and 10,000 become exercisable on October 23, 1998.
(3) Represents options granted pursuant to the Company's 1990 Incentive Option
plan on September 8, 1997, of which 3,333 became exercisable on March 8,
1998, 3,333 become exercisable on March 8, 1999, and 3,334 become
exercisable on March 8, 2000.
11
<PAGE>
The following table sets forth the stock options exercised by the Named
Executives during fiscal year 1997 and, as of September 30, 1997, the number
of unexercised stock options and the value of in-the-money options held by the
Named Executives. No stock appreciation rights were exercised in fiscal year
1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME SHARES OPTIONS AT FY-END (#) AT FY-END ($)
- ---- ACQUIRED ON VALUE ------------------------- -------------------------
EXERCISE
(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth I. Sawyer....... 0 0 550,000 25,000 -- --
Dennis J. O'Connor...... 0 0 15,833 31,667 -- --
</TABLE>
After the close of the Company's last fiscal year, the Board approved the
grant of new five-year options to the Named Executives at an exercise price of
$2.25 per share, upon surrender for cancellation of certain of the options set
forth above in the table. Pursuant to such Board action, the Named Executives
hold repriced options as follows: Mr. Sawyer--500,000, and Mr. O'Connor--
37,500. All of such repriced options will become exercisable as follows: one-
third become exercisable on July 1, 1999, and the remaining two-thirds become
exercisable on July 1, 2001.
EMPLOYMENT AGREEMENTS AND TERMINATION ARRANGEMENTS
The Company has entered into an employment agreement with Mr. Sawyer, which
provides for his employment through October 4, 2000, subject to earlier
termination by the Company for Cause (as such term is defined in the
agreement). Mr. Sawyer's agreement provides for a rolling three-year term of
employment which is automatically extended each year for an additional one
year unless either party provides written notice by July 4th of such year that
he or it desires not to renew the agreement. Under the agreement with Mr.
Sawyer, the Company is required to use its best efforts to cause him to be
reelected to the Board during his term of employment. Mr. Sawyer, pursuant to
the terms of his employment agreement, is and will be required to serve, if so
elected, on the Board of Directors as well as any committees thereof.
Mr. Sawyer's agreement provides for certain payments upon termination of his
employment. Upon termination of Mr. Sawyer's employment without cause (as such
term is defined in the agreement) by the Company or for the Company's material
breach, Mr. Sawyer is entitled to receive the balance of his current salary
for the remainder of the employment term and the amount of his current bonus
multiplied by the number of years remaining under his agreement. A material
breach by the Company of the employment agreement includes, but is not limited
to, a termination without cause and a change of his responsibilities. In the
event of termination of Mr. Sawyer's employment for death, disability or for
cause, Mr. Sawyer is entitled to receive his current base salary through the
date of termination and, in the event of death or disability, a pro-rated
amount of his last annual bonus. As a result of a material breach by the
Company of his employment agreement following a change of control (as such
term is defined in the agreement) of the Company, Mr. Sawyer is entitled to
receive, if such a termination occurs within two years following the change of
control of the Company, a lump sum payment equal to the lesser of three times
the sum of his annual base salary and most recent bonus or the maximum amount
permitted without the imposition of an excise tax on Mr. Sawyer or the loss of
a deduction to the Company under the Internal Revenue Code of 1986, as amended
(the "Code"), plus reimbursement of certain legal and relocation expenses
incurred by Mr. Sawyer as a result of the termination of his employment and
maintenance of insurance, medical and other benefits for 24 months or until
Mr. Sawyer is covered by another employer for such benefits.
In April 1998, Mr. Sawyer and the Company amended Mr. Sawyer's employment
agreement. Mr. Sawyer agreed to waive breaches of his employment agreement
which would arise out of consummation of the Proposed Transaction, to
relinquish his title and position as President of the Company and each of its
subsidiaries if Lipha exercises its right to designate the President of the
Company and each of its subsidiaries, and to vote his shares
12
<PAGE>
of Common Stock in favor of the Proposed Transaction. The Company agreed to
forgive, in each year that Mr. Sawyer remains employed by the Company, one-
third of the principal amount of his promissory note, plus accrued interest on
the forgiven portion. As of April 30, 1998, the outstanding balance of the
note, including interest, was $382,000. The entire unpaid principal of the
promissory note and accrued interest would be canceled upon certain events,
including termination of Mr. Sawyer's employment without cause and the
expiration of this employment agreement in accordance with its terms.
The Company has entered into a severance agreement with Mr. O'Connor, dated
October 23, 1996. The agreement provides, with certain limitations, that upon
the termination of Mr. O'Connor's employment by the Company for any reason
other than for cause or by Mr. O'Connor for good reason or following a change
of control (as such terms are defined in the agreement), Mr. O'Connor is
entitled to receive a severance payment. The amount of the payment is to be
equal to six months of his salary at the date of termination, with such amount
to be increased by an additional month of salary for every full month he has
been employed by the Company in his present position, up to a maximum of six
additional month's salary.
The Company entered into an agreement with Dr. Rudi D. Neirinckx, dated
March 25, 1998, providing for his employment by the Company without a specific
term effective upon the closing of the Stock Purchase Agreement. Dr. Neirinckx
has received an option to purchase up to 250,000 shares of Common Stock at an
exercise price of $2.625 per share. The exercise price will increase to up to
$4.00 per share if financial thresholds to be agreed upon are not attained.
Such option will expire if the closing of the Stock Purchase Agreement does
not occur. See "Proposal II -- Approval of Stock Sale and Option Issuance."
The Company has entered into an employment agreement with Mr. Tarriff, dated
February 20, 1998. Upon termination of Mr. Tarriff's employment within the
first year of employment other than by the Company for cause (as such term is
defined in the agreement), Mr. Tarriff is entitled to receive the balance, if
any, of his salary for the first year of employment. In the event of
termination of Mr. Tarriff's employment after one year of employment by Mr.
Tarriff for good reason (as such term is defined in the agreement) or by the
Company without cause, Mr. Tarriff is entitled to receive a severance payment
equal to one year of his then current salary less any amount of compensation
paid by a new employer for the balance of the year from the termination date.
In connection with his employment by the Company, he was granted options to
purchase 200,000 shares of Common Stock at an exercise price of $1.50 per
share. The exercise price will increase to up to $2.00 per share if certain
financial thresholds are not attained.
Under the stock option agreements with Messrs. Sawyer, O'Connor, Neirinckx
and Tarriff, any unexercised portion of the options becomes immediately
exercisable in the event of a change of control (as such term is defined in
their agreements). However, each of such persons has agreed that the Proposed
Transaction does not constitute a change in control under his stock option
agreement. Each of Messrs. Sawyer, Neirinckx and Tarriff have agreed not to
exercise his stock options for a period of three years and 10 business days
following the closing of the Stock Purchase Agreement, and Mr. O'Connor has
agreed not to exercise his stock options during the three years following the
closing of the Stock Purchase Agreement, except for installments of one-third
of his stock options on each of the anniversaries of the closing.
PENSION PLAN
The Company maintains a defined benefit plan (the "Pension Plan") intended
to qualify under Section 401(a) of the Code. Effective October 1, 1989, the
Company ceased benefit accruals under the Pension Plan with respect to service
after such date. The Company intends that distributions will be made, in
accordance with the terms of the Plan, to participants as of such date and/or
their beneficiaries. The Company will continue to make contributions to the
Pension Plan to fund its past service obligations. Generally, all employees of
the Company or a participating subsidiary who had completed at least one year
of continuous service and attained 21 years of age were eligible to
participate in the Pension Plan. For benefit and vesting purposes, the Pension
Plan's "Normal Retirement Date" is the date on which a participant attains age
65 or, if later, the date of completion of 10 years of service. Service is
measured from the date of employment. The retirement income formula is 45% of
the highest consecutive five-year average basic earnings during the last 10
years of employment, less 83 1/3%
13
<PAGE>
of the participant's Social Security benefit, reduced proportionately for
years of service less than 10 at retirement. The normal form of benefit is
life annuity, or for married persons, a joint survivor annuity. Neither of the
Named Executives has any years of credited service under the Pension Plan.
Par currently maintains a retirement plan (the "Retirement Plan") and a
retirement savings plan. The Board of Directors of Par directed the cessation
of employer contributions to the Retirement Plan effective December 30, 1996.
Consequently, participants in the Retirement Plan will no longer be entitled
to any employer contributions under such Plan for 1996 or subsequent years.
COMPENSATION AND STOCK OPTION COMMITTEE REPORT
The Compensation and Stock Option Committee of the Board (the "Compensation
Committee"), consisting entirely of non-employee directors, approves the
policies and programs pursuant to which compensation is paid or awarded to the
Company's executive officers and key employees. The Compensation Committee
held two meetings in fiscal year 1997. In reviewing overall compensation for
fiscal year 1997, the Compensation Committee focused on the Company's
objectives to attract executive officers of high caliber from larger, well-
established pharmaceutical manufacturers, to retain the Company's executive
officers, to encourage the highest level of performance from such executive
officers and to align the financial interests of the Company's management with
that of its shareholders by offering awards that can result in the ownership
of Common Stock. The Company did not utilize specific formulae or guidelines
in reviewing and approving executive compensation.
Elements of Executive Officer Compensation Program. The key elements of the
Company's executive officer compensation program consist of base salary,
annual bonus, stock options and other incentive awards through participation
in the Company's 1990 Stock Incentive Plan. In awarding or approving
compensation to executive officers in fiscal year 1997, the Compensation
Committee considered the present and potential contribution of the executive
officer to the Company and the ability of the Company to attract and retain
qualified executive officers in light of the competitive environment of the
Company's industry and the Company's financial condition.
Base Salary and Annual Bonus. Base salary and annual bonus for executive
officers are determined by reference to Company-wide and individual
performances for the previous fiscal year. The factors considered by the
Compensation Committee included both strategic and operational factors, such
as efforts in responding to regulatory challenges, in exploring strategic
alternatives for the Company, in research and development and in reviewing and
implementing updated systems and operational procedures, as well as the
Company's financial performance. In addition to Company-wide measures of
performance, the Compensation Committee considers those performance factors
particular to each executive officer, including the performance of the area
for which such officer had management responsibility and individual
accomplishments.
Base salaries for executive officers were determined primarily by reference
to industry norms, the principal job duties and responsibilities undertaken by
such persons, individual performance and other relevant criteria. Base salary
comparisons for most executive officers were made to a group of pharmaceutical
manufacturers in the United States. Such group was selected by the
Compensation Committee based upon several factors, including, but not limited
to, the duties and responsibilities of the executive officer used in the
comparison, size and complexity of operations, reputation and number of
employees of other companies. With respect to Mr. Sawyer, the Company's Chief
Executive Officer, a comparison was made by an independent consulting firm,
prior to the signing of his employment agreement in 1992, to generic
pharmaceutical companies and turnaround situations selected by the consulting
firm. In keeping with its goal of recruiting executive officers from larger,
well-established pharmaceutical manufacturers, the Compensation Committee
considered the performance of the companies used in the comparisons, as
measured by their quality and regulatory profile, as well as competitive
necessity in determining base salaries. The Compensation Committee considered
it appropriate and in the best interest of the Company and its shareholders to
set the levels of base salary for the Company's Chief Executive Officer and
other executive officers at the median of comparable companies in order to
attract and retain high caliber managers for the Company so as to position the
Company for future growth and improved performance.
14
<PAGE>
The Compensation Committee, in determining the annual bonuses to be paid to
the Company's executive officers for fiscal year 1997, considered the
individual's contribution to the Company's performance as well as the
Company's financial performance and assessments of each executive officer's
participation and contribution to the other factors described above, as
opposed to determination by reference to a formal, goal-based plan. The non-
financial measures varied among executive officers depending upon the
operations under their management and direction. The Compensation Committee
did not grant any cash bonuses in fiscal year 1997 to the Named Executives.
Stock Options and Other Awards. The Company's 1990 Stock Incentive Plan
provides for stock option and other equity-based awards. Under such Plan, the
size of each award and the persons to whom such awards are granted is
determined by the Compensation Committee based upon the nature of services
rendered by the executive officer, the present and potential contribution of
the grantee to the Company and the overall performance of the Company. The
Compensation Committee believes that grants of stock options will enable the
Company to attract and retain the best available talent and to encourage the
highest level of performance in order to continue to serve the best interests
of the Company and its shareholders. Stock options and other equity-based
awards provide executive officers with the opportunity to acquire equity
interests in the Company and to participate in the creation of shareholder
value and benefit correspondingly with increases in the price of the Common
Stock.
Compensation Committee's Actions for Fiscal Year 1997. In determining the
amount and form of executive officer compensation to be paid or awarded for
fiscal year 1997, the Compensation Committee considered the criteria discussed
above. In light of the reduction in sales in fiscal year 1997 from fiscal year
1996 and the Company's weakened financial condition, the Compensation
Committee did not award cash bonuses to the Named Executives. The Compensation
Committee awarded stock options to Mr. O'Connor in consideration of his
reaching certain objectives and to increase the incentive for him to
contribute to the financial success of the Company.
Chief Executive Officer Compensation. The Compensation Committee approved an
employment agreement in October 1992 for Mr. Sawyer. In approving such
employment agreement, the Compensation Committee authorized a base annual
salary of $366,993 for Mr. Sawyer. Mr. Sawyer agreed to reduce his salary
effective July 1, 1996 to $350,000 per year. No cash bonuses, stock options or
other awards were granted to Mr. Sawyer in fiscal year 1997 in view of the
Company's operating results and financial condition.
COMPENSATION AND STOCK OPTION COMMITTEE
Mark Auerbach
H. Spencer Matthews
Robin O. Motz
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee, consisting of Messrs. Auerbach and Matthews and
Dr. Motz for fiscal year 1997, conducted deliberations concerning executive
officer compensation during the last completed fiscal year. None of the
Compensation Committee members is or ever was an officer or employee of the
Company. During the last fiscal year, none of the executive officers of the
Company has served on the board of directors or on the compensation committee
of any other entity, any of whose executive officers served on the Board of
the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
As a public company, the Company's directors, executive officers and more
than 10% beneficial owners are subject to reporting requirements under Section
16(a) of the Securities Exchange Act of 1934, as amended. None of the
Company's directors, executive officers or such 10% beneficial owners
delinquently filed, to the Company's knowledge, any reports required under
Section 16(a) of such Act during fiscal year 1997.
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PERFORMANCE GRAPH
The graph below compares the cumulative total return of the Common Stock with
the cumulative total return of The New York Stock Exchange Composite Index and
the S&P Health Care Drugs Index--Major Pharmaceuticals for the annual periods
from September 30, 1992 to September 30, 1997. The graph assumes $100 was
invested on September 30, 1992 in the Common Stock and $100 was invested on
such date in each of the Indexes. The comparison assumes that all dividends
were reinvested.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
9/30/92 9/30/93 9/30/94 9/30/95 9/30/96 9/30/97
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pharmaceutical Resources, Inc. $100 $191 $132 $143 $64 $32
- ----------------------------------------------------------------------------------------------
NYSE Composite Index $100 $115 $119 $145 $174 $240
- ----------------------------------------------------------------------------------------------
S&P(R) Health Care Drugs
Index-Major Pharmaceuticals $100 $81 $97 $153 $207 $314
- ----------------------------------------------------------------------------------------------
</TABLE>
16
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PROPOSAL II
APPROVAL OF STOCK SALE AND OPTION ISSUANCE
GENERAL
At the Meeting, the holders of Common Stock will be asked to approve the
sale of 10,400,000 shares of Common Stock (the "Shares") to Lipha, a
subsidiary of Merck KGaA, at $2.00 per Share, and the grant and issuance to
Merck KGaA and Genpharm, a subsidiary of Merck KGaA, of options (each, an
"Option" and collectively, the "Options") to purchase up to an aggregate of
1,171,040 shares of Common Stock (the "Option Shares") at an exercise price of
$2.00 per share in exchange for certain services. The sale of the Shares will
be made pursuant to the terms and conditions of that certain Stock Purchase
Agreement, dated March 25, 1998, between the Company and Lipha (the "Stock
Purchase Agreement"). The grant and issuance of the Options will be made
pursuant to terms and conditions of separate Services Agreements to be entered
into with each of Merck KGaA and Genpharm upon the closing of the Stock
Purchase Agreement. The Shares and the Option Shares together will constitute
approximately 38% of the issued and outstanding Common Stock after giving
effect to, and as of the anticipated date of closing of, the transactions (the
"Closing") under the Stock Purchase Agreement (the "Closing Date").
Approval of Proposal II is required in order to comply with the rules of The
New York Stock Exchange and to satisfy a condition to the Closing of the Stock
Purchase Agreement. The rules of The New York Stock Exchange require the
Company to obtain prior shareholder approval of the issuance of securities
(including, for this purpose, options to purchase securities) representing 20%
or more of the Common Stock issued and outstanding before the issuance of such
securities. Based upon the number of presently outstanding shares of Common
Stock, the Shares and the Options on the Closing Date will constitute more
than 20% of the outstanding Common Stock. The approval of the Proposed
Transaction by the Company's shareholders is a non-waivable condition to the
Closing of the Stock Purchase Agreement. Accordingly, if the Proposed
Transaction is not approved by the Company's shareholders, the Stock Purchase
Agreement, the related agreements and the transactions contemplated thereby
will not be consummated. In such event, management of the Company will
continue its efforts to seek equity and/or debt financing and/or other
strategic alliances, although there can be no assurance whether any such
financing or alliance will be available on terms as favorable as the Stock
Purchase Agreement and related agreements or otherwise on terms acceptable to
the Company, or at all.
The Board believes that the Proposed Transaction is in the best interests of
the Company and its shareholders. The Company intends to use a significant
portion of the net cash proceeds to be received upon the sale of the Shares to
repay certain advances made to it under its existing line of credit and the
remainder is expected to be used for working capital, including expansion of
the Company's operations. The agreement by the Company to sell the Shares and
to grant and issue the Options is also part of an overall transaction in which
certain exclusive distribution rights and services are to be provided to the
Company under the Distribution Agreement and the Services Agreements, as
described in "--Background" below.
THE BOARD HAS UNANIMOUSLY APPROVED THE STOCK PURCHASE AGREEMENT, THE
DISTRIBUTION AGREEMENT, THE SERVICES AGREEMENTS, THE OPTIONS AND THE
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE SALE OF THE SHARES AND THE
GRANT AND ISSUANCE OF THE OPTIONS. See "--Reasons for the Proposed
Transaction" below.
BACKGROUND
Over the past several years, the Company has been searching for strategic
transactions, including equity investments, acquisitions, joint ventures and a
sale of part or all of the Company. This search intensified over the last 18
months because of the Company's declining sales and profit margins and
significant operating losses. The Company had discussions and negotiations
with numerous parties in the United States and elsewhere, including Merck
KGaA. However, no definitive agreements were ever entered into. In determining
to approve the Proposed Transaction, the Board principally noted that the
Stock Purchase Agreement and the other agreements contemplated thereby will
have the effect of providing the Company with approximately $21 million
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to repay advances under its line of credit and additional working capital
while, at the same time, strengthening its product line by adding
approximately 40 products being developed by Genpharm and its affiliates and
to be distributed in the United States exclusively by the Company pursuant to
the Distribution Agreement without requiring the significant investment by the
Company in the development of such products. A few of the products to be
distributed under the Distribution Agreement have received U.S. Food and Drug
Administration ("FDA") approval of Abbreviated New Drug Applications ("ANDAs")
and Genpharm has filed (but has not received FDA approval) or anticipates
filing ANDAs for other products. In addition, Merck KGaA and its affiliates
will provide various services, expertise, technical assistance and support to
the Company pursuant to the separate Services Agreements.
