SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to 14(a) of the Securities and Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
Pharmaceutical Resources, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] 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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<PAGE>
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is an 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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4) Date Filed:
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<PAGE>
PRELIMINARY COPY-FOR SEC REVIEW
PHARMACEUTICAL RESOURCES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On June __, 1998
TO THE SHAREHOLDERS:
The 1998 Annual Meeting of Shareholders of Pharmaceutical Resources, Inc.
(the "Company") will be held on June ___, 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__, 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>
PRELIMINARY COPY-FOR SEC REVIEW
PROXY STATEMENT
PHARMACEUTICAL RESOURCES, INC.
One Ram Ridge Road
Spring Valley, New York 10977
ANNUAL MEETING OF SHAREHOLDERS
To Be Held On June __, 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 __, 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 __, 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. 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 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 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
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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.
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.
The election of directors will require an affirmative vote of 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 [18,886,098] 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
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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 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 If Proposed Transaction
the Proposed Transaction is Approved
------------------------ -----------------------
Percentage
Amount of of Percentage of
Name and Address of Beneficial Owner(6) Common Common Amount of Common
--------------------------------------- Stock Stock Common Stock Stock
--------------------------------------------------
<S> <C> <C> <C> <C>
Merck KGaA(1)......................................... 249,700 1.30 12,462,972 42.20
Clal Pharmaceutical Industries Ltd.(2)................ 2,313,272 12.23 500,000 1.71
Kenneth I. Sawyer(3)(4)(5)............................ 156,900 * 156,900 *
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)................................. 24,118 * 24,118 *
Stephen A. Ollendorff(5).............................. 475 * 475 *
Rudi D. Neirinckx, Ph.D.(5)........................... [ ] * [ ] *
[Merck nominee 2](5)................................... [ ] * [ ] *
[Merck nominee 3](5)................................... [ ] * [ ] *
[Merck nominee 4](5)................................... [ ] * [ ] *
All directors and current executive officers 2.22 423,968 1.44
as a group (seven persons) (3)........................ 423,968
</TABLE>
* 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
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1,171,040 shares which may be acquired upon exercise of options to be
granted to Merck KGaA and Genpharm upon 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."
(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 upon 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 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; Dr. Motz, 42,000 shares; and Mr. O'Connor, 22,500 shares. Does not
reflect 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." Dr. Neirinckx will become the President and Chief
Operating Officer of the Company upon the consummation of the Stock
Purchase Agreement.
(6) The business address of each director, executive officer 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."
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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 - Rudi D. Neirinckx, Ph.D. and
[_______]; 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
- -[_____] and [______]. In connection with the Proposed Transaction, Lipha
obtained the right to designate 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 in the accompanying form 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 therein. 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.
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:
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Year
of First
Name Age Election
- ---- --- --------
Class I
Rudi D. Neirinckx, Ph.D....................................... [ ] --
[bio to come]
[Additional nominee designated by Lipha to come]
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).......................................... 59 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. From July 1990 to August 1992, President, Chief
Executive Officer and Director of Implant Technology
Inc., a manufacturer of artificial hips and knees. 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. Chief Executive Officer and director of Acorn
Venture Capital Corporation for more than the past five
years. Director of Computer Products, Inc., a designer,
manufacturer and seller of power supplies.
Class III
[Two nominees designated by Lipha to come]
- -----------------
(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.
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,
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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 other 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 or of
its committees 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
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share, (ii) the issuance by the Company of warrants to purchase 2,005,107 shares
of Common Stock (the "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 are 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 Clal 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 will
not be 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,
secured promissory note in the principal amount of $1,500,000. The note bears
interest at 7% per annum, and is payable in eight semi-annual installments
commencing in July 1999. The Company may prepay the note in full if it makes a
payment of $600,000 before August 13, 1998. Until the 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 with 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 balance of the note, including interest, was
approximately $382,000. The Company has agreed to forgive the note over a
three-year period, provided that Mr. Sawyer is employed by the Company. See
"--Executive Compensation--Employment Agreements and Termination Arrangements."
Stephen A. Ollendorff, 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.
The Company believes that all of the above transactions were on terms that
were fair and reasonable to the Company.
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 upon
the consummation of the Stock Purchase Agreement. The executive officers of Par
Pharmaceutical, Inc., the Company's principal subsidiary ("Par"), 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
executive officers of the Company and Par who are not directors or nominees for
election as directors:
9
<PAGE>
Name Age
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 Marketing of Par. Since June 1989,
an employee of Bristol-Myers Squibb, a drug
manufacturer, serving as Senior Director of Marketing,
Business Development and Strategic Planning from 1995
to 1997 and Director of Marketing from 1992 to 1995.
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 1995 427,153 200,000 -- -- 49,806
and Chairman
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-$2,070.