Stock Purchase Agreement. On the Closing Date, the Company will sell to
Lipha the Shares at an aggregate purchase price of $20,800,000 in cash, or
$2.00 per Share. The closing price of the Common Stock on The New York Stock
Exchange on March 25, 1998, the day the Stock Purchase Agreement was executed,
was $2.625 per share, and, on May 5, 1998 was $4.00 per share. The Shares,
upon issuance at the Closing, will not be registered under the Securities Act
of 1933, as amended (the "Securities Act"). However, Lipha has certain demand
and piggy-back registration rights with respect to the Shares. See "--
Registration Rights Agreement" below. The Stock Purchase Agreement contains
certain significant terms, obligations and other agreements, as described
below, including the obligation to grant and issue the Options in return for
the right to receive certain services, Lipha's right to designate a majority
of the Board members, Lipha's right of first refusal in respect of certain
equity offerings, Lipha's agreement not to engage in certain extraordinary
transactions and the agreement to seek shareholder approval for the sale of
the Shares and the grant and issuance of the Options.
Board Representation. Lipha has the right to designate a majority of the
members of the Board, subject to and effective upon the Closing. Pursuant to
this right, Lipha has designated Messrs. Scheuble, A. Tabatznik, N. Tabatznik
and Jander. Three members of the Board will be comprised of Mr. Sawyer and two
additional designees of the current Board (collectively, the "Company
Designees"). The Board has designated Messrs. Auerbach and Ollendorff. All of
such seven persons have been nominated by the Nominating Committee of the
Board to be nominees for election as directors to be voted upon at the
Meeting. See "Proposal I--Election of Directors." In addition, Lipha will have
the right to designate (i) jointly with the Company Designees, two members of
the Board to comprise the Audit Committee of the Board and (ii) the President
and Chief Operating Officer of the Company. Mr. Sawyer will continue to serve
as Chairman and Chief Executive Officer of the Company and each of its
subsidiaries. The effect of the foregoing agreement is to afford voting
control to the designees of Lipha with respect to matters determined by the
Board. Lipha has designated Dr. Rudi D. Neirinckx to become President and
Chief Operating Officer of the Company and each of its subsidiaries. The
current Board has elected Dr. Neirinckx to such positions subject to and
effective upon the Closing. Until the earlier of the Closing or the
termination of the Stock Purchase Agreement, Dr. Neirinckx is serving the
Company as a paid consultant. Pursuant to an agreement with no specific
employment term, Dr. Neirinckx will, subject to the Closing, receive an annual
salary of $250,000, and a minimum bonus of $25,000 in 1998. Dr. Neirinckx has
received options to purchase up to 250,000 shares of Common Stock at an
exercise price of $2.625 per share. The exercise price will increase to up to
$4.00 per share if financial thresholds to be agreed upon are not attained.
Such options automatically expire if the Stock Purchase Agreement does not
close. See "Executive Compensation--Employment Agreements and Termination
Arrangements."
Mr. J. Neil Tabatznik is the Chairman of Genpharm, which will develop,
manufacture and distribute products to the Company pursuant to the
Distribution Agreement. Mr. Anthony S. Tabatznik is a board member of Merck
Pharma which controls the pharmaceutical operations of Merck KGaA, including
Genpharm, andDr. Scheuble is Deputy Member of the Executive Board of Merck
KGaA. See "Proposal I--Election of Directors--Directors" and "--Certain
Relationships and Related Transactions."
Right of First Refusal. Lipha will have a right of first refusal for a
period of six years following the Closing Date to purchase all, but not less
than all, of any equity securities to be sold by the Company pursuant to any
proposed non-registered offering or any registered offering solely for cash.
If Lipha does not exercise its
18
<PAGE>
first refusal rights within 30 days of notice from the Company, the Company
may sell such securities to any third party on substantially the same terms
and conditions as first offered to Lipha. The Shares and the Option Shares do
not have any preemptive rights.
Limitations on Related Party Transactions and Business Combinations; Lock-
up. Lipha has agreed, for a period of three years following the Closing Date,
not to cause or permit the Company to engage in any transactions or enter into
any agreements or arrangements with, or make any distributions to, any
Affiliate or Associate (each as defined in the Stock Purchase Agreement) of
Lipha without the prior written consent of a majority of the Company
Designees. In addition, Lipha has agreed, for a period of three years
following the Closing Date, not to propose that the Company, or to cause or
permit the Company to, engage in business combinations or other extraordinary
transactions, including mergers and tender offers, without the prior written
consent of a majority of the Company Designees and the prior receipt of a
fairness opinion from an independent nationally recognized investment bank.
As a condition to the Closing, certain holders of options to purchase Common
Stock, including Mr. Sawyer, Dr. Neirinckx and Mr. Tarriff, have agreed not to
exercise their options for a period of three years and 10 days from the
Closing Date and certain other holders, including the current directors of the
Company, have agreed not to exercise more than one-third of their options
annually commencing on the first anniversary of the Closing Date.
The Closing is subject to certain conditions, including, but not limited to,
obtaining all necessary consents, expiration or termination of applicable
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, Merck KGaA's purchase of the shares of Common Stock from Clal pursuant
to the Clal Sale Agreement, absence of certain litigation, execution and
delivery of the Services Agreements, confirmation of the fairness opinion by
Gruntal & Co., L.L.C., financial advisor to the Company ("Gruntal"), and
approval by the Company's shareholders of Proposals I, II and III described in
this Proxy Statement.
The foregoing description of the terms and conditions of the Stock Purchase
Agreement does not purport to be complete and is qualified in its entirety by
reference to the Stock Purchase Agreement, a copy of which is attached hereto
as Exhibit A and incorporated herein by reference.
Merck KGaA and the Company have reached an agreement in principle for Merck
KGaA to prepay in full the IPR Note in the principal amount of $600,000 on
behalf of the Company in exchange for consideration relating to IPR to be
agreed upon in the future. See "Proposal I--Election of Directors--Certain
Relationships and Related Transactions--Clal Agreements."
Distribution Agreement. In connection with the Stock Purchase Agreement,
Genpharm and the Company have entered into a Distribution Agreement, dated
March 25, 1998 (the "Distribution Agreement"), pursuant to which Genpharm
granted exclusive distribution rights to the Company within the United States
and certain other U.S. territories with respect to approximately 40 generic
pharmaceutical products currently under development or being sold by Genpharm
and its affiliates outside of the United States. Products may be added to or
removed from the Distribution Agreement by mutual agreement of the parties.
Genpharm is required to use commercially reasonable efforts to develop the
products which are subject to the Distribution Agreement and is responsible
for the completion of product development and for obtaining all applicable
regulatory approvals. The Company will pay Genpharm a percentage of gross
profits attributable to sales of such products. The Company believes that the
Distribution Agreement is beneficial to the Company and its shareholders in
that it immediately provides a potential pipeline of a significant number of
additional products to be sold by the Company without the substantial
financial investment and the accompanying risk involved with new product
development. If the Closing does not occur before July 16, 1998, the
Distribution Agreement will be immediately terminable at the option of
Genpharm with respect to certain products and otherwise will be terminable at
the option of Genpharm on March 25, 1999. The Company intends to reserve up to
120,000 shares of Common Stock for stock options to be granted, subject to
applicable laws, to employees of Genpharm who provide services in connection
with the Distribution Agreement. Executives of Merck KGaA and Genpharm will
allocate such stock options to the Genpharm employees.
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<PAGE>
Services Agreements. At, and as a condition to, the Closing, each of Merck
KGaA and Genpharm will enter into separate Services Agreements, effective as
of the Closing Date, to provide various services to the Company for a period
of 36 months, including, but not limited to, rendering advice and providing
technical support and assistance in the areas of research and development,
regulatory compliance, manufacturing, quality control and quality assurance,
administration, marketing and promotion (collectively, the "Services"). In
consideration of providing the Services, the Company will issue, at the
Closing, an Option to Merck KGaA to purchase up to 820,000 shares of Common
Stock and an Option to Genpharm to purchase up to 351,040 shares of Common
Stock.
Options. The Options will entitle Merck KGaA and Genpharm to purchase up to
an aggregate of 1,171,040 Option Shares at an exercise price of $2.00 per
share with one-third of the total Option Shares vesting annually commencing on
the first anniversary of the Closing Date. The Options will be exercisable at
any time beginning three years and 10 days following the Closing Date and will
terminate, to the extent unexercised, on April 30, 2003. The Options contain
provisions that protect the holder against dilution by adjustment of the
exercise price and the number of Option Shares issuable upon exercise in
certain events, such as stock dividends, stock splits, consolidation, merger,
or sale of all or substantially all of the Company's assets. The holders of
the Options do not have any rights as shareholders of the Company unless and
until the Options have been exercised. The Options and the Option Shares will
not be registered under the Securities Act. However, the Option Shares may be
registered upon the exercise of registration rights by the holders of the
Options and/or Option Shares pursuant to certain demand and piggy-back
registration rights under the Registration Rights Agreement described below.
Clal Sale Agreement. Pursuant to a letter agreement, dated March 25, 1998,
between the Company, Merck KGaA and Clal (the "Clal Sale Agreement"), Clal has
agreed to sell to Merck KGaA (or its designee) on the Closing Date, an
aggregate of 1,813,272 shares of Common Stock at a price of $2.00 per share.
The consummation of the sale of such shares is conditioned upon the
consummation of the Stock Purchase Agreement. Merck KGaA also agreed to pay
Clal, on the second anniversary of the Closing Date, an amount equal to the
excess, if any, of the weighted average trading price of all trades in shares
of Common Stock on The New York Stock Exchange during the 30 trading days
preceding such date over $2.00, multiplied by 500,000. In addition, Clal has
the right to cause Merck KGaA and/or the Company to purchase Clal's remaining
500,000 shares of Common Stock during the five-day period commencing three
years and five days after the Closing Date, in certain circumstances, at a
price of $2.50 per share. If Clal does not exercise such right, then Merck
KGaA and the Company have the right to cause Clal to sell its remaining shares
in open market transactions and Merck KGaA and the Company will purchase from
Clal all shares which have not been sold within 90 days. The shares of Common
Stock to be purchased from Clal under the Clal Sale Agreement are referred to
herein as the "Clal Shares." Clal has agreed, for the three-year and five-day
period following the Closing, not to acquire or sell, directly or indirectly,
any shares of Common Stock, other than pursuant to the Clal Sale Agreement,
enter into any agreement with respect to the voting, holding or transferring
of any shares of Common Stock or to propose or participate in any transactions
involving the Company or recommend others to take any of such actions. Clal
also agreed, pursuant to the Clal Sale Agreement, to vote all of its shares of
Common Stock in favor of the election of all nominees for director and for
Proposals II and III. Upon the Closing, the Clal Stock Purchase Agreement will
terminate.
Registration Rights Agreement. In consideration of the rights and benefits
obtained by the Company under the Stock Purchase Agreement and the services
that will be provided to the Company pursuant to the Services Agreements, and
as a condition to the Closing, the Company will grant to Lipha, Merck KGaA and
Genpharm (collectively, the "Holders") certain registration rights under a
registration rights agreement, which will become effective as of the Closing
Date (the "Registration Rights Agreement"). In general, the Holders will not
be able to freely sell the Shares, the Option Shares or the Clal Shares
(collectively, the "Registrable Shares") without registration under applicable
securities laws or unless an exemption from registration is available.
Starting nine months after the Closing, the Holders will be entitled to
three demand registrations of Registrable Shares and two additional demand
registrations if the Options are exercised. In addition, the
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Company will grant to the Holders the right to register the Registrable Shares
on each occasion that the Company registers shares of Common Stock, subject to
certain limitations and exceptions. If the Company at any time registers
shares of Common Stock for sale to the public, the Holders will agree not to
sell publicly, make any short sale, grant any option for the purchase of or
otherwise publicly dispose of shares of Common Stock during the same period
during which directors and executive officers of the Company are similarly
limited in selling the Company's securities up to 180 days after the effective
date of the applicable registration statement.
Upon the Closing, Merck KGaA will beneficially own approximately 42% of the
outstanding Common Stock (including the Clal Shares to be purchased under the
Clal Sale Agreement). If Merck KGaA and its affiliate exercise the Options
(after they become exercisable three years and 10 days after the Closing Date)
and Merck KGaA acquires all remaining Clal Shares three years and 10 days
after the Closing Date, Merck KGaA would beneficially own approximately 46% of
the outstanding Common Stock. As a result of its large stock ownership, Merck
KGaA would likely be able to exercise control over matters requiring
shareholder approval. This, together with Lipha's ability to designate a
majority of the Company's directors, would likely have the effect of delaying,
making more difficult or preventing any change in control of the Company not
desired by Merck KGaA.
REASONS FOR THE PROPOSED TRANSACTION
The United States generic pharmaceutical industry in which the Company
operates has continued to be extremely competitive, with pricing pressures
coming from both competitors and, more recently, the channels of distribution.
As a result of this and the lack of significant profitable new products to
sell, the Company has incurred significant operating losses in its last two
fiscal years. In recognition of the foregoing, the Company has disclosed in
its annual and quarterly reports its need to sell new products, whether
distributed or manufactured, in order to offset continuing losses. As a result
of its weakened financial condition, the Company has not had the resources to
dedicate to the significant research and development activities necessary to
develop additional new products. The Company has also disclosed its search for
strategic alliances to strengthen its financial condition and product line.
The Board believes that the Proposed Transaction addresses both of these needs
through the Stock Purchase Agreement, the Services Agreements and the
Distribution Agreement.
The management of the Company, with Board discussion and review, actively
pursued and carefully reviewed a number of potential financing and acquisition
proposals over the past several years. However, no definitive agreements or
binding letters of intent were entered into by the Company with any of the
entities with which the Company had discussions. Although the Company has
raised funds through a secured, asset-based line of credit, such funding is
not permanent financing for the Company and alternative and additional funding
is needed for the long-term requirements of the Company. In addition, the
Company believed that it did not have available the necessary financial
resources to support the Company's operations during the extended period of
time likely to be required to search for and complete a different strategic
transaction. Based upon internal discussions and discussions with financial
advisors, the Board did not believe that a public offering or private
placement of the Company's securities would likely raise capital for the
Company sufficient to meet its long-term financing requirements on terms which
are equivalent to or more advantageous than those available through the
Proposed Transaction. Further, to the knowledge of the Company, there were no
other viable strategic alliances available to it on equivalent or better
terms.
The management of the Company and the Board have carefully reviewed the
terms of the Proposed Transaction as well as the financial strength and
substantial pharmaceutical operations of Merck KGaA and its affiliates. Merck
KGaA is a multi-national specialty pharmaceuticals, laboratory and chemicals
company with in excess of $4 billion in annual sales, of which $2.5 billion in
sales were derived from pharmaceuticals. Also, the Company has had successful
business dealings with Genpharm and an affiliate since 1992 in the form of
distribution agreements with the Company.
The terms of the Stock Purchase Agreement, including the sale of the Shares,
the grant of the Options for services and the related agreements were
negotiated at arms' length between the Company and Merck KGaA and its
affiliates. At its March 25, 1998 meeting, the Board unanimously determined
that the price to be paid for
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the Shares and the transactions contemplated by the Stock Purchase Agreement,
the Distribution Agreement, the Services Agreements and the Options are, taken
as a whole, from a financial point of view, in the best interests of the
Company and its shareholders. The determination of the Board was based upon
consideration of a number of factors. The following list set forth the
material factors the Board considered in its evaluation and approval of the
Proposed Transaction:
(i) the immediate cash investment provides necessary capital for the
Company to reduce its borrowings, to fund its operations and to expand its
business;
(ii) the Distribution Agreement broadens the Company's existing generic
product line with both near-term and long-term products which are expected
to increase the Company's cash flow;
(iii) the Distribution Agreement provides the Company with an immediate
short-term and long-term product pipeline which would otherwise take the
Company a significant number of years and financial resources to develop;
(iv) because the Proposed Transaction involves the issuance of new
capital stock to Lipha and not a buy-out of the Company's outstanding
capital stock, existing shareholders of the Company will have the
opportunity to participate in any future growth and profitability of the
Company resulting from the Proposed Transaction, including through any
increase in the market value of the Common Stock;
(v) Merck KGaA's financial, product and operational strength could enable
the Company to respond more effectively to the competitive and rapidly
consolidating generic drug industry;
(vi) the opportunities to achieve distribution, manufacturing and
development efficiencies and synergies;
(vii) the Services Agreements provide the Company with additional
significant expertise and support in research and development, financing,
marketing and manufacturing;
(viii) the potential increases in product innovation resulting from the
combination of the generic drug research and development activities of
Merck KGaA and the Company;
(ix) the absence of any known viable alternative strategic transactions
or financings;
(x) an alliance with a company of Merck KGaA's stature may enhance the
Company's future business opportunities;
(xi) the structure of the Proposed Transaction attempts to preserve the
Company's ability to utilize its substantial Federal net operating loss
carryforward; and
(xii) the written opinion, dated March 25, 1998, of Gruntal to the effect
that the price to be paid for the Shares and the transactions contemplated
by the Stock Purchase Agreement, the Distribution Agreement, the Services
Agreements and the Options are, taken as a whole, fair to the Company's
shareholders from a financial point of view.
The foregoing discussion of the information and factors considered by the
Board is not intended to be exhaustive, but is believed to include the
material factors considered by the Board. In view of the wide variety of
information and factors considered, the Board did not find it practical to,
and did not, quantify or otherwise assign any relative or specific weights to
the foregoing factors, and individual directors may have given differing
weights to different factors.
THE BOARD HAS UNANIMOUSLY APPROVED THE STOCK SALE AND OPTION ISSUANCE AND
UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE TO APPROVE THE STOCK SALE
AND OPTION ISSUANCE.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
The Company engaged Gruntal to render an opinion as to the fairness, from a
financial point of view, of the consideration to be paid for the Shares and
the transactions contemplated by the Proposed Transaction. On March 25, 1998,
at a meeting of the Board held to evaluate the Proposed Transaction, Gruntal
rendered to the Board an
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oral opinion (which opinion was subsequently confirmed by delivery of a
written opinion, dated March 25, 1998, and confirmed in writing as of the date
of this Proxy Statement), to the effect that, as of the date of such opinion
and based upon and subject to certain matters stated therein, the price to be
paid for the Shares and the transactions contemplated by the Stock Purchase
Agreement, the Distribution Agreement, the Services Agreements and the Options
are fair, taken as a whole, to the Company's shareholders from a financial
point of view. In connection with its confirmatory letter dated the date of
this Proxy Statement, Gruntal updated certain of the analyses performed in
connection with its opinion, dated March 25, 1998, and reviewed the
assumptions on which such analyses were based and the factors considered in
connection therewith. The scope of Gruntal's analyses in connection with its
confirmation was more limited than that conducted in connection with its
opinion letter, dated March 25, 1998.
THE FULL TEXT OF THE WRITTEN OPINION OF GRUNTAL, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN,
IS ATTACHED HERETO AS EXHIBIT B AND IS INCORPORATED HEREIN BY REFERENCE.
GRUNTAL'S OPINION IS DIRECTED TO THE BOARD, ADDRESSES ONLY THE FAIRNESS OF THE
PURCHASE PRICE FOR THE SHARES AND THE RELATED TRANSACTIONS FROM A FINANCIAL
POINT OF VIEW TO THE COMPANY'S SHAREHOLDERS AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT
THE MEETING. THE SUMMARY OF THE OPINION OF GRUNTAL IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
Overview of Analyses. Gruntal used both quantitative and qualitative
assessments to evaluate the Company. Gruntal's determination that the
consideration to be received by the Company in the proposed transaction is
fair, from a financial point of view, to the shareholders of the Company was
based on all qualitative and quantitative analyses described herein.
For its quantitative evaluations, Gruntal calculated a range of values using
four separate approaches: (i) a comparable company analysis based upon
comparable publicly-traded companies, (ii) a discounted cash flow analysis,
(iii) a historical price and volume analysis, and (iv) a comparable
transaction analysis based upon acquisitions of comparable companies. In
making its determination, however, Gruntal reached the conclusion that certain
approaches were more relevant and represented more direct comparability.
Qualitative Considerations. In addition to quantitative analyses discussed
below, Gruntal considered a number of qualitative factors related to the
Company. Among the qualitative factors relating to the Company considered
were: (i) for the past two fiscal years the Company has experienced
significant operating losses primarily due to (a) the entry into the market of
competition for two products where the Company had previously been the sole
generic manufacturer, (b) industry wide pricing pressures on immediate release
generic drug products, and (c) the lack of new product approvals; (ii) the
Company's near-term product pipeline lacks any significant revenue or high
margin products; (iii) its current weak balance sheet and projected continued
operating losses, on a stand-alone basis, limits the Company's ability to
develop and introduce new products; (iv) the Company has few significant non-
operating assets to divest in order to generate cash to fund operations; (v)
the Company went through a restructuring in fiscal 1997 to stem losses without
providing any significant short-term impact; (vi) General Electric Capital
Corporation, the Company's lender, waived events of default on three
occasions, in fiscal year 1997; and (vii) management has held discussions over
time with many generic drug companies in the industry to explore strategic
alternatives and no known alternative strategic proposal is pending at a
higher price.
Among the qualitative factors relating to the strategic alliance between the
Company and Merck KGaA, Gruntal noted that (i) a Merck KGaA investment
provides capital for the Company to support and grow its current operations;
(ii) Gruntal believes an institutional equity private placement would be done
at a discount to the market but would not provide the near-term products or
other operating synergies provided by the Merck KGaA transaction; (iii)
management believes that Merck KGaA provides an immediate short and long-term
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product pipeline which would take a significant amount of time and money to
internally develop; (iv) Company management believes that the transaction
provides an opportunity to achieve distribution, manufacturing and development
efficiencies and/or synergies; (v) Company management believes that the Merck
KGaA relationship may enable the Company to respond more fully to the
competitive demands of the rapidly consolidating generic drug industry; (vi)
the Distribution Agreement broadens the Company's existing generic product
line and significantly adds to its near and long-term product pipeline; (vii)
Company management believes that the Company and Merck KGaA may realize
increased product innovation from the combination of their respective research
and development activities in the generic drug areas; (viii) a significant
capital/product infusion allows the Company shareholders to retain future
upside in any stock appreciation; and (ix) the proposed structure attempts to
preserve the Company's substantial Federal net operating loss carryforward.
Comparable Company Analysis. Using publicly available information and
information provided by Company management, Gruntal compared selected
historical, current and projected operating and financial data, stock data and
financial ratios for the Company with certain data from selected publicly-
traded companies engaged primarily in the generic pharmaceutical business
that, in Gruntal's judgment, were most closely comparable to the Company. The
companies selected were: Alpharma, Inc., Copley Pharmaceutical, Inc., Duramed
Pharmaceuticals, Inc. and IVAX Corporation (the "Comparable Companies").
Gruntal reviewed, among other things, the following data with respect to the
Comparable Companies: (i) operating statement data, including latest 12 months
("LTM") net revenues; (ii) LTM operating cash flow ("LTM EBITDA"); (iii) LTM
operating income ("LTM EBIT"); (iv) LTM net income; (v) estimated 1998 net
income; and (vi) estimated 1999 net income. Estimated net income for 1998 and
1999 for Comparable Companies, was based on median earnings per share for 1998
and 1999 forecasted by the Institutional Brokers Estimate System ("IBES")
multiplied by the fully diluted shares outstanding. Utilizing this
information, Gruntal calculated a range of market multiples for the Comparable
Companies by dividing the "Enterprise Value" (total common shares outstanding
multiplied by closing market price per share on March 23, 1998 or "Market
Equity Value", plus total debt and preferred stock, minus cash and cash
equivalents) for each Comparable Company by, among other things, such
company's LTM net revenues, LTM EBITDA and LTM EBIT, and by dividing each of
the Comparable Company's Market Equity Value by, among other things, the
company's LTM net income, and estimated 1998 and 1999 net incomes. For the
Comparable Companies: (i) the LTM net revenue multiples ranged from 0.9x to
2.8x (1.6x mean); (ii) the LTM EBITDA multiples ranged from 11.2x to 12.8x
(12.0x mean); (iii) the LTM EBIT multiples ranged from 18.6x to 48.2x (33.4x
mean); (iv) the LTM net income multiples ranged from 34.9x to 237.5x (136.2x
mean); (v) the estimated 1998 net income multiples ranged from 24.7x to 35.0x
(29.9x mean); and (vi) the estimated 1999 net income multiples ranged from
19.6x to 35.0x (25.3x mean).
Due to the lack of current earnings and cash flow and forecasted earnings of
the Company, Gruntal focused its analysis on Enterprise Value/LTM net revenues
multiple. Gruntal derived an Enterprise Value/LTM net revenues multiple range
of 0.9x to 1.0x as the high end of this range which is approximately the low
end of the Comparable Companies range (0.9x to 2.8x). This low multiple range
(as compared to the Comparable Companies) was used to reflect that a portion
of the Company's revenue is derived from low margin products and products
distributed but not manufactured by the Company and that the Company's
products have lower margins than the Comparable Companies' products.
Based on a price of $2.00 per share for the Common Stock, the Company's
implied LTM net revenue multiple, calculated on the same basis as the
Comparable Companies, was 0.9x.
Because of the inherent differences in the business, operations, and
prospects of the Company and the businesses, operations and prospects of the
Company's Comparable Companies, Gruntal believes it was inappropriate to, and
therefore did not, rely solely on the quantitative results of the analysis,
but rather also made qualitative judgments concerning differences between the
financial and operating characteristics and prospects of the Comparable
Companies that would affect the public trading values of each as compared to
the Company.
Comparable Transaction Analysis. Gruntal also was limited in its ability to
perform a Comparable Transaction Analysis of the Company due to the lack of
minority investment transactions for which valuation
24
<PAGE>
data is publicly available involving companies which are closely comparable to
the Company on an operating, product and financial basis. Furthermore, eight
of the 10 transactions reviewed by Gruntal were mergers or sales of a majority
interest. Of the remaining two transactions, one was pending and had limited
public data available and the second transaction represented the purchase by
the majority owner of the remaining minority interest.
Gruntal reviewed selected publicly-available financial data, including
Enterprise Value (at the effective date of the transaction) to net revenues,
Enterprise Value to EBITDA, Enterprise Value to EBIT, and Market Equity Value
to net income, regarding 10 acquisitions of selected generic pharmaceutical
companies. The 10 transactions selected, which took place between December 2,
1992 and February 10, 1998, were as follows: (i) the acquisition of Biocraft
Laboratories, Inc. by Teva Pharmaceutical Industries; (ii) the acquisition of
Marsam Pharmaceuticals, Inc. by Schein Pharmaceuticals, Inc.; (iii) the
acquisition of Circa Pharmaceuticals, Inc. by Watson Pharmaceuticals, Inc.;
(iv) the acquisition of Royce Laboratories, Inc. by Watson Pharmaceuticals,
Inc.; (v) the acquisition of Zenith Laboratories, Inc. by IVAX Corp.; (vi) the
acquisition of Hi-Tech Pharmacal Co., Inc. by Circa Pharmaceuticals, Inc.;
(vii) the acquisition of McGaw, Inc. by IVAX Corp.; (viii) the acquisition of
a majority interest in Copley Pharmaceutical Inc. by Hoechst Celanese Corp.;
(ix) the acquisition of the remaining minority interest not already owned in
Faulding, Inc. by FH Faulding & Co. Ltd.; and (x) the acquisition of a
minority interest in Halsey Drug Co. by Galen Associates which is pending
completion and has limited financial data available.
The analysis considered the multiples of each of the aforementioned selected
data points based upon the selected transactions. As in the case of the
Comparable Companies Analysis, the lack of current earnings and cash flow pose
a potential barrier to deriving a meaningful valuation. Gruntal focused its
analysis on Enterprise Value/LTM net revenues multiple. Gruntal derived an
Enterprise Value/LTM net revenues multiple of approximately 1.4x as the high
end of this range which is approximately the low end of the Comparable
Transaction Analysis range (1.4x to 5.4x). As in the Comparable Companies
Analysis, this low multiple range (as compared to the comparable transactions)
was used to reflect that a portion of the Company's revenue is derived from
low margin products and products distributed but not manufactured by the
Company.
Based on a price of $2.00 per share for the Common Stock, the Company's
implied LTM net revenue multiple, calculated on the same basis as the
Comparable Companies, was 0.9x.
None of such acquisitions, however, took place under market conditions or
competitive circumstances that were directly comparable to those of the
acquisition of a minority interest in the Company by Merck KGaA, and each of
the acquired companies is distinguishable from the Company in certain
respects. Accordingly, an analysis of the results for the foregoing is not
mathematical nor necessarily precise; rather it involves complex consideration
and judgment concerning differences in financial and operating characteristics
of companies and other factors that could affect results. In particular,
Gruntal considered the strategic fit of the corporate alliance between the
Company and Merck KGaA, the Company's current product mix and product
pipeline, the product pipeline offered by Merck KGaA and the proceeds from the
transaction. These qualitative judgements were utilized to confirm the
findings based on Gruntal's quantitative analysis. These qualitative judgments
do not lead to specific conclusions regarding the transaction value or
multiples, but rather were part of Gruntal's evaluation.
Discounted Cash Flow Analyses. Gruntal performed two discounted cash flow
("DCF") analyses, one for the Company on a stand-alone basis and the other
including Merck KGaA' s Distribution Agreement to reflect the potential future
benefit of the strategic alliance over and above the infusion of capital. Both
analyses were based on four-year projections using financial information
provided by the Company's management for the years ending September 30, 1998
through September 30, 2001. For the two DCF analyses, Gruntal discounted the
projected unleveraged free cash flows (earnings before interest and taxes,
plus after-tax interest expense and depreciation and amortization, less change
in net working capital and less capital expenditure) for the respective four
years and the terminal value (calculated as a multiple of EBIT). From this
Enterprise Value, Gruntal subtracted all debt obligations appearing on the
Company's balance sheet at December 27, 1997, and added the cash balance on
such balance sheet to arrive at an implied equity value ("Equity Value"). The
terminal value was computed by applying multiples ranging from 12.0x to 16.0x
to the forecasted EBIT of the last year
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<PAGE>
projected. Gruntal applied a discount rate of 30.0% based on its estimates of
the Company's weighted average cost of capital. Further, Gruntal performed
sensitivity analyses to understand the effects on Equity Value from changes in
the discount rate and the terminal value. Based on management's four-year
projections for the fiscal years ending September 30, 1998 through September
30, 2001, the implied equity value for the Company divided by its fully
diluted shares outstanding rendered an implied equity value per share
("Implied Equity Value Per Share").
The Implied Equity Value Per Share on a stand-alone basis ranged from $0.15
per share to $0.51 per share. The DCF analysis incorporating the Distribution
Agreement offered an Implied Equity Value Per Share that ranged from $3.93 per
share to $5.55 per share. Therefore, the DCF analysis showed the Implied
Equity Value Per Share rising as a result of the Distribution Agreement.
Historical Price and Volume Analysis. Gruntal reviewed the weekly closing
price and volume of the Common Stock during the four, eight and 12-month
periods and the three and five-year periods ending March 23, 1998, as well as
reviewed daily closing price and volume during the one-year period ending
March 23, 1998. Gruntal also indexed the Company's stock performance over the
one-year period against an index of the stock prices over such periods of the
Comparable Companies. Gruntal noted that on an indexed basis over a one-year
period, the Company performed below the Comparable Company index. Gruntal also
tested the frequency distribution for price sensitivity of the Common Stock.
Gruntal noted that the Company experienced significant volatility and a net
decline in stock price during the 12-months ended March 20, l998, largely as a
result of the competitive market environment for new drugs in the generic drug
industry and continued operating losses by the Company. The high, low and
average closing prices for the Common Stock for the 12-month period ended
March 23, 1998 were $3.75, $1.13 and $2.31, respectively. The high, low and
average closing prices for the Common Stock for the six-month period ended
March 23, 1998 were $2.75, $1.13 and $2.07, respectively. Gruntal noted the
assumed transaction price of $2.00 per share represents a slight discount to
the six month and 12-month average share price. Gruntal determined that over
the last four, eight and 12 months approximately 56.0%, 38.0% and 28.9%,
respectively, of the Common Stock traded below $2.00 per share. In addition,
Gruntal observed that the Common Stock did not trade higher than $2.00 between
November 17, 1997 and January 16, 1998.
Based on Gruntal's quantitative and qualitative analysis, Gruntal believes
as described above that the Proposed Transaction is fair, from a financial
point of view, to the shareholders of the Company.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required for approval of Proposal II.
IF PROPOSAL II IS NOT APPROVED, IF THE STOCK PURCHASE AGREEMENT TERMINATES
OR IF THE PROPOSED TRANSACTION IS NOT CONSUMMATED FOR ANY OTHER REASON, THE
ELECTION OF THE SEVEN NOMINEES AS DIRECTORS AS DESCRIBED IN PROPOSAL I WILL
NOT BECOME EFFECTIVE AND THE COMPANY'S CERTIFICATE OF INCORPORATION WILL NOT
BE AMENDED AS DESCRIBED IN PROPOSAL III, EVEN IF EITHER OR BOTH OF SUCH
PROPOSALS ARE APPROVED BY THE COMPANY'S SHAREHOLDERS AT THE MEETING. IF
PROPOSAL II IS NOT APPROVED BY THE SHAREHOLDERS AT THE MEETING, EACH OF LIPHA
AND THE COMPANY WILL HAVE A RIGHT TO TERMINATE THE STOCK PURCHASE AGREEMENT.
IN SUCH EVENT, IT IS THE PRESENT INTENTION OF THE COMPANY TO DISCUSS WITH
MERCK KGAA AND ITS AFFILIATES ENTERING INTO ALTERNATIVE TRANSACTIONS, SUBJECT
TO APPLICABLE LAWS AND REGULATIONS. NO SPECIFIC ALTERNATIVE TRANSACTIONS ARE
CURRENTLY PROPOSED. FURTHER, IF PROPOSAL II IS APPROVED BY THE COMPANY'S
SHAREHOLDERS AT THE MEETING, BUT EITHER OR BOTH OF PROPOSAL I AND PROPOSAL III
ARE NOT APPROVED BY THE COMPANY'S SHAREHOLDERS AT THE MEETING OR IF THE STOCK
PURCHASE AGREEMENT IS TERMINATED, THE COMPANY WILL NOT CONSUMMATE THE STOCK
PURCHASE AGREEMENT AND THE ELECTION OF DIRECTORS AS DESCRIBED IN PROPOSAL I
WILL NOT BECOME EFFECTIVE AND THE COMPANY'S CERTIFICATE OF AMENDMENT WILL NOT
BE AMENDED AS DESCRIBED IN PROPOSAL III.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
PROPOSAL II.
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<PAGE>
PROPOSAL III
INCREASE IN AUTHORIZED COMMON STOCK
The Board has proposed an amendment to Article IV of the Company's
Certificate of Incorporation to increase the authorized number of shares of
Common Stock from 60,000,000 to 90,000,000 shares upon the consummation of the
Stock Purchase Agreement (the "Common Stock Amendment"). Unless the authorized
number of shares of Common Stock is increased, the Company will not have a
sufficient number of authorized shares of Common Stock to consummate the
Proposed Transaction.
As of April 30, 1998, 18,890,153 shares of Common Stock were issued and
outstanding. In addition, 3,507,957 shares of Common Stock were reserved as of
such date for future issuance upon the exercise of outstanding stock options
and warrants, for future grants of stock options and other equity awards under
the Company's existing stock option plans and under the Company's employee
stock purchase plan. Further, there is outstanding one stock purchase right
for each share of Common Stock outstanding. There is also one right reserved
for each share of Common Stock reserved for issuance upon exercise of
outstanding stock options and warrants. The rights, issued pursuant to the
Rights Agreement, dated August 8, 1991, between the Company and First City
Transfer Company, as successor rights agent, entitle the holder to purchase
one share of Common Stock for each right held, in certain circumstances.
Accordingly, 22,398,110 shares of Common Stock are presently reserved to cover
potential exercise of the rights. If the Proposed Transaction is approved,
10,400,000 shares of Common Stock will be issued to Lipha and 1,171,040 shares
of Common Stock will be reserved for potential exercise of the Options of
Merck KGaA and Genpharm, and an additional 11,571,040 stock purchase rights
will be issued or subject to issuance to such entities requiring a reservation
of a corresponding number of shares of Common Stock.
The purpose of the proposed Common Stock Amendment is to provide additional
shares of Common Stock for the consummation of the Proposed Transaction and
for other valid corporate purposes without further shareholder approval unless
required by applicable law or regulation. Those corporate purposes may
include, among other things, offerings to raise additional capital, management
incentive and employee benefit plans, expansion of the Company's business
through investments or acquisitions, stock dividends, stock splits, and new
stock incentive plans. The Company has no present plans, understandings, or
agreements for the issuance or use of additional Common Stock, other than in
connection with the Proposed Transaction and options, warrants and rights
outstanding or to be granted in the ordinary course of business. The Board
believes the Common Stock Amendment is in the best interests of the Company
because it is necessary to effect the Proposed Transaction and the Board
thereafter also will have the flexibility to promptly issue additional shares
of Common Stock when the need and appropriate opportunities arise. The
issuance of additional shares of Common Stock authorized under the proposed
Common Stock Amendment would reduce the proportionate voting interest in the
Company held by current shareholders. Current holders of Common Stock have no
preemptive rights.
Although the Board has no present intention of doing so, the Company's
authorized but unissued Common Stock could be issued in one or more
transactions which would make a takeover of the Company more difficult or
costly. Issuing additional shares of Common Stock in the future could also
have the effect of diluting the ownership of persons seeking to obtain control
of the Company. The Common Stock Amendment is not intended to deter future
takeovers of the Company, nor is the Board currently proposing to shareholders
any anti-takeover measures.
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required for approval of Proposal III.
IF PROPOSAL III IS NOT APPROVED, THE ELECTION OF THE SEVEN NOMINEES AS
DIRECTORS AS DESCRIBED IN PROPOSAL I WILL NOT BECOME EFFECTIVE AND THE STOCK
SALE AND OPTION ISSUANCE AS DESCRIBED IN PROPOSAL II WILL NOT OCCUR, EVEN IF
EITHER OR BOTH OF SUCH PROPOSALS ARE APPROVED BY THE COMPANY'S SHAREHOLDERS AT
THE MEETING. FURTHER, IF PROPOSAL III IS APPROVED BY THE COMPANY'S
SHAREHOLDERS AT THE MEETING, BUT EITHER OR BOTH OF PROPOSAL I AND PROPOSAL II
ARE NOT APPROVED BY THE COMPANY'S SHAREHOLDERS AT THE MEETING OR
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<PAGE>
IF THE STOCK PURCHASE AGREEMENT IS TERMINATED, THE COMPANY WILL NOT CONSUMMATE
THE STOCK PURCHASE AGREEMENT AND THE ELECTION OF DIRECTORS AS DESCRIBED IN
PROPOSAL I WILL NOT BECOME EFFECTIVE AND THE COMPANY'S CERTIFICATE OF
AMENDMENT WILL NOT BE AMENDED AS DESCRIBED IN THIS PROPOSAL III.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
PROPOSAL III.