10
<PAGE>
(3) Mr. O'Connor did not become a Named Executive until fiscal year 1997, even
though he was employed previously by the Company.
The following table sets forth stock options granted to the Named
Executives during fiscal year 1997. No stock appreciation rights were granted in
fiscal year 1997.
Stock Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Individual Grants Appreciation for Option Term(1)
------------------------------------------------- -------------------------------
% of Total
Shares Options
Underlying Granted to
Options Employees Exercise Expiration
Name Granted (#) in Fiscal Year Price ($) 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.
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
Shares Underlying Unexercised In-the-Money Options
Name Acquired on Value Options at FY-End (#) at FY-End ($)
- ---- ----------------------- ----------------------
Exercise(#) Realized($) 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.
11
<PAGE>
Employment Agreements and Termination Arrangements
- --------------------------------------------------
The Company has entered into an employment agreement with Mr. Sawyer, which
provides for his employment in his current position 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 March 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, relinquished his
title and position as President of the Company and its subsidiaries if Lipha
exercises its right to designate the President of the Company and/or its
subsidiaries, and agreed to vote his shares 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 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 275,000 shares of Common Stock at an
exercise price of $_____ per share. 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."
12
<PAGE>
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.
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% 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 all of 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
13
<PAGE>
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 matters, efforts in exploration of strategic
alternatives for the Company, such as the strategic alliance with Clal, research
and development expenditures, review and implementation of updated systems and
operational procedures as a foundation for future growth and realignment of the
Company's internal sales and marketing organization, 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.
The Compensation Committee, in determining the annual bonuses to be paid to
its 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
14
<PAGE>
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 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 are or ever were officers or employees 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.
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(R) 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
15
<PAGE>
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]
<TABLE>
<CAPTION>
Sept.-92 Sept.-93 Sept.-94 Sept.-95 Sept-.96 Sept.-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 ........................ $100 $ 81 $ 97 $153 $207 $314
Index-Major Pharmaceuticals
</TABLE>
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 (the "Shares") of Common Stock 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
(the "Option Shares") of Common Stock 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 Common Stock) 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.
16
<PAGE>
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 to repay certain
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 exclusively
in the United States 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) and 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 a share of 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 __, 1998, was $_____ 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. Neirinckx, [ ], [ ] and [ ]. 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 and each of its subsidiaries. Mr.
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Sawyer will continue to serve as Chairman and Chief Executive Officer of the
Company and each of its subsidiaries. The effect of the foregoing agreements is
to afford voting control to the designees of Lipha with respect to matters
determined by the Board. Lipha has designated Dr. Rudi Neirinckx to become
President and Chief Operating Officer of the Company. 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 $275,000 year, and a minimum
bonus of $25,000 in 1998. Dr. Neirinckx has received options to purchase up to
275,000 shares of Common Stock at an exercise price of $_____ per share. Such
options automatically expire if the Stock Purchase Agreement does not close. See
"Executive Compensation-Employment Agreements and Termination Arrangements."
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 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 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 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 litigation, 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 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.
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
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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 tremendous 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.
Services Agreements. At, and as a condition to, the Closing, each of Merck
KGaA and Genpharm will enter into a Services Agreement, 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 each year after the date of
grant. 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 holder of the Options does not have any rights as a
shareholder 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 three years and 10 days after the Closing Date, in certain circumstances,
at a price of $2.50 per share (the shares of Common Stock to be purchased from
Clal under the Clal Sale Agreement are referred to herein as the "Clal Shares").
If Clal does not exercise such right, then Merck KGaA and the Company have the
right to cause Clal to sell all of 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. Clal has agreed, for a 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,
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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 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 or grant any option for the purchase 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 shares to be purchased under the Clal
Sale Agreement). If Merck KGaA and its affiliates exercise the Options (after
they become fully exercisable three years and 10 days after the Closing Date)
and acquire 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 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 alternate funding 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 any extended period of time
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,
there were no other viable strategic alliances available to the Company 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
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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 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 preserves 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, from a financial point of
view, fair to the Company's shareholders.
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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 oral opinion (which opinion was subsequently confirmed by
delivery of a written opinion, dated March 25, 1998, and updated to 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 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 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 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 Company 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: (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) the
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
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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 Credit 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 and would not provide 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 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) 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 preserves 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; (vi)
estimated 1999 net income; and (vii) selected balance sheet data. 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);
(vi) the estimated 1999 net income multiples ranged from 19.6x to 35.0x (25.3x
mean); and (vii) [the book value multiples ranged from 1.3x to 5.5x (2.8x
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
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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 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 sale of a majority interest. Of the remaining two
transactions, one was pending and had limited public data available and the
second transaction represented the remaining minority purchase by the majority
owner.
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
24
<PAGE>
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 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").