PROPOSAL IV
APPROVAL AND ADOPTION OF THE 1997
DIRECTORS STOCK OPTION PLAN
GENERAL
At the Meeting, the holders of Common Stock will be asked to vote upon a
proposal to approve and adopt the Company's 1997 Directors Stock Option Plan
(the "Directors Plan"). On October 28, 1997, the Board approved the Directors
Plan, subject to the approval and adoption of the Directors Plan by the
shareholders of the Company not later than October 28, 1998. The purposes of
the Directors Plan are to advance the interests of the Company by affording
eligible directors an opportunity and additional incentive to acquire,
maintain and increase their ownership interests in the Company and thereby
encourage continued service. In connection with the adoption of the Directors
Plan, the Board decided to terminate the 1995 Directors Stock Option Plan
subject to approval of the Directors Plan at the Meeting. The approval of the
Directors Plan will have no effect upon the Company's 1989 Directors Stock
Option Plan (the "1989 Plan"), except that current non-employee directors will
surrender for cancellation options granted under the 1989 Plan for an equal
number of options under the Directors Plan as described below. See "--Summary
of Directors Plan."
SUMMARY OF DIRECTORS PLAN
The Company has reserved for issuance under the Directors Plan 500,000
shares of Common Stock. Options granted under the Directors Plan may be
granted only to directors of the Company who are not employees of the Company
or otherwise eligible to receive options under any other plan adopted by the
Company (each, an "Eligible Director"). Such options do not qualify as
incentive stock options within the meaning of Section 422 of the Code.
If approved by the Company's shareholders, the Directors Plan provides for
automatic annual grants of stock options to purchase 5,000 shares of Common
Stock to each Eligible Director on the date of the director's initial election
to the Board and on each succeeding date that the shareholders elect directors
at a meeting (a "Date of Grant"). No Eligible Director will receive more than
one automatic annual grant in a year. Further, Eligible Directors will be
entitled to receive on each Date of Grant an additional grant of options to
purchase 6,000 shares of Common Stock as long as the Eligible Director owns at
least 2,500 shares of issued Common Stock (the "Additional Grant"). In order
to receive an Additional Grant on any subsequent Date of Grant, the Eligible
Director must own at least an additional 2,500 shares of issued Common Stock
for each Date of Grant. Subject to approval of the Directors Plan by the
shareholders at the Meeting, all current Eligible Directors will receive an
option to purchase 10,000 shares of Common Stock, at an exercise price of
$2.25 per share, for each year such director served on the Board, in exchange
for the surrender for cancellation of all stock options then held by the
Eligible Director, but in no case will such grant exceed the number of stock
options surrendered. Also, current Eligible Directors will receive an option
to purchase an additional 6,000 shares of Common Stock, at an exercise price
of $2.25 per share, if such Director owned at least 2,500 shares of Common
Stock on April 1, 1998. The exercise price for options granted under the
Directors Plan will be, in general, the closing sale price of the Common Stock
on the date of grant.
Any option granted under the Directors Plan will become exercisable in full
on the first anniversary of the Date of Grant, provided that the Eligible
Director has not been removed for "cause" as a member of the Board on or prior
to the first anniversary of the Date of the Grant. To the extent options
granted under the Directors Plan become exercisable, such options will remain
exercisable until the tenth anniversary of the Date of Grant and will remain
exercisable regardless of whether the Eligible Director continues to serve as
a member of the Board. If an Eligible Director fails to continue to own a
number of shares of Common Stock equal to the numbers of shares which were
conditions to the Additional Grant(s), such Additional Grant(s) will
automatically terminate.
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<PAGE>
If an unexercised option expires or terminates (in whole or in part) for any
reason, the shares allocable to the unexercised portion of the option will be
available for future grants of options under the Directors Plan. The aggregate
number of shares of Common Stock as to which options may be granted, the
number of shares covered by each option and the option exercise price will be
adjusted in the event of stock splits, stock dividends or other capital
adjustments.
Pursuant to its terms, the Directors Plan will terminate on October 28,
2008, and no options may be granted after that date. The provisions of the
Directors Plan will, however, continue thereafter to govern all options
previously granted, until the exercise, expiration or cancellation thereof.
The Board may, however, terminate the Directors Plan at an earlier date and
may amend the Directors Plan from time to time.
No option is transferable other than by will or the laws of descent and
distribution or by a qualified domestic relations order as defined under the
Code and no option may be exercised by anyone other than the optionee, except
that if the optionee dies or becomes incapacitated, the option may be
exercised by the optionee's estate, legal representative or beneficiary,
subject to all other terms of the Directors Plan. The Directors Plan will be
administered by the entire Board.
All of the current directors of the Company, and all of the nominees for
election as directors will be eligible to receive options under the Directors
Plan. Messrs. A. Tabatznik and N. Tabatznik, nominees for election as
directors of the Company, have orally waived their rights to receive options
under the Directors Plan. In connection with, and subject to, the consummation
of the Stock Purchase Agreement, all current Eligible Directors have agreed
not to exercise any stock options, including stock options acquired under the
Directors Plan (even though the stock options may be otherwise exercisable)
during the three years following the Closing Date, except that installments of
one-third of the stock options may be exercised on the first, second and third
anniversaries of the Closing Date.
The foregoing is a summary of the Directors Plan. This summary does not
purport to be complete, and is qualified in its entirety by reference to the
text of the Directors Plan. A copy of the Directors Plan is available upon
written request from the Company's Secretary at no charge.
NEW PLAN BENEFITS
The following table sets forth the dollar value of benefits and number of
shares underlying options if the Directors Plan is approved.
<TABLE>
<CAPTION>
DOLLAR NUMBER OF
NAME AND POSITION VALUE OPTIONS
----------------- -------- ---------
<S> <C> <C>
Kenneth I Sawyer...................................... -- --
President, Chief Executive Officer and Chairman
Dennis J. O'Connor.................................... -- --
Vice President, Chief Financial Officer and Secretary
Executive Group....................................... -- --
Non-Executive Director Group.......................... $455,000(1) 260,000
Non-Executive Officers Employee Group................. -- --
</TABLE>
- --------
(1) Represents the total net realizable value, after payment of the stock
option exercise price, if grants of stock options made under the Directors
Plan were exercised on May 5, 1998. Such stock option grants are
conditioned upon shareholder approval of the Directors Plan at the
Meeting.
The closing price of the Common Stock on The New York Stock Exchange on May
5, 1998 was $4.00.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of certain Federal income tax aspects of
stock options to be granted under the Directors Plan based upon the Code and
other statutes, regulations and interpretations in effect on the date of this
Proxy Statement. The summary is not intended to be exhaustive and does not
include any state, local or foreign income or other tax consequences.
29
<PAGE>
Any option granted under the Directors Plan is not intended to qualify as an
"incentive stock option", as that term is defined in Section 422 of the Code.
Neither the option holder nor the Company will incur any Federal income tax
consequences upon the grant of an option under the Directors Plan. Generally,
the option holder will recognize, on the date of exercise, ordinary
compensation income in an amount equal to the excess, if any, of the fair
market value of the shares of Common Stock on the date of exercise over the
exercise price thereof.
On a subsequent sale of any shares obtained upon the exercise of an option,
the participant will recognize capital gain or loss equal to the difference,
if any, between the amount realized and his or her tax basis in the shares.
The tax basis of the shares, for purposes of computing taxable gain or loss,
will be the sum of the exercise price and the amount of ordinary income
recognized on the date of exercise.
For Federal income tax purposes, the Company is generally entitled to a
deduction in an amount equal to the ordinary compensation income recognized by
the option holder, to the extent that such income is considered reasonable
compensation under the Code. Generally, the Company will be entitled to claim
such deduction in the fiscal year containing the last day of the calendar year
in which the option is exercised.
The Company believes the adoption of the Directors Plan is in the best
interests of the Company and its shareholders. The affirmative vote of a
majority of the votes cast in person or by proxy at the Meeting is required
for approval of the Directors Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
PROPOSAL IV.
INDEPENDENT AUDITORS
The Board has selected the firm of Arthur Andersen LLP, independent
certified public accountants, to act as independent public accountants for the
Company for the 1998 fiscal year. Arthur Andersen LLP has acted in such
capacity for the Company from the fiscal year ended September 30, 1995. A
representative of Arthur Andersen LLP is expected to be present at the
Meeting. Such representative will have the opportunity to make a statement if
he or she so desires and is expected to be available to respond to appropriate
questions.
OTHER MATTERS
At the date of this Proxy Statement, the Board has no knowledge of any
business which will be presented for consideration at the Meeting, other than
as described above. If any other matter or matters are properly brought before
the Meeting or any adjournment(s) thereof, it is the intention of the persons
named in the accompanying form of proxy to vote proxies on such matters in
accordance with their judgment.
SUBMISSION OF SHAREHOLDER PROPOSALS
Any proposal which is intended to be presented by any Company shareholder
for action at the 1999 Annual Meeting of Shareholders must be received in
writing by the Secretary of the Company, at One Ram Ridge Road, Spring Valley,
New York 10977, not later than January 5, 1999 in order for such proposal to
be considered for inclusion in the proxy statement and form of proxy relating
to the 1999 Annual Meeting of Shareholders.
By Order of the Board of Directors
Dennis J. O'Connor
Secretary
Dated: May 5, 1998
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<PAGE>
EXHIBIT A
STOCK PURCHASE AGREEMENT, dated March 25, 1998, between Pharmaceutical
Resources, Inc., a New Jersey corporation (the "Company"), whose principal
offices are located at One Ram Ridge Road, Spring Valley, New York 10977, and
Lipha Americas, Inc., a Delaware corporation (the "Purchaser"), whose
principal offices are located at 1209 Orange Street, Wilmington, Delaware
19801.
WHEREAS, the Company desires to issue and sell to the Purchaser, and the
Purchaser desires to purchase from the Company, 10,400,000 restricted shares
(the "Shares") of the Company's common stock, par value $.01 per share
("Common Stock");
WHEREAS, concurrently with the execution and delivery of this Agreement,
Merck KGaA, an affiliate of the Purchaser ("Merck"), and Clal Pharmaceutical
Industries, Ltd. ("Clal") are entering into a stock purchase agreement
pursuant to which Merck (or its designees) will, subject to the terms and
conditions thereof, purchase from Clal certain shares of Common Stock
beneficially owned by Clal (the "Clal Stock Purchase Agreement"), the
consummation of which transaction shall occur at the time of the consummation
of the transactions contemplated by this Agreement;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as an inducement to the Company to enter into this Agreement, the Company and
Genpharm, Inc. ("Genpharm"), an affiliate of the Purchaser, are entering into
a distribution agreement pursuant to which, and subject to the conditions
contained therein, the Company shall distribute certain products of Genpharm,
substantially in the form of Exhibit A hereto (the "Distribution Agreement");
WHEREAS, at the Closing (as defined in Section 1.2 hereof), the Company and
Genpharm and Merck shall enter into services agreements substantially in the
form of Exhibit B hereto (collectively, the "Services Agreements"; each
individually referred to herein as a "Services Agreement") pursuant to which
Merck and Genpharm shall render certain significant services to the Company,
in consideration of, among other things, the issuance by the Company to Merck
and Genpharm of certain five-year stock options exercisable commencing in the
year 2001 to acquire up to an aggregate of 1,171,040 additional shares of
Common Stock (the "Option Shares"), substantially in the form of Exhibit C
hereto (collectively, the "Options"; each individually referred to herein as
an "Option");
WHEREAS, the Company has received a fairness opinion from Gruntal & Co.,
L.L.C. ("Gruntal") to the effect that the Purchase Price (as defined in
Section 1.1 hereof) and the transactions contemplated by this Agreement, the
Distribution Agreement, the Services Agreements and the Options are, taken as
a whole, from a financial point of view, fair to the holders of Common Stock;
WHEREAS, the Company's Board of Directors has approved the execution and
performance of this Agreement, the Distribution Agreement, the Services
Agreements and the Options, and has determined that the transactions
contemplated hereby and thereby are in the best interests of the Company and
its shareholders; and
WHEREAS, the Company and the Purchaser desire to set forth their mutual
agreements with respect to the sale and purchase of the Shares and as to the
other matters set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements set forth herein, the parties hereto agree as follows:
SECTION 1. Closing Transactions.
1.1 Purchase and Sale of Shares. At the Closing, the Company shall sell to
the Purchaser, and the Purchaser shall, or shall cause its designee to,
purchase from the Company, upon the terms and subject to the conditions
hereinafter set forth, the Shares for an aggregate cash purchase price of
$20,800,000 (the "Purchase Price"), or $2.00 per Share.
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1.2 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Hertzog, Calamari
& Gleason, 100 Park Avenue, 23rd Floor, New York, New York, at 10:00 A.M., on
the second business day following the date on which all of the conditions set
forth in Sections 4 and 5 hereof shall have been satisfied or, to the extent
permitted, waived, or at such other place, time and/or date as the parties may
agree (the "Closing Date"); provided, that the Closing Date shall not occur
before June 1, 1998.
1.3 Closing Deliveries. (a) At the Closing, the Company shall deliver to the
Purchaser, Merck and Genpharm, as applicable:
(i) a stock certificate or certificates representing the Shares, registered
in the name of the Purchaser or, subject to Section 13.2 hereof, its
designee on the Company's books and containing no legends other than as
set forth in Section 9.2 hereof and as required under the Rights
Agreement (as defined in Section 7.11 hereof);
(ii) a registration rights agreement, duly executed by the Company,
substantially in the form of Exhibit D hereto (the "Registration
Rights Agreement");
(iii) the certificates of officers of the Company referred to in Sections
5.1 and 5.2 hereof;
(iv) the agreements covering the Options, duly executed by the Company;
(v) the opinion of counsel referred to in Section 5.3 hereof;
(vi) the Services Agreements, duly executed by the Company;
(vii) the agreement of the Chairman of the Company referred to in Section
7.10 hereof; and
(viii) the agreement of Kenneth Sawyer referred to in Section 7.3(e)
hereof.
(b) At the Closing, the Purchaser, Merck and Genpharm, as applicable, shall
deliver to the Company:
(i) the Purchase Price, in the form of a wire transfer of immediately
available funds to an account designated by the Company;
(ii) the Registration Rights Agreement, duly executed by the Purchaser,
Merck and Genpharm;
(iii) the certificates of officers of the Purchaser referred to in Sections
4.1 and 4.2 hereof;
(iv) the opinion of counsel referred to in Section 4.3 hereof;
(v) the Services Agreements, duly executed by Merck or Genpharm, as
applicable;
(vi) the agreements covering the Options, duly executed by Merck or
Genpharm, as applicable; and
(vii) the agreement of the Purchaser (and its Affiliates) referred to in
Section 7.3(e) hereof.
SECTION 2. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchaser as follows:
2.1 Organization. Each of the Company, and any corporation with respect to
which the Company owns a majority of the common stock, or has the power to
vote or direct the voting of sufficient securities to elect a majority of the
directors, or has the power to control or direct the actions of such
corporation, all of which are set forth on Schedule 2.11 hereto (collectively,
the "Subsidiaries", each individually referred to herein as a "Subsidiary"),
is a corporation duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, as set forth on Schedule
2.11. Each of the Company and its Subsidiaries has all necessary corporate
power and authority to own or lease its properties and to conduct its business
as now being conducted. Each of the Company and its Subsidiaries is duly
qualified to do business and is in good standing as a foreign corporation in
each jurisdiction in which the property owned, leased or operated by it, or
the nature of the business conducted by it, requires such qualification under
applicable law, except where the failure to be so qualified would not result
in a Material Adverse Effect (as defined in Section 2.10 hereof).
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2.2 Authorization. The execution, delivery and, subject to obtaining the
approval (the "Shareholders' Approval") of the holders of (i) a majority of
the outstanding shares of Common Stock for the issuance of the Shares, the
delivery of the Options and the issuance of the Option Shares, (ii) a majority
of the outstanding shares of Common Stock for the amendment of the Company's
certificate of incorporation in order to increase the number of authorized
shares of Common Stock and (iii) a plurality of the shares of Common Stock
voted at a meeting for the election of the Nominees (as defined in Section 7.3
hereof) (the preceding clauses (i), (ii) and (iii) to be individually referred
to herein as a "Proposal" and collectively as the "Proposals"), the
performance by the Company of this Agreement, the other agreements referred to
herein and the transactions contemplated hereby and thereby have been duly
authorized by all requisite corporate action by the Company. This Agreement
constitutes, and each other agreement referred to herein, upon due execution
and delivery, will constitute, the valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except
as such enforceability may be limited by (i) bankruptcy laws and other similar
laws affecting creditors' rights generally and (ii) general principles of
equity, regardless of whether asserted in a proceeding in equity or at law.
2.3 Non-contravention. Neither the execution, delivery or performance of
this Agreement and the other agreements referred to herein nor the
consummation of the transactions contemplated hereby or thereby will, subject
to obtaining the Shareholders' Approval, violate or be in conflict with any
provision of the certificate of incorporation or by-laws of any of the Company
and its Subsidiaries; subject to obtaining the Shareholders' Approval, and
except as set forth on Schedule 2.3 hereto, violate or be in conflict with any
material note, bond, lease, mortgage, indenture, license, contract,
commitment, franchise, permit, instrument or other material agreement or
obligation to which any of the Company and its Subsidiaries is a party or by
which it is bound; violate or be in conflict with any law, judgment, decree,
order, regulation or ordinance by which any of the Company and its
Subsidiaries is bound or affected; or result in the creation or imposition of
any liens, charges, pledges or other encumbrances ("Liens") in favor of any
third party upon any property or assets of the Company and its Subsidiaries.
2.4 Authorization of the Shares. Subject to obtaining the Shareholders'
Approval, all corporate action necessary for the issuance, sale and delivery
of the Shares has been taken by the Company and, when issued and delivered
upon payment in full of the Purchase Price, the Shares will be validly issued,
fully paid and nonassessable, free and clear of any and all Liens. Subject to
obtaining the Shareholders' Approval, the Option Shares will be validly
authorized for issuance and, when and if issued upon payment in full of the
exercise price for the Option Shares in accordance with the terms of the
Options, the Option Shares will be validly issued, fully-paid and
nonassessable, free and clear of any and all Liens.
2.5 Capitalization. The authorized capital stock of the Company consists of
60,000,000 shares of Common Stock, of which no more than 18,923,000 shares are
issued and outstanding as of the date hereof, and 6,000,000 shares of
preferred stock, par value $.0001 per share, of which no shares are issued and
outstanding as of the date hereof. The Company holds no treasury shares. All
outstanding shares of Common Stock have been duly and validly issued and are
fully-paid and nonassessable. There are no outstanding securities exchangeable
or convertible into, or options, warrants, or rights to subscribe for, or to
purchase, or commitments to issue, any unissued shares of capital stock of any
of the Company and its Subsidiaries, except as set forth on Schedule 2.5
hereto.
2.6 Reports Under the Exchange Act. Since October 1, 1994, except as set
forth on Schedule 2.6 hereto, the Company has filed with the Securities and
Exchange Commission (the "SEC") in timely fashion all reports required to be
filed by the Company pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (as such reports may have been amended or
supplemented, the "SEC Reports"). The Common Stock is registered under Section
12(b) of the Exchange Act. As of their respective filing dates with the SEC,
the SEC Reports did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances in
which they were made, not misleading.
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2.7 No Brokers or Finders. No person, firm or corporation has or will have,
as a result of any act or omission by any of the Company and its Subsidiaries,
any right, interest or valid claim against the Purchaser or any of the Company
and its Subsidiaries for any commission, fee or other compensation as a finder
or broker, or in any similar capacity, other than with respect to the opinion
referred to in Section 4.9 hereof (the costs of which will be borne by the
Company), in connection with the transactions contemplated by this Agreement.
2.8 Governmental Authorizations; Third-Party Consents. No approval, consent,
authorization or other action by, or notice to or filing with, any
governmental authority or any other person or entity, and no lapse of a
waiting period, is necessary or required in connection with the execution,
delivery or performance by the Company of this Agreement, the other agreements
referred to herein or the transactions contemplated hereby or thereby, except
for (i) such filings or approvals required pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the regulations
promulgated thereunder (the "HSR Act"), (ii) such filings or approvals as may
be required to be obtained in connection with the manufacture and sale of
products pursuant to the Distribution Agreement, (iii) the Shareholders'
Approval of the Proposals by the requisite votes, (iv) such filings or
approvals required to list the Shares and the Option Shares on the New York
Stock Exchange and the Pacific Stock Exchange and (v) the matters set forth on
Schedule 2.8 hereto.
2.9 Financial Statements. The audited financial statements of the Company
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 (the "Audited Statements") and the unaudited financial
statements of the Company included in the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 1997 (the "Unaudited
Statements") complied as to form with the requirements of the Exchange Act and
except as disclosed therein or in the footnotes thereto and, except for the
absence of notes and subject to year-end adjustments in the case of the
Unaudited Statements, were prepared in accordance with United States generally
accepted accounting principles. The Audited Statements and the Unaudited
Statements fairly present, in all material respects, the consolidated
financial condition and the consolidated results of operations of the Company
as of the dates and for the periods indicated therein.
2.10 Absence of Material Adverse Effect. Except as disclosed in the SEC
Reports, since January 1, 1998, the business of the Company and its
Subsidiaries has been operated in the ordinary course and substantially
consistent with past practice. Since January 1, 1998, there has been no event
or circumstance resulting in a material adverse effect on the properties,
business and assets, liabilities, condition (financial or otherwise) or
operations of the Company and its Subsidiaries, considered as a whole (a
"Material Adverse Effect"). There has been no event or circumstance, since
January 1, 1998, which would materially adversely affect the ability of the
Company to perform its obligations under this Agreement, or any of the other
agreements to be entered into in connection with this Agreement, or to
consummate the transactions contemplated hereby and thereby.
2.11 Subsidiaries; Other Equity Interests. Each Subsidiary of the Company
and each other person in which the Company or any of its Subsidiaries has an
equity interest is set forth on Schedule 2.11 hereto. Each Subsidiary is
wholly (100%) owned by the Company. The authorized, issued and outstanding
shares of the capital stock of each Subsidiary, and the record and beneficial
ownership of the outstanding shares thereof, is as set forth on Schedule 2.11.
There are no agreements or arrangements to which any Subsidiary is a party or
by which it is bound for the redemption, repurchase or issuance of, and there
are no options, warrants, puts, calls or other rights to subscribe for or
purchase, shares of such Subsidiary's capital stock.
2.12 No Third-Party Options. Except as contemplated hereby, as set forth on
Schedule 2.12 hereto, or as disclosed in the SEC Reports, there are no
existing agreements, contracts, commitments, options, warrants or rights with,
of or to any person which are binding on the Company or its Subsidiaries to
acquire any of the Company's and its Subsidiaries' assets, properties, or
rights or any interest therein (whether real, personal or mixed, tangible or
intangible, wherever located and whether in the possession of the Company and
its Subsidiaries or any other person), except for those entered into in the
ordinary course of business consistent with past practice for the sale of
inventory and/or which could not reasonably be expected to result in a
Material Adverse Effect.
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2.13 Employee Matters.
(a) The Company has delivered to the Purchaser a list of its and its
Subsidiaries' current employees (the "Employees"). This list, attached hereto
as Schedule 2.13(a), sets forth the current compensation, commissions or
hourly rate of pay, date of birth, date and location of employment and job
title for each Employee. Schedule 2.13(a) lists all agreements between the
Company and its Subsidiaries and any Employee(s) with respect to the
employment of any Employee(s). Except as set forth on Schedule 2.13(a), there
are no outstanding loans with outstanding principal amounts in excess of
$50,000 from the Company or any of its Subsidiaries to any Employees. Except
as set forth on Schedule 2.13(a), no Employee is on disability or other leave
of absence and the Company is not aware of the intent of any officer,
executive employee or head of a department of any of the Company and its
Subsidiaries to terminate his/her employment.
(b) Schedule 2.13(b) hereto lists each "employee benefit plan", as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), whether or not covered by ERISA, that any of the Company
and its Subsidiaries sponsors or has sponsored to which the Company or any of
its Subsidiaries is or has been in the past three years required to make
contributions, including without limitation any pension, profit-sharing,
retirement or deferred compensation plan, each other benefit plan, policy,
arrangement or practice, whether covering one or more employees, which
provides deferred compensation, bonus, stock purchase, stock option, vacation,
severance, disability, hospitalization, medical insurance or life insurance
payments or benefits and any other material employee benefit plans,
agreements, arrangements or understandings maintained for the benefit of the
Employees or former employees of any of the Company and its Subsidiaries
("Former Employees") (collectively, together with any related trusts, the
"Employee Benefit Plans"). Except as set forth on Schedule 2.13(b), no
Employee Benefit Plan constitutes a multi-employer plan (as defined under
Section 400(a)(3) of ERISA). Except as set forth on Schedule 2.13(b), all
participants in the Employee Benefit Plans are Employees or Former Employees
(or their dependents or beneficiaries). The Company has previously delivered
or made available to the Purchaser true and complete copies of all documents
or instruments establishing or constituting each such Employee Benefit Plan
and all summary plan descriptions or other descriptive materials relating
thereto distributed by the Company and its Subsidiaries to Employees. Except
as set forth on Schedule 2.13(b), all Employee Benefit Plans are currently in
compliance with all applicable funding requirements under law. Schedule
2.13(b) also sets forth a list of those Former Employees (or their dependents
or beneficiaries) who are receiving continuation coverage under the Company's
or any of its Subsidiaries' medical plans pursuant to the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA") and the dates upon which those
individuals commenced receiving such continuation coverage. Except as set
forth on Schedule 2.13(b), none of the Company, its Subsidiaries or the
Purchaser will incur any liability under any Employee Benefit Plan or
agreement with an Employee solely as a result of the transactions contemplated
by this Agreement.
(c) Except as set forth on Schedule 2.13 (c) hereto, (i) each Employee
Benefit Plan which is an "employee pension benefit plan", as defined in
Section 3(2) of ERISA, meets the requirements of Section 401(a) of the Code
and any related trust is exempt from U.S. federal income tax under Section
501(a) of the Code and (ii) the Company and its Subsidiaries are in compliance
in all material respects with the terms of such Employee Benefit Plans and
with the requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), and ERISA in respect thereto. None of the Company or its Subsidiaries
has any obligation under any Employee Benefit Plan or otherwise to provide
post-retirement health benefits (exclusive of obligations under COBRA) with
respect to any of the Employees or Former Employees.
(d) The Employees are not and have not in the past three years been covered
by any labor or collective bargaining agreement. No strike, work stoppage,
picketing, slowdown, lockout or material labor dispute involving the Company's
or its Subsidiaries' operations has occurred during the past three years or,
to the Company's knowledge, is threatened. To the Company's knowledge, no
attempt at the organization of a union involving the Company or its
Subsidiaries has occurred during the past three years or is threatened.
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(e) None of the Company or its Subsidiaries has incurred any material
liability under, and has complied in all material respects with, the Worker
Adjustment Retraining and Notification Act and the regulations promulgated
thereunder and any similar state laws and does not reasonably expect to incur
any such liability as a result of actions taken or not taken prior to the date
hereof.
(f) Except as set forth on Schedule 2.13(f) hereto or as disclosed in the
SEC Reports, the Company and its Subsidiaries have complied in all material
respects with all applicable laws, rules, regulations and executive orders
governing the terms and conditions of employment, discriminatory practices
with respect to employment, hiring and discharge, the employment of aliens,
the payment of minimum wages and overtime, workplace health and safety or
otherwise relating to the conduct of employers with respect to employees and
potential employees, and except as set forth on Schedule 2.13, there have been
no claims made or, to the Company's knowledge, threatened against the Company
or its Subsidiaries arising out of, relating to or alleging any material
violation of the foregoing.
2.14 Permits. The Company and its Subsidiaries have all licenses, permits,
orders, certificates, authorizations, consents and approvals of all
governmental and regulatory authorities and bodies, whether federal, state or
local, domestic or foreign, which are necessary for the operation of its
business as currently conducted ("Permits"), except for the failure to have
such Permits that could not, individually or in the aggregate, reasonably be
expected to result in a Material Adverse Effect. Except as could not,
individually or in the aggregate, reasonably be expected to result in a
Material Adverse Effect, the Permits are in full force and effect and no
suspension or cancellation of any of them is pending or, to the Company's
knowledge, threatened.
2.15 Intellectual Property. Schedule 2.15 hereto sets forth all of the
patents, registered copyrights and registered trademarks of the Company and
its Subsidiaries, all of which are owned by the Company or its Subsidiaries
free and clear of any Liens. None of the Company or its Subsidiaries has
infringed upon or unlawfully used, in any material respect, any patent,
trademark, service mark, tradename, copyright, or trade secret ("Intellectual
Property") owned by another person. None of the Company or its Subsidiaries
has received any written notice of any claim of infringement or other material
claim relating to any of its Intellectual Property. No shareholder of the
Company or its Subsidiaries or member of any such shareholder's family or any
entity controlled by them, or any Employee or Former Employee owns or has any
proprietary, financial or other material interest, directly or indirectly, in
any Intellectual Property which the Company or its Subsidiaries owns,
possesses or materially uses in its operations. Schedule 2.15 sets forth all
confidentiality or non-disclosure agreements to which either the Company or
its Subsidiaries or any of its Employees or Former Employees is a party and
which relate to the Company's or its Subsidiaries' business and were executed
in the past seven years.
2.16 No Pending Litigation or Proceedings. Except as set forth on Schedule
2.16 hereto or as disclosed in the SEC Reports, there are no material actions,
suits, proceedings (including arbitral proceedings) or investigations pending
or, to the Company's knowledge, threatened against the Company or its
Subsidiaries or directly relating to or otherwise directly affecting the
business, assets or properties of the Company and its Subsidiaries. Except as
set forth on Schedule 2.16 or as disclosed in the SEC Reports, there is no
outstanding judgment, writ, injunction, decree, award or order of any court or
any governmental or regulatory authority or body against or directly affecting
the business, assets or properties of the Company and its Subsidiaries.
2.17 Insurance Coverage. Each of the Company and its Subsidiaries has during
the past three years maintained liability, casualty, property loss and other
insurance policies with respect to the conduct of its business in such
amounts, of such kinds and with such insurance carriers as the Company and its
Subsidiaries, as applicable, has deemed appropriate and sufficient for
companies of a similar size engaged in similar types of businesses and
operations. Schedule 2.17 hereto sets forth a summary description of each such
insurance policy, listing for each policy the risks insured against, coverage
limits, any deductible amounts, any pending claims thereunder and the term of
each such policy. Each such policy is in full force and effect, and no written
notice of cancellation has been received with respect to any such policy, nor
will the consummation of the transactions contemplated by this Agreement cause
the cancellation of, or the right to cancel, any such policy pursuant to the
terms of such policy. The Company and its Subsidiaries have filed all notices
or reports required under such
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policies, except such filings the failure of which to make could not
reasonably be expected to result in a Material Adverse Effect.
2.18 Compliance with Laws. Except as set forth on Schedule 2.18 hereto or as
disclosed in the SEC Reports, each of the Company's and its Subsidiaries'
business and operations are being conducted in compliance with all applicable
laws, statutes, rules, regulations, ordinances, codes, orders, franchises and
Permits of all governmental entities, including without limitation, those
relating to occupational safety and health and equal employment practices,
except for such instances of noncompliance that could not, individually or in
the aggregate, reasonably be expected to result in a Material Adverse Effect.
No notice, citation, summons or order has been assessed and no investigation
or review is pending or, to the Company's knowledge, threatened by any
governmental or other entity with respect to any alleged material violation by
any of the Company and its Subsidiaries of any of the foregoing.
2.19 Environmental Matters. Except as set forth on Schedule 2.19 hereto or
as disclosed in the SEC Reports, and except for such matters that could not,
individually or in the aggregate, reasonably be expected to result in a
Material Adverse Effect, (a) there are no investigations, inquiries or other
proceedings pending or, to the Company's knowledge, threatened with regard to
the current or prior conduct of the business and operations of the Company and
its Subsidiaries, or relating to (x) any properties owned or previously owned
by the Company and its Subsidiaries, (y) any properties at which any of the
Company and its Subsidiaries has conducted operations or (z) any sites at
which any of the Company and its Subsidiaries has disposed of, or arranged for
the disposal of, waste materials, and arising out of or relating to any actual
or alleged failure to comply with any requirement of any law, statute, rule,
regulation, code or ordinance relating to air or water quality, waste
management, hazardous or toxic substances, or the protection of health or the
environment ("Environmental Laws"); (b) the Company and its Subsidiaries are
in compliance with the requirements of all Environmental Laws in connection
with its business, operations and otherwise; and (c) none of the properties or
sites referred to in clauses (x), (y) or (z) above is contaminated with any
hazardous waste or substance as a result of any act or omission of the Company
and any of its Subsidiaries, or, to the Company's knowledge, any agent,
servant or bailee of the Company and any of its Subsidiaries, to a degree that
poses a risk to health or the environment or could impose a liability on the
Company. With regard to compliance with Environmental Laws, the
representations and warranties set forth in this Section 2.19 shall supersede
the provisions of Section 2.18 hereof.
2.20 Tax Returns and Taxes.
(a) The Company and its Subsidiaries have filed all Tax Returns (as
hereinafter defined) required to be filed by it. Except with respect to any
contested liability for Taxes (as hereinafter defined), as set forth on
Schedule 2.20 hereto, all such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Company and any of its Subsidiaries
(whether or not shown on any Tax Return) have been paid except for (i) Taxes
accrued but not yet payable, (ii) Taxes which are being contested in good
faith, and (iii) Taxes, the non-payment of which could not reasonably be
expected to result in a Material Adverse Effect. Except as set forth on
Schedule 2.20, none of the Company and its Subsidiaries has received any
notice of assessment of additional Taxes that is currently pending. Except as
set forth on Schedule 2.20, none of the Company and its Subsidiaries has
waived any statute of limitations in respect of Taxes or executed or filed
with any Tax authority any agreement or document extending the period of
assessment of any Taxes, and the Company and its Subsidiaries are not
currently the beneficiary of any extension of time within which to file any
Tax Return. Except as set forth on Schedule 2.20, there are no claims,
examinations, audits, proceedings or proposed deficiencies for or in respect
of Taxes pending or, to the Company's knowledge, threatened against the
Company or its Subsidiaries. No claim has been made in writing to the Company
or its Subsidiaries in the past three years by an authority in a jurisdiction
where the Company and its Subsidiaries do not file Tax Returns that it is or
may be subject to taxation by that jurisdiction. There are no recorded Tax
Liens on any of the assets of the Company and its Subsidiaries, nor are there
any security interests on any of the assets of the Company and its
Subsidiaries that arose in connection with any failure (or alleged failure) of
the Company or any of its Subsidiaries to pay any Tax (other than Liens and
security interests for Taxes not yet due and payable or for Taxes that the
Company (or any of its Subsidiaries, as applicable) is contesting in good
faith).
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(b) The Company (and each of its Subsidiaries, as applicable) has withheld
and paid all Taxes required by applicable law to have been withheld and paid
in connection with amounts paid or owing to any Employee or Former Employee,
independent contractor, creditor, stockholder or other third party, except
where the failure to do so could not reasonably be expected to result in a
Material Adverse Effect.
(c) Except as set forth on Schedule 2.20, there is no dispute or claim
concerning any Tax liability of the Company (or any of its Subsidiaries, as
applicable) either (i) claimed or raised by any governmental authority in
writing or (ii) as to which the Company or any of its executive officers (or
employees principally responsible for Tax matters) has knowledge based upon
personal contact with any agent of such authority. Schedule 2.20 lists those
federal, state, local, and foreign income Tax Returns filed with respect to
the Company (or any of its Subsidiaries, as applicable) that have been audited
in the past three years, and indicates those Tax Returns that currently are
the subject of audit.
(d) The Company (or any of its Subsidiaries, as applicable) has not filed a
consent under Section 341(f) of the Code concerning collapsible corporations.
Except as set forth on Schedule 2.20(f) hereto, the Company (or any of its
Subsidiaries, as applicable) has not made any payments, nor is it obligated to
make any payments, nor is it a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Section 280G of the Code. The Company has disclosed on its
federal income Tax Returns all positions taken therein that could give rise to
a substantial understatement of federal income Tax within the meaning of
Section 6662 of the Code. The Company (or any of its Subsidiaries, as
applicable) is not a party to any Tax allocation or sharing agreement. The
Company has not been a member of an Affiliated Group filing a consolidated
federal income tax return (other than a group the common parent of which is
the Company).
(e) The Company (or any of its Subsidiaries, as applicable) does not have
(i) income reportable for a period ending after the Closing Date but
attributable to a transaction (e.g., an installment sale) occurring in or a
change in accounting method made for a period ending on or prior to the
Closing Date which resulted in a deferred reporting of income from such
transaction or from such change in accounting method (other than a deferred
intercompany transaction); or (ii) deferred gain or loss arising out of any
deferred intercompany transaction. No "ownership change" (within the meaning
of Section 382(g) of the Code) has, to the Company's knowledge, occurred prior
to the date hereof which currently limits the Company's ability to utilize any
net operating loss carryovers under Section 382 of the Code.
For purposes of this Agreement, "Tax" or "Taxes" means any federal, state,
local, or foreign income, gross receipts, license, payroll, employment,
excise, severance, stamp, occupation, premium, windfall profits, environmental
(including taxes under Code Section 59A), customs duties, capital stock,
franchise, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty, deficiency or
addition thereto, whether disputed or not, and "Tax Return" means any return,
declaration, report, claim for refund, or information return or statement
relating to Taxes, including any schedule or attachment thereto, and including
any amendment thereof.
2.21 Outstanding Registration Rights. Except as set forth on Schedule 2.21
hereto or as disclosed in the SEC Reports, the Company has not in the past
three years granted (or incurred any obligations or commitments to grant) to
any holder or holders of any capital stock (or rights to acquire any capital
stock) of the Company (i) any rights to request or demand registration of, or
the filing of an offering circular with respect to, outstanding shares of
capital stock of the Company under any securities laws or rules, (ii) any
rights to include any outstanding shares of capital stock of the Company in
any registration or filing effected by the Company pursuant to any securities
laws or rules, or (iii) any rights to require the Company to take action under
any securities laws or rules in order to permit or otherwise facilitate
disposition of any outstanding shares of the Company's capital stock.
2.22 Certain Beneficial Owners.
(a) Schedule 2.22(a) hereto sets forth an analysis prepared by the Company's
auditors stating the stock ownership of 5-percent shareholders (as such term
is defined in Section 382 of the Code) in the Company as of
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the dates indicated therein. To the Company's knowledge, such Schedule
correctly sets forth in all material respects the stock ownership of such
shareholders and the changes in such stock ownership as of each fiscal year-
end indicated therein.
(b) Schedule 2.22(b) lists all options, warrants, or other stock rights
issued by the Company and outstanding as of the date hereof to any person,
whether or not a 5-Percent Shareholder, that have not yet been exercised as of
the date hereof, together with the exercise dates, exercise prices, any
consideration paid therefor and expiration dates.
2.23 FDA Compliance. The products manufactured, sold, distributed or
supplied by each of the Company and its Subsidiaries, as applicable, are not
adulterated or misbranded within the meaning of the United States Federal
Food, Drug and Cosmetic Act, as amended ("USFFDCA"), and comply with any
monograph or other requirements of the United States Food and Drug
Administration ("FDA") applicable to the products or their manufacture, except
for instances of noncompliance that could not, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Effect. Such
products have been and continue to be manufactured in compliance with all
applicable statutes, ordinances and regulations, including but not limited to,
the USFFDCA and the regulations thereunder, including the current Good
Manufacturing Practices which have been adopted by the FDA, except for
instances of noncompliance that could not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect. Current Good
Manufacturing Practice means current good manufacturing practice regulations
established in 21 C.F.R. Parts 210 and 211, as amended and in effect from time
to time, and other applicable FDA policies relating thereto. Except as set
forth on Schedule 2.23 hereto or as disclosed in the SEC Reports, none of the
Company and its Subsidiaries has in the past three years received any notice
or summons in respect of a material violation or alleged material violation of
any statute or regulation from the FDA or other similar authorities.