Because of the Company's historical and current lack of earnings and the
degree of uncertainty surrounding future earnings, Gruntal assigned greater
relevance to the scenarios where the terminal value was discounted. Due to the
high proportion of value contribution associated with the terminal value, a
sensitivity analysis was performed assuming the terminal value was 20.0% or
50.0% of the forecasted terminal value. With these changes, the Implied Equity
Value per share for the Company on a stand-alone basis ranged from $0.04 per
share to $2.31 per share. The DCF analysis incorporating Merck KGaA's
Distribution Agreement offered an Implied Equity Value per share that ranged
from $1.58 per share to $4.63 per share assuming the terminal value was 20.0% or
50.0% of the forecasted terminal value. Therefore, the DCF analysis showed the
Implied Equity Value Per Share rose 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 20, 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 Company.
25
<PAGE>
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.
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 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, [18,886,098] shares of Common Stock were issued and
outstanding. In addition, [3,507,012] 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 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, [22,393,110] 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
inventive plans. The
26
<PAGE>
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 will help 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 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 issued under the 1989 Plan for an equal number of options
under the Directors Plan as described below. See "-Summary of Directors Plan."
27
<PAGE>
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 (the "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 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 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 of Directors
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 number of shares which were a
condition to the Additional Grant(s), such Additional Grant(s) will
automatically terminate.
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, however, will 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
modify or 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
the 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, other than Mr. Sawyer and Dr. Neirinckx, will be eligible
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
28
<PAGE>
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.
Name and Position Dollar Value Number of Options
- ----------------- ------------ -----------------
Kenneth I Sawyer, Chairman -- --
and Chief Executive Officer
Dennis J. O'Connor -- --
Vice President, Chief
Financial officer and Secretary
Executive Group -- --
Non-Executive Director Group $[ ](1) 260,000
Non-Executive Officers -- --
Employee Group
- ------------------------------------
(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 April 30, 1998. Such stock option grants are conditioned upon
shareholder approval of the Directors Plan at the Meeting.
The closing price of a share of Common Stock on The New York Stock
Exchange on May __, 1998 was $_____.
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 state, local or foreign income or other tax consequences.
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.
29
<PAGE>
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 December 31, 1998 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 __, 1998
30
<PAGE>
Exhibit A
Stock Purchase Agreement
<PAGE>
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.
A-1
<PAGE>
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.
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.
A-2
<PAGE>
(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).
A-3
<PAGE>
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.
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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.
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
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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.
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
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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.
(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
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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
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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 it
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 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
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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).
(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
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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
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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 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.
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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 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
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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 Option 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:
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.
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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.
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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.
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.
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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.
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.
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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
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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 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.
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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 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
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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 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.
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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
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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.
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
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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 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.
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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 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
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"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
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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.
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
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<PAGE>
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.
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
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<PAGE>
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.
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
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<PAGE>
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
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<PAGE>
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
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.
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<PAGE>
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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<PAGE>
Exhibit B
[Letterhead of]
GRUNTAL CAPITAL MARKETS
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.
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.
B-1
<PAGE>
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 PAR.
Respectfully submitted,
Gruntal & Co., L.L.C.
By: /s/ Gruntal & Co., L.L.C.
----------------------------
B-2
<PAGE>
PRELIMINARY COPY-FOR SEC REVIEW ONLY
PHARMACEUTICAL RESOURCES, INC.
Proxy for Annual Meeting To Be Held on June __, 1998
This Proxy is being Solicited on Behalf of the Board of Directors
Know All Men By These Presents: That the undersigned shareholder(s)
P of Pharmaceutical Resources, Inc., a New Jersey corporation (the
"Company"), hereby constitute(s) and appoint(s) Kenneth I. Sawyer and
R Dennis J. O'Connor with full power of substitution in each, as the
agents, attorneys and proxies of the undersigned, for and in the
O 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,
X Suffern, Three Executive Boulevard, Suffern, New York, on June ___,
1998, at 10:00 a.m. (local time) and any adjournment(s) thereof, all
Y 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 would direct 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:
<PAGE>
_____ Please mark your
| | votes as in this
| X | 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.
1. Election of Directors.
Nominees:
Class I: [to come]
Class II Kenneth I. Sawyer, Mark Auerbach, Stephen A. Ollendorff
Class III: [to come]
. For Withhold Authority to
All Vote for all Nominees
Listed
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(INSTRUCTION: To withhold authority to vote for any individual
nominee or nominees, write each nominee's name in the space below.)
2. Approval of Stock Sale to Lipha For Against Withheld
Americas, Inc. and Grant and
Issuance of Options to Merck
KGaA and Genpharm Inc.
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3. Approval of Increase in Authorized For Against Withheld
Number of Common Stock
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<PAGE>
4. Approval and Adoption of the 1997 For Against Withheld
Directors Stock Option Plan
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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 , 1998.
__________________________________, 1998
Signature Date
__________________________________, 1998
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, admini-
strator, 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.