2.24 Reliance. The representations, warranties, covenants and agreements of
the Company contained herein and in the certificates and schedules required to
be delivered in accordance with the terms of this Agreement shall, subject to
Section 11 hereof, survive any investigation made by the Purchaser and are
made by the Company with the expectation that the Purchaser is relying thereon
in entering this Agreement and the same shall not be deemed waived by any
investigation conducted by the Purchaser or its employees, advisors,
consultants or representatives, whether before or after the consummation of
the transactions contemplated hereby.
SECTION 3. Representations and Warranties of the Purchaser. The Purchaser
hereby represents and warrants to the Company as follows:
3.1 Organization. The Purchaser is a corporation duly organized and validly
existing and in good standing under the laws of Delaware and is a wholly-owned
subsidiary of Merck. The Purchaser has all necessary corporate power and
authority to own or lease its properties and to conduct its business as now
being conducted.
3.2 Authorization. The execution, delivery and performance by the Purchaser
of this Agreement, the other agreements referred to herein and the
transactions contemplated hereby and thereby have been duly authorized by all
requisite corporate action by the Purchaser and, in the case of the
Distribution Agreement and the Services Agreement to which it is a party, by
Merck and Genpharm, as the case may be. This Agreement constitutes, and each
of the other agreements referred to herein, upon execution and delivery, will
constitute, a valid and binding obligation of the Purchaser and, in the case
of the Distribution Agreement and the Services Agreement to which it is a
party, of Merck and Genpharm, enforceable against the Purchaser, Merck or
Genpharm, as the case may be, in accordance with its terms, except as such
enforceability may be limited by (i) bankruptcy laws and other similar laws
affecting creditors' rights generally and (ii) general principles of equity,
regardless of whether asserted in a proceeding in equity or at law.
3.3 Non-contravention. Neither the execution, delivery and performance of
this Agreement and the other agreements referred to herein nor the
consummation of the transactions contemplated hereby or thereby will violate
or be in conflict with any provision of the articles of organization of the
Purchaser or, in the case of the
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Distribution Agreement and the Services Agreement to which it is a party, of
Merck or Genpharm, as the case may be; violate or be in conflict with any
material note, bond, lease, mortgage, indenture, license, contract,
commitment, franchise, permit, instrument or other material agreement or
obligation to which the Purchaser, Merck or Genpharm is a party or by which
either of them is bound; violate or be in conflict with any law, judgment,
decree, order, regulation or ordinance by which the Purchaser, Merck or
Genpharm is bound or affected; or result in the creation or imposition of any
Liens in favor of any third party upon any property or assets of the
Purchaser, Merck or Genpharm.
3.4 No Brokers or Finders. No person, firm or corporation has or will have,
as a result of any act or omission by the Purchaser, Merck or Genpharm, any
right, interest or valid claim against the Company for any commission, fee or
other compensation as a finder or broker, or in any similar capacity, in
connection with the transactions contemplated by this Agreement.
3.5 Governmental Authorizations; Third-Party Consents. No approval, consent,
authorization or other action by, or notice to or filing with, any
governmental authority or any other person or entity, and no lapse of a
waiting period, is necessary or required in connection with the execution,
delivery or performance by the Purchaser or, in the case of the Distribution
Agreement and the Services Agreement to which it is a party, by Merck or
Genpharm, as the case may be, of this Agreement, the other agreements referred
to herein or the transactions contemplated hereby or thereby, except for such
filings or approvals (a) required pursuant to the HSR Act and (b) as may be
required (by the FDA or other governmental authorities) to be obtained in
connection with the Distribution Agreement.
3.6 Investment Representations. (a) The Purchaser and its Affiliates (as
defined in Rule 405 of the Securities Act of 1933, as amended (the "Securities
Act")) are acquiring the Shares and the Options and, upon exercise of the
Options, will be acquiring the Option Shares solely for their own accounts and
not with a view to, or for resale in connection with, any distribution thereof
within the meaning of the Securities Act. Each of the Purchaser, Merck and
Genpharm is an "accredited investor" (as defined in Rule 501(a) of Regulation
D promulgated under the Securities Act).
(b) The Purchaser, on behalf of itself and its Affiliates, understands that
(i)the Shares and the Options have not been registered, and the Option Shares,
when issued, will not be registered under the Securities Act or any applicable
state securities laws, by reason of their issuance by the Company in a
transaction exempt from the registration requirements of the Securities Act
and applicable state securities laws and (ii) the Shares, the Options and the
Option Shares must be held by the Purchaser (or Merck or Genpharm, as
applicable) indefinitely unless a subsequent disposition thereof is registered
under the Securities Act and applicable state securities laws or is exempt
from such registrations.
(c) The Purchaser, on behalf of itself and its Affiliates, acknowledges that
no representations or warranties have been made or furnished to, or relied on
by, the Purchaser or any of its representatives in connection with its
purchase of the Shares except as expressly provided herein. The Purchaser has
such knowledge and experience in financial and business matters that it is
capable of evaluating the risks and merits of this investment.
(d) The Purchaser, on behalf of itself and its Affiliates, acknowledges
that, following its acquisition of the Shares, the Purchaser will be an
Affiliate of the Company and will be subject to all requirements and
restrictions applicable to Affiliates under the Securities Act and the
Exchange Act (including the rules and regulations promulgated thereunder).
SECTION 4. Conditions to the Company's Obligation.
The obligation of the Company to consummate the transactions contemplated
hereby shall be subject to the satisfaction or waiver (other than in respect
of Sections 4.4, 4.6 and 4.8 hereof) by the Company, at or prior to the
Closing, of all the following conditions:
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4.1 Representations and Warranties. The representations and warranties of
the Purchaser set forth in this Agreement shall be true and correct in all
material respects on and as of the date hereof and on and as of the Closing
Date (with the same effect as though such representations and warranties had
been made on and as of such Closing Date), and officers of the Purchaser shall
have certified to such effect to the Company in writing.
4.2 Performance of Obligations. The Purchaser shall have performed,
satisfied and complied with all covenants, agreements and conditions required
by this Agreement to be performed, satisfied or complied with by it on or
before the Closing Date, and officers of the Purchaser shall have certified to
such effect to the Company in writing.
4.3 Opinion of Counsel. The Company shall have received from Coudert
Brothers, counsel for the Purchaser, an opinion addressed to the Company,
dated the Closing Date, in form and substance reasonably satisfactory to the
Company, it being understood that Coudert Brothers may rely upon the opinion
of Klaus-Peter Brandis, Head of the Legal Department of Merck, for all matters
of German law, if applicable.
4.4 No Litigation or Legislation. No federal, state, local or foreign
statute, rule or regulation shall have been enacted after the date hereof, and
no litigation, proceeding, governmental inquiry or investigation shall be
pending, which prohibits or seeks to prohibit or materially restricts the
consummation of the transactions contemplated by this Agreement or the other
agreements provided for herein.
4.5 Clal Sale of Shares. Merck (or its designee) shall have purchased those
certain shares of Common Stock beneficially owned by Clal in accordance with
the terms of the Clal Stock Purchase Agreement, and all agreements between
Clal and the Company relating to or arising out of Clal's acquisitions of
Common Stock shall be terminated by the parties thereto and be of no further
force and effect.
4.6 HSR Act. All applicable waiting periods under the HSR Act shall have
expired or been terminated with respect to the transactions contemplated by
this Agreement.
4.7 Distribution Agreement in Effect. The Distribution Agreement shall be in
full force and effect and there shall exist no facts or circumstances which,
with the giving of notice or the passage of time or both, would constitute a
material default thereunder by Genpharm.
4.8 Shareholders' Approval. The Shareholders' Approval of each of the
Proposals shall have been obtained and all of the Nominees (as defined in
Section 7.3 hereof) shall have been elected.
4.9 Fairness Opinion. The fairness opinion of Gruntal, the Company's
financial advisor, rendered with regard to this Agreement and the other
agreements to be entered into in connection herewith and the transactions
contemplated hereby and thereby shall have been reconfirmed by Gruntal as of
the date of mailing to the Company's shareholders of the definitive proxy
statement (the "Proxy Statement") in respect of the Company's meeting of its
shareholders to be held in connection with the Proposals (the "Meeting").
4.10 Purchase Price and Other Closing Deliveries. The Purchaser shall have
paid the Purchase Price and delivered, or cause to be delivered, the
agreements, instruments and certificates specified in Section 1.3(b) hereof.
4.11 Consents and Waivers. The Company shall have obtained all material
consents and waivers necessary or appropriate for its consummation of the
transactions contemplated by this Agreement, as specified in Section 2.8
hereof and Schedule 2.8 hereto, and the other agreements referred to herein
after using its reasonable best efforts to obtain them.
4.12 Services Agreements. Merck and Genpharm shall have duly executed and
delivered to the Company the Services Agreements.
4.13 Purchaser Board Approval. The Board of Directors of Merck shall have
approved this Agreement and the transactions contemplated hereby prior to
April 3, 1998.
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SECTION 5. Conditions to the Purchaser's Obligation.
The obligation of the Purchaser to consummate the transactions contemplated
hereby shall be subject to the satisfaction or waiver (other than in respect
of Sections 5.4, 5.5 and 5.9 hereof) by the Purchaser, at or prior to the
Closing, of all the following conditions:
5.1 Representations and Warranties. The representations and warranties of
the Company set forth in this Agreement shall be true and correct in all
material respects on and as of the date hereof and on and as of the Closing
Date (with the same effect as though such representations and warranties had
been made on and as of such Closing Date), and officers of the Company shall
have certified to such effect to the Purchaser in writing.
5.2 Performance of Obligations. The Company shall have performed, satisfied
and complied with all covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by it on or before the
Closing Date, and officers of the Company shall have certified to such effect
to the Purchaser in writing.
5.3 Opinion of Counsel. The Purchaser shall have received from Hertzog,
Calamari & Gleason, counsel for the Company, an opinion addressed to the
Purchaser, dated the Closing Date, in form and substance reasonably
satisfactory to the Purchaser.
5.4 No Litigation or Legislation. No federal, state, local or foreign
statute, rule or regulation shall have been enacted after the date hereof, and
no litigation, proceeding, governmental inquiry or investigation shall be
pending, which prohibits or seeks to prohibit or materially restricts the
consummation of the transactions contemplated by this Agreement or the other
agreements provided for herein, or materially restricts or impairs the ability
of the Purchaser to own an equity interest in the Company.
5.5 HSR Act. All applicable waiting periods under the HSR Act shall have
expired or been terminated with respect to the transactions contemplated by
this Agreement.
5.6 Board Resignations. The Purchaser shall have received the resignations
of the current members of the Board of Directors of the Company, subject to
their re-election in accordance with Section 7.3 hereof.
5.7 No Material Adverse Effect. Since the date hereof, there shall not have
occurred a condition or event constituting a Material Adverse Effect (other
than in respect of the matter set forth on Schedule 2.10 hereto).
5.8 ISRA. The Company shall have delivered to the Purchaser evidence of the
Company's having obtained an ISRA Clearance (as defined in Section 7.4
hereof).
5.9 Shareholders' Approval. The Shareholders' Approval of each of the
Proposals shall have been obtained and all of the Nominees shall have been
elected.
5.10 Closing Deliveries. The Company shall have delivered the Shares, the
Options and the agreements, instruments and certificates specified in Section
1.3(a) hereof.
5.11 Distribution Agreement. There shall exist no facts or circumstances
which, with the giving of notice or the passage of time or both, would
constitute a material default by the Company under the Distribution Agreement.
5.12 Services Agreements; Options. The Company shall have duly executed and
delivered to Merck and Genpharm the Services Agreements and the Options.
5.13 Board Approval. The Board of Directors of Merck shall have approved
this Agreement and the transactions contemplated hereby prior to April 3,
1998.
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5.14 Option Standstill Agreements. At least fifteen (15) days prior to
Closing, the Company shall have duly executed and delivered to the Purchaser
agreements in writing, in form reasonably satisfactory to the Purchaser, from
(i) the four persons listed on Schedule 5.14(a) hereto that, notwithstanding
the terms of any stock option plan or any option heretofore granted, not to
exercise or seek to exercise such options until three (3) years and ten (10)
U.S. business days from the Closing Date and (ii) substantially all other
persons who then hold unexercised options, warrants or other stock rights to
purchase Common Stock, other than those persons set forth on Schedule 5.14(b)
hereto, not, notwithstanding the terms of any stock option plan or any option
theretofore granted, to exercise or seek to exercise such options, warrants or
other stock rights, except to the extent indicated on Schedule 5.14(b).
5.15 Section 7.10 Agreement. The Company shall have delivered the agreement
of the Chairman of the Company referred to in Section 7.10 hereof.
5.16 Clal Share Purchase. The Purchaser shall have purchased, after using
its reasonable best efforts to do so, those certain shares of Common Stock
beneficially owned by Clal in accordance with the terms of the Clal Stock
Purchase Agreement.
5.17 Consent. The Company shall have obtained the approvals set forth on
Schedule 2.3, Item 1, hereto.
SECTION 6. Covenants of the Parties.
The Company and the Purchaser hereby covenant as follows:
6.1 Hart-Scott-Rodino Notification. As soon as practicable after the
execution of this Agreement, the Company and the Purchaser shall each file, or
cause to be filed, with the Federal Trade Commission and the Antitrust
Division of the United States Department of Justice, pursuant to the HSR Act,
the notifications and documentary materials required in connection with the
transactions contemplated by this Agreement. Thereafter, the Company and the
Purchaser will file any additional information requested as soon as
practicable after any receipt of a request for additional information and
shall use reasonable best efforts to obtain early termination of the
applicable waiting period under the HSR Act. The Company and the Purchaser
shall coordinate and cooperate with each other in exchanging such information
and providing such reasonable assistance as may be requested in connection
with such filings. All filing fees in connection with the HSR Act shall be
paid by the Purchaser.
6.2 Publicity. The Company and the Purchaser shall consult with each other,
to the extent reasonably practicable, as to the form and substance of any
press releases and other third-party communications or disclosures relating to
the negotiation, execution, delivery and consummation of this Agreement, the
other agreements referred to herein, and the transactions contemplated hereby
or thereby. No party shall be prohibited from issuing or filing any press
release or other third-party communication or disclosure which, upon advice of
its legal counsel, shall be deemed necessary or appropriate under applicable
law or the applicable rules of any stock exchange; provided, however, that
such party shall have first consulted with the other party as to the form and
content of such disclosure. This covenant shall survive the Closing or any
termination of this Agreement.
6.3 Confidentiality. All information to which access is given or furnished
by one party to the other in connection with the negotiation, execution,
delivery and consummation of this Agreement, the other agreements referred to
herein, and the transactions contemplated hereby or thereby shall be kept
confidential by each party and shall be used only in connection with this
Agreement, such other agreements and the transactions contemplated hereby and
thereby; provided, however, that the foregoing shall not apply to any
information that (a) shall be publicly available as of the date hereof, (b)
shall become publicly available other than as a result of prohibited
disclosure by such party, (c) shall be disclosed to such party by any person
or entity that is not known to such party to be subject to any confidentiality
restrictions imposed by the other party or (d) shall be required to be
disclosed by law, the applicable rules of any stock exchange or by order of
any court of competent jurisdiction. Without limiting the foregoing, the
Purchaser shall not disclose, and shall use its reasonable best efforts to
cause its Affiliates not to disclose, any such confidential information to any
person or entity that is not
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an Affiliate or a director or officer of such Affiliate or any advisor
thereto. This covenant shall survive the Closing or any termination of this
Agreement.
6.4 Further Assurances. Upon reasonable request of a party and without
further consideration, the other party, whether prior to or after the Closing,
shall execute, acknowledge and deliver all such other instruments and
documents, and shall take all such other actions for the purpose of effecting
and evidencing the consummation of the transactions contemplated by this
Agreement and the other agreements referred to herein. Without limiting the
generality of the foregoing, the Company shall, and shall cause its
Subsidiaries to, from the date hereof until the earlier of the Closing Date or
the termination of this Agreement pursuant to Section 13.11 hereof, provide
all information and documents reasonably requested by the Purchaser relating
to a determination of the Company's status as a United States real property
holding corporation, as defined under the Code.
SECTION 7. Covenants of the Company.
The Company (and the Purchaser, to the extent expressly provided in this
Section 7) hereby covenants as follows:
7.1 Exchange Act Filings. From and after the date hereof to the Closing Date
or the earlier termination of this Agreement pursuant to Section 13.11 hereof,
the Company shall use its best efforts to file in a timely manner all reports
required to be filed by it with the SEC under the Exchange Act and shall,
promptly upon filing, deliver copies of such reports to the Purchaser.
7.2 Proxy Statement; Meeting; Listing Applications. (a) The Company shall
prepare, review with the Purchaser and its counsel, and file with the SEC the
Proxy Statement as soon as reasonably practicable after the date hereof. Each
party shall furnish all information concerning itself and related persons
which is required or customary for inclusion in the Proxy Statement. The
Company shall, as soon as reasonably practicable after the date hereof, (i)
take all steps necessary to duly call, give notice of, convene and hold a
meeting of its shareholders for the purpose of securing the Shareholders'
Approval to the Proposals (such meeting is presently contemplated by the
parties to be held in June 1998); (ii) distribute to its shareholders the
Proxy Statement in accordance with applicable Federal and state laws and with
its Certificate of Incorporation and By-Laws; and (iii) recommend (in the
Proxy Statement and, if deemed appropriate by the Company, otherwise) to its
shareholders approval of the Proposals. Notwithstanding anything to the
contrary contained herein, if the Agreement shall be terminated (or is subject
to termination) pursuant to Section 13.11 hereof, the Company may postpone,
adjourn or cancel the Meeting, withdraw or change its recommendation to its
shareholders and/or withdraw or delay distribution of the Proxy Statement.
(b) The Company shall use its commercial best efforts to have the Shares and
the Option Shares listed on The New York Stock Exchange and The Pacific Stock
Exchange.
7.3 Board Representation. (a) Subject to the conditions set forth herein,
the Company shall nominate, and the Company and the Purchaser shall use their
best efforts to cause the election at the Meeting of, certain persons to be
designated by each of the Purchaser and the Company (collectively, the
"Nominees"), as provided herein, to serve as directors on the Board of
Directors of the Company such that:
(i) a majority of the members of such Board shall be comprised of the
Purchaser's designated representatives; and
(ii) three of the members of such Board shall be comprised of the
Company's designated representatives consisting of Kenneth I. Sawyer
("Sawyer") and two additional representatives designated by the current
Board of Directors of the Company (collectively, the "Company Designees").
Notwithstanding anything to the contrary contained herein, each
representative designated by the Purchaser in accordance with Section 7.3(f)
hereof shall be nominated for election to serve on the Board of Directors
unless such representative shall not be satisfactory to the Company's current
Board of Directors for good faith reasons and each Company Designee shall be
nominated to serve on the Board of Directors unless such Designee (other
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than Sawyer) shall not be satisfactory to the Purchaser for good faith
reasons. All current members of the Company's Board of Directors not nominated
as set forth above shall resign effective upon the Closing. Any current
members of such Board nominated as set forth above shall resign effective upon
the Closing, subject to their renomination and re-election as set forth
herein. All Nominees shall take office if, and only if, the Closing shall
occur.
(b) Any director designated hereunder shall serve subject to the terms of
the Company's Certificate of Incorporation and By-laws, each as in effect on
the Closing Date, and the provisions of applicable law.
(c) The Company Designees and the Purchaser shall jointly designate two of
the Company's directors to comprise the audit committee of the Company. Each
of such directors must qualify as independent, outside directors in accordance
with the rules and regulations of The New York Stock Exchange.
(d) The directors designated by the Purchaser shall serve as Class I and
Class III directors of the Company (as allocated by the Purchaser) whose terms
shall expire in the years 2000 and 1999, respectively. The Company Designees
shall serve as Class II directors of the Company whose terms shall expire in
the year 2001. There shall be no Class II directors other than the Company
Designees (and their respective successors selected in accordance with Section
8.1 hereof) through May 31, 2001.
(e) The Company shall include in the Proxy Statement distributed in respect
of the Meeting the Proposals and shall recommend its approval of each Proposal
(including approval of all Nominees) by the shareholders of the Company.
Sawyer and the Purchaser (and its Affiliates) agree to vote any shares of
Common Stock which they own or otherwise have the power to vote in favor of
each of the Proposals (including approval of all Nominees).
(f) The Company shall give the Purchaser written notice not less than 10
days prior to the filing with the SEC of the preliminary Proxy Statement in
respect of the Meeting to allow the Purchaser to designate its nominees for
director for inclusion in such Proxy Statement. The Company shall have no
obligation to include such nominees in the Proxy Statement unless the Company
receives written notice from the Purchaser setting forth its designated
nominees (along with all biographical and other information necessary for
inclusion in the Proxy Statement) not later than five days after the Company's
notice to the Purchaser.
7.4 Environmental Matters. For each parcel of real property which is owned,
operated, leased or used by the Company and any of its Subsidiaries in the
State of New Jersey, the Company shall, and shall cause each of its
Subsidiaries to, as applicable, comply with the obligations imposed by the New
Jersey Industrial Site Recovery Act and any regulations promulgated
thereunder, at or prior to the Closing, by either (a) securing any of the
following: (i) a letter of nonapplicability from the New Jersey Department of
Environmental Protection ("NJDEP"); (ii) approval by NJDEP of a negative
declaration submitted by the Company; (iii) a no further action letter from
NJDEP; (iv) a letter of authorization for the transfer of ownership from NJDEP
without any material conditions thereto; or (v) approval from NJDEP of a
remediation agreement reasonably acceptable to the Purchaser; or (b) filing a
De Minimis Quantity Exemption Affidavit with NJDEP (any of the items listed in
clauses (a) and (b) above being an "ISRA Clearance").
7.5 Conduct of Business Prior to Closing. From and after the date hereof to
the Closing Date or the earlier termination of this Agreement pursuant to
Section 13.11 hereof, except as set forth on Schedule 7.5 hereto, neither the
Company nor its Subsidiaries shall (a) conduct their respective businesses
other than in the ordinary course, except as contemplated by this Agreement;
(b) amend its charter or by-laws; (c) sell, lease or otherwise dispose of any
material assets or properties owned or used in the operation of their
respective businesses, except for the sale of inventory and disposition of
obsolete equipment in the ordinary course of business; (d) dissolve, or agree
to dissolve, or merge or consolidate with, or agree to merge or consolidate
with, or purchase or agree to purchase all or substantially all of the assets
of, or otherwise acquire, any other business entity; (e) authorize for
issuance, issue or sell any additional shares of its capital stock or any
securities or obligations convertible into shares of its capital stock or
issue or grant any option, warrant or other right to purchase any shares of
its capital
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stock, except for (i) the granting of options, warrants or rights under the
Company's existing stock or other plans (as such are set forth on Schedule
2.13 hereto) and (ii) the issuance or sale of capital stock pursuant to the
exercise of any options, warrants, or rights granted prior to the date hereof
to any of the Company's employees, directors, independent contractors or other
agents and listed on Schedule 2.12 hereto; (f) redeem, buy back, or cancel any
shares, securities, options, warrants or other stock rights in the Company; or
(g) other than in the ordinary course of business, enter into any material
contract or agreement, or incur any material capital expenditure, which has
not been approved by the Purchaser.
7.6 Options, Warrants or Other Stock Rights. From and after the date hereof
to the Closing Date or the earlier termination of this Agreement pursuant to
Section 13.11 hereof, the Company shall issue options and warrants, or other
stock rights under the Company's existing stock option or stock purchase plans
only if the exercise date is no earlier than three years from the Closing Date
and the options, warrants or other stock rights are issued in connection with
the performance of services for the Company and qualify as "compensatory
options" within the meaning of Treas. Reg. Sec. 1.382-4(d)(8)(iii).
7.7 Other Agreements. At the Closing, upon satisfaction or permitted waiver
of the conditions set forth in Section 4 hereof, the Company shall execute and
deliver the agreements, instruments and certificates specified in Section
1.3(a) hereof.
7.8 Right of First Refusal. (a) Subject to the conditions and other
provisions set forth in this Section 7.8 and in Section 8.4 hereof, the
Company, for a period of six years following the Closing, shall give the
Purchaser written notice (the "Transaction Notice") of the Company's intention
to sell equity securities of the Company in any offering not subject to
registration under the Securities Act (or, if subject to registration under
the Securities Act, in any offering for cash only) specifying the terms and
conditions of such offering, including the type and amount of consideration to
be received by the Company. Subject to the conditions and other provisions set
forth in this Section 7.8 and in Section 8.4 hereof, the Purchaser shall have
the right, exercisable by giving written notice to the Company within 30 days
after receipt of the Transaction Notice, to purchase all, but not less than
all, of the equity securities described in the Transaction Notice on
substantially the same terms and conditions as specified in such Transaction
Notice. In the event that the Purchaser shall not provide notice of its
election to consummate such transaction within such 30-day period, the Company
may sell the equity securities to any third party or parties (a "Third-Party
Transaction") on substantially the same terms and conditions as specified in
the Transaction Notice at any time within 90 days after the expiration of such
30-day period. If the Company shall not consummate a Third-Party Transaction
within such 90-day period, the consummation of such Transaction or any other
Third-Party Transaction shall again be subject to the Purchaser's rights under
this Section 7.8(a).
(b) The closing of any transaction to be consummated with the Purchaser
pursuant to this Section 7.8 shall take place at the offices of the Company or
its counsel on a date designated by the Company and reasonably acceptable to
the Purchaser not later than 60 days after the Purchaser's receipt of the
Transaction Notice.
7.9 Appointment of COO. As soon as practicable following the Closing, the
Board of Directors of the Company shall duly elect a designee of the Purchaser
as the President and Chief Operating Officer (COO) of the Company and each of
its Subsidiaries.
7.10 Agreement of the Chairman of the Company. At the Closing, the Company
shall deliver a fully executed agreement to the Purchaser reasonably
satisfactory to the Purchaser whereby the Chairman of the Company, Kenneth I.
Sawyer, shall expressly (i) agree to the appointment referred to in Section
7.9 above; (ii) agree that he shall serve as the Chairman and Chief Executive
Officer of the Company and each of its Subsidiaries; and (iii) acknowledge
that Section 7.9 hereof and this Section 7.10 hereof do not constitute a
breach or a violation by the Employer (as such term is used in the below
mentioned Employment Agreement) of the terms of his employment pursuant to the
Employment Agreement between the Company and Sawyer, dated as of October 4,
1992, as amended.
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7.11 Rights Agreement. Each of the Company and First City Transfer Company
(as successor rights agent) shall, prior to the Closing, execute and deliver
an amendment to the Rights Agreement, dated August 6, 1991, as amended (the
"Rights Agreement"), exempting from operation under the Rights Agreement the
acquisitions of shares of Common Stock pursuant to this Agreement and the
Options. Such amendment shall be in full force and effect and constitute a
valid and binding agreement of the Company enforceable against the Company in
accordance with its terms.
7.12 U.S. Real Property Holding Corporation. From and after the date hereof
to the Closing Date or the earlier termination of this Agreement pursuant to
Section 13.11 hereof, the Company shall (a) use reasonable efforts to avoid
making any changes in the composition of its assets which would cause the
Company to be classified as a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code and (b) obtain the consent
of the Purchaser prior to the acquisition of any United States Real Property
Interest (as defined in Section 897 of the Code).
SECTION 8. Covenants of the Purchaser.
The Purchaser (and the Company following the Closing, to the extent
expressly provided in this Section 8) hereby covenants as follows:
8.1 Company Designees. For a period of three years following the Closing,
the Purchaser shall not cause, and shall use its best efforts not to permit,
(i) the removal, except for cause (as such term is defined and used under New
Jersey corporate law), of any of the Company Designees serving as directors of
the Company prior to the scheduled expiration of their terms or (ii) the
shortening of any of such Designees' terms as directors. In the event that any
Company Designee shall resign or cannot otherwise continue to serve as a
director, the remaining Company Designee(s) shall designate a replacement
therefor and, upon such designation, unless such designee shall not be
reasonably satisfactory to the Purchaser, the Company and the Purchaser shall
use their reasonable best efforts to cause the appointment and/or election of
such designated replacement to the Company's Board of Directors. Such
replacement directors shall be deemed to be Company Designees for the purpose
of this Agreement.
8.2 No Modification. For a period of three years following the Closing, the
Purchaser shall not cause, and shall use its reasonable best efforts not to
permit, the Company to agree to any amendment, modification or waiver of or
take any action in respect of this Agreement, the Distribution Agreement or
the other agreements referred to herein, including, without limitation, in
respect of any agreement or settlement relating to a dispute or claim for
indemnification hereunder or thereunder, without the prior written consent of
at least a majority of the Company Designees (including any replacements
therefor as provided in Section 8.1 hereof).
8.3 Other Agreements. At the Closing, upon satisfaction or permitted waiver
of the conditions set forth in Section 5 hereof, the Purchaser shall pay the
Purchase Price and execute and deliver the agreements, instruments and
certificates specified in Section 1.3(b) hereof.
8.4 Related Party Transactions. For a period of three years following the
Closing, except as expressly permitted by this Agreement or any other
agreements referred to herein, the Purchaser shall not cause or permit the
Company or its Subsidiaries existing on the date of the Agreement, directly or
indirectly, to engage in or enter into any, or to amend or terminate any then
validly existing, transaction, arrangement or agreement with, or to make any
distribution or dividend of property or monies to, the Purchaser or any
Affiliate or associate (as defined in Rule 405 of the Securities Act
("Associate")) of the Purchaser, without the prior written consent of a
majority of the Company Designees (including any replacements therefor as
provided in Section 8.1 hereof).
8.5 Business Combinations. For a period of three years following the
Closing, neither the Purchaser nor any of its Affiliates or Associates shall,
without the prior written consent of a majority of the Company Designees
(including any replacements therefor as provided in Section 8.1 hereof) and
the prior receipt from an independent nationally recognized investment bank of
a written fairness opinion to the effect that the proposed transaction is
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fair (from a financial point of view) to all shareholders of the Company, (i)
propose that the Company, or cause or permit the Company to, merge,
consolidate or enter into any other business combination with or into another
entity (including, without limitation, any "short-form" merger), (ii) propose
that the Company, or cause or permit the Company to, sell, lease, pledge or
otherwise dispose of all or any material portion of the assets of the Company,
(iii) propose or make, or cause or permit the Company to propose or make, any
exchange offer or tender offer for, or repurchase of, any securities of the
Company or (iv) propose that the Company, or cause or permit the Company to,
recapitalize, liquidate, dissolve or, to the extent it would cause the Company
not to be publicly-held, reorganize.
8.6 Executive Committee. For a period of three years following the Closing,
the Purchaser shall cause the Company to, and the Company shall, constitute
and maintain an executive committee of the Company's Board of Directors to
manage the fundamental matters concerning the Company in the intervals between
Board meetings, and each shall use its reasonable best efforts to cause Sawyer
(or his designee who shall be a member of the Company's Board of Directors) to
be, and remain for such period, a duly appointed, full member of such
committee.
SECTION 9. Transfer of Securities. The Purchaser, for itself and each of its
Affiliates, agrees as follows:
9.1 Transfer Restrictions. The Purchaser and its Affiliates shall not
transfer any of the Shares or the Option Shares unless such transfer shall be
in full compliance with all applicable provisions of the Securities Act and
all applicable provisions of state securities laws.
9.2 Legends. Each certificate for the Shares and the Option Shares shall be
endorsed with the following legend:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAWS, AND MAY NOT
BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT UNDER APPLICABLE FEDERAL AND
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY
TO THE COMPANY THAT THE TRANSFER IS EXEMPT FROM REGISTRATION UNDER
APPLICABLE FEDERAL AND STATE SECURITIES LAWS."
SECTION 10. Exchanges; Lost, Stolen or Mutilated Certificates. Upon
surrender by the Purchaser (or Merck or Genpharm, as applicable) to the
Company of any certificates representing the Shares or the Option Shares, the
Company, at its expense, shall issue in exchange therefor, and deliver to the
Purchaser (or Merck or Genpharm, as applicable), a new certificate or
certificates representing such Shares or Option Shares, in such denominations
as may be requested in writing by the Purchaser (or Merck or Genpharm, as
applicable). Every surrendered certificate representing the Shares or the
Option Shares shall be duly endorsed or be accompanied by a written instrument
of the Purchaser's (or Merck's or Genpharm's, as applicable) attorney duly
authorized in writing. Upon receipt of evidence satisfactory to the Company of
the loss, theft, destruction or mutilation of any certificate representing any
Shares or Option Shares, and in case of any such loss, theft or destruction,
upon delivery of an indemnity agreement satisfactory to the Company, or in
case of any such mutilation, upon surrender and cancellation of such
certificate, the Company shall issue and deliver to the Purchaser (or Merck or
Genpharm, as applicable) a new certificate for such Shares or Option Shares of
like tenor and in the same amount and name in lieu of such lost, stolen or
mutilated certificate.
SECTION 11. Survival of Representations, Warranties and Agreements. The
representations and warranties (including the Schedules hereto) of the parties
contained herein and the agreements and covenants contained in Section 7
hereof (excluding Sections 7.3, 7.8 and 7.9 hereof) shall survive the date
hereof for a period of 12 months following the Closing Date (the "Survival
Period"); provided, that (i) a party shall not be liable to the other party
hereto for any claim for indemnification under Section 12 hereof in respect of
a breach of a representation or warranty unless written notice thereof
describing such claim with reasonable specificity
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shall be delivered to the Indemnitor (as defined in Section 12.1 hereof) prior
to the expiration of the Survival Period and (ii) the representations and
warranties relating to Taxes contained in Section 2.20 hereof shall survive
until the expiration of the appropriate statute of limitation.
SECTION 12. Indemnification.
12.1 Indemnitors; Indemnified Persons. For purposes of this Section 12, each
party which, pursuant to this Section 12, agrees to indemnify any other person
or entity shall be referred to as the "Indemnitor" with respect to such person
or entity, and each such person or entity who is indemnified shall be referred
to as the "Indemnified Person" with respect to such Indemnitor.
12.2 Company Indemnity. The Company hereby agrees to indemnify and hold
harmless each of the Purchaser and it Affiliates, and its directors, officers,
employees, agents and controlling persons (within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act), from and against any
and all claims, liabilities, losses, damages and expenses (including, without
limitation, reasonable attorneys' fees and disbursements) asserted against or
incurred by any such Indemnified Person which are caused by or are related to
or arise out of (a) subject to Section 11 hereof, the Company's material
breach of any of its representations, warranties, covenants or agreements
contained in this Agreement, (b) any untrue statement or alleged untrue
statement of a material fact contained in the Proxy Statement or the omission
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (a "Violation") or (c)
(i) any material violation by the Company or any Subsidiary thereof of any
Environmental Laws, or the disposal, discharge or release of solid wastes,
pollutants or hazardous substances, whether in compliance with Environmental
Laws or not, other than in respect of those matters set forth on Schedule 12.2
hereto, (ii) the ownership, operation or use of any landfill, wastewater
treatment plant, air pollution control equipment, storage lagoon or other
waste management or pollution control facility, whether in compliance with
Environmental Laws or not, other than in respect of those matters set forth on
Schedule 12.2 hereto, or (iii) exposure of any person to any chemical
substances, noises or vibrations generated by the Company, any of its
Subsidiaries, or any of their respective predecessors, whether in compliance
with Environmental Laws or not, other than in respect of those matters set
forth on Schedule 12.2 hereto; provided, however, that no indemnification
shall be provided hereunder for any decrease in the market price of the shares
of Common Stock purchased or owned by the Purchaser or any of its Affiliates;
and provided, further, that no indemnification shall be provided hereunder
with respect to the preceding clause 12.2(b) to the extent an untrue or
alleged untrue statement or omission or alleged omission was made by the
Company in reliance upon and in conformity with information furnished by or on
behalf of the Purchaser for use in the Proxy Statement. The Company shall
reimburse any such Indemnified Person for all costs and expenses (including,
without limitation, reasonable attorneys' fees and disbursements and costs of
investigation) incurred in connection with preparing for, bringing or
defending any action, claim, investigation, suit or other proceeding, whether
or not in connection with pending or threatened litigation, which shall be
caused by or related to or arise out of the foregoing, whether or not such
Indemnified Person shall be named as a party thereto.
12.3 Purchaser Indemnity. The Purchaser hereby agrees to indemnify and hold
harmless each of the Company, and its directors, officers, employees and
agents, from and against any and all claims, liabilities, losses, damages and
expenses (including, without limitation, reasonable attorneys' fees and
disbursements and costs of investigation) asserted against or incurred by any
such Indemnified Person which are caused by or are related to or arise out of
(a) subject to Section 11 hereof, the Purchaser's material breach of any
representation, warranty, covenant or agreement of the Purchaser contained in
this Agreement or (b) a Violation to the extent that such Violation shall
occur in respect of information furnished to the Company by or on behalf of
the Purchaser for use in the Proxy Statement. The Purchaser shall reimburse
any such Indemnified Person for all costs and expenses (including, without
limitation, reasonable attorneys' fees and disbursements and costs of
investigation) incurred in connection with preparing for, bringing or
defending any action, claim, investigation, suit or other proceeding, whether
or not in connection with pending or threatened litigation, which shall be
caused by or related to or arise out of the foregoing, whether or not such
Indemnified Person shall be named as a party thereto.
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12.4 Defense. Promptly after receipt by an Indemnified Person of notice of
any claim or demand or the commencement of any suit, action or proceeding by
any third party with respect to which indemnification may be sought hereunder,
such Indemnified Person shall notify in writing the Indemnitor of such claim
or demand or the commencement of such suit, action or proceeding, but failure
so to notify the Indemnitor shall not relieve the Indemnitor from any
liability which the Indemnitor may have hereunder or otherwise, unless the
Indemnitor shall be actually prejudiced by such failure. If the Indemnitor
shall so elect, the Indemnitor shall assume the defense of such claim, demand,
action, suit or proceeding, including the employment of counsel reasonably
satisfactory to such Indemnified Person, and shall pay the fees and
disbursements of such counsel. In the event, however, that such Indemnified
Person shall reasonably determine that having common counsel would present
such counsel with a conflict of interest or alternative defenses shall be
available to an Indemnified Person or if the Indemnitor shall fail to assume
the defense of the claim, demand, action, suit or proceeding in a timely
manner, then such Indemnified Person may employ separate counsel to represent
or defend such Person against any such claim, demand, action, suit or
proceeding and the Indemnitor shall pay the reasonable fees and disbursements
of such counsel; provided, however, that the Indemnitor shall not be required
to pay the fees and disbursements of more than one separate counsel for all
Indemnified Persons in any jurisdiction in any single action, suit or
proceeding. For any claim, demand, action, suit or proceeding the defense of
which the Indemnitor shall assume, the Indemnified Person shall have the right
to participate therein and to retain its own counsel at such Indemnified
Person's own expense (except as otherwise specifically provided in this
Section 12.4), so long as such participation does not interfere with the
Indemnitor's control of such claim, demand, action, suit or proceeding. The
Indemnitor shall not, without the prior written consent of the Indemnified
Person, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder unless such settlement, compromise or
consent shall include an unconditional release of such Indemnified Person from
all liability arising out of such claim, demand, action, suit or proceeding
and would not prohibit, restrict or impair the Indemnified Person from
engaging in any business.
12.5 Purchaser Claims. If there shall be any claim for indemnification by
the Purchaser under this Section 12 or under the Distribution Agreement, all
determinations by the Company relating thereto, including, without limitation,
the choice and engagement of counsel, the defense and/or prosecution of any
action and the terms and conditions of any settlement or compromise thereof,
shall be made solely by the Company Designees (by majority vote thereof).
12.6 Exclusive Remedy. The parties hereto agree that the sole and exclusive
remedy and recourse with respect to any and all claims, suits, actions,
demands, liabilities, losses, expenses and damages relating to or arising out
of the subject matter of this Agreement (excluding the Distribution Agreement
and the Services Agreements) shall be pursuant, and subject, to the
indemnification provisions set forth in this Section 12, subject to the
provisions of Section 13.11 hereof and except for the remedy of injunctive
relief set forth in Section 13.12 hereof.
SECTION 13. Miscellaneous.
13.1 Expenses. The parties shall bear their own respective expenses
(including, but not limited to, all fees and expenses of counsel, financial
advisers and independent accountants) incurred in connection with the
preparation, negotiation and execution of this Agreement and the other
agreements referred to herein and the consummation of the transactions
contemplated hereby and thereby. To the extent that a Company Designee shall
be required to make any determination or take any action hereunder (including,
without limitation, with respect to indemnification under Section 12 hereof or
reviewing the compliance of the Purchaser with its covenants and agreements
contained herein) in his/her capacity as a Company Designee, the Purchaser
shall cause the Company to, and the Company shall, promptly reimburse and/or
pay any reasonable out-of-pocket expenses incurred by the Company Designee in
acting in such capacity. The Company Designees are intended third-party
beneficiaries of this provision.
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13.2 Assignment; Binding Effect. All terms and provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor
any of the rights, interests or obligations hereunder may be assigned or
delegated by any party hereto without the prior written consent of the other
party; provided, that the Purchaser shall have the right to designate an
Affiliate of the Purchaser to purchase and take delivery of the Shares at the
Closing pursuant to Section 1.1 hereof. The obligations and agreements of the
Purchaser hereunder shall succeed to and bind any purchaser or transferee,
whether or not such purchaser or transferee shall be an Affiliate of the
Purchaser, of the Shares and/or the Option Shares, but shall also remain
binding on the Purchaser if the transferee is an Affiliate thereof.
Notwithstanding the foregoing, the Options shall be at all times
nontransferable and nonassignable by the Purchaser or Genpharm.
13.3 Entire Agreement. This Agreement (including the Exhibits and Schedules
hereto) and the other agreements referred to herein or delivered pursuant
hereto contain the entire agreement between the parties with respect to the
subject matter hereof and thereof and supersede all prior arrangements or
understandings, written or oral, with respect thereto, including, without
limitation, the Confidentiality Agreement, dated December 16, 1997, by and
between the parties. The parties hereto agree that the only representations
and warranties made in connection with the transactions contemplated hereby
and thereby are those expressly made in writing in this Agreement. The
Purchaser expressly disclaims reliance upon any representations or warranties
other than those expressly made in writing by the Company in this Agreement.
The Purchaser acknowledges and agrees that it is sophisticated in matters
concerning the subject matter of this Agreement and the business of the
Company, that the Purchaser and the Company have an ordinary business
relationship of seller-purchaser and that no special relationship of trust
exists between the Purchaser and the Company which could give rise to a
special duty of care.
13.4 Notices. All notices hereunder shall be in writing and shall be given:
(a) if to the Company, at One Ram Ridge Road, Spring Valley, New York 10977
(attention: Kenneth I. Sawyer, President), fax number: (914) 425-5097, or such
other address or fax number as the Company shall have designated in writing to
the Purchaser in accordance with this Section 13.4, with a copy to Hertzog,
Calamari & Gleason, 100 Park Avenue, New York, New York 10017 (attention:
Stephen Ollendorff, Esq. and Stephen R. Connoni, Esq.), fax number: (212) 213-
1199, or (b) if to the Purchaser, at c/o Merck KGaA, Frankfurter Strasse 250,
64271 Darmstadt Germany (attention: Dr. Rudi Neirinckx), fax number 011 49
6151 72 3435, or such other address or fax number as the Purchaser shall have
designated in writing to the Company in accordance with this Section 13.4,
with a copy to Coudert Brothers, 1114 Avenue of the Americas, New York, New
York 10036-7703 (attention: Edwin S. Matthews, Jr., Esq.), fax number: (212)
626-4120. Any notice shall be deemed to have been given if personally
delivered or sent by express commercial courier or delivery service or by
telegram, telefax, telex or facsimile transmission. Any notice given in any
other manner shall be deemed given when actually received.
13.5 Amendments; Waiver. Prior to the Closing, this Agreement may not be
amended or, subject to Section 13.11 hereof, terminated, and no provision
hereof may be waived, except pursuant to a written instrument executed by the
Company and the Purchaser. For a period of three years following the Closing,
neither this Agreement nor the Distribution Agreement may be amended, and no
provision hereof or thereof may be waived, without the prior written consent
of at least a majority of the Company Designees (on behalf of the Company) and
except pursuant to a written instrument executed by both parties.
13.6 Counterparts. This Agreement may be executed in counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
13.7 Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be a
part of this Agreement. As used herein, the phrase "to the Company's
knowledge" shall mean the actual knowledge of any of the executive officers of
the Company only.
13.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed wholly therein.
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13.9 Severability. If any term or provision hereof shall be invalid or
unenforceable, (i) the remaining terms and provisions hereof shall be
unimpaired, (ii) any such invalidity or unenforceability in any jurisdiction
shall not invalidate or render unenforceable such term or provision in any
other jurisdiction and (iii) the invalid or unenforceable term or provision
shall be deemed replaced by a term or provision as determined by a court to be
valid and enforceable and to express, to the fullest extent legally
permissible, the intention of the parties with respect to the invalid or
unenforceable term or provision.
13.10 Consent to Jurisdiction. In connection with any dispute which may
arise under this Agreement or under any other agreement referred to herein
(except for the Distribution Agreement), each of the parties hereby
irrevocably submits to, consents to, and waives any objection to the exclusive
jurisdiction of the courts of the State of New York located in the County of
New York and of the United States District Court for the Southern District of
New York, and waives any objection to the laying of venue in such courts. Each
such party admits that any such dispute may be resolved at least as
conveniently in such a court as in any other court, and shall not seek
dismissal or a change of venue on the ground that resolution of such a dispute
in any such court shall not be convenient or in the interests of justice. The
Purchaser hereby appoints Coudert Brothers as its agent upon whom service of
process may be made with the same force and effect as if such service shall
have been made personally upon the Purchaser. The Company hereby appoints
Hertzog, Calamari & Gleason as its agent upon whom service of process may be
made with the same force and effect as if such service shall have been made
personally upon the Company.
13.11 Termination.
(a) This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing: (i) by the mutual
written consent of the Purchaser and the Company, (ii) by either party to this
Agreement, if the Shareholders' Approval shall not have been obtained with
respect to each of the Proposals at the Meeting, including any adjournments
thereof, (iii) by either party to this Agreement, if there shall have been a
material breach of a representation or warranty contained in this Agreement by
the other party, or a material breach by the other party of any covenant or
agreement set forth herein and such breach shall not have been cured within
ten (10) days following the occurrence thereof, and such shall not have been
waived by the other party hereto, (iv) by either party to this Agreement, if
the Closing shall not have occurred by July 15, 1998 or (v) by the Company, if
the Board of Directors of the Company determines in good faith, after
consultation with outside counsel, that failure to terminate this Agreement
would create a substantial risk of liability for breach of its fiduciary
duties to the Company's shareholders under applicable law.
Upon any such termination, all further obligations of the parties shall
become null and void and no party shall have any liability to the other party,
except that the obligations of the parties hereto pursuant to Sections 6.2,
6.3 and 13, including Section 13.11(b), hereof shall survive such termination
indefinitely.
(b) Notwithstanding anything to the contrary contained herein, if this
Agreement (i) is terminated by either party pursuant to Section 13.11(a) (iii)
hereof, then the breaching party shall promptly pay to the non-breaching party
in cash an amount equal to $750,000, or (ii) is terminated by the Company
pursuant to Section 13.11(a) (v) hereof, then the Company shall promptly pay
to the Purchaser in cash an amount equal to $1,000,000. The parties
acknowledge and agree that the provisions of this Section 13.11(b) provide for
liquidated damages (and not a penalty) and shall be the sole and exclusive
remedy and recourse of the parties hereto in respect of a termination of this
Agreement pursuant to Sections 13.11(a)(iii) or (v) hereof.
13.12 Injunctive Relief.
(a) The Purchaser hereby acknowledges and agrees that a breach by it of its
covenants or agreements hereunder will cause irreparable harm to the Company.
Accordingly, the Purchaser acknowledges and agrees that a remedy at law for a
breach of its obligations hereunder (including, but not limited to, its
obligations under Sections 6.3, 7.3 and 8 hereof) will be inadequate and
agrees, in the event of a breach or threatened breach by the Purchaser of the
provisions of this Agreement (including, but not limited to, its obligations
pursuant to
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Sections 6.3, 7.3 and 8 hereof), that the Company and, in the case of Sections
7.3, 8.1, 8.5 and 8.6 hereof, the shareholders of the Company (other than the
Purchaser) and the Company Designees, shall be entitled, in addition to all
other available remedies, to an injunction restraining any actual or
threatened breach and/or the remedy of specific performance.
(b) The Company hereby acknowledges and agrees that a breach by it of its
covenants or agreements hereunder will cause irreparable harm to the
Purchaser. Accordingly, the Company acknowledges and agrees that a remedy at
law for a breach of its obligations hereunder (including, but not limited to,
its obligations under Sections 6.3 and 7 hereof) will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Agreement (including, but not limited to, its obligations
pursuant to Sections 6.3, 7.3 and 7.8 hereof), that the Purchaser shall be
entitled, in addition to all other available remedies, to an injunction
restraining any actual or threatened breach and/or the remedy of specific
performance.
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be
executed as of the date first written above.
Pharmaceutical Resources, Inc.
By: Kenneth I. Sawyer
---------------------------------
Name: Kenneth I. Sawyer
Title: President
LIPHA Americas, Inc.
By: Rudi Neirinckx
---------------------------------
Name: Rudi Neirinckx
Title: Head, New Business
Merck KGaA
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EXHIBIT B
- -------------------------
717 FIFTH AVENUE
13TH FLOOR
NEW YORK, NY 10022
TELEPHONE (212) 872-3900 GRUNTAL
CAPITAL MARKETS
- -------------------------
OVER A CENTURY OF SERVICE
TO INVESTORS
- -------------------------
March 25, 1998
Board of Directors
Pharmaceutical Resources, Inc.
One Ram Ridge Road
Spring Valley, NY 10977
Dear Sirs:
We understand that Pharmaceutical Resources, Inc. ("PAR" or the "Company")
and Lipha Americas, Inc., an affiliate of Merck KGaA (the "Purchaser"), have
entered into a Stock Purchase Agreement (the "Agreement"), pursuant to which
the Purchaser will purchase at closing 10,400,000 shares of common stock of the
Company (the "Common Stock") to be so1d by the Company at a per share purchase
price of $2.00 (the "Transaction"). We understand that, in connection with the
Agreement, among other things, (i) Merck KGaA and Clal Pharmaceutical
Industries Ltd. ("Clal") will enter into a stock purchase agreement pursuant to
which Merck KGaA will purchase or have the right to purchase from Clal all
shares of Common Stock beneficially owned by Clal, the consummation of the
purchase of common shares of Common Stock pursuant to which transaction is
expected to occur at or about the time of the consummation of the Transaction
contemplated by the Agreement; (ii) concurrently with the execution of this
Agreement, the Company and an affiliate of Merck KGaA are entering into a
distribution agreement pursuant to which the Company shall distribute certain
products of the Purchaser; (iii) concurrently with closing of the Transaction
contemplated by the Agreement, the Company and Merck KGaA and an affiliate of
Merck KGaA will enter into a service agreements, pursuant to which such
companies shall render certain services to the Company and (iv) in connection
with such service agreements the Company will execute and deliver to Purchaser
a five-year options to acquire an aggregate of 1,171,040 additional shares of
Common Stock. The terms and conditions of the Transaction are set forth in more
detail in the Agreement.
You have requested our opinion as to the fairness to the shareholders of PAR
from a financial point of view of the terms of the Transaction.
In arriving at our opinion, we have reviewed the Agreement and certain
publicly available business and financial information relating to PAR. We have
also reviewed certain other information, including financial forecasts and
related information, provided to us by PAR and we have met with PAR's
management to discuss the business and prospects of PAR. We have also
considered certain financial and stock market data of PAR, and we have compared
that data with similar data for other publicly held companies in businesses
similar to those of PAR, and we have considered the financial terms of certain
other business combinations and other transactions which have been effected or
currently pending which we have deemed relevant. We also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which we deem relevant.
B-1
<PAGE>
GRUNTAL
CAPITAL MARKETS
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
it being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of PAR's
management as to the future financial performance of PAR. In addition, we have
not made an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of PAR, nor have we been furnished with any such
evaluations or appraisals. We have discussed with counsel to PAR, and relied
upon their description of, all legal matters with respect to the Transaction.
Our opinion is necessarily based upon financial, economic, market and other
conditions as they exist on, and the information made available to us as of,
the date hereof. We have not been requested to opine upon, and our opinion does
not in any manner address, PAR's underlying business decision to proceed with
the Transaction. We will receive a fee in connection with the rendering of this
opinion. In addition, PAR has agreed to indemnify us for certain liabilities
arising out of our engagement in the rendering of this opinion.
As part of our investment banking services, we are regularly engaged in the
valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes.
In the ordinary course of our business, we and our affiliates may actively
trade the equity securities of PAR for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. As you are aware, we also regularly publish research reports
regarding the businesses and securities of publicly-owned companies in the
generic drug industry, including PAR.
It is understood that this letter is for information of the Board of
Directors of PAR in connection with its consideration of the Transaction. Our
opinion does not constitute a recommendation to any member of the Board of
Directors or any shareholder as to how such member or shareholder should vote
on the proposed Transaction and is not to be quoted or referred to, in whole or
in part, in any registration statement, prospectus or proxy statement, or in
any other document used in connection with the offering or sale of securities,
nor shall this letter be used for other purposes, without our prior written
consent. We understand that this opinion will be filed with the Securities and
Exchange Commission and distributed to PAR's shareholders as part of the Proxy
Statement related to the proposed Transaction. We hereby consent to the
foregoing use of the opinion.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the terms of the Transaction are fair, from a financial point of
view, to the shareholders of PAR.
Respectfully submitted,
Gruntal & Co., L.L.C.
By: /s/ Gruntal & Co., L.L.C.
B-2
<PAGE>
- --------------------------
717 FIFTH AVENUE
13TH FLOOR
NEW YORK, NY 10022
TELEPHONE (212) 872-3900
GRUNTAL
CAPITAL MARKETS
- --------------------------
OVER A CENTURY OF SERVICE
TO INVESTORS
- --------------------------
May 5, 1998
Board of Directors
Pharmaceutical Resources, Inc.
One Ram Ridge Road
Spring Valley, NY 10977
Members of the Board:
Reference is made to our opinion letter, dated March 25, 1998, to the Board
of Directors of Pharmaceutical Resources, Inc. ("PAR") with respect to the
transaction involving PAR and Lipha Americas, Inc., an affiliate of Merck
KGaA. You have requested and we hereby confirm that nothing has come to our
attention as of the date hereof which would cause us to change in any material
respect the form or content of such opinion letter. The nature of the scope of
our analyses subsequent to March 25, 1998 has been more limited than that
conducted in support of our opinion letter dated March 25, 1998.
Very truly yours,
By: /s/ Gruntal & Co., L.L.C.
Gruntal & Co., L.L.C.
B-3
<PAGE>
PHARMACEUTICAL RESOURCES, INC.
PROXY FOR ANNUAL MEETING TO BE HELD ON JUNE 26, 1998
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Know All Men By These Presents: That the undersigned shareholder(s) of
Pharmaceutical Resources, Inc., a New Jersey corporation (the "Company"), hereby
constitute(s) and appoint(s) Kenneth I. Sawyer and Dennis J. O'Connor with full
power of substitution in each, as the agents, attorneys and proxies of the
undersigned, for and in the name, place and stead of the undersigned, to vote at
the Annual Meeting of Shareholders of the Company to be held at the Holiday Inn,
Suffern, Three Executive Boulevard, Suffern, New York, on June 26, 1998, at
10:00 a.m. (local time) and any adjournment(s) thereof, all of the shares of
stock which the undersigned would be entitled to vote if then personally present
at such meeting in the manner specified and on any other business as may
properly come before the meeting. The undersigned directs my (our) proxies to
vote for me (us) as specified by a cross (X) in the appropriate spaces, upon the
following proposals:
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS GIVEN ON THE
REVERSE SIDE. IF NO INSTRUCTIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR EACH OF
THE FOLLOWING PROPOSALS AND, AT THE PROXIES' DISCRETION, UPON ANY OTHER MATTERS
THAT MAY PROPERLY COME BEFORE THE MEETING AND ANY ADJOURNMENT(S) THEREOF.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
X Please mark your votes as in this example
This proxy when properly executed will be voted in the manner directed herein.
If no direction is made, this proxy will be voted (i) FOR the election of all
listed nominees for director, (ii) FOR the sale of 10,400,000 shares of Common
Stock to Lipha Americas, Inc. and the grant and issuance of options to purchase
an aggregate of 1,171,040 shares of Common Stock to Merck KGaA and Genpharm
Inc., (iii) FOR the approval of an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock, (iv)
FOR the approval and adoption of the 1997 Directors Stock Option Plan, and (v)
at the discretion of the proxy holders, in respect of such other business as may
properly come before the meeting and at any adjournment(s) thereof.
WITHHOLD AUTHORITY
FOR TO VOTE FOR ALL
ALL NOMINEES LISTED
1. Election of Directors. [ ] [ ]
(INSTRUCTIONS: To withhold authority to vote for any individual nominee or
nominees, write each nominee's name in the space below.)
Nominees:
Class I: Anthony S. Tabatznik and J. Neil Tabatznik
Class II: Kenneth I. Sawyer, Mark Auerbach and Stephen A. Ollendorff
Class III: Bernhard Scheuble and Klaus H. Jander
FOR AGAINST WITHHELD
2. Approved of Stock Sale to Lipha
Americas, Inc. and Grant and
Issuance of Options to Merck
KGaA and Genpharm Inc. [ ] [ ] [ ]
3. Approval of Increase in Authorized
Number of Shares of Common
Stock [ ] [ ] [ ]
4. Approval and Adoption of the
1997 Directors Stock Option Plan [ ] [ ] [ ]
5. In their discretion, the proxy holders are authorized to vote upon such
other business as may properly come before the meeting and any
adjournment(s) thereof, and as set forth in Rule 14a-4(c) of the Securities
Exchange Act of 1934, as amended.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY TO ALLOW ADEQUATE
TIME FOR MAILING AND PROCESSING PRIOR TO THE MEETING TO BE HELD ON JUNE 26,
1998.
SIGNATURE ____________________________________ DATE:__________________________
SIGNATURE IF HELD JOINTLY ____________________ DATE:__________________________
PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN SHARES ARE HELD BY JOINT
TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY THE PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AN AUTHORIZED PERSON.
